Q3 2023 Sumo Logic Inc Earnings Call
[music].
Greetings and welcome to the sumo logic third quarter fiscal 2023 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
Now I'll turn the conference over to your host Bryan Liberator Senior director of Investor Relations you may begin.
Thank you and good afternoon, welcome to <unk> third quarter fiscal 2023 earnings Conference call. Joining me on the call today are <unk>, President and CEO and Stuart Pearson Chief Financial Officer. Our format. Today will include prepared remarks by Roominess Stuart followed by a question and answer session.
Some of our discussions and responses to your questions will contain forward looking statements, including statements relating to the expected performance of our business expectations regarding our platform and solutions expectations regarding our go to market efforts, our future financial results and guidance our growth expense and investment strategies are.
Market opportunities the recent economic downturn inflation and our overall future prospects. These statements are subject to risks and uncertainties actual results may differ materially from our forward looking statements.
A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, including our risk factors filed with our most recent quarterly report on Form 10-Q, and the risk factors that will be included in our Form 10-Q that will be filed subsequent to this call.
So my logic assumes no obligation and does not intend to update or comment on forward looking statements made on this call except as required by law.
Our discussion today will include non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to.
As a substitute for or in isolation from our GAAP results information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP and non-GAAP results can be found in our earnings release, which was furnished with our form 8-K filed today with the SEC on our Investor Relations website at Investor <unk> seen that logic dotcom.
For certain forward looking guidance, a reconciliation of the non-GAAP financial guidance the corresponding GAAP measure is not available as discussed in detail in our earnings release posted on our Investor Relations website with that let me turn the call over to Jeremy.
Thanks to everyone for joining us today on our third quarter earnings call. We are pleased with the continued progress and strength in our business. We once again exceeded the high end of all of our guided metrics in.
In Q3, we delivered total revenue of $79 million or 27% year over year revenue growth and ended the quarter with <unk> of $298 9 million or 22% year over year growth.
We achieved these strong results, while also demonstrating outperformance across both gross margin and operating margin.
Our improving operating efficiency is driven by a combination of continued cost optimization.
Improved sales productivity and head count rationalization.
We've driven sequential operating margin improvements throughout this year as it remains a key area of focus.
Moreover, we remain optimistic about our opportunity and our ability to execute against our plans.
We are committed to continuing to deliver more efficient growth as we look to accelerate our plans to achieve cash flow breakeven and profitability.
While in the near term there is less certainty and more noise in the macroeconomic climate, we have control over how we manage the business and we remain committed to delivering more durable growth and accelerating our path to profitability.
Despite the macro uncertainty we are still in the early innings of a multiyear growth cycle, driven by digital transformation cloud migration and security modernization.
Companies are increasingly relying on digital services to help grow and operate their business.
And we play a critical role in ensuring that these experiences are both reliable as well as secure.
These long term trends drive our business and are contributing to our strength.
Now we are seeing in our results.
In Q3, we continued to see strong win rates with our customers increasing their adoption and usage of our platform.
We ended the quarter with 501 customers with more than 100, K and they are representing a year over year growth of 14%.
Before I share some key customer wins I would like to reiterate that our vision is to make the world's digital experiences both reliable and secure.
Our cloud native platform uniquely helps customers do three things first ensure application reliability second secure and protect against modern security threats and third gain insights into cloud infrastructure.
This vision and our strength was further validated by the fact that we were recently named a visionary in Gardner's Magic quadrant for security information and event management for a second straight year.
Additionally, we were the only cloud native vendor in the Gartner Magic quadrant for both a P M and observe ability as well as Sim that offers a unified analytics platform for application reliability and security.
As a reminder, at the core of our platform is best in class cloud scale log analytics. This is critical as logs are essential for detecting diagnosing and troubleshooting and re meeting both reliability and security issues.
Rapid root cause analysis is essential to minimize end user or business disruption.
And security and compliance risks to applications and cloud infrastructure.
Given the significant overlap and the logs required to ensure cloud application reliability and security as well as the volume of data created by these cloud apps the ability to effectively analyze these logs at scale from a unified platform will become increasingly important.
We believe we are uniquely positioned to help customers address the challenges of delivering reliable and secure digital services.
With that I'd like to share. Some examples of how our customers are using our platform and talk about key wins for the quarter.
These wins were fueled by companies modernizing and migrating to the cloud as well as cloud native companies expanding their footprint and platform usage.
Many of the wins this quarter are with digitally disruptive companies, leveraging new technology and modern architectures to gain market share within traditional industries.
I like to first highlight some new logos that we landed in the quarter.
The first was a six figure new logo deal with a large online retailer who is newly spun off from its brick and mortar parent company.
The new entity need a security solution.
That can be easily deployed by the existing team and works seamlessly with a modern cloud native technology stack we've.
We proved our value during the POC process. When we identified two ongoing threats that were quickly remediated.
Ultimately they selected our cloud Sim because of its ability to scale with their business and it's easy out of the box integrations, providing immediate time to value.
Next we landed a six figure new logo deal with a fortune 500 healthcare company that is moving to the cloud and expanding the use of kubernetes for their micro services architecture.
Their existing solutions had difficulty scaling with the data generated by them by their micro services architecture, creating excessive personnel costs to configure and maintain it.
They wanted their team to spend more time, developing and less time, maintaining and manually troubleshooting issues. Therefore, they select a sumo logic for our SaaS based analytics offering and easy to use kubernetes observer ability solution.
These wins represent companies in different verticals that are digitally transforming their businesses, thereby requiring them to adopt new solutions to ensure the reliability and security of their cloud applications without having to run configure and maintain those technologies themselves or needing specialized in house skills.
<unk>.
Besides new customers, we continue to see many of our existing and larger customers expand their use of our platform by adopting additional sumo logic products to solve additional reliability and security use cases, which is made easy with our flexible credit space licensing model.
Additionally, data is growing faster than budgets and our cloud native platform can deliver significant economic benefits to our customers via the unified platform and data tiers.
I'd like to highlight a few of these exciting cross sells.
We landed a seven figure enterprise cross sell.
With a tech focused telecommunications company, who is already spending over $1 million with us.
This cross sells a great example of how our platform seamlessly supports a variety of security and observer ability use cases.
First they have made three acquisitions in the last six months and wanted to standardize their logging on sumo logic because of their best in class log analytics for troubleshooting and remediated issues in real time.
Additionally, they chose to standardize on sumo because of our shared vision of open telemetry standard across four observe ability.
According to our customer their Dev ops teams have experienced a 30% reduction in mean time to identify and reduction in the meantime to remediate versus competitive solutions.
Second they wanted a sim for their production and application environment and saw the benefit of using our single platform due to the similar or complementary log data for both application reliability and security.
And they'll also be using our fed ramp moderate authorize him and they're fed ramp environment.
Another similar win came from our mid market segment for a six figure cross sell with our media and technology company.
Originally using sumo for a classic monitoring and troubleshooting use case with logs, reducing time to identification and remediation when the payments or API has failed.
They are building out the security practice practices and adopted our cloud Sim and sore as they saw the benefits of having a single vendor providing a single platform for ensuring application reliability and security of their mission critical applications.
While data consumption continues to grow more than 50% year over year data volumes are continuing to outpace budgets with.
With increasing data volumes, there's a natural opportunity to drive further expansions.
In the quarter, we had a couple of fortune 500 companies with seven figure upgrades due to continued data growth. They chose sumo because of our data tiers help lower their ingestion costs and are out of the box analytics helps increase their time to value.
Lastly, I'd like to highlight that we continue to see strong traction with our channel partners for both observe ability and security deals.
More than two thirds of our new business went through the channel in the quarter and we think we can continue to drive this number up as we continue our focus shifts to our partner first strategy.
In addition, as we shift from channel fulfilled to channel sourced sales opportunities. It will free up sales cycles for our direct sellers, improving the reach and efficiency of our sales organization.
This is an important lever for our future growth.
These wins highlight our continued traction larger market opportunity as well as underscores the core differentiators of our unified cloud native platform for observer ability and security.
Our platform.
Is able to handle modern data volumes at unparalleled scale as our customers' needs expand and contract.
An environment, where customers are scrutinizing budgets, there's an even bigger opportunity for customers to eliminate expenses by moving to our unified platform that has the breadth and scale required to meet their business needs.
Additionally, our platform is highly audited and certified for a variety of industry security and compliance regulations, including PCI HIPAA and fed ramp.
With that I would like to share some quick product highlights during Q3, we announced significant new capabilities and functionality to continue strengthening our full stack observe ability and security value by providing our practitioners with greater insights and usability.
We announced reliability management, which is a better approach to measure and improve the reliability of distributed applications shifting the focus on reliability towards the user experience.
Additionally, we provided some exciting updates and enhancements to develop our strategy and user experience with our views are monitoring a unified entity model intelligent alert grouping and our new app to help practitioners manage their AWS performance and cost.
For security, we continue to invest in developing security capabilities as well as enhancements to the platform in order to open up new routes to markets and levers for growth.
This quarter, we announced that our cloud Sim is now available as part of the sumo logic fed ramp moderate offering.
With this designation sumo logic became the first cloud native Sim to deliver insights into on premises and cloud environments for public sector organizations, helping in our efforts to continue to expand our public sector presence.
Additionally, we continued our commitment and focus on our Dev ops community and end user practitioners. This quarter, we hosted our sixth annual user conference illuminate a premier global education and community event that brought together customers with thought leaders and I T operations development and operations security.
And more BC.
Besides the free training certifications and best practices content that we deliver to illuminate we also continue to support the broader open source community contributions to open telemetry initiatives.
I'm extremely proud of the highly differentiated solutions that we have to offer in a single platform that is recognized by customers and industry experts experts alike, and I feel that our portfolio offerings have never been stronger.
Before concluding I'd like to welcome Timothy Young blood to our board of directors as we further our efforts to help see sows in organizations of all sizes address the increasing cyber security challenges with digital transformation and cloud migrations.
Kim has extensive cyber experience and a deep understanding of challenges faced by his fellow <unk> and we're super excited to have him joined the board.
Now in summary, our industry, leading cloud native platform has never been stronger and we continue to deliver improved results on both the top and bottom line as we drive towards the commitments, we've made on the path to profitability and positive cash flow.
I'm extremely proud of our continued progress and results we have achieved so far throughout the first three quarters of our fiscal year I would like to thank all our employees for their continued dedication and passion to help US innovate drive continued improvements in our go to market efforts and lastly commitment to increase our operation.
Rigor.
The impact of these collective efforts can be seen through the significant efficiency improvements from our initial guidance at the beginning of the fiscal year.
With that I'd now like to turn it over to Stuart Grierson, Our Chief Financial Officer, who will provide more details on our strong financial results in Q3, and our outlook for Q4 as well as our fiscal year.
Thanks from me and thanks, everyone for joining us on the call.
I'd like to start with a brief summary of the financial highlights for the quarter and then go into more detail on each topic.
First as <unk> mentioned, we've continued to deliver strong topline results with Q3 year over year revenue growth of 27% and AOR growth of 22%.
We have continued to deliver our commitment to more efficient growth.
And cost of sales, we executed some focused initiatives to drive efficiencies in our cloud infrastructure and operations, resulting in a reduction in cost of revenue from the prior quarter.
These efforts combined with the strong revenue in the quarter resulted in gross margins of 73%.
In addition, as discussed in prior calls we are executing on our revised go to market strategy and these actions are starting to pay off resulting in improved operating performance.
To recap under Linda <unk> leadership, we segmented our sales team into a hunter farmer model.
Implemented a channel first strategy.
New sales leaders and up leveled our talent to better fit this new model.
The result has been a rationalization of the salesforce, while driving productivity gains and maintaining growth.
We have consciously reduced discretionary spend and overall hiring across all organizations in order to bring our cost structure more in line with our long term operating plan.
The result was Q3 operating margins of negative 7% of revenue a significant improvement from the midpoint of our guidance of negative 23, 5%.
These results reflect our commitment to driving more efficient growth as we execute on the path to profitability. We shared with you at our Investor Day on September 20th.
As mentioned on our last call. We believe <unk> is the best leading indicator of growth in our SaaS business.
We ended the quarter with a R. R of $298 9 million, representing 22% year over year growth.
Our a R. R is impacted by the reduced number of total sales reps and ramp sales reps from the changes we've driven in the sales organization.
While these efforts are delivering better sales efficiency it'll take time for the sales organization to ramp and reach full productivity.
As previously discussed the benefit of these changes will not be linear in nature with greater impact as we progress into the second half of FY 'twenty four and beyond.
Our 100, K plus a our customers are foundational to our growth.
In Q3, the number of 100 K plus they are our customers grew 14% year over year while.
While the incremental account of these customers was not as significant as in prior quarters their relative contribution to a R was consistent as our larger customers contributed significantly to the growth this quarter.
As expected our dollar based net retention was consistent at 115% for the third quarter in a row.
This remains a significant improvement from the prior year as we improved both our expansion and retention rates.
We do expect Q4 net retention rates to be a few percentage points lower given some no known Q4 downsizing driven by budgetary pressures as some customers look to reduce spend in this uncertain macro environment.
Turning to billings calculated billings for the trailing 12 month period was $311 7 million up 18% year over year.
Call that we look at calculated billings over a trailing 12 month period as this metric can fluctuate from quarter to quarter due to the timing of our renewals and variances in billing schedules, which was particularly true this quarter for some of our larger customers.
Remaining performance obligation or our P. O remains healthy at $354 9 million, representing a year over year increase of 21%.
Now I'll review the income statement in more detail as a reminder, unless otherwise noted all metrics are non-GAAP .
As previously stated total Q3 revenue increased to $79 million up 27% year over year.
We once again saw better than expected linearity in the quarter, a positive indicator of the improved rigor and discipline in the sales organization. In addition, there were some upgrades in the quarter with associated contract revisions, resulting in moderate revenue acceleration in the quarter.
Q3, gross margin was 73%, which was a few percentage points better than the prior quarter. The improvement was largely driven by several focused initiatives to lower our cloud infrastructure cost.
We expect Q4 gross margins to be in the 72% to 73% range as we sustain the savings from these initiatives longer term, we expect gross margins in the mid 70% plus range as we drive efficiencies in our cloud infrastructure and operations.
With regards to operating expenses, we have continued to rigorously scrutinize hiring and discretionary expenses.
By the end of this fiscal year, we will have eliminated roughly 27 million in expenses or approximately 9% from our original plan.
As previously mentioned in Q3, we reduced operating expenses across all functions from the prior quarter.
While we expect to modestly increase our operating expenses in Q4, as we add capacity and sales. We also remain cognizant of the greater uncertainty caused by the macro environment and will invest cautiously.
Yeah.
As stated previously our Q3 operating margin was negative 7% driven by revenue outperformance improvements in gross margin and careful management of operating expenses.
Net loss in the quarter was negative $4 4 million or negative four cents per diluted share based on approximately $119 1 million weighted average diluted shares outstanding.
Turning to our balance sheet and cash flow.
We remain well capitalized and ended the quarter with $342 1 million in cash and marketable securities and no debt.
Free cash flow in the quarter was negative $9 1 million or negative 12% of revenue.
As we've shared previously given the variability of free cash flow from quarter to quarter, we recommend looking at free cash flow and free cash flow margin on an annual basis.
We expect to end the year with free cash flow margin of approximately negative 10%.
We also expect to continue to deliver improvements in free cash flow margin in the future as we focus on driving more efficient growth.
Turning to guidance as a reminder, we believe that is more relevant to measure the growth of our business on a full year basis, given potential variability from quarter to quarter.
The macroeconomic environment continues to create a higher degree of uncertainty.
While we did not experience a material impact to our business in Q3, we are seeing increased scrutiny over budgets and buying decisions.
We also believe this environment and the associated uncertainty will progress through Q4 and into next fiscal year.
Despite this backdrop, we believe that our offering is more resilient than most as we enable teams to work more efficiently, allowing them to accomplish more with fewer resources.
I need to deliver reliable and secure digital experiences for mission critical applications will continue to be a top priority for our customers and the broader market.
For the full fiscal year 'twenty 'twenty three we expect total revenue of 298 million to $299 million, representing 23% year over year growth.
non-GAAP operating margin of negative 16% to negative 15%.
And non-GAAP loss per share of negative 36 cents to negative 35 cents on approximately $117 5 million weighted average shares outstanding.
For the fourth quarter, we expect total revenue of $77 million to $78 million, representing 15% to 16% year over year growth.
non-GAAP operating margin of negative 14% to negative 13%.
And non-GAAP loss per share of negative nine cents to negative cents on approximately 125 million weighted average shares outstanding.
In summary, we are pleased with our continued strong execution on both our top and Bottomline priorities.
I am committed to delivering more efficient growth, while accelerating our path to profitability as we navigate this uncertain macroeconomic environment.
Our unified cloud native platform for reliability and security continues to resonate with our customers as more customers are seeking to provide best in class digital experience to their end users.
With that remain and I are happy to take any of your questions operator.
Okay.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before.
These darkies.
One moment, please while we poll for questions.
And our first question comes from the line of Camille military.
Blair. Please proceed with your question.
Thank you and congrats on the strong quarter.
Several of your peers have announced plans to slow down hiring can you provide more detail on how you're thinking about head count changes going forward are you planning more rationalization or given the initial success of the Hunter farmer farmers structure would you be adding to the sales organization.
Yeah, Hey, Camille we're actually as I said in the in the prepared remarks, we'll be looking to add capacity to the sales organization. So we're down year over year, obviously as we've we've made the changes we want to make sure we have the right people in the organization.
But we will always balance of hiring with continued viewed of productivity gains.
But our expectation is to add capacity in the sales org.
Got it helpful and I realize that <unk> is the right metric to focus on but there is a bit of a divergence between revenue and billings growth can help bridge the gap between these metrics and what's driving the strong revenue acceleration.
Yeah. So I think you know as we've shared and I think you're right <unk> is the best metric to look at in terms of kind of the the leading indicator of growth.
And so as we have made the changes in the sales org, our capacity is down and particularly a wrap capacity is down and that does have an impact and they are and that's what you're seeing in the numbers.
And then revenue is is a trailing indicator in a SaaS business and so you were getting the benefit of the strength in the prior quarters as I mentioned, there was some very moderate sort of impact this quarter on some revenue acceleration, which which helped with the beat.
Though we were strong with we were.
Glad of the strong beat regardless, but that's the dynamic that you're seeing from a billings perspective, just to touch on that one you know we've talked about this in the past, we will have variability from quarter to quarter and some of that's got to do with billing schedules and so one of the comments I made was we did see this quarter a number of our larger.
Deals had billing schedules that were while they were one or multi year contracts. Some of the billing schedules were less than one year in duration, so they're either.
Lee or semiannual and so that can impact billings are the prospective of billings growth year over year.
Yeah.
Got it that's very helpful. Thanks again.
Yeah.
Our next question comes from the line of Matt Hedberg with RBC capital markets. Please proceed with your question.
Yeah. Thank you this is actually not swanson on for Matt.
I guess this is kind of be for both of you, but it's really impressive to see the D. B N IRR whole consistent for three quarters, given how challenging the macro spend.
Can you just kind of expand I guess on what you think this means about how your customers are seeing your platform and then given the challenging macro you know one of the trends we've heard a lot this quarter, it's about consolidation to fewer vendors.
Getting back onto the platform as well.
Hey, this is rami and I'll start I think the first part of that answer is pretty simple we were really well positioned in two very large markets that are growing.
Both on the reliability side and security.
<unk> uniquely we're well positioned even more so because of that single unified platform that not only meets the technology requirements, but also the business needs in this circumstance and macroeconomics uncertainty so more specifically a lot to do with the tiered analytics and licensing model now the other part.
To your question in terms of a single platform and consolidation yeah, we see elements of that but honestly, there's still a lot of best of breed. That's out there a lot of homegrown solutions and then a lot of other commercial products that just don't meet the scale, let alone the economic needs that are ripe for replacement and displacement by sumo.
That's that's super helpful. And then congrats on the clouds and game beside ramp certification.
Do you mind, just commenting a little bit on how federal was in general for the quarter.
So our public sector business is something we've been investing in more now on the go to market side as we've now achieved all obviously fed ramp moderate for our cloud Sim.
We've had capabilities for logging there and we've expanded that and so now we're the only cloud native solution that's available through that means and channel and so a lot of effort will be focused on our channel partners are driving our public sector business.
Right. Thank you.
Okay.
Our next question comes from the line of Derrick Wood with Cowen. Please proceed with your question.
Oh, great. Thanks, it's Andrew on for Derrick Congrats on the strong quarter Stuart I think there's 7 million revenue beat was one of if not your largest ever in your call you called out that there was some revenue acceleration there, but any quantification of what that helped drive that.
It would be great and that is that kind of the main driver of the Q4 guide down sequentially, which I think normally it would be up sequentially.
Yeah sure Andrew So just to quantify the Q3 are you know not to beat but the impact of the acceleration is about one and a half million of the over achievement. So obviously it was a nice clean beat irrespective of that but that definitely helped with the to your point larger than usual beat that we saw.
But I think as you look at Q4, we signaled you know as early as last quarter that there was going to be you know that that number is even smaller we have raised guidance and you know that's obviously with the visibility we have but also being cognizant of the environment, we're in and the uncertainty but I.
You know raising we raised guidance effectively by $2 million from where we were three three months ago.
Yeah, Great and just lastly, just lastly, I think I think just to you know.
We've talked about variability from quarter to quarter as well and obviously you know what we've always focus folks on is the annual growth and so you know now we're guiding to 23% annual growth versus the 19% we were at last year.
Yeah, great. Thanks, and then roaming.
APAC and Europe were pretty strong last quarter, just wanted to check how that performance was this quarter and how pipelines are looking out for Q4.
Yeah International.
Combined was strong again, we've seen direct business there as well as the partner business continue to perform.
It's really about coverage and capacity on the direct side and then time in the saddle with a lot of new partners that are vars or <unk> as well as M. S piece as we look to grow that segment of our business.
So that's a continued effort of investment for us going forward I think it was north of 23 or 22% contribution international for last quarter.
Which was more than 50% growth year over year.
Awesome. Thanks, guys.
Yeah.
Our next question comes from the line of Gray Powell with B T. I G. Please proceed with your question.
Hey, guys. Thanks for taking the question and congratulations on that.
The good set of numbers here.
So yeah, a couple on my side and I was really just hoping to square the ALR and revenue comments to specifically how should we think about the sequential growth in <unk> in Q4, I mean, it just seems like you could probably get pretty close to your Q4 revenue guidance with little to no growth beyond the Q3.
And being a run rate.
I know you mentioned.
Customer downsizing I'm so sorry.
Just trying to think through those things and just basically verified that I'm doing the math correctly here.
Sure I'll take this one great. So Ah Stewart obviously.
Obviously, we don't give out our guidance at this point, but I think just to give you a little maybe color and perspective, you know I think I would look at kind of the capacity we have rate was being down both a year over year and absolute sales reps and then also from a rep perspective, that's what has the impact on a R. R.
The near term, which is why we talked about how as those ramps as those reps.
You know continue to be onboard and ramp the impact gets greater as we get into FY 'twenty for particularly the back half.
So that's how to think about a R. R M.
You know from a revenue perspective.
I think our philosophy has remained consistent somehow we are guiding to revenue is is you know we put out numbers that we have a high conviction that we can deliver on.
Obviously, you know you build a little in and given the uncertainty that we have in this environment, but that's how we think about revenue guidance.
Okay. That's really helpful. And then in terms of like the assumptions for Q4 are you assuming like a stable macro environment versus Q3, I think worse than just kind of curious what sort of like.
Underlying our view of the world.
Yeah listen I think we're seeing more discussions around.
Buying decisions budgets right than we saw even as we were in Q3, So we're definitely seeing a more scrutiny.
And so we've seen that I'd say tick up from where it was in Q3 and I think we expect that to continue into Q4 and into next year.
Alright understood very helpful. Thank you very much.
Yeah.
And our next question comes from the line of <unk> Singh with Morgan.
Okay.
Uh huh.
Thank you for taking the question and congrats on the solid execution. This quarter sure I guess my question was really around they're really great sort of operational efficiencies you guys had been materializing in the business. If I look at sort of Opex I think it's down sequentially quarter over quarter, and then I think two of the three lines.
Opex R&D and.
And G&A are down year over year sales and marketing and sort of slightly up heard you loud and clear on the need to invest until some marketing I guess my broader question is as we look over the next you know a four to five quarters.
Is this piece of efficiency sort of sustainable you know how structural are these efficiencies that you're seeing within gross margin R&D G&A should we assume that that sort of sustains going forward realizing that there needs to be more investment in sales and marketing as you as you would have go to market and product.
To get a sense of you know.
How how long lasting some of these hum margin improvements can be hum going forward.
Yeah. So so our expectation since it is obviously as I said, we're going to invest in sales capacity.
Given we are lower listen we need to invest in cross the business as we scale, we recognize that we needed to improve.
Our op loss profile, we still got work to be done there obviously.
As we laid out a picture of driving the company towards first cash flow breakeven in operating margin breakeven and we're trying to accelerate that path and so you know we're going to we're going to evaluate this every quarter. It's an ongoing thing where we're looking at hiring plans, we look at where do we hire a we look at discretionary spend and so obviously, while we had a.
Big impact this quarter and it's pretty unusual for a business is growing like ours to be able to take down expenses quarter over quarter. I don't think you should continue to expect that but certainly we expect to have the better leverage and efficiencies relative to revenue as we scale this into the over the next several quarters.
And so big picture, but as you know the the mantra here is is that the.
The team is going to invest behind revenue versus ahead of revenue, which had been more of the case the past couple of years.
I would say that's true obviously I think the most important thing there that we evaluate as both the environment. We're all operating in as well as the productivity that we're seeing in the sales force right and so it is it's constantly evaluating those and and that will dictate the pace at which we invest in sales capacity.
Understood.
That's very clear.
I mean on the or maybe it might be a question for you Stewart as well on some of these you know customer down sells to the extent that that's happening is there a profile of customers that that where that's occurring more versus last whether its a market segment mid mark.
Large enterprise versus SMB or in particular industries or customers that we have really expanded significantly with sumo logic past couple of years, they may be going through a.
Digesting period now is there any sort of pattern that you are picking up in some of the customers that are indicating that they are that they may be looking to rationalize some of their spend going forward.
Sanjay I don't know if anyone's immune to what's going on out there and if they are I don't know how.
How they're operating a business right.
I think was we look at the macro headwinds. There's also some macro tailwind right and I think those companies that have similar tailwind are continuing to invest but just not at the pace that they're investing in before.
So the size of the upgrades or cross sells maybe temporarily reduced or the length of the contract right.
You know I think no one no particular vertical is better than in other right now to be honest I think we've seen probably stronger contribution internationally than we originally thought given everything going on with the war and the macroeconomic uncertainty GDP all that I don't know how long that will persist our business in the enterprise.
Is continuing to progress as is in the mid market segments.
And we will continue to as Stuart mentioned moderate that investment as we see demand and kind of budgets dictate how we invest.
Yeah.
Got it and that's the trick for US here at maintenance makes a ton of sense. Thank you very much.
Thank you.
Yeah.
And our next question comes from the line of Blair Abernethy with Rosenblatt Securities. Please proceed with your question.
Thanks, and nice quarter guys.
I mean, just wanted to dig in a little bit more on the channel side just.
Just you know in terms of the managed service providers how are they performing in this macro and the cloud service providers that you've been working more closely with over the last couple of last year. So I just wanted to get a sense of.
You know how how the channel is performing for you now and in the environment.
So there are good to hear your voice.
First let me start by saying that we were in this transition.
Two channel first strategy right, meaning that we are trying to make sure all new opportunities involve and are actually transacted through a channel partner or whether that's a var or disney or in lot of cases like as you're referring to an MSP or an MSP now to your question specifically about <unk>.
Service providers, I think they're going to play an increasing role going forward, particularly because of labor shortages. The concerns around the breadth of security kind of risks and services of attack and the technologies that are insufficient that are continuing out there. It gives us a great opportunity to go sign up new.
[noise] ones as well as continue to expand and differentiate their businesses.
Last quarter, we did sign up some new M. S. S piece, we saw the contribution from channel as I mentioned earlier increase.
Now, we're seeing the pipeline being deal Reg as well as opportunities from the channel being brought to sumo start to increase versus solely the other way around so those are all great indicators, but we have a lot more work to do.
Okay.
Okay, great and and Stewart.
Just on the cloud.
The gross margins this quarter.
Any other color you can give us on that what you were able to do.
On the cloud margin the gross margin and you know is this is this should we be thinking of this as the new level.
Yeah, So blurry.
Blair I'm not going to get into specifics of what we did I mean, there's lots of things you can do is you run a SaaS service in terms of optimizing your infrastructure costs and operations and so you know we we are as a team looked at opportunities and you saw those results in the current quarter a signal.
Signal with 72% to 73% gross margin for Q4, and so we have a number of initiatives that we're looking at some of them will take investment in order to drive the savings further down the road and so obviously our goal is get back to the 75% plus range over time and so yes.
I think you know, where we're going to build up towards that level.
And evaluate different things, we can do every quarter.
Yeah.
Okay, Great and one last quick one just any any FX impact on the topline this quarter of note.
No we price in U S dollars. So obviously, we do have a I mean, obviously that impacts the cost of the solution for folks internationally, but but but not a dynamic that we could point to having any meaningful impact at this point.
Great. Thank you.
Yeah.
And our final question comes from the line of pendulum Bora with Jpmorgan. Please proceed with your question.
Okay.
Hey, guys. This is Noah on for pendulum, thanks for taking our questions and congrats on the quarter maybe.
Maybe just a quick follow up on the sales reps could you maybe just talk about the rep productivity trend in the third quarter and how that's heading into the fourth quarter.
Yeah, I'm not going to give specifics Noah on the productivity gains and when we'd sort of talked about at our Investor day, We're continuing to see I'll say, just same levels or productivity gains for the for the folks that we've been bringing on board and so we're very encouraged.
By their results feel like we've made the right moves in the sales organization to get it moving in a better direction and and we'll be obviously, we track this month to month and quarter to quarter as we move forward, we expect to be able to drive further gains down the line.
Got it and then just for a follow up question maybe.
Based on your conversations with <unk>, how do you think industry growth trends next year do you think they will.
Take a step down or do you think it will be more resilient.
You know to be honest.
Lot of our C. So cio's, it's all over the place.
Lot of them are going through that finalization of budgets and planning now.
I can tell you there's still a lot of demand and concern around continued investment in security, which we're well positioned for but there's also the reality of shortage of staff right and so back to the M. S. S. P conversation. So that's one arrow area the.
The second area is I think the the effort around migrating of workloads to the cloud Hasnt slowed down I think the question really is how do I replace some of the traditional homegrown piecemeal parts that were stitched together with a consolidated platform as some of the conversations that we're having in la.
Leading to some great cross sells and upsells as well as new opportunities.
Other than that it's comes down to.
People process and technology decision as every CIO looks across their portfolio of spend and where they can drive X percent savings and we think we're well positioned because we can help them save money as well as continue to innovate and drive agility in growth.
Got it thank you.
Okay.
And we have reached the end of the question and answer session I'll now turn the call back over to management for closing remarks.
Wonderful. Thank you again, everyone for joining us today.
In summary, our industry, leading cloud native platform in my humble opinion has never been stronger.
We're completely in control of the efforts this past quarter and our plans for the year to deliver efficient growth and efficiency improvements.
Particularly based on from our initial guidance earlier in the year, we will continue to deliver improved results on both the topline and bottomline as we accelerate towards eventual cash flow breakeven and of course profitability with that I want to take a moment to thank all of our employees once again for their hard work their dedication as well as everyone.
Today for joining us on the call. Thank.
Thank you very much and happy holidays.
Yeah.
And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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