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Yext, Inc. (NYSE:YEXT) Q1 2024 Earnings Call Transcript June 6, 2023 Yext, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.05. Operator: Hello and welcome to the Yext Inc. First Quarter Fiscal 2024 Financial Results Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity […] Yext, Inc. (NYSE:YEXT) Q1 2024 Earnings Call Transcript June 6, 2023 Yext, Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.05. Operator: Hello and welcome to the Yext Inc. First Quarter Fiscal 2024 Financial Results Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask a question. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nils Erdmann, Senior Vice President, Investor Relations. Please go ahead. Nils Erdmann: Thank you, operator, and good afternoon everyone. Welcome to Yext’s Fiscal First Quarter 2024 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath; President and COO, Marc Ferrentino; and CFO, Darryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, expectations regarding the growth of our business, our outlook for the second quarter and fiscal year 2024, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities, as further described in our first quarter earnings press release. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Yext’s growth, the evolution of our industry, our product development and success, our management performance and general economic and business conditions. These forward-looking statements represent our beliefs and assumptions only as of the date made and we undertake no obligation to revise or update any statements to reflect changes that occur after this call. Further information on factors and other risks that could cause actual results to materially differ from these forward-looking statements, is included in our reports filed with the SEC, including in the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors in our most recent Form 10-K for the fiscal year ended January 31st, 2023, and our press release that was issued this afternoon. During the call, we also refer to certain metrics, including non-GAAP financial measures, reconciliations to the most comparable historical GAAP measures are available in the earnings press release which is available at investors.yext.com. We also provide definitions of these metrics in the earnings press release. I will now turn the call over to Mike. Michael Walrath: Thanks, Nils, and thanks everyone for joining us today. We are pleased to report solid Q1 results and a strong start to the year. We generated revenue of $99.5 million. Non-GAAP earnings per share of $0.09 and over $14 million of adjusted EBITDA. Our non-GAAP EPS and adjusted EBITDA were the highest in Yext history, and we continue to hit new peak levels of efficiency and profitability. Our performance in the first quarter was a direct result of our continued execution on our priorities, creating value for our customers and improving productivity across the organization. Last year was a turning point for Yext, and we spent the better part of fiscal ’23 reorganizing our team, reorienting ourselves around our customers to deliver the highest value and delivering tremendous product innovation. Our first quarter total non-GAAP cost of revenue and operating expenses totaled $89.7 million, down from $106.2 million last year, a 16% decrease. We’ve hit the ground running in fiscal 2024 and in the first quarter we continued to build awareness for the power of Yext Answers platform and its ability to deliver and generate trusted answers across the full spectrum of digital experiences. Both new and existing customers are realizing how much our platform can enhance their digital transformation by reducing friction, streamlining operations, addressing customer pain points, and driving increased value. Our launches of Content Generation Studio and Yext Chat in beta have been catalysts for more in-depth discussions around Generative AI. As Yext becomes increasingly engaged in strategic discussions about the end-to-end customer journey through the digital experience, our conviction in the long-term opportunity of our platform grow stronger. In the last couple of weeks, we launched two new global campaigns focused on the importance of having a modern, composable best-in-breed architecture that shows the possibilities of what customers can do with our AI-led DXP. Our go-to-market executive team has been in place for six months and we’re pleased with the progress we are making. While the full transformation of our go-to-market will take a couple more quarters, we are beginning to see increases in pipeline production and conversions, particularly with smaller enterprise customers. Our mid-market team benefits from shorter sales cycles and less complex integrations and the uptake is a good indicator of how our value proposition is landing with customers. So while it is still early, we believe this momentum will eventually carry over to the larger enterprises as well. Our first quarter performance delivered against the goals we laid out in March and again in April during our Investor Day. We streamlined our operations and demonstrated even greater efficiency and profitability. And in spite of macroeconomic headwinds, we exceeded our revenue, adjusted EBITDA, and non-GAAP EPS targets for the quarter. We generated significant year-over-year profit growth and as Darryl will describe in more detail, we are raising all of our top and bottom-line targets for the year. During our previous earnings call, we mentioned our multi-year plan to transition a portion of our services business to our systems integrator and partner ecosystem. As part of our restructuring plan, we reduced the size of our professional services organization. As expected, the shift in our services strategy had a modest impact on our retention and bookings in Q1. And we expect this to continue as we work through the renewals and build more partnerships throughout the year. The upside to this was felt immediately, and the margin profile of our business has increased significantly. This resulted in non-GAAP gross margin of 79.2% for the quarter, which exceeded our expectations and contributed to our bottom line beat. Overall, we experienced business conditions in Q1 that were similar to the previous several quarters. Our net retention rate for direct on the basis of ARR was consistent with the fourth quarter. We achieved year-over-year growth with a smaller sales organization, which indicates that our emphasis on productivity is having the desired effect. We’ve made steady progress in Q1, despite a continuing cost conscious demand environment. And as our go-to-market and demand gen engines begin to ramp, we’re looking forward to picking up momentum. At the same time our team remains committed to growing our business profitably and managing efficiently. I’m grateful for the commitment and efforts of our entire global team, who are performing well in a challenging environment and staying focused on the significant opportunities ahead of us. With that, I’d now like to turn the call over to Marc. Marc Ferrentino: Thanks, Mike. Back in March, we announced the strengthening of our Answers Platform with new AI-enabled features as part of our Spring ’23 release. Our innovative AI-driven solutions and our digital experience platform are driving considerable interest from new and existing customers. We launched a beta version of Yext Chat in February, based on significant demand for Chat from our customers. And we expect that Chat will soon be included in our general release. Our recently launched Studio and Content Generation features have also been well received. And we believe there is significant opportunity for us and our partners with these products. From our conversations with prospective and existing clients, it’s clear that Yext is at the center of a massive transformation taking place that can help businesses leverage the power of AI. Our innovations across natural language processing, analytics, and security as well as our leading technology integrations are driving competitive wins in the marketplace and setting the table for sustainable long-term growth. Our innovative composable product platform makes it easier for businesses to enhance their digital experiences, and we have some great customer examples from Q1. During the quarter we expanded our position and added customer wins within the healthcare, financial services, technology, and consumer product sectors. Here are just a few examples. Our go-to-market team executed an impressive win back with a large healthcare provider. This provider was a pre-week Yext customer that churned in 2020. They replaced Yext with another listings provider. And since then has suffered from inaccuracies on Google, a lack of customer support, and an absence of analytics data. They were already familiar with our best-in-class listing solution and further impressed with the new features of our platform such as Verifier, Direct API integrations, and new Apple Map integrations, which won them back in Q1. Another boomerang customer with TGI Friday’s. After leaving Yext, they were in talks and close to signing with another listings provider, but after demonstrating the benefits of our composable platform in a head-to-head against a competitor, we were able to win them back. A few months ago, Yext was evaluated against several search providers and selected by Netgear to power the search experiences across all of their global sites, including e-commerce, support community, and documentation. We’re looking forward to a great partnership. One of the largest regional banks in the US became another great example of a customer visualizing Yext as a platform, as opposed to a point solution. By showcasing how Yext could not only replace an existing listing provider but also enhance and improve their entire digital experience. We were able to engage with the customer across several branches, loan officers, products and FAQs of the organization. Our team provided quantitative analysis of their digital experience and provided examples of the incremental value that our platform could add relative to their in-house and third-party providers. As a result, the customer chose our platform and our suite of products to work with their existing systems and to manage their experiences across channels and different modalities. Beltone was a competitive win where we were able to demonstrate the advantages of our platform over various point solutions. Beltone had been using in-house tools at a competing listing solution. And they needed a platform that could streamline their existing process and manage the scope of their extensive network. The Yext direct integrations and extensive publisher network helped earn us their listings business and they regarded our other products as compelling opportunities for us to scale in the future. Mathnasium needed a platform that could help them automate their existing highly manual listing process and scale across more than one thousand franchise locations. We were able to win the business over several competitors because of our platform benefits, strong analytics, and superior technology. And finally, one of the world’s largest producers of premium [indiscernible] was looking for ways to leverage AI-generated content as part of its marketing effort. Consistent with what we have heard from numerous consumer brands, this customer wanted to explore cost conscious ways to generate content, without having to devote significant internal or external resources. By meeting with several of the company’s C-level executives, we were able to showcase how Yext AI-based products and platform capabilities could provide better digital experiences to their customers. Yext is in a strong position, particularly at this moment in time, to help businesses leverage AI-based technology and improve their digital experiences through our composable digital experience platform. I couldn’t be more excited about the buzz around AI, that’s helping drive awareness amongst C-level executives and helping our teams demonstrate how powerful a partner Yext can be to businesses, particularly in today’s environment. Now I’ll turn the call over to Darryl. Darryl Bond: Thanks, Marc. As our financial results demonstrate, the first quarter highlighted our continued operating efficiency and profitability. Our Q1 revenue of $99.5 million exceeded the high end of our guidance range. Revenue growth was approximately 2% in constant currency and 1% on as reported basis. This represented a year-over-year negative impact of approximately $1.3 million due to FX. While still facing uncertainty in the macro environment, our newly reorganized sales and marketing teams are executing on a prudent and productivity-led growth strategy. We achieved year-over-year growth to sales organization that is much leaner than it was a year ago, which indicates that our emphasis on productivity and accountability is delivering the desired outcome. Our growth in Q1 was driven by continued demand in our direct business. Our customer count for direct excluding SMB increased 5% year-over-year to over 2,970. Annual recurring revenue or ARR was $398.3 million, up 3% year-over-year in constant currency as well as on an as reported basis. Direct customers represented 82% of total ARR. Direct ARR at the end of Q1 totaled $326.1 million, an increase of 5% year-over-year in constant currency as well as on an as reported basis. Third-party resellers which represented 18% of total ARR at the end of Q1 delivered ARR of $72.2 million, a decrease of 6% year-over-year in constant currency, as well as on an as reported basis. As of the end of Q1, our net retention rate was 97% for our direct customers and 92% for our third-party resellers. These rates were consistent with our rates as of the end of Q4, and we’re pleased with the level of stabilization that’s occurring due to the efforts of our sales and customer success team. Turning to non-GAAP results, which are reconciled to GAAP in our earnings press release, Q1 gross profit was $78.7 million, representing gross margin of 79.2% compared to 76.4% in the year ago quarter. The positive impact to our gross margin was result of the changes we described in Q4, related to the shifting of some of our lower-margin services to our SI and partner ecosystem. These changes as well as continued improvements in our operating efficiency contributed to margin improvements that were better than anticipated. At the time of our Q4 earnings report in March, we expected gross margin improvement throughout the rest of the year that would eventually put us at the high end of our 75% to 80% range. However, we were able to implement organizational changes and recognize cost savings earlier than anticipated. We expect our gross margins for the remainder of our fiscal year to remain at the high end of this range. Our operating expenses in Q1 were $69 million or 69% of revenue compared to $82.9 million or 84% of revenue in the year-ago quarter. The key part of our operating expense discipline has been the realignment of our sales and marketing team and our sales and marketing costs as a percentage of revenue were 40% in Q1 compared to 55% in the first quarter last year. Our Q1 net income was $10.6 million compared to a net loss of $7.8 million in the year-ago quarter. Our Q1 net income per basic share was $0.09 compared to a net loss of $0.06 per basic share in the first quarter of last year. Cash and cash equivalents were $217 million at the end of Q1 compared to $190 million at the end of the fourth quarter. The increase in our cash balance was driven primarily by collections, partially offset by continued share repurchases in Q1, which totaled $4.6 million or 600,000 shares. Since the commencement of the program or share repurchases have totaled $82 million or 14.4 million shares. We intend to continue to maintain a strong balance sheet and cash position going forward and will remain open to buying back our stock at attractive prices. Net cash provided by operating activities for Q1 was $26.7 million compared to $17.9 million in the year-ago quarter and our CapEx was 900,000 compared to $1.6 million in Q1 last year. Turning to our outlook for the second quarter and full fiscal year ’24, the macro environment remains challenging and customer behavior across all businesses suggests continued uncertainty. Longer sales cycles, tighter budgets, and additional approval layers are common and our guidance assumes that these weaker macro conditions and their effects will persist throughout this year. As of today, for the second quarter, we expect revenue in the range of $101.5 million to $102.5 million. Adjusted EBITDA in the range of $11 million to $12 million and non-GAAP EPS in the range of $0.06 to $0.07, which assumes a weighted average basic share count of approximately 124.6 million shares. For the full year fiscal ’24, we expect revenue in the range of $404 million to $407 million. Adjusted EBITDA in the range of $49 million to $51 million, and non-GAAP EPS in the range of $0.28 to $0.29, which assumes a weighted average basic share count of approximately 125.1 million shares. We are now ready to open up the line for questions. Q&A Session Follow Yext Inc. (NYSE:YEXT) Follow Yext Inc. (NYSE:YEXT) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Tom White with D.A. Davidson. Please go ahead. Thomas White: Great. Thanks for taking my question guys. Nice start to the year. Two, if I could. Mike, maybe you could elaborate a bit more on kind of how you’re progressing on some of the initiatives around sales productivity and building pipeline in some novel ways? And curious sort of where that stands and how you’re currently thinking about potentially adding quota-carrying reps this year? And then second question on net retention for direct, same as last quarter, 97%, I think historically it’s been sort of 110%, 112% range. Can you kind of refresh our memory or maybe like is the market for an offering like yours today kind of meaningfully different in any way versus when you had retention in that higher range? Just kind of curious whether maybe the offerings were penetrated or anything like that. Any color you can share there would be helpful? Thanks. Michael Walrath: Sure. Hey, Tom. So let me take the first one. I’ll try to remember the second one while we do that, but you can refresh it for me. So progress on the sales and marketing side, I mentioned this in my comments. We’ve got an executive team now with Tom and Raianne, who are together have been on in the seat for a little over half the year. And we’re clearly seeing progress, I mean, we saw increased productivity in Q1, we saw growth with obviously a smaller expense on sales and marketing, that tells me that, we’re getting more from the machine. But I want to be careful that, not to indicate that the machine is — the work is done there. So the work is clearly ongoing and it takes as I’ve said before, it takes more than a couple of quarters to not just decide what you’re going to fix, but then go ahead and fix it. And then obviously we have the sales cycles to think through as well. So the long-range view on this is, if it takes six to 12 months to fix it, and six to nine month sales cycles, then you kind of hit full steam you know a few quarters down the road clearly. As far as the productivity goes and the quota-carrying reps and we’ve talked about this at Investor Day, this is the critical analysis for us. So we’re doing, we’re clearly doing with fewer reps today, similar numbers that we’ve done historically. And the path to accelerating growth is obviously more sales capacity, but you really want to gate that by seeing the qualified pipeline building. And as I’ve said before, we’re going to be cautious about that because of the macro environment, because of these extensions that we’re seeing. But also because we have a lot of — there’s a lot of new things being built here and we really want to make sure we have clear view to the quality of the pipeline that we’re seeing. So — but things are moving, the campaigns that we launched just in the last few weeks are part of a demand-generation strategy, that’s highly analytical and geared towards building more demand. And as we see the demand build and we look that pretty granularly, we’ll be able to decide where do you — where we’ll increase sales capacity convert into more ARR. Is that make sense? I don’t know if we lost, Tom. But I think the second question was on net retention rate and whether anything had fundamentally changed with the business from when we were in the 110% plus range. The short answer to the question for me is, no. That’s we want to be there or better. Clearly we’re taking, as we’ve said, we’re taking some headwinds on here, with defocusing of certain types of revenue that we talked about last quarter and during Investor Day. So it’s having a really positive impact on our gross margins, but we’re — it’s not going to help the net retention metric or the gross retention metric in the near term as we make sort of these decisions around revenue that’s far less efficient than we wanted to. And I think that’s part of the story. But I don’t think there is anything structural about the business, if anything with the breadth of our product and the product innovation that we’re seeing, there should be more upsell opportunity ultimately and cross-sell opportunity that would drive that number back to and above 110% in the long-run. Thomas White: That’s great. Thanks. I was on mute before, but I appreciate the color. Michael Walrath: No problem. Operator: The next question comes from Ryan MacDonald with Needham. Please go ahead. Ryan MacDonald: Hi. Thanks for taking my questions. Congrats and nice quarter. Michael, maybe just to start on the chat — Yext Chat and some of the new sort of AI-enhanced offerings that are in beta right now. It’s great to see, obviously, the early progress there and interest. But as you kind of go through the conversations, are you seeing more demand from sort of net new customers prospective customers? DX or more with the existing, and I guess based on the conversations you’ve had thus far, is there an opportunity here to sort of buck the broader macro trends of maybe tightening spend to sort of see shorter sales cycles for sort of a hot investment area? Michael Walrath: Yeah. So, I think it’s early to comment too much on the specific products, Yext Chat is still in beta, Content Generation we just launched, and we feel there’s a lot to come in that area. But clearly, these are areas that companies are focused on, figuring out how to make use of generative AI. And as we’ve said, we’ve been in that business for — we’ve been heavily investing in that business for last five years. And so, what I’m seeing in my conversations with customers is a tremendous amount of interest. And the right amount of reticence also, enterprises need to be careful with how they deploy these technologies. There is a lot of generative stuff showing up and smart management teams are thinking really carefully about this technology because we’ve all seen there is downside to it. So when you talk about outrunning the headwinds, I do think there are a number of opportunities for us there. One is, we have not had, and I think this is well understood. We’ve not had a highly tuned and highly efficient demand generation machine or machine that converts qualified demand as effectively as we like to bookings and that’s been the source of some of our frustrations on that side. So as we build that versus companies who have had — really have finely-tuned go-to-market machines, we should have the ability to begin to outrun some of the macro headwinds. But we’re staying really conservative on how we project that given our beyond next quarter it’s — we obviously have limited visibility into how the market is going to be and what those uncertainties are going to look like. So, we’re a funny mix of optimistic and seeing progress, but at the same time being I think very conservative about what the environment might bring to us. Ryan MacDonald: It’s a tricky balance, I get it. But sounds great. Maybe on the second question, I noticed in the prepared remarks there was sort of a heightened level of focus may be on the customer call-outs of a number of win-backs that you had during the quarter. And I’m just curious as you think about sort of the go-to-market strategy, are you placing an increased level of emphasis on winning back previously lost customers and maybe what you’re doing there? And then is this really being driven by anything, any dynamics or evolving dynamics within the competitive landscape at all? Thanks. Michael Walrath: Yeah. So I’ll say some stuff about that and Marc may want to add. So what I’m seeing is a couple of things. So I think when we recommitted ourselves to communicating better about the innovation that was happening through the listings and reviews products in particular, I think we’ve gotten better at talking about the innovation that’s happening there. For a little while I think we lost that thread. Maybe as importantly or more importantly, I think this environment makes it much harder on some of our smaller competitors to do deals that are uneconomic to — and to service their customers. And so smaller private companies who have been attempting to compete with us here, they are living in a very different capital environment, and they were living in a couple of years ago and even last year. And I think they have a lot less scale on their business. And so, I suspect that one of the things we’re seeing is that, where some of these companies where they don’t have technological parity, we’re competing on services are in a very different financial position now. And so we’re going to continue to go after winning back customers and proving to these customers that we have the best set of solutions. And I think the other thing that’s happening is in this environment, the consolidation play becomes really important. So being able to offer multiple and package and bundle together, multiple services can help a lot in an environment where a lot of companies are looking for cost savings. And so I’d highlight those three things, and say that, that’s driving it. Marc? Marc Ferrentino: Yeah. The only thing that’s just really piling on top of what Mike said is that, we saw a few years ago a flight to low-cost, low-quality providers during the sort of some of the economic downturn that happened around COVID. And feel that you get what you pay for. And so a lot of these customers are starting to recognize that the sort of promises made for the price points that were made are just that — they were — maybe false promises in some cases. So we’re starting to see that recognition, and the recognition of the quality of our products and what that quality does. And so ultimately you start to see that — you start to see those boomerangs coming back. In addition to that, because we are — we have expanded our product set and really moves a lot of the existing products forward while adding new products, they see Yext, not just as a point solution for a single product, but actually seeing us as a partner for multiple different areas. As Mike said, the consolidation of the single vendor that can help them in multiple areas. And that was some of the driving reasons behind some of those win backs, as we talked about in the script. Ryan MacDonald: Awesome. Appreciate the color. Congrats again. Marc Ferrentino: Thanks. Operator: The next question comes from Rohit Kulkarni with ROTH MKM. Please go ahead. Rohit Kulkarni: Hey, thanks. Couple of questions and a nice quarter. One is on just AI and where are you with getting the products to market and how — any feedback that you may have heard from customers, that may be looking at demos. I thought the demo that you had at the Investor Day were pretty impressive and very flushed out. So would love to get an update on anything new, with regards to getting real products and real customers’ hands from an AI perspective. And then again the follow up on the boomerang customers that was very interesting and thanks for all the color. Maybe talk about how much of an opportunity do you have in terms of getting those boomerang customers back-end versus upsell versus new net new customer wins? As in where, if you have to choose or prioritize over the next six months your renewed go-to-market strategy, how would you prioritize that boomerang versus upsells or cross-sells versus net new wins? Michael Walrath: Yeah. So, Marc, can — we got a — we lost a little bit of the first question, but I think it was around momentum of the AI products in the market and what we’re hearing from customers around some of the newer products like Chat and Content Generation. And Marc can give you, provide some more color on that? Marc Ferrentino: Yeah. It’s been really amazing with what’s been happening in market right now. I mean we are being helped by an overall interest in AI and overall interest in what Generative AI can do for organizations. What I think is, we’re in a really special position, is that what we bring to the market right now is not just hype, it’s not just a story, it’s actually tangible products, tangible ways that they can leverage Generative AI inside of their enterprise, inside of their companies. And so that has definitely given us an advantage in these conversations, where maybe the initial interest in understanding what AI can do for the enterprise or maybe what got us in the door. But then we quickly turn that into something tactical or something real, as we show them actual product. And we show them how their lives and how the lives of their — of the teams will be enhanced and increased in productivity that we’re seeing across the Board. We will see across the Board by leveraging some of our products. And then on the Chat side, this is very new and natural customer experience is really what’s captivating a lot of the imagination of some of the folks that we’re talking to about this. And it’s such a demonstrable product and it’s such a demonstrable set of products. The AI you can show it, you can see it, it’s not the sort of a hypothetical. And that has really spurred on a ton of interest. And ultimately when we’re in the room though, we of course share the broader set of products that we have, so it becomes a gateway or an entryway for us to have a larger conversation around the entire platform. And there’s a lot more on that front coming. We’ve been doing this for a long time and we’ve got a really robust product roadmap. So we’re — it’s super energizing to have these conversations with customers. I think on the — your question about focus on boomerang customers versus upsell versus new, it’s all of the above, and it’s basically prioritizing the customer opportunity. Interestingly, one of the things I think I was engaged with the customer just this week who had been one of our listings only customers who had left us. And one of the customers I talked to were in those early discussions where it became clear that service had been an issue and focus had felt like an issue. This customer opportunity showed up as an opportunity to do everything but listings. And I think somewhat tentatively and as we updated this has been a few years so as we updated the set of products and solutions, I think as we’re open with respect to the opportunity to consolidate functions and how far the platform had advanced over the last two or three years. And what was initially a discussion about the non-listing products became a full platform has become a full platform discussion around what would ultimately be a boomerang customer on listings. And so it underscores, I think, what we’re seeing anecdotally in the market, which is broadly and you know everybody is talking about it, how can I — and we’re doing it inside our own business, how can I have less software contracts and less shelfware and less things that I’m not using well and instead of focusing on a broader platform of services that work really well together and are built to be integrated with my other systems. And so — but we will continue to pursue all qualified demand across all those different categories as aggressively as we can. Rohit Kulkarni: Great. Thanks, Mike. Thanks, Marc. Operator: [Operator Instructions] The next question comes from Arjun Bhatia with William Blair. Please go ahead. Christopher Madison: Hi. Thank you. This is Chris on for Arjun. So the first thing I wanted to talk about was, obviously, the Generative AI space in general is evolving very quickly. Have you seen much buyer hesitation due to just how quickly the space is moving and maybe some of the larger customers wanting to wait kind of let things settle down a bit before making long-term commitments or purchasing decisions. And if so, what’s the right message to get past that adoption barrier? Michael Walrath: Yes. So Marc will talk about the detail. I’ll give you this color. I think keep in mind that ChatGPT, the sort of lightning bolt that changed the market was six months ago, right? And so in normal course, we talked about enterprise cycles in six to nine months. Everyone’s talking about the elongation, I think that that’s clearly being seen. So we’re probably still three months from like the deal cycle is three to six months from the deal cycles in the industry that might have started around Generative AI from actually getting the end of the road. And so I think it’s really early to opine on the willingness or reluctance of enterprises to kind of dive into these things. I do think every business in the world has this problem, which is if you fear it too much, you’re going to be left behind and your competitors are going to use it. If you don’t fear it enough, you’re going to make mistakes and you’re going to be embarrassed or worse in regulated industries and things like that. And so it’s a little bit of the Goldilocks thing where you should have a healthy fear about how to bring these things to your business, but it shouldn’t paralyze you from making use of them because if you — companies who refuse to take advantage of these technologies are going to have a really hard time competing with companies who are modernizing their digital experience platforms. And really focusing on delivering a consumer-grade digital experience. So that’s my high-level view and Marc may have specific customer stuff. Marc Ferrentino: Yes. I mean anecdotally, everything that Mike said is backed up by what we’re seeing in market right now. There’s not — I’m not seeing a hesitation. I’m not seeing a sort of fear of new technology. What I’m seeing is this the normal sort of buying cycle that you would expect for any piece of technology. We were talking about something like chat specifically, I mean, that is a major channel for digital experience. The cycles on those types of products, they should be thoughtful, they should be sort of span the normal set of steps and piloting phase and the rest of the processes that you need to go through when you’re changing in many cases, we’re adding a dominant digital experience channel to your line-up. So in many cases, actually, it’s quite the opposite is that this technology is now opening up new use cases that maybe before the previous version of chat technology would have never been considered, which is I still think is one of the cooler parts of this that we’re seeing is that there’s new use cases that are coming up that had really never been considered before. Michael Walrath: Okay. So you have another one, Chris? Christopher Madison: Yes Thank you. That’s really helpful color. One other one was, so it seems like nearly every company that we’re talking to — we’re hearing about how quickly product road maps are kind of evolving and shifting to meet the surging demand for Generative AI, even that you’ve had a bit of a head start in this space? Are you seeing much of that dynamic kind of play out internally for you as well? Just generally, how are you thinking about product strategy in the current market? Michael Walrath: Yes. I mean, I think the beauty of being too far ahead of this curve is that it’s created probably a lot less disruption internally in terms of having to reprioritize the whole road map and catch up. We’re seeing this every day. We’re — everybody seems to have their generative — lots of companies have never talked about generative until a couple of quarters ago or now have strategies built around it. And we think that’s good and we think that, that’s drawing attention to it. But we’ve been at this for a really long time. And we’ve been able to keep our heads down and deliver really significant product innovation without getting distracted or having to — I mean we’re all — I think we’re always reacting our prioritization around what our customers want and where the market is going. And every good product company does that, but we just have the benefit of having been, I think, trying to break this well down for a number of years that lets us feel really confident that the prioritization we have is good. Marc Ferrentino: Yes. I think the foresight that we had in heading down this path a few years ago is definitely paying dividends right now. So the sort of ebbs and flows of our product road map are mostly driven by customer needs in general. That’s been our orientation around product road map for a while. Let’s look at the set of things that are — set of customer problems that are out there that we can help them with, then we will. We have had multiple forms of different types of AI generative AI, different transformer-based models that have been things we’ve built on part of our road map and [Technical Difficulty] for quite some time. So there hasn’t been a lot of radical knee-jerk change because in a lot of ways to sort of the market is coming to us, which has been terrific. Operator: This concludes our question-and-answer session and the call has now concluded. Thank you for attending today’s presentation. You may now disconnect. Follow Yext Inc. (NYSE:YEXT) Follow Yext Inc. (NYSE:YEXT) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Stitch Fix, Inc. (NASDAQ:SFIX) Q3 2023 Earnings Call Transcript June 6, 2023 Stitch Fix, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.3. Operator: Good day and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2023 Stitch Fix Earnings Conference Call. At this time, all participants are in a […] Stitch Fix, Inc. (NASDAQ:SFIX) Q3 2023 Earnings Call Transcript June 6, 2023 Stitch Fix, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.3. Operator: Good day and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2023 Stitch Fix Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Hayden Blair. Hayden Blair: Good afternoon and thank you for joining us today to discuss the results for Stitch Fix’s third quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, Interim CEO of Stitch Fix; and David Aufderhaar, CFO. We have posted complete third quarter 2023 financial results in a press release on the quarterly results section of our website, investors.stitchfix.com. A link to the webcast of today’s conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause results to differ. In particular, our press release issued and filed today, as well as the Risk Factors sections of our annual report on Form 10-K for our fiscal year 2022 previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter of fiscal year 2023, which we expect to be filed tomorrow. Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our Investor Relations website and a replay of this call will be available on the website shortly. With that, I will turn the call over to Kat. Katrina Lake: Thanks, Hayden. Five months ago, I came back as Interim CEO motivated by the opportunity ahead and with a clear understanding of the need to reposition and refocus the company to set ourselves up for success. Today, amidst a challenging macroeconomic climate, preserving profitability and cash flow remain top priorities. Generally, we are focusing on the near term protecting the balance sheet, actively managing our inventory levels, while improving composition and managing the global impact of tightening credit standards on vendors and manufacturers. But we are also mindful of the long-term opportunity ahead and by no means standing still. We understand that focusing on our client is key to success, and we continue to invest in personalization and AI to maximize our long-term potential. We also completed a strategic review of our business operations in Q3, with a critical eye on operational efficiency and effectiveness, while maintaining profitability and cash flow over a longer timeframe as we focus on driving future growth. This was a robust review of our operations and processes across the company to identify areas, enhance the client experience, and drive improved business results. One aspect of this review was a full analysis of our network strategy. As we have refocused on our core fixed business, we believe our inventory will be better optimized across a smaller network of warehouses in the U.S. Understanding this, we have developed a [3 node strategy] [ph] that will allow us to more optimally serve the entire country and simultaneously showcase the greatest breadth and depth of inventory to our clients and stylists. This consolidated network will allow us to deliver a better client experience with access to more inventory for a given fix, while at the same time allowing us to operate with lower more cash efficient inventory levels. Because of this, we intend to close two additional fulfillment centers in Bethlehem, Pennsylvania; and Dallas, Texas. As we have a lease already expiring in Bethlehem, we are choosing not to renew that. Our analysis has also shown that our remaining three fulfillment centers in Atlanta, Indianapolis, and Phoenix will remain optimal even with a larger client base in the future as we could expand capacity within these locations in the short-term and the long-term. We will undertake a phased approach with the closures to maintain our current high levels of client service. We expect to begin the Bethlehem wind down in Q1 and we will move on to Dallas later in the year. We expect to achieve approximately 15 million in annualized cost savings once the 3 node strategy is completed. I want to thank all of our associates and team at the [indiscernible]. We are immensely grateful for your hard work and commitment to our clients. Thank you. Additionally, the continued realities of economic conditions in both the U.S. and the UK have led us to re-examine our geographic footprint. And this morning, we informed our employees in the UK that we are exploring exiting the UK market in FY 2024. In FY 2023, the UK will represent approximately 50 million in annual revenue and negative 15 million of adjusted EBITDA. Though we believe Stitch Fix is a service that will ultimately find success across many geographies, including the UK and Western Europe, today, we are not confident in the path to profitability in the near-term in that market, especially as we prepare for potentially extended periods of complicated macroeconomic conditions in both the U.S. and UK. There are also numerous investments we have made in our core client experience that we have not replicated in our client experience in the UK. Going forward, we would prefer to be investing in our core experience and continue to build it as a more modern, globally capable platform with the ability to scale in many geographies instead of managing multiple [tech stacks] [ph] country by country. We are proud of the UK team and what they have accomplished to date. Consistent with UK law, we will enter into a consultation period with UK employees regarding potentially exiting the UK market prior to making any final decision. While there are a number of moving parts to these operational changes, we know they are the right decisions to make. This review has helped paint a more realistic view of what it will take to change the course of our trajectory, and we have more clarity around the opportunities ahead. We are retooled and refocused on the right metrics that will navigate us through a wide range of macroeconomic scenarios in the short-term and we are setting ourselves up to be in a healthier position for the eventual growth to come. In the meantime, we are committed to continuing to build on our competitive advantages and to further the leadership we have in the space of personalization. We continue to invest in our core client experience, leveraging AI and data science to enable our human stylists, leveraging the advantages of each to further our leadership and personalization and style. For years, we had utilized capabilities in generative AI, injecting scores, and language into our personalization engine, and more recently, automatically generated product descriptions. We have also developed and implemented more advanced proprietary tools, such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market. A new area we have enhanced our AI capabilities in is our inventory buying. We have historically utilized a number of tools to make data informed decisions with our inventory purchases. Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize [indiscernible] at the client level to drive company level buying action. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and AOV over time. This backend personalization will also allow us to more effectively tailor the depth and timing of our buying decisions so it will allow us to buy the right inventory in the right amounts at the right time. Early testing of this approach compared against our existing buying tools have shown a 10% lift in keep rate and AOV, and by the end of Q1, we expect 20% of all POs created to be algorithmically informed. We will continue to scale adoption throughout the year and we are excited about the capabilities. It remains a clear example of how we continue to lean into data science and AI to further our differentiators and drive long-term success. Ultimately, we are continuing to build a business that is truly differentiated, and we want to lean into these areas of differentiation by investing in capabilities that will both improve the customer experience and prioritize profitability in the short-term. I’m excited about the work we have done. Understanding the work that we have to do and continue to believe we are taking the necessary steps to set the stage for healthy growth in the future. With that, I’ll turn it over to David for a deeper dive on the financials. David Aufderhaar: Thank you, Kat, and hello to everyone on the call. Fiscal Q3 results exceeded expectations. Revenue came in at the high-end of our guidance range at $395 million, down 20% year-over-year and 4% sequentially. Consistent with some of our retail peers, we saw strength during February and March, but did see increased macroeconomic headwinds in April. Net active clients in the quarter declined 11% year-over-year, and 3% sequentially to approximately $3.5 million. While our overall average order value is holding relatively steady year-over-year, similar to Q1 and Q2, our analysis shows that all client cohorts are spending less than in prior years, and we expect this trend to continue in Q4. Q3 gross margins expanded 150 basis points quarter-over-quarter to 42.5%, due to improved inventory composition and less promotional activity in the quarter. We continue to expect gross margins to be around 42% for the fiscal year, and are actively focused on improving gross margins with opportunities to improve product margin, transportation efficiency and inventory efficiency over time. The network strategy initiative that Kat highlighted in our comments is a good example of that focus. Net inventory ended the quarter at $152 million, down 5% quarter-over-quarter and down 29% year-over-year. We do expect overall inventory levels to decline in Q4 as we continue to manage inventory closer to demand and revise our assortment strategy to better align with our core experience. And this alignment may take several quarters to optimize. Advertising was 7% of revenue in Q3. While we continue to see customer acquisition costs declining year-over-year, we did see an increase quarter-over-quarter due to seasonality in our growth marketing channels and an increased focus on driving brand awareness. This was partially offset by strong re-engagements in the quarter, which were up 34% sequentially and 24% year-over-year. We expect to maintain similar levels of advertising spend in Q4. Q3 adjusted EBITDA came in ahead of our outlook at $10.1 million, due to the continued realization of cost savings in FY 2023 and tight ongoing cost controls. And finally, we once again generated positive cash flow this quarter, delivering $21.9 million of free cash flow in Q3. We continue to feel good about our strong balance sheet and ended the quarter with over $240 million in cash, cash equivalents, and highly rated securities and no bank debt. Moving on to the outlook. For Q4, we expect revenues to be between $365 million and $375 million reflecting a relatively similar trajectory to what we saw in April. We expect adjusted EBITDA for the quarter to be between $0 and $10 million, largely reflecting the impact of our implemented cost structure initiatives on a sequentially lower top line. Going forward, we will continue to focus on profitability in the short-term, while maximizing our long-term potential. As a reminder, we have already completed a $135 million of cost savings initiatives in FY 2023 and the proposed initiatives that Kat discussed earlier will drive an additional $50 million in annualized expense savings. We are mindful that we’ve been profitable at different revenue levels in the past and we are making the tough decisions now to endure a wide range of possible macroeconomic scenarios. Over time, we expect the investments in improving our client experience along with the increased leverage in our P&L will enable us to establish a healthy base on which to grow. With that, I’ll turn the call over to the operator for Q&A. Q&A Session Follow Stitch Fix Inc. (NASDAQ:SFIX) Follow Stitch Fix Inc. (NASDAQ:SFIX) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from Youssef Squali with Truist Securities. You may proceed. Youssef Squali: Yes. Hi, guys. Thank you for taking the questions. I have a couple of [sales] [ph]. Maybe just a high level question. Kat, you touched a little bit on this in your prepared remarks. As you look at the long-term opportunity, you’re obviously making a lot of changes, refocusing on core fixed business, pulling out of the UK. How should we be thinking about just the way you think about the addressable market as we look at the number of addressable customers, I think you have now [3.4, 3.5 now] [ph], realistically, with this new strategy, maybe just talk to us a little bit of how you kind of size up the market? And then in terms of just the, as you look at AI, and this is also something you touched upon. Can you just remind us of basically what are kind of low hanging fruits ahead of you that you believe you’ll be able to realize maybe on the search side on the curation side and over time how do you think AI will ultimately impact the business? So, those are two questions. Thank you. Katrina Lake: Yes, great. Thank you for the great questions, Youssef. I mean, firstly, on the long-term opportunity, I mean, I feel super excited and optimistic. I think a lot of the strategy right now is focusing on the core on our differentiators on the things that we know that we do best, which is really this human in the loop styling of being able to combine the best in the world algorithms in combination with human stylists to be able to deliver and experience, that’s really differentiated. And so, to be able to kind of spend this time where we’re stabilizing the business, but still continuing to push forward in the areas that we really believe that we have long-term competitive differentiation, that’s kind of high level how we’re thinking about the business right now and we’re really excited. In terms of the addressable market, I think we continue to feel really optimistic about that. I think as we think about some of the capabilities that we’re really pushing on, which really are at the, kind of Intersection of AI, and so it’s a good kind of link of questions that you asked. Like one of the things that I love about our experience is that we have generative AI that’s really in more a visual format. And so the outfits that we have in our app, those are actually taking into account your preferences, what we know about you and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix. That’s a really good example of, I think a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us, and then I think it’s also really compelling because I really think that pushes as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it. And so, as we’re thinking about the ways in which we are innovating and the ways that we’re investing, in particular in AI, I think a lot of that actually is with an eye towards how do we make sure that we’re pushing the addressable market, making sure that we’re serving our clients that we serve well today, but also really thinking about like are these features and capabilities value add to a broader universe of clients. And so, I think we feel really excited about those capabilities and we’re excited about the plan that we have to be able to continue to invest in those. Youssef Squali: Okay. Great. Thank you, Kat. Operator: Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed. Simeon Siegel: Thanks. Hey, everyone. Hope you’re all doing well. Can you quantify any and do you pay impact with P&L maybe last year, just give us context, how many active clients are there, maybe revenues, EBIT pressures, however you want to help us understand to contextualize that? And then maybe also share what you think P&L impacts might be from closing the two distribution centers? Thank you. Katrina Lake: Yes, I’ll have David share more color there. David Aufderhaar: Yes, Simeon, thanks. A couple of things. First on the UK, just a reminder that this is still a proposal, and so there’s no decision that’s been made. But just size and shape, I think Kat called out that in this year, it’s around $50 million in revenue and about negative $15 million in EBITDA. So, if you just do the simple math of flow through, that means there’s about $35 million in SG&A expense in the UK as well. And so, that’s sort of the high level P&L for the UK. And then on the second question was the distribution centers. With this, it would be about an annualized savings of $10 million to $15 million. It’s more of a timing question of, you know we want to make sure that as we do this, we do this in a very client right ways that we aren’t impacting the client and that’s why we’re phasing the closings. And so, savings in FY 2024 would obviously be smaller than that. Simeon Siegel: Great. Thanks. And then Kat, any color on just anything you’re seeing trade down wise, just thinking about the broader promotional environment out there? Katrina Lake: Yes. It’s a great question, Simeon. I mean, honestly, we’ve talked about it a lot internally and we have a wide range of price points. We have items that are in the 20s all the way up to $100. And so, we have a pretty wide range of kind of inventory price points. And it’s an area of our business that we definitely have kept our eye on as we’ve kind of seen a little bit of macroeconomic softness. So far, I think customer acquisition is probably the thing that’s been more hard in a macroeconomic climate. We’ve actually so far I think seeing more strength in terms of people spending in AOV than one might expect, but I think our strategy really is to be able to have that broad range of price points to be able to meet the customer where they are. And so, we feel very prepared to be able to do that. But candidly, I don’t know that we’ve seen – I don’t know that our data reflects like a huge amount of trade down, but it’s definitely something we’re keeping an eye on. Simeon Siegel : Great. Thanks a lot guys. Best of luck for the rest of the year. Hope you have a nice summer. Katrina Lake: Thank you. You too. David Aufderhaar: Thank you. You too. Operator: Thank you. [Operator Instructions] Our next question comes from David Bellinger with ROTH MKM. You may proceed. David Bellinger: Hi, thanks for the question. First one, on the inventories and the greater [depths available] [ph] that was mentioned in the release, can you quantify the improved access to inventory for your stylists? And is just any way to frame up how much that’s improved Q2 to Q3? And how much further work needs to be done in order to open-up inventory access more fully to the stylist base? Katrina Lake: Thanks, David. If I can kind of clarify, are you speaking to the part where we talk about, kind of the network or I just want to make sure that I’m understanding this specific question? David Bellinger: Yes, that’s correct. Yes. Katrina Lake: One of the things as we, kind of really took a fresh look at our business is that as we think about a styling first model and really kind of channeling clients through a funnel where we are collecting the right preferences so that we can really personalize for them, like that model depends on having co-located inventory. And so historically, we’ve had 5 and even 6 warehouses at different points. And when we have that many warehouses were spreading the inventory across a broader network, which means that there’s going to be times when we have pockets of good inventory and pockets of more challenging inventory. And so, if you think especially in used cases where like somebody is coming in with – to a stylist with a very specific request, if we don’t have kind of that density of inventory and the breadth and depth, it makes it potentially harder for a stylist to be able to meet that specific need of the client. And so, consolidating that warehouse into 3 nodes is something that really helps as we think about our future ability to be able to meet specific requests of clients and for our stylists to be able to have availability in all of the breadth and depth of inventory that we buy too and that we have in our system. And so it really, we see this as something that I think can help us to be able to achieve more of our goals as we think about being able to meet our stylist needs and ultimately our clients’ needs. Does that make sense? Katrina Lake: No. That’s perfect. It’s very helpful. And then it’s my follow-up. Could you talk a bit more about some of the April trends? Is there anything specific you can point to that stood out as you exited the quarter? And then can you clarify too on the Q4 guidance, is that consistent with the deceleration you saw later in the period? Is there anything you can comment on in regard to quarter to date revenue growth? Just would help us in our models. Katrina Lake: Yes. David, do you want to answer that? David Aufderhaar: Yes, David. For April, it wasn’t – to Kat’s point, it wasn’t anything around AOV or pricing that tended to hold steady. It was more we saw some macro headwinds around, sort of volume that was coming through. And it was pretty consistent with what we had heard from some of our peers as well where we were – we saw strength in February and March. And then it sort of tailed off in April. And that is included in our guide for Q4 as well. David Bellinger: Understood. Thank you very much. Operator: Thank you. Our next question comes from Trevor Young with Barclays. You may proceed. Trevor Young: Great, thanks. First one, just on the reduced [DC footprint] [ph], as that plays out into next year, should we contemplate some further thinning of your inventory on balance sheet? I’m just trying to get a sense of, should that continue to come in a little bit or are we now, kind of level set on inventory and as you contemplate having more breadth and depth as you were talking about, Katrina that we’re kind of at the right levels here? And then David, just a housekeeping one, just that commentary on advertising, maintaining similar levels of spend in 4Q, did you mean that as a percentage of revenue or in absolute dollars? Katrina Lake: Thanks, Trevor. David, do you want to take both of those actually? David Aufderhaar: Sure. And I’ll answer the second one first, because that’s a really quick one. Advertising, it’s a percentage of revenue. So, we do expect that to be similar to the 7% of revenue we saw this quarter. And so, then on the inventory, I mean, I think there’s two things to think about there. One is, actually the work that we’re doing right now with the teams that are really focusing on composition and focusing on the core experience. I think we touched on this last quarter is, that helps us really focus the inventory and the teams have done a great job chasing into Q4 to get really relevant inventory for our clients. And so because of that, we do expect inventory to go down in Q4. And then with regard to the closures, certainly that could be an added impact or benefit. We want to make sure first that we have the right inventory to Kat’s point around density and making sure that stylists have everything available, but absolutely, as you concentrate in less warehouses, there is the ability to do that with less inventory. And so we would expect inventory turns to go up over time. Trevor Young: Great. Thank you. Operator: Thank you. [Operator Instructions] Our next question comes from Tom Nikic with Wedbush Securities. You may proceed. Tom Nikic: Hey, and good afternoon. Thanks for taking my question. So, I know, you’ve done a lot of work to right size the cost structure of the business. But, you know, I think, ultimately, at some point, you know, the top line needs to inflect, and you know, some of the customer attrition needs to ease up and customer account needs to start rising again. Like, you know, how do we think about, you know, potential, you know, bottoming of the customer base? I mean, like, you know, do we kind of think, like, next year and then customer account starts rising again? There are more normalization that needs to happen, and you know, how do you go about driving, you know, a reacceleration of the top line and the customer count? Thanks. Katrina Lake: Thanks for the question, Tom. Yes, I mean, look, like we totally understand that and like that is our focus, right? Like we’re really focused on cash flow on profitability and ultimately thinking about growth over the longer-term. And we’re to this day, like we were really thinking about like on the marketing side, we’re being efficient. Like, we really want to spend to the right levels, where based on where things are right now, based on where the macro is right now. And we want to be able to be prepared for a range of macroeconomic outcomes. I think we see some good pockets of data here and there. And then as we mentioned, April was a little bit tougher, right? And so, like we just need to be able to be prepared for whatever that means. And this business has been profitable. This business has great economics, and we’ve been profitable at much lower levels of revenue. And so, I think we’re trying to make sure that we are focused on stabilizing the business, making sure that we’re absolutely doing the right things now to be investing in our core, to be investing in our platform so that we can be prepared for that growth. We’re not prepared at this time to be able to tell you when we think that inflection is going to be, but I really believe we’re doing all the right things to set ourselves up for that. Tom Nikic : Thanks, guys. Appreciate the color. Operator: Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed. Dana Telsey: Hi, good afternoon, everyone. Kat, as you think about what categories worked, what are you seeing in categories? Is there a category realignment that you expect to manage the business on given the reduction in distribution center space that you expect Stitch Fix to be known for and what you’re seeing in terms of some of this on the subscription model? And lastly, how are keep rates? And what are you seeing in the past towards enhancing the customer experience? How is that moving along relative to your plans? Thank you. Katrina Lake: Yes, great questions. And I think the first one on the assortment, I mean, we’re seeing like on the men’s side, we’re seeing [short sleeve woven’s work] [ph], we’re seeing across the board. I think we’re seeing more occasion and dressy. In the women’s business, dresses have been a place where we’ve been historically underpenetrated. And we’ve seen a lot of success in dresses. We’ve seen success in fitted dresses and more of the work dresses, definitely an event. I think you’re probably hearing that across the board, but I think people are excited to be out and be doing things and we’re certainly seeing that in our business. And the consolidation of the warehouses really does allow to be able to hit more of that variety. And so, I would say that historically, like our business is probably more over indexed in places like tops. And it’s maybe been harder to serve some of the categories that are less represented in our inventory, partly because it’s, I think the – it’s easier – I think going forward, we believe it will be easier to be able to have, kind of even underrepresented categories available for our stylists to be putting in fixes more often with the consolidation of warehouses. And so, we really do believe that the consolidation of the warehouses will help us to be able to achieve for our clients greater and our stylists, greater, kind of access to variety and that could potentially help us to be able to address more parts of the clients wardrobe and more parts of kind of wallet share in those categories. In terms of, like what we’re excited about in terms keep rates in enhancing the customer experience, as David mentioned, and I said earlier, it’s interesting, like we really haven’t seen AOV be problematic, I would say, even though we feel like we’re seeing macro in some other ways. But I think AOV is a place where we’re actually seeing some holding, which is great. And longer-term, we talked about kind of some of the ways that we’re using algorithms in our buying, and I’m just like really, really excited about that. I think there’s, what we’re doing now is, we’re using algorithms not just to kind of give insights to our buying team, but actually to buy product. And that’s starting, you know we’re starting to see some of the product that we bought that way, kind of hit our warehouses and we’re really excited about, kind of the potential of that product. And I think scaling that capability is something that we’re really excited about that I think really can play a large part in enhancing the customer experience and longer-term definitely impacting things like keep rate. Dana Telsey: Thank you. Operator: Thank you. Our next question comes from Ashley Helgans with Jefferies. You may proceed. Ashley Helgans: Hi. Thanks for taking our questions. First, just any color on the declines in active clients? And then I know in the past you’ve talked about targeting marketing to reactivate clients. Any update on how that’s progressing? Thanks so much. David Aufderhaar: Yes. Thanks for the question. On active clients, we were down 97,000 quarter-over-quarter. That’s around 3%. And we did see higher gross adds this quarter, compared to Q2, and that was sort of a function of both increased acquisition spend. But also, I think to your point, the call out is, we also saw strong reengagement. Reengagement went up 34% quarter-over-quarter and 24% year-over-year. And so, I think we’re definitely leaning in on the reengagement side from a marketing standpoint. With that, we do continue to expect active clients to be negative in Q4, and that’s because we’re still, sort of lapping this high dormancy. Just as a reminder, we spent last year in Q3 and Q4 over $50 million each quarter on marketing and a good portion of that was focused on this Freestyle first client acquisition and pulling back on that. That’s still the headwind that we’re working from an active client standpoint. Ashley Helgans: Great. Thank you so much. Operator: Thank you. Our next question comes from Edward Yruma with Piper Sandler. You may proceed. Edward Yruma: Hey, guys. Thanks for taking the question. I guess first a housekeeping question. I know the stock based comp is down pretty significantly year-over-year, but less so on that trailing 9 month basis, I guess, is this kind of the trend we should think about going forward? And then, Kat, just like a bigger picture question, I was kind of been asked about when could you bend the curve on client growth? But maybe ask differently, do you think you need a more supportive macro to kind of bring the business back to growth or do you think you have the levers and tools today that even if macro remains tough that that you could try to drive that client growth in the medium-term? Thank you. Katrina Lake: Thanks, Ed. I will take the second question and then maybe, and David you can come back to SBC. I mean, it’s a great question, Ed. I mean, we know that we have a macro effect on our business, like there’s no question. That being said, like, I think it’s hard for us to quantify. And frankly, I think it’s kind of a waste of time to really spend too much time quantifying it because I do think, I don’t know that I can answer your question exactly. Like, is it enough to inflect without macro. Like, I don’t know if I can answer that exactly, but I do think there are real opportunities. And I think right now, we’re working on our, kind of strategic plan for the next fiscal year. And I’m really excited. I think where we do have very clearly identified opportunities for us to deliver a better experience, to have a more, for a more compelling value proposition for a broad range of people. And so, I think regardless of the macro, there are definitely things that we can be doing to positively impact our business and positively impact our clients. And so, we’re really focused there. And as I said, like I we just really want to be prepared for a wide range of whatever macro is going to hand us over the next 12 months to 24 months. And so, we want to make sure we’re focused on the right things that are going to be the right things regardless of macro and we want to be able to be prepared to take advantage when macro turns our way. And so, I can’t answer it exactly, but like we definitely believe we can make forward progress even – and we’ll keep an eye on what’s happening with macro. David Aufderhaar: And then Ed, on the SBC side, this quarter we definitely came down from last quarter. I think it’s around 12% down from last quarter, and it’s around 28% down year-over-year. And so, the level that we’re at right now is probably the right level. If you think about it from a near-term perspective and just like the rest of our fixed cost structure, it’s something that we’ll want to leverage going forward. Edward Yruma: Thanks so much. Operator: Thank you. Our next question comes from Lauren Schenk with Morgan Stanley. You may proceed. Lauren Schenk: Great. Thanks. I just wanted to dig a little deeper into your comments about investing more around AI, just sort of any incremental color you can share there? And then just bigger picture, how are you thinking about, sort of AI as a competitive threat, whether that be personal assistance, etcetera, over the coming, you know, months and years, frankly? Thanks. Katrina Lake: Yes. Thanks, Lauren. I mean, we could probably spend an entire hour on this. So, maybe I’ll just share a few highlights. But I think we, like I hear what you’re saying is, like, it is – like it’s in a lot of ways it’s positive, that like AI has been part of our story since the very beginning. We’ve been using data science and machine learning since day one to power our business. And I think there’s some real competitive differentiation that we’ve developed over our 10 plus years of leading in that space that are benefiting us today. And at the same time, obviously, a lot of people are really interested in the space right now and looking at things that we’ve done. And so, I think we plan to kind of have the best of both worlds. And so, I was with our technology team the other day, and we have an AI roadmap, which is part of what’s kind of being, kind of sliced into our strategic plan for next year. And that’s a combination of, I think there are opportunities where we can take advantage of off-the-shelf advancements in AI that have happened where there are capabilities that 5, 10 years ago would have required us to build a 5% or 7% or 10% team to develop a capability that’s now off-the-shelf. That’s something that we can bring into our business and [deliver as value] [ph] to our clients. And then there are other places where we need to push and we need to continue our advantage. And one of the real things about AI is that, like, your capabilities around AI are only as good as the data that you’re training on. And the data that we have is really proprietary. It’s been developed over 10 years it’s really, really predictive. And so, there’s a lot of opportunities for us where there’s off-the-shelf things that we can do that are surfaced, but the real valuable things are where – how can we take advantage of this one-to-one connection that we have with our clients and the incredible amount of data that we have to be able to push the envelope? And I think what we talked about in inventory buying is a really great example of that. We are now actually using like that, kind of individual level data about our clients to be able to buy in aggregate and to be able to do that in a much more compelling way that we have historically. And so, we mentioned we’re just starting to have buys that have been generated by that tool that are hitting our warehouses and that our styles are having access to now. And it’s super early days. And so, we AB tested it. We know that there’s a benefit that we saw in the AB test. We’re starting to gradually integrate that into our buying processes, but that’s a place where we’re really excited, where this is actually algorithmic buying that we are starting to roll-out that I think is going to be able to deliver better experiences to our clients and stylists and ultimately better numbers and better numbers to our bottom line. And so, that’s something that really only we can do because of the depth of data that we have, because of the connection we have with our clients. Because we have individualized data about every single client and their preferences that they’re sharing with us that allows us to then be able to buy in a way that I think would be very, very challenging for any other retailer to do. Lauren Schenk: Great. Thank you. Operator: Thank you. Our next question comes from Aneesha Sherman with Bernstein. You may proceed. Aneesha Sherman: Great. Thank you. So, there’s been a lot of, kind of ups and downs in the last few years, but if you go back to, if we just rewind back to pre-COVID levels in about February 2020, so right before COVID, you had about 3.5 million active customers, kind of where you are now. And so, you’ve sort of anniversaried all of the ups and downs and come full circle, but in many ways, it’s a stronger business now. You have higher awareness levels. You have better customer data, better [algo] [ph], broader assortment. So, why are those same 3.5 million customers generating lower total revenue? Like, what’s different about their behavior? Is it you know, are they buying lower priced items? Are the keep rates different? Can you help us contextualize, like, what is different, you know, versus where you were back then pre-COVID? Katrina Lake: It’s hard without knowing exactly the specific data point that you’re pointing to, but I would say like, at a high level, like some of what we are anniversarying is some of clients that were brought in in a freestyle first experience. And those clients did not generate the same level of engagement and revenue delivery that historically our clients did. And so, I think my guess is kind of that’s probably what you’re looking at. And like going forward, now we are bringing people into an experience where they’re sharing with us their style preferences, what they’re looking for, what they like, what they don’t like. And during some of those Freestyle first days, we weren’t gathering that kind of information about clients. And so that made it hard for us to retain and engage them in the way that we’ve historically done that. And so, my guess is that’s probably the reason and the good news is that we’re largely getting back to where certainly getting back to where we were. And I would say even pushing forward past that. I think we’re now at a place where we – the algorithmic buying as an example is that’s a step change. That is a paradigm shift. That is an improvement from the way that we were doing things in 2019. And as we look forward, I think there are other opportunities for us to be able deliver more value and a more compelling client experience in a similar way to be able to return back that business where we are bringing people in, who are engaged, who are excited, who are looking at this long-term relationship. And that’s a lot of what we talked about. That’s a lot of what’s happening when we talk about, kind of focusing on our core. David Aufderhaar: And I think one other call out is just client tenure. Is, it’s the same amount of clients, but there’s definitely a different mix from a client perspective. And so, clients tend to be more active earlier in that life cycle until it stabilizes. And so, that’s another one of the factors. Aneesha Sherman: Okay. Those are really helpful color. So then, just to follow-up on that. You know, to your comment, David, earlier on that all cohorts are spending less and you’re not seeing differentiation by cohort, if AOV isn’t declining and gross adds are up, I assume that means that churn is what’s gone up, and that’s what’s driving the volume declines. Is that accurate? David Aufderhaar: That is, yes. Aneesha Sherman: Okay. And then does that suggest you’re seeing no differences in churn between those older cohorts and the newer cohorts or actually are you actually seeing some differences in behavior and churn levels between those kind of Freestyle first people you’ve brought on in the last couple of years versus your original clients from several years ago? David Aufderhaar: No, I mean, I think a big part of it is what Kat was alluding to is, losing those Freestyle first clients. But certainly, it’s a little bit of both. Aneesha Sherman: So, you’re seeing higher churn for your newer cohorts than for your older cohorts? David Aufderhaar: Not necessarily the newer cohorts, it’s more specifically those Freestyle first clients that we were bringing. Those are certainly some of our newer clients, but they’re a specific cohort. And for that cohort, we’re definitely seeing higher churn rates. And that’s one of the reasons we pulled back on that and we’re focusing more on the core. Overall, macro still pressures sort of all of them in the same way though. Aneesha Sherman: Thank you. David Aufderhaar: Yes. Operator: Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect. Follow Stitch Fix Inc. (NASDAQ:SFIX) Follow Stitch Fix Inc. (NASDAQ:SFIX) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Core & Main, Inc. (NYSE:CNM) Q1 2023 Earnings Call Transcript June 6, 2023 Core & Main, Inc. beats earnings expectations. Reported EPS is $0.74, expectations were $0.46. Operator: Good morning everyone and welcome to the Core & Main First Quarter 2023 Earnings Call. My name is Karla, and I will be coordinating your call today. […] Core & Main, Inc. (NYSE:CNM) Q1 2023 Earnings Call Transcript June 6, 2023 Core & Main, Inc. beats earnings expectations. Reported EPS is $0.74, expectations were $0.46. Operator: Good morning everyone and welcome to the Core & Main First Quarter 2023 Earnings Call. My name is Karla, and I will be coordinating your call today. [Operator Instructions] I would now hand you over to the management team to begin. Please go ahead. Robyn Bradbury: Thank you. Good morning, everyone. This is Robyn Bradbury, Vice President of Finance and Investor Relations for Core & Main. Core & Main is a leader in advancing reliable infrastructure with local service nationwide. We are thrilled to have you join us this morning for our first quarter earnings call. I am joined today by Steve LeClair, our Chief Executive Officer and Mark Witkowski, our Chief Financial Officer. Steve will lead today’s call with a business update followed by an overview of our recent acquisitions. Mark will then discuss our first quarter financial results and full-year outlook followed by a Q&A session. We will conclude the call with Steve’s closing remarks. We issued our first quarter earnings press release this morning and posted a presentation to the Investor Relations section of our website. As a reminder, our press release, presentation, and the statements made during this call include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in our earnings press release and in our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures, which we believe are useful to assess the operating results of our business. A reconciliation of these measures can be found in our earnings press release and in the appendix of our investor presentation. Thank you for your interest in Core & Main. I will now turn the call over to Chief Executive Officer, Steve LeClair. Steve LeClair: Thanks, Robyn. Good morning, everyone. Thank you for joining us today, we’re excited to share our results with you. Starting on Page 5 of the presentation, first quarter net sales finished in line with our expectations, reflecting a return to more typical seasonality for the first quarter. Our sales grew 25% in the first quarter of fiscal 2021 and another 52% in the first quarter of last year. This makes year-over-year comparisons tough, especially when confronted with disruptive weather in some of our major markets. We had an excellent quarter from a profitability standpoint with adjusted EBITDA margin increasing 30 basis points year-over-year to a new first quarter record of 14%. Prices remained elevated against improving supply chains and gross margins outperformed our expectations, offsetting lower sales volume, and inflationary cost pressure to deliver a solid adjusted EBITDA outcome for the quarter. Our end markets remain stable throughout the first quarter. Non-discretionary municipal repair and replacement demand continue to show resilience backed by healthy municipal budgets and strong project backlogs. As we expected, residential volumes were down significantly, compared to a strong prior year comparable. That said, we believe the long-term fundamentals of the housing industry are solid, and we are pleased with the level of demand we are seeing from our customers and many of the public home builders. Residential lot development is still in balance, representing a short supply of vacant developed lots. On the non-residential side, on shoring trends have generated an increasing number of large projects and our scale advantage has positioned us to capture meaningful growth from the projects in select markets. While we remain optimistic about the opportunities for growth in the non-residential market, we recognize that tightening lending standards could have a short to medium-term impact on non-residential development, which could impact the demand for our products and services. During the quarter, we made significant strides in executing the capital allocation frame work we laid out in prior quarters. In the first quarter, we deployed over $400 million of capital to organic growth, acquisitions, and share repurchases. And we maintain ample capacity to continue investing in growth opportunities. We continue to invest in resources to support the growth of our product, customer, and geographic expansion initiatives, which help drive market outperformance and long-term value creation. For example, we opened two new locations in underserved markets during the first quarter to grow our footprint and make our products and expertise more accessible nationwide. Our greenfields continue to mature and offer new growth opportunities, we have the ability to efficiently open new branches in attractive markets, due to our scale advantage, talent pool, and training programs. We are pleased with the progress we’ve made across these initiatives as we entered the busiest time of our selling season. We complement our organic growth investments with acquisitions to broaden our geographic footprint, enhance our product lines, enter adjacent markets, and acquire key talent. We completed three acquisitions during the quarter and signed a definitive agreement to acquire another business subsequent to the quarter. Our M&A pipeline remains very active, and we expect to continue adding new businesses to the Core & Main family throughout 2023 and beyond. Our record first quarter operating cash flow also contributed to the liquidity to fund a $332 million share repurchase from a majority shareholder, which was concurrent with a 5 million share secondary offering. The share repurchase reduced our diluted share count by 15 million shares. Looking ahead, organic and inorganic growth investments remain our number one capital allocation priority, but we will look to return capital to shareholders as opportunities arise. Turning to our recent acquisitions on Page 6, we added three high performing businesses to our family and subsequent to the quarter, signed a fourth, generating combined historical annualized net sales of over $115 million. Landscape and construction supplies is a full service provider of geosynthetics products with two locations in the Chicago Metropolitan area. Since opening nearly 20 years ago, the team at LCS has built a well-regarded business and serves customers in more than 15 states. The acquisition adds key talent and expands our existing geosynthetics and erosion control product offering to our customers in the upper Midwest. UPSCO is a provider of utility infrastructure products and services, headquartered in the Finger Lakes region of New York with sales offices in the Northeast, Mid-Atlantic and Midwest regions of the U.S. Since 1965, UPSCO has earned a trusted reputation for providing its customers with best-in-class products and services to build and remediate utility infrastructure. In addition to pre-fabricated meter sets, they offer a broad range of products and services including pipe, valves, fittings, infusible piping solutions to satisfy the needs of its customers. This acquisition brings us adjacent product line and unique cross selling opportunities to our existing customer base, thereby expanding the addressable market for our products and services. The team at UPSCO shares our commitment to providing high quality products and service for reliable utility infrastructure, and we are excited to have them join our business. Midwest Pipe Supply is a single branch, full service distributor of storm drainage and water products in Northern Iowa. Since 2002, the team at Midwest Pipe Supply has built a strong reputation as a dependable distributor of drainage, septic, and waterworks solutions. The company offers a wide range of product and services for contractors, municipalities, and agriculture customers throughout the state. This acquisition expands our product offering and geographic reach in the Midwest alongside a team with commitment and dedication to the communities they serve. Foster Supply is a leading producer, installer, and distributor of specialty precast concrete products, storm drains, and other erosion control solutions, offering out of seven locations across Kentucky, Tennessee, and West Virginia. Since 1981, the team at Foster Supply has been the partner of choice for contractors and municipalities seeking innovative solutions for unique worksite challenges. Bringing that team to Core & Main will allow us to combine our collective expertise and differentiated product and service offerings to better meet the needs of our shared waterworks and geosynthetics customers. Lastly, I want to share that I’m extremely proud to see our vision of advancing reliable infrastructure realized through the achievement of our growth strategies. Our strategy is to leverage the scale, resources, talent, and capabilities we have is one of the largest companies in our industry. All in our support of experience and entrepreneurial, local teams to consistently deliver value to our customers and suppliers. We’ve come a long way in building the foundation for Core & Main, and executing our strategy, and we have a significant runway of growth opportunities ahead. Now, I’ll turn the call over to our Chief Financial Officer, Mark Witkowski, to discuss our financial results and fiscal 2023 outlook. Go ahead, Mark. Mark Witkowski: Thanks, Steve. I’ll begin on Page 8 with highlights of our first quarter results. We reported net sales of nearly $1.6 billion for the quarter, a decrease of 1.5%, compared with the prior year period. The slight year-over-year sales decline was expected and follows strong comparative performance in the prior year when net sales grew 52%, compared with the first quarter of fiscal 2021. We saw positive price contribution during the quarter as material costs have sustained at elevated levels, and we experienced pressure on volumes due to a return to more typical seasonality for the first quarter. We have since seen demand improve in the second half of April and into May with drier and more stable weather conditions across the country. Gross margins of 27.9% was 160 basis points higher than the prior year period and reflects the benefit of accretive acquisitions, execution of our margin enhancement initiatives, and the utilization of low cost inventory. Despite the strong start to gross margins in the first quarter, we continue to expect gross margin for the full-year to be lower than fiscal 2022, but likely stronger than we anticipated at the beginning of the year. Selling, general and administrative expenses increased 8.3% to $223 million for the first quarter. The increase in SG&A reflects the impact of cost inflation, acquisitions, and investments to support our anticipated growth. SG&A as a percentage of net sales increased 130 basis points to 14.2%. Our SG&A as a percentage of net sales is typically higher in the first quarter, due to seasonality of our sales and fixed cost structure. Interest expense was $17 million for the first quarter, compared with $13 million in the prior year period. The increase was due to higher variable interest rates on the unhedged portion of our senior term loan. Income tax expense for the first quarter was $31 million, compared with $30 million in the prior year period, reflecting effective tax rates of 18.9% and 18%, respectively. The increase in effective tax rate was due to an increase in income attributable to Core & Main, Inc. resulting from a decline in partnership interest held by non-controlling interest holders. We recorded $133 million of net income for the first quarter, compared with $137 million in the prior year period. The decrease was primarily due to lower sales volume, higher SG&A expenses, and higher interest expenses, partially offset by favorable gross margin performance. Diluted earnings per share in the first quarter was in-line with the prior year period at $0.50 per share. The diluted earnings per share calculation includes the basic weighted average shares of Class A common stock, plus the dilutive impact of outstanding Class A common stock that would be issued upon exchange of partnership interest. Adjusted EBITDA increased nearly 1% to $220 million, and adjusted EBITDA margin increased 30 basis points to 14%. The increase in adjusted EBITDA margin was due to our strong gross margin performance during the quarter, partially offset by the impact of cost inflation and investments to support our growth. Turning to our cash flow and balance sheet performance on Page 9, operating cash flow was a record for the first quarter at $120 million. We continued the inventory optimization initiative, we started in the middle of last year generating $35 million of cash from inventory in the first quarter, compared with a $207 million investment in the prior year. We typically build inventory in the first and second quarter to prepare for our spring and summer selling seasons. However, we were able to reduce inventory this year while maintaining service levels with our customers, due to our prudent inventory investments in the prior year. On a year-over-year basis, net inventory was down about 2% in the first quarter, even with the higher product costs, inventory acquired through acquisitions, and new inventory to support our greenfields. As I mentioned last quarter, we are targeting an operating cash conversion range of 80% to 100% of adjusted EBITDA, and we expect continued improvement in cash flows as we progress throughout the year. Net debt leverage at the end of the quarter was 1.7x, and our available liquidity stands at $1.1 billion following the capital deployment actions we took during the quarter. The $332 million share repurchase we executed during the quarter was done concurrently with a public secondary offering of 5 million shares by our majority shareholder. As a result of the repurchase, we reduced our diluted share count by 15 million shares. Our capital allocation framework remains consistent with what we laid out last quarter. Organic and inorganic growth investments remain our Number 1 capital allocation priority, and we intend to continue returning capital to shareholders through share repurchases or dividends. We have ample capacity to invest, and we remain confident in our ability to capture growth opportunities as they develop throughout the year. I’ll wrap up on Page 10 with an update on our outlook for the remainder of 2023. We expect end market volumes to remain stable for the rest of the year. We expect lot development for new residential construction to be down on a year-over-year basis, but the sentiment and level of demand from our customers and public homebuilders has improved since last quarter. We continue to expect growth in non-discretionary municipal repair and replacement activity, and a relatively stable non-residential end markets supported by a diverse project exposure. In total, we continue to expect end market volumes to be down in the low to mid-single-digit range for the year. We expect to deliver 2 points to 3 points of above-market growth from the execution of our product, customer, and geographic expansion initiatives. In terms of acquisitions, we’ve seen an acceleration of activity in recent months, and we look forward to adding more high-quality companies to the Core & Main family in 2023. We now expect roughly 4 points of sales growth from acquisitions that have signed or closed within the last 12 months. Our acquisitions are performing well, and we continue to improve our ability to integrate them into our company. We’ve seen price inflation continue to moderate as we lapse the price increases from a year ago and we continue to expect roughly flat price contribution for the full-year. We still expect gross margins to normalize in fiscal 2023, but the impact is likely to be better than we anticipated last quarter as a result of our continued utilization of low-cost inventory. Given our recent acquisitions and strong margin performance in the first quarter, we are raising our expectations for fiscal 2023 net sales and adjusted EBITDA. We now expect net sales to be in the range of $6.6 billion to $6.9 billion, and we expect adjusted EBITDA to be in the range of $820 million to $880 million. Our expectation for operating cash conversion remains unchanged at 80% to 100% of adjusted EBITDA. As we progress throughout the year, we will continue to focus on organic and inorganic growth opportunities, margin expansion and operating cash conversion through inventory optimization. We are well-positioned to outperform the market in this complex demand environment, creating value for all our stakeholders. We look forward to helping our customers build more reliable infrastructure as we enter a key part of the construction season. At this time, I’d like to open it up for questions. Q&A Session Follow Core & Main Inc. Follow Core & Main Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from Kathryn Thompson from Thompson Research Group. Your line is now open. Please go ahead. Kathryn Thompson: Hi. Thank you for taking my questions today. Just, first a bigger picture question before I get to, Mark to the quarter. When you look at several federally funded initiatives, IIJA, CHIPS Act, and the Inflation Reduction Act, how does Core & Main participate those and [indiscernible] how do they win with those dollars as they flow through? Steve LeClair: Thanks, Kathryn. This is Steve. A couple of different areas I would share with you. Certainly, the projects themselves have a lot of opportunity for us, whether it’s the new chip facilities that are going in, battery facilities, a lot of this onshoring activity that has been part of that in addition to the infrastructure piece itself, all benefit us. But what I would also share is that just given our size and scale, we’ve been able to support a lot of these major contractors that are involved with these across multiple geographies. We’ve been able to help assist in getting product to access that, in some cases, may still be in short supply or being utilized in other parts of the country. So, as we’ve continued to work with a lot of these larger projects and these larger contracts, we continue to find ways to utilize size and scale to get our unfair share of business in those areas. Kathryn Thompson: Okay. And maybe digging a little bit deeper to pipes, valves & fittings and fire protection as that saw modest declines in the quarter, pipes, valves & fittings, I assume was more driven by resi, could you give you more clarity on that? And then just a little bit more color on the modest softness in the fire protection segment. Steve LeClair: Yes. Well, I’ll start first with residential. So, we anticipated a challenging residential quarter here, particularly given some of the softening that we’ve seen with the new land development as homebuilders have been scaling back. That certainly was anticipated as we got onto – into the quarter. And certainly, from the beginning to the end, we saw what I’d call a slightly change in sentiment more positive as we exited Q1, but we’re also going up against pretty difficult comps from last year. As you saw, we were up 52% last year. So, we were certainly seeing some challenges there. As far as fire protection, some of the other areas, we did see some softness in a couple of different areas across the country. Weather and seasonality were also part of the impact that we saw. It’s difficult to put our finger exactly on how much was parceled out between the typical seasonality which returned last year in weather. We certainly were impacted in California and other areas with extraordinarily wet weather that impacted all the underground work. And then even in the northern areas where seasonality returned, it was a pretty tough winter in some of those areas and pushed a lot of things into later in the spring. Kathryn Thompson: Okay, great. Thanks very much. Steve LeClair: Thanks Kathryn. Operator: Our next question comes from Michael Dahl from RBC Capital Market. Your line is now open. Please go ahead. Michael Dahl: Good morning. Thanks for taking my questions. I wanted to start off on capital allocation. Obviously, a lot of moving pieces in the quarter with a nice buyback, but then the comments that you made just now about the accelerating M&A activity. Can you help us understand kind of what’s – what do you think is driving the acceleration in some of the deals in the pipeline? It sounds like maybe progressing along better than you might have anticipated? And when you think about, kind of the contribution, I think you outlined four points. Just to be clear, is that [Technical Difficulty] that’s a little higher than I would have thought based on the deals you’ve already closed. So, is that inclusive of any contribution from deals that you’re still contemplating and expecting to close? Steve LeClair: Well, I’ll talk a little bit about what we delivered in terms of M&A in the first quarter. So, as you saw there, we had close to 11 branches and $115 million in annualized sales that came through in that quarter. Our pipeline continues to be very robust. You saw last year, we had a number of really solid bolt-on acquisitions for Water Works. We’re continuing to see those increase as well too with Midwest Pipe Supply. And then as you get into some of our other product categories, we get into geosynthetics and erosion control, we’ve been able to tie in a number of different acquisition targets in that space as well, too. So, we’re seeing a lot of opportunity there. The multiples have been very favorable for us as we’ve gone through this. And we continue to see a very robust pipeline. And I can let Mark talk a little bit more about the capital allocation and how we’ve been prioritizing. Mark Witkowski: Yes, Michael, thanks for the question. On the capital allocation, again, no change from what we described last quarter in terms of the priorities, organic growth, inorganic growth being our top priorities. And then I think the repurchase that we completed during the quarter really represented our commitment to the capital deployment back to shareholders. And you can expect that we’ll continue along that path of capital allocation priorities that we’ve laid out. In terms of your question on the guide, we do have four points of acquisitions embedded in there, which includes the addition of UPSCO, Midwest Pipe and Foster for the remaining parts of 2023. So, no contemplation of acquisitions that have not been signed and that’s all acquisitions that have been completed at this point. Michael Dahl: Okay, that’s very helpful. Thanks. And my follow-up is also around capital allocation. So, if we look at the balance sheet and the cash flow that you’re guiding to for the year, it seems like you’d probably end up, all else equal, close to one – like in the net leverage range in the low 1s, or around 1x. So, relative to your target range, I think that gives you a full turn or more of leverage, which is technically, kind of like 850 million of available dry powder this year based on your EBITDA guide. So, is that – in terms of kind of order of magnitude on what you think you can deploy this year between M&A and potentially incremental buybacks, is that the right way to think about it or would you be thinking about, kind of a more gradual layering in of deployment? Mark Witkowski: Yes, Michael, I think that’s the right way to think about it over a period of time. The timing of it, we’ll continue to assess the timing of cash flows this year, where that leverage level shakes out and liquidity as we think about deploying that capital, but that’s how we feel the 2x to 3x leverage is a comfortable level for us. And yes, that provides for a decent amount of capital that we’ll look to deploy again through our organic and inorganic initiatives, and potentially additional share repurchases and/or dividends. Michael Dahl: That’s great. Okay. Thank you. Mark Witkowski: Thanks. Operator: Our next question comes from Joe Ritchie from Goldman Sachs. Your line is now open. Please go ahead. Joe Ritchie: Thank you. Good morning, everyone. So, I was wondering if you can maybe start by – I was wondering if you could maybe start by giving us just a little bit more color on your organic growth this quarter. So specifically, like – any kind of like order of magnitude on the different end markets and how they contributed to the quarter from a volume standpoint. And also curious, I know that pricing is expected to be flat for the year, but curious how pricing started out in the first quarter? Mark Witkowski: Yes. Thanks, Joe. Yes, in terms of the sales breakdown for the quarter, I’d say, from a price standpoint, we were in the, I’d say, single-digit range for the quarter. Definitely much less of an impact than what we saw in the prior years as we’ve seen some of that pricing stabilize. And then from a volume perspective, kind of low double-digit range there with the bigger impacts, obviously, in the residential end market, given the softness there and the really tough comps, in particular in the residential market in the prior year. And I’d say, from a volume perspective, down to a lesser extent in non-resi and muni that was primarily due to the return to the typical seasonality that we talked about and some of the weather impact. So, I wouldn’t necessarily call that market necessarily, but were the drivers of the softer volume in the quarter. Joe Ritchie: Okay. That’s super helpful. And I guess, maybe just my follow-on question to that is, clearly, like we’ve been waiting now for a while for some of this infrastructure spending to come through. We got through the debt ceiling. I’m just curious, like on the muni side specifically, what are you seeing, what are you hearing from your customers? I know that, clearly, you mentioned that things seem to have gotten a little bit better in the second half of April and into early May, was that predominantly muni-driven? Just any color around that would be helpful. Steve LeClair: Sure. I think municipal piece has been incredibly resilient as we’ve gone through this period. Municipal budgets have been strong. The projects have been flowing. We certainly had some seasonality and some weather that hampered a few things in the first quarter, but continue to be really encouraged by what we’re seeing in bid activity with municipal piece. From the IIJA perspective, we’re seeing a trickle of funds starting to make its way into projects. We’ve seen some in Florida, another one in Arizona that’s been allocated. So, still slower than what we would anticipate, but we also know that it is starting to make its way through, and certainly starting to see some of those positive ramifications and green shoots coming through. Joe Ritchie: That’s great to hear, Steve. If I could maybe just ask one more. I was just looking at your adjusted EBITDA margin guide for the year, the [12.4% to 12.8%] [ph]. Clearly, you’re off to a much better start in 1Q at 14%. So, like – how do we think about the rest of the year? Because it seems like this number looks – at least from our – in a high level, looks very conservative. What are kind of some of the offsets as you progress through the next three quarters? Mark Witkowski: Yes. I think as you look at the guide in terms of what was embedded for us, obviously we had the surprise of the additional gross margin from some of the releases, some low-cost inventory in the quarter. As we talked about it at year-end, we do expect normalization at some point, at the gross margin level as we progress throughout the year. I’d say, we still have some low-cost inventory to release even though we did make some progress on that in the quarter. But I think a little too early yet for us to revise the gross margin normalization that we’re expecting, which was in the 100 basis point to 150 basis point range, but I’d say that’s the primary driver of that EBITDA margin reset that we’ve talked about. Joe Ritchie: Understood. Thank you. Operator: Our next question comes from Anthony Pettinari from Citigroup. Your line is now open. Please go ahead. Asher Sohnen: Hi. This is Asher Sohnen on for Anthony. Thanks for taking my question. Just looking at – following up on the last one, the increase to your EBITDA guide, it seems to be driving [indiscernible] part by more low-cost inventory than expected. So, is that just a function of you moving through inventory or may be slower than expected, with volume pressure or maybe pricing has been strong enough to make more of your inventory sit into, sort of the low-cost basis bucket, or maybe you’re even able to continue doing some prebuys? So, what’s driving that? Mark Witkowski: Asher, good question. And I think the answer to that is really all the items that you mentioned there. I mean, we – it did take us longer to get inventory through the system in Q1 just given some of the softness in volume. So, we are hanging on to some of that longer than anticipated. It’s also given us an opportunity to invest in other product categories that we’ve continued to see some price come through. So, those have been some of the factors. And then I’d say, beyond that, we are continuing to make progress against our gross margin initiatives, in particular, private label, and some of the other pricing initiatives that we’ve got. So, I think the – what you’ll see is the longer it takes us to, kind of release some of that inventory. You know, we have more of an opportunity to offset some of that reset that we have. But again, I just think a little too early for us to adjust the normalization that we’ve been expecting, that gross margin level. Asher Sohnen: Okay, Thank you. That’s helpful. And then just, sort of switching gears. In your prepared remarks, I think you talked about sort of the risk presented to, kind of the commercial private non-res segment from credit tightening, but I’m just wondering even anecdotally, have you actually seen the impact, kind of come through on that? Are you seeing maybe projects get delayed or still at the start or something like that? Steve LeClair: As of the end of first quarter, we really haven’t seen much impact at all from the credit challenges that – or the perceived credit challenges that have been out there. And if you look at the projects that we have, we have a really diverse mix of project types in non-residential. Everything from commercial and institutional buildings, data centers, warehouses, and we talked a little bit about these large projects and the onshoring trends that have happened, all of those have been favorable for us, and we’ve continued to see volume and bid activity there. In addition to just the $110 billion of federal infrastructure funding that’s been earmarked for roads and bridges, we view that as a tailwind, particularly as we look at projects that contain storm drainage and erosion control products. So, we’re watching closely to make sure we understand a little bit what’s happening here in terms of the lending aspect of this, but so far, we’ve not seen it. Asher Sohnen: Great. That’s helpful. I’ll turn it over. Operator: Our next question comes from Andrew Obin from Bank of America. Your line is now open. Please go ahead. David Ridley-Lane: Good morning. This is David Ridley-Lane on for Andrew. Can you maybe help bridge the change in the adjusted EBITDA guidance for this fiscal year? How much of it was the first quarter outperformance versus additional acquisitions versus the gross margin here being better than you had feared? Mark Witkowski: Yes, David, thanks for the question. As you look at the adjustment to the guidance for the full-year, I’d say, we took it up at the midpoint, it was about $25 million. Half of that was primarily the better-than-expected gross margins that we had in the quarter. The remainder of it would be EBITDA related to acquisitions that we added that were not included in the prior guide. David Ridley-Lane: Thank you for that. And then how much of the – because I know you have a couple of different initiatives internally to improve gross margin. And so, I’m just, sort of wondering what was the, kind of underlying progress versus, kind of, another benefit from just the sell-through of the lower cost inventory? Mark Witkowski: Yes, David, if you’re looking at it year-over-year, I’d say that from a gross margin standpoint, still a lot of release of inventory in there, but a good chunk of benefit coming through from private label and some of the other gross margin initiatives, in particular, some of the pricing initiatives that we put in place. I’d say, if you look at it sequentially from Q4 to Q1, still had some nice improvement over Q4 number. And I’d say most of that was the release of low-cost inventory. Hard to make a lot of progress on some of those initiatives in just a quarter, but still had some nice releases of that low-cost inventory. So, those are, I’d say, the primary components of that. David Ridley-Lane: Thank you very much. Steve LeClair: Thank you. Operator: We have no further questions. I will now hand back to your host for any further remarks. Please go ahead. Steve LeClair: Thank you all again for joining us today. It was a pleasure to have you on the call. Our consistently strong performance quarter-after-quarter is a direct result of the hard work of our field and functional support teams, our focus on operational discipline, and the diversity of our products and end markets. We are well-positioned to build on our positive momentum, and we have a strong outlook for fiscal 2023. Our platform provides for significant value creation opportunity as our growth strategy is grounded in agility, innovation, and execution. We have a tremendous amount of opportunity ahead of us, and we are well-positioned to execute on those opportunities. Thank you for your interest in Core & Main. Operator, that concludes our call. Operator: Thank you. This concludes today’s call. Thank you for joining. You may now disconnect your lines. Have a great day. Follow Core & Main Inc. Follow Core & Main Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q1 2023 Earnings Call Transcript June 6, 2023 Dave & Buster’s Entertainment, Inc. beats earnings expectations. Reported EPS is $1.35, expectations were $1.24. Operator: Good afternoon, and welcome to the Dave & Buster’s First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After […] Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q1 2023 Earnings Call Transcript June 6, 2023 Dave & Buster’s Entertainment, Inc. beats earnings expectations. Reported EPS is $1.35, expectations were $1.24. Operator: Good afternoon, and welcome to the Dave & Buster’s First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Cory Hatton, VP of Investor Relations and Treasurer. Please go ahead. Corey Hatton: Thank you, operator, and welcome to everyone on the line. Leading today’s call will be Chris Morris, our Chief Executive Officer; and Mike Quartieri, our Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster’s Entertainment, Incorporated and is copyrighted. Before we begin the discussion on our company’s first quarter 2023 results, I’d like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed, which are not entirely based on historical fact. Any of these items should be considered forward-looking statements relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties have been published in our filings with the SEC, which are available on our website. In addition, our remarks today will include references to financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP measure contained in our earnings announcement released this afternoon. Pro forma financials, including Main Event for the trailing four quarters ended April 30, 2023 can be found directly in our earnings release this quarter. Now it is my pleasure to turn the call over to Chris. Chris Morris: Okay. Thank you. Corey. Good afternoon, everyone, and thank you for joining our call today. We are pleased to report record results for the first quarter of fiscal 2023. In Q1, we generated record revenue of $597 million and record adjusted EBITDA of $182 million resulting in an adjusted EBITDA margin of 30.5%. In a few moments, Mike will walk you through the details of our financial performance. In the first quarter, our team did a phenomenal job running the business. Our extremely talented team of operators and support center employees continue to execute on the breadth of strategic opportunities we’ve identified to unlock significant revenue growth and cost efficiency opportunities in our business. Our operational achievements in the quarter are indicative of the progress on our strategy, and we’re also seeing improved guest satisfaction scores as we perfect the service model and optimize the role of our team members play as our most important brand ambassadors. In addition, with key enhancements we’ve made to our culinary team, we are working feverishly to improve our overall food and beverage offering, including improving the quality of the food, simplifying the menu, improving operating efficiencies, and upgrading guest facing technology to simplify the ordering process amongst other initiatives. We remain particularly encouraged by the opportunity for our Special Event business which saw significant comp store growth on a sequential basis, returning back to 2019 levels. We are taking full advantage of the recovery and with the heightened focus we are applying to this important business, we have a clear path ahead to grow meaningfully into the future. The improved growth has been driven by structural alignment changes to the team, both at the local store and support center level. And these changes are already bearing fruit. As Mike will discuss more in a few minutes, we continue to be laser-focused on implementing efficiencies and reducing cost across all areas of the business. While we previously exceeded our synergy target and have locked in at least $25 million in cost reductions as a result of the combination with Main Event, we have parlayed these efforts into running the business with sharpened cost controls, as we believe significant opportunities still exist to reduce our cost base across cost of goods sold, store labor, store operating expenses and corporate overhead. As you can see, our results this quarter are already benefiting from improved input costs, as well as improved labor optimization. In combination with our other initiatives, we expect these cost efforts to drive a lower cost base, expand our margins and improve cash flow generation. Turning to market initiatives in the quarter, as a follow-on to our fall football campaign, we continue to dedicate a portion of our marketing spend to our Watch experience. The out-of-home social sports watch audience is large and we feel confident in our ability to drive both brand relevancy and visit frequency by building even greater awareness that Dave and Buster’s is America’s new favorite place to watch sports. Over the spring, we leveraged marquee NBA and college sports watching events to get the word out and were featured in 30 NCAA basketball games during Conference Championships appealing to both families and young adults. We also ran over 60 spots in key NBA playoff games to create awareness nationally, as well as in those local communities. The first quarter is also spring break season. So in parallel, we ran several digital promotions, targeting families and social, paid digital and CRM to keep D&B top of mind and in the consideration for families looking for out of home fun during spring break. Running these programs and digital channels allows us to stay nimble by adjusting deals and spend based on performance as well as timing given spring break weeks vary so greatly across the nation. We are very excited about the enhanced digital capabilities with the team that we’ve assembled to elevate our ability to meet our guests where they are, and maximize media effectiveness. Looking ahead, summer is an important time for our brands as both families and young adults look for fun things to do to fill long days with experiences that allow them to connect. As we announced yesterday, at Dave & Buster’s, our summer campaign features a high value limited time five free games promotion to drive traffic in conjunction with our new highly appealing You Know You Want To campaign. In the quarter, we opened one new Dave & Buster’s store in Puerto Rico, and three new Main Event stores in Little Rock, Arkansas, Tucson, Arizona and Lexington, Kentucky. We also signed two international franchise agreements for up to 15 stores in India and up to five stores in Australia. We continue to be extremely excited about the future of this organization. We have two industry leading brands in Dave & Buster’s and Main Event. These brands have exceptional business models, strong assets and are led by a talented and passionate group of operators. We have a clear line of sight on the strategic opportunities ahead for the business and a management team with a proven track record of superior execution. As evidenced of the conviction we have in the long-term success of our business and the value we see in our shares, we have repurchased $200 million of common stock thus far in fiscal 2023, reducing our shares outstanding by nearly 12%. We have an additional $100 million remaining on our share repurchase authorization. We highly encourage you to tune into our virtual Investor Day next Tuesday, June 13 at 7:00 AM Central where we look forward to unveiling more details about our vision and strategy with you. With conclusions drawn from extensive research and field work by management team with a track record of successful execution, we will specifically outline the numerous levers we have to drive top and bottom line growth, as well as cash flow over the next three years. You’re not going to want to miss this exciting and informative event. With that, let me turn the call over to Mike to review our first quarter results. Mike? Mike Quartieri: Thanks, Chris. We’re pleased to report strong financial results for the first quarter. We generated record revenue of $597.3 million, record net income of $70.1 million, and record adjusted EBITDA of $182.1 million in the first quarter. On a pro forma basis, our first quarter revenue and adjusted EBITDA reflect growth of 3.8% and 4.6%, reflective — respectively relative to our first quarter of fiscal 2022. We continue to make significant strides, optimizing our business model to drive revenue, realize meaningful cost savings across the company, and deploy capital at high ROI opportunities. We produced a 30.5% adjusted EBITDA margin in the first quarter, an improvement of 20 basis points versus the prior year period on a pro forma basis, Our margin profile remains one of our strongest attributes of our business and we are confident in the levers we have on the cost side to defend it. Also, our strategic investments to lower our overall cost base will be a meaningful catalyst to expand margins as we continue to grow and consumer confidence improves. Pro forma comparable store sales decreased 4.1% versus 2022 as we lapped a very robust prior-year period. Recall that in March and April of 2022, we saw outsized comp performance of 15% and 26% respectively as the country emerged from the Omicron variant. When we look back at a more normalized level of business, we were up 10.3% versus 2019 on a consolidated basis. Our Special Events business continued to grow in Q1 2023 with our combined comps now flat to pro forma 2019 levels. We generated $92.4 million in operating cash flow during the first quarter, contributing to an ending cash balance of $91.5 million, for total liquidity of over $581 million when combined with the $490 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the quarter with total leverage ratio of 2 times. Our strong cash flow generation and conversion gives us the ability to simultaneously invest in our system, grow new stores and repurchase shares. As previously mentioned, we repurchased 3.6 million shares in the first quarter at a total cost of $125.5 million. And subsequent to the end of the quarter, we repurchased an additional 2.1 million shares at a total cost of $74.5 million, bringing the total purchases to the 5.7 million shares, totaling $200 million representing nearly 12% of our outstanding shares as of the end of fiscal 2022, and we still have $100 million available on our remaining existing share repurchase authorization. Turning to capital spending. We invested a total of $50.8 million in capital additions during the quarter, opening one new Dave and Buster’s store in Puerto Rico and three new Main Event stores in Little Rock, Arkansas, Tucson, Arizona and Lexington, Kentucky. We have already opened two new Dave & Buster’s stores during the second quarter, one in Lubbock, Texas and the other in Queen Creek, Arizona. Consistent with our prior statements, we are on track to open a total of 16 new stores during the fiscal 2023 period, comprised of 11 Dave & Buster’s and five Main Event locations, plus the relocation of our Dave and Buster’s Vernon Hills, Illinois store. To summarize, we are extremely excited about the strong execution in our business, our progress capturing synergies, the numerous growth opportunities for us to pursue, and the talent and experience of our team to drive growth despite the challenging macroeconomic environment. We remain focused on closely managing costs and capital spending to ensure we strategically unlock the maximum value of these two great brands and deliver the highest returns possible for our shareholders. We look forward to speaking to you again in next week at our virtual Investor Day where will be discussing our mid-term growth strategy in detail. Now operator, you can open up the line for questions. Q&A Session Follow Dave & Buster's Entertainment Inc. (NASDAQ:PLAY) Follow Dave & Buster's Entertainment Inc. (NASDAQ:PLAY) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Andy Barish with Jefferies. You may now go ahead. Andy Barish: Hey, good evening, guys. Just a couple from me. Mike, if you can point us towards anything specific in the other operating expense — other store operating expense line that was certainly along with other expense areas, one where there were some nice improvement versus our modeling. Anything specific that’s starting to show up in that line or different from past periods. Mike Quartieri: I’ll touch on a couple of things. One, from an inflationary perspective, we’re starting to see a little bit of deflation quarter sequential on our hourly wage rates, we’re down approximately about 0.5% there and we’re down about 3% quarter sequential on our commodities. So that’s benefiting our cost of goods sold at the top line. Besides that, we are continuing to realize the synergies which are benefiting our G&A costs and we have continued to look at the other store operating expenses whether that’s store operating supplies, utilities, things of that affect that we’ve been able to put some programs in place to help reduce those types of costs. Andy Barish: Got you. Thank you. And then just a follow-up. I’m sure we’ll hear more on this next week. But where are you kind of in the remodel test and some of the new entertainment, the social gaming aspects and things like that? Are some of those out in stores at this point or how do we kind of think about that for the rest of 2023 and then into 2024? Chris Morris: Yes, Andy, I’ll take that. This is Chris. And you’re absolutely right. Next week at our Investor Day, we’re really excited to be able to walk everybody through the details of our plan. We’ve got a lot to share with you. Remodels are certainly one of those items. We strongly see remodels as one of the catalysts to — one of the key catalyst to get our topline moving on a sustainable basis. Right now the first remodel to open will be late July, early August. So we don’t have a remodel yet in the market. We are — we have 12 units that are — we are going through the permitting process and we expect to have six of those 12 done this year. And so, really looking forward to getting those in the market and we will walk you through a lot more details next week. Andy Barish: Okay. Very helpful. Thanks, guys. Chris Morris: All right. Thank you. Operator: Our next question will come from Jake Bartlett with Truist. You may now go ahead. Jake Bartlett: Great. Thanks for taking the questions. My first is on the quarter-to-date, in the recent quarters you’ve talked about giving us some quarter-to-date trends on sales. So I’m hoping you can do that this quarter as well. So that’s one part of the question. The other is on the — versus 2019, the same-store sales versus 2019 has decelerated over last three quarters, kind of, it looks like there’s building pressure, maybe momentum is declining. I guess your answer on the quarter-to-date is going to help with that question, but what would you attribute that slowdown to and do you have a view into re-accelerating that? Chris Morris: This is Chris. Let me — I’ll take the first part of that question then I’ll let Mike take the second part. So with respect to providing intra-quarter sales figures, in our last call we let everybody know that going forward that’s a practice that we’re just moving away from. We want to keep our focus just on more longer-term approach. But — so we’re not going to be able to provide commentary on how we’re doing just for the first few weeks of this quarter that we’re currently in. But what I will tell you is, our year-to-date comps through May versus our year-to-date comps through April, there is really no material difference between those two. But I wouldn’t read too much into that because the month of May is just really such a small month for us. June and July is when the business really picks up, just from a seasonality standpoint. The month of May typically represents about 25% of our sales during the quarter. So we’re really looking forward to get it into the summer months here in June and July. Both of our brands typically do very well during those months. And so we’re — our focus is just more on the longer term. Mike Quartieri: Yes. I think in regards to the second part of your question — I would say, just in regards to the second part of your question about looking back to 2019, one thing we did note during this quarter, we did see versus 2019, every month we progressively improved. So although there is some decline when you’re looking at from quarter sequential, I think that’s just more about the pent-up demand in the economy with excess dollars around COVID relief and all the stimulus that was in the system that was just being burnt off. Jake Bartlett: Great, great, I appreciate that. And I understand on the quarter-to-date point. My other question was about the cadence of marketing and you’ve launched five games for free promotion, but this lapse, I believe the summer games, which is re-launched last year. So I’m wondering if — in terms of cadence and what we compare against on a promotional perspective, do you expect whenever you — what you’re doing this summer to be more impactful? I mean, is there a reason to think that your approach this year is going to have a more of a — be more of a traffic driver than last year’s approach. Chris Morris: Well, I’ll just — generally speaking, we — our goal is that, every year we intend to do better than we did in the prior year. So generally speaking, we fully expect that this campaign is going to outperform prior year’s campaign. That’s just the standard that we hold ourselves to. What I’ll tell you is, Summer Games, that’s a promotion that the brand has done typically during the summer months. And when we looked at — our team has dug in really deep and looked at the performance of all the marketing activities over really long period of time and our opinion is, last year that was one of the weakest campaigns of the year. And when we went back and when we looked at time, we really — we didn’t really see Summer Games really moving the needle in a big way when we looked at the results before and after the marketing spend. Other than — and the 2018 year when we did Summer Games and we tied it in with the launch of our new VR attraction with Jurassic Park. But aside from that, it didn’t really move the needle. But we do know that our guests are looking for value during this period of time. We know that our guests are very eager to come in and take advantage of the entertainment offering. And so we felt strongly that we needed to lead with entertainment and we needed to bring more — bring some interest into the game room. And based on all of our concept testing, the offer that we’re running by far outscored anything else in our concept testing. So we’re pretty optimistic, just based on all the research that we did. But it just launched yesterday. So time will tell. Jake Bartlett: Great. And then last question real quick, on the share buybacks, nice thing and an aggressive like to see that. It looks like what you’ve repurchased quarter-to-date is about where your cash balance was at the end of the quarter. I know you’ve been generating — likely generating free cash flow since then. But are you — is your approach to it — would you take down debt in order to buy back shares? I just want to make sure I understand your approach to the balance sheet. Mike Quartieri: That would be conversations we have back and forth with the Board. But rest assured, given our liquidity and the future cash flow generation that we are able to produce and what we’ve done historically on a free cash flow conversion from EBITDA, we’re very comfortable taking either approach, either using just the cash on the balance sheet or to take out a piece of debt on the revolver to do so. Jake Bartlett: Great. I appreciate it. Operator: Our next question will come from Brian Vaccaro with Raymond James. You may now go ahead. Brian Vaccaro: Hi, thanks, and good evening. I just wanted to circle back to the comps in the first quarter and ask about it on a year-on-year basis. I mean, it looks like both brands were down around 4% based on your 10-Q disclosures. I’m just trying to keep in perspective, quarter-to-date you had said was down low singles, it implies a sharper decline in April. And could you just provide more color on what you think is driving that decline? I mean, is it primarily the difficult lap or are there any sequential changes in behavior beyond normal seasonality that might be worth highlighting, like low amounts being loaded on cards or how consumers are navigating the menu on the F&B side or just anything across the incumbents, just any color would be helpful there. Chris Morris: Sure, Brian. I’ll start and let you wrap it up. I mean, the short answer is no. There’s nothing that’s noticeable that happened between March and April. There was a considerably higher compare in April. So we’re lapping a much stronger number in the prior year. And so that’s definitely a consideration. As Mike mentioned earlier when we compare our results to the 2019 year, the pre-pandemic year, what we actually saw a sequential improvement going from March to April. But we’ve spent a lot of time looking at our numbers to see if there is any trends that we should be aware of, changes in consumer behavior or anything along those lines. And there was nothing noteworthy there. Mike Quartieri: Yes. I think the only other thing to add on to your point of regarding Power Card loads, we haven’t seen any decline in that dollar value. So, the health of the customer is still there. So I think it’s really more around — it’s a very tough comp when you’re lapping over 26% growth which is 9% higher than what we had in the March period of 15% on a combined basis. Brian Vaccaro: Okay, that’s helpful. And then on the margin front, I just wanted to go back to the comments on labor specifically, and you saw, I think, it was about 40 bps of deleverage but comps being down 4%. I guess — it looks like the cost per week is running down 1% to 2% year-on-year by my math and I’m just trying to frame how you’re achieving that. If you could provide more color on how you’re optimizing the labor that you’re deploying in the units? And Mike, could you also just give us what was year-on-year wage inflation In the quarter? Mike Quartieri: Yes, sure. So, I’ll start with the beginning. How are we controlling labor right now is really a testament to Tony and the operating team that we have. Very much a diligent view of looking at the weekly forecast for sales, analyzing that on a per day basis in order to get the staffing right where you’re getting that staffing out of Monday through Thursday to really honed it in on the weekend when we’re peaking the peak, is driving the labor overall down but also having the right labor at the right time and the right place, allows us to improve our overall scores with our guests and our guest satisfaction. So I think from that perspective, it’s really about driving that discipline and do it on a weekly basis, on a daily basis, on a per-shift basis and that type of rigor is really paying off for us. In regards to the wage inflation, give me one second. Overall wages in Q1 from an hourly perspective, Q4 was roughly $13.14 and we’re seeing now closer to just over $13 and with a couple of pennies above that. So continued focus on as we replace employees who have learned or had left, and so we’re getting the new employees on that turnover ratio. We’re able to bring people in at a little slightly lower rate, just based on the controls that we see and the discipline around our hiring practices. Brian Vaccaro: Okay, great. That’s helpful. And I just wanted to go back to the — last one for me, just on the share repurchases and capital allocation. Can you just touch on the decision to buy back stock versus paying down debt with the rate on your term loan, now I think about 10%. And I am just also curious where you are in the process of potentially refinancing some or all of your debt. Thank you. Mike Quartieri: Yes. When go through the exercise of looking at how we view the, I would say, the extreme undervalue of our shares in relation to that 10% debt. And just believe that the shares have a greater value of upside in order to repurchase that $200 million that we felt comfortable with. In regards to refinancing potential, the soft call does come off June 29 and so we would be looking to take advantage of the market, assuming there is a market which we’re all knocking on wood that there would be, to be able to reprice that desk — that debt accordingly and yield interest savings off of that. Brian Vaccaro: All right, great. I’ll pass along. Thank you. Chris Morris: Thank you. Operator: Our next question will come from Jeff Farmer with Gordon Haskett. You may now go ahead. Jeff Farmer: Great, thank you. Just looking for a follow-up to a couple of earlier questions. Specifically, the first one would be, additional color on your guest trends in general. You touched on it, but I’m curious if there’s anything more notable across weekend, weekday, family, young adults, income, demographics, any way you want to slice it, but is there anything that you’ve noticed in terms of shift changes in recent months as the consumers come under a little bit more pressure? Chris Morris: Yes, sorry. [indiscernible] and I was just pointing each other like who wants to take that one. And so, I’ll start. So again, I’ll tell you, the short answer is, there is no — there has been no material shift throughout the quarter in consumer behavior trends. So it was pretty consistent throughout all three months of the quarter. Some of the items that you mentioned, look, we just don’t get into that level of granularity in our disclosures. And so, if there’s something that really is material, that pops up at that point in time, we’ll share with you. But throughout the quarter it was — throughout all three periods, it was pretty consistent. Mike Quartieri: Yes. And just to add on top of that, it’s not only at the demographics level from an income perspective for our guests, we also look at across the spectrum of all the geographies and the DMAs that we’re in. And there is not any particular area that’s falling off more than anything else. So everything has been staying relatively consistent. Jeff Farmer: Okay. And this was also touched on, but a lot of us are sort of looking at that same-store sales metric versus 2019. It’s already been asked above. But I am curious sort of one thing that sort of popped up and there has been a conversation with investors is that, perhaps the strength of the NFL campaign in September, October, into early November was sort of stronger than everyone appreciated. And as you rolled off of that, again, this is all sort of theoretical, as you rolled off of that, potentially that became a little bit of a traffic headwind or you just lost that tailwind. So did you subscribe to that at all? Do you think that there is just so much strength around or resonance with the NFL campaign that once you sort of rolled off of that, you saw this? I won’t call it a normalization, but a downshift as it relates to traffic trends. Chris Morris: I don’t think I’d go that far. What I’d tell you is that, we’re — we were pleased with the success of the campaign, and we learned a lot doing that. It was the first time that we had on a national level promoted the Watch side at that level. And then to have someone like Travis Kelce endorsed it was a big win for us. And that actually helped inform our decision to do the Slam Dunk Deal and then take advantage of — at the national level, take advantage of March Madness as well as NBA Finals. So very, very pleased with the results there. But I don’t think I would go as far as to attribute that as the difference maker in our sales. I think, we — at this point in time, we’re not seeing material shifts throughout the quarter. We didn’t see those materials shift one way or the other within the granular aspects of the business. We — there is — yeah, I think just lapping a really challenging period last year has certainly made it more difficult and we’re going to know a lot more during the summer months. Yes, I think what we’re — the summer months are very important to us. As I mentioned, June, July, that’s when young adults want to come to us as well as families, and so it’s a really high volume period of time for us. And what the consumer does over the summer is going to be very, very interesting. And so, right now we’re focused on everything that we can control. We’re focused on the things that we know and next week we’re going to walk you through why we’re so enthusiastic about our plan and we’ve got a number of levers that are available to us to grow this business and we really look forward to walking you through all of those. And when we’re done walking you through that, there’ll be no mistake that there is considerable upside in this business. So right now, we’re still trying to figure out exactly the consumer environment and topline. We’ll know lot more at the end of the summer and we’re really excited about our plan. Jeff Farmer: I appreciate that. Just one more again, another follow-up, I apologize for being long-winded here. So the margin performance, I’m getting sort of real-time emails about this how impressive it was in the backdrop of the comp that you guys delivered. And the question now becomes, are you guys sort of full tilt or maximizing the margin efficiencies that this business can drive at this state in that sort of, the best we can hope is that, you hold on to these margin inefficiencies as you move forward or are there — is there sort of additional margin opportunities that lie ahead above and beyond just revenue growth. Is there other levers that you guys have out there that you think can continue to drive margin improvement above and beyond what you guys have already done? Chris Morris: Yes. So we see further improvement. And that’s one of the items that will walk you through next week. So if you could just hold off a week, we’re going to give you a ton of information on it, and I believe you’re going to be very pleased. Mike Quartieri: Yes, the one thing I’ll add, Jeff, there is a seasonality nature to our business when it — especially when it comes through just your top line, and then how that flows through. So in this period of Q1 and Q4, we’ve historically always had our best margins. Q2 has been pretty much about average and then obviously when Q3, when kids go back to school, it’s our general seasonally low period of time and then you just see that margin drop accordingly, because you just don’t have the topline flows through that you typically would see in these higher periods of Q1 and Q4, so to Chris’ point [Multiple Speakers] Jeff Farmer: I was just going to say, I think investors clearly understands the seasonality aspect of it. It is just the improvement in the margin, which was the thing that’s getting attention. So I hear you loud and clear and more to come at the Investor Day. So I appreciate it, guys. Thank you. Michael Quartieri: You got it. Chris Morris: Thank you. Operator: Our next question will come from Sharon Zackfia with William Blair. You may now go ahead. Sharon Zackfia: Hi, good afternoon. So on the last earnings call you talked about a choppy kind of sales environment. I think part of that was related to the movement in spring breaks and it’s always kind of tough in mid to late March to kind of know where things are going to lie. Do you feel like now there’s more predictability in your sales trends? And I’m also curious as to kind of how you’re viewing the competitive environment at this point, whether you’re seeing any more incremental pressure from new competitors opening, kind of, like, we used to hear about would Dave & Buster’s back before the pandemic. Chris Morris: Let me go in reverse order. So with respect to the competition, I mean, there is — that’s not something you’re going to hear from this team. We’re focused on maximizing the opportunities that we have in front of us with Dave & Buster’s and we’re going to walk you through our plans next week. We’re super excited about it. As I said a minute ago, we have so many levers that we’re — that we believe we’re going to be able to effectively pull to get this business moving. Our plan is to outcompete. So that’s our plan. With respect to the predictability of sales, relative to that period of time that you just referenced, the answer is yes, because that period of time last quarter, the last time we had our call, it was very confusing to understand the underlying trend in the business because there are so many mismatches in spring break. And so that was just kind of wreaking havoc with our numbers. And so, obviously, we don’t have that same level of mismatch happening at this point in time. And so, relatively speaking, it’s — we’re in a better environment to get a feel for sales. But at the same time, I’ll also tell you that with all the chatter happening in the macro environment around the consumer and what’s going to happen to consumer spending during the summer and in the fall. All that stuff kind of ways on our ability to effectively predict sales. And so, as I mentioned a minute ago, we try not to get bogged down in that. We just try to stay really focused on the things that we can control and be as efficient as we can and sort of aggressively execute the strategic initiatives that we’ve identified. Sharon Zackfia: Thanks for that. And then one question on the Amusement comp down 6.5%-ish. Is that a proxy for kind of the traffic on the Amusement side or are you seeing kind of lower loads per card than you would have seen in the year-ago period? Mike Quartieri: Yes, I’ll take that. Actually — we’re actually seeing an increase in some of the card loads. So there is the concept of, as you give customers that opportunity to trade up in value, that you do get this nuance of a parent buying the higher value card and splitting it between their kids as opposed to buying the two individual cards. So there is a little bit of that, but it is also one of the indicators that we’re always watching for as we measure, that is for traffic and any other, call it, the ability to kind of measure how our marketing campaigns and other value opportunities that we have to offer to our customers. Sharon Zackfia: Okay. Thank you. Chris Morris: Thank you. Operator: Our next question will come from Chris O’Cull with Stifel. You may now go ahead. Chris O’Cull: Thanks, good afternoon, guys. I had a follow-up question regarding that. Just given a lot of the comp performance has been coming from Check build or pricing, how are you thinking about that moving forward, especially given the transaction performance, because it may be a little pause about, maybe trying to raise the Check with a higher entry point with the Power Card or do you feel like you can still raise that Check going forward. Chris Morris: We still believe that there is opportunity to grow Check, but I hear you loud and clear, that is something that we need to proceed with caution, just because we always want to protect the value proposition. I think in these types of businesses, these low frequency, high experiential businesses, the guest is looking for — they think about value differently than they might think about value on a restaurant chain. And so, we’re really focused on the overall experience. We believe that there is still room on price and certain aspects of the business. We believe that there are certain ways for us to be smart about growing Check, but at the same time giving the guests something in return for value. And so, again, all of that will be — we’ll walk through all of that next week and you’ll — I think you’re going to be pleased with what you hear. Chris O’Cull: Great. And then, Michael, I just had a question regarding some of these recent Main Event openings. Can you give us an idea of how much you’re spending to open these stores in terms of just the cash outlay and the building costs and some of those things because you haven’t opened that many Main Events? I’m just curious to see what the investment cost is for that business. Mike Quartieri: Yeah, I mean, just to give your perspective, historically Main Event would use developer financing when they selected the site. Would have entered into that sale leaseback at the time of closing, and then use those proceeds to offset the capital outlay. So in general, you would look at a Main Event is costing a little over $20 million, $22 million given that it’s a 55,000 plus square foot location with bowling, it has a higher cost to construct. Use those off — those proceeds from the developer financing and then have a net investment of about $8 million into it. Where we are looking at it today given the strength of our balance sheet and the free cash flow conversion, we’re looking at actually putting in that excess amount and funding the full amount of the CapEx upfront with our existing balance sheet and liquidity. What that does is that, it will inflate your CapEx spend, but in turn, we then will enter into sale leasebacks once the stores open and in doing so by having it as an operating asset, we will get a far better return on the cash proceeds from that sale leaseback that makes it worth the time and effort to go ahead and utilize our balance sheet and protect ourselves from an overall perspective. So as it stands right now, the pipeline of what’s opened is all — was in place with Main Event at the time of the transaction. So we haven’t had to utilize our balance sheet yet, but Murfreesboro will be our first one. So you will see probably about a $30 million uptick in CapEx from our historical levels when you combine the two companies. But again, that increase is merely timing and we get a far better return on doing the sale leaseback once that store is an operating asset. Chris O’Cull: Is your expectation that you’ll have kind of a sales-to-investment ratio below one with the margin — the high margin will result in the higher 25% maybe plus cash on cash returns, or how are you thinking about the unit economics for that business? Mike Quartieri: You’re thinking of it correctly. Chris O’Cull: Okay, great. Thanks, guys. Chris Morris: Thank you. Operator: Our next question will come from Dennis Geiger with UBS. You may now go ahead. Dennis Geiger: Great, thank you. One quick follow-up sort of on the lack of changes in consumer behavior, and you kind of touched on it a bit here. But any updated thoughts on the resiliency of the brands into the tougher macro relative to prior, just given what you’ve seen and kind of the lack of any of those notable changes as you look ahead over the coming quarters or so? Mike Quartieri: Yes. I mean, I think, we will get into this a little bit more on Investor Day, but when we go back and look at prior uncertainty in the market, whether that’s the 2008, 2009 crisis, the company performed extremely well. Although comp store sales would have been down, but the amount of adjusted EBITDA decline was far less than what the comp store sales are. So from that perspective, there’s a very much of a protective environment that we have. And as we get further into these types of situations or these environments, that’s when the trade down from the more expensive vacation into the staycation which then yields into that Dave & Buster’s trip, helps protect us in that type of an environment. Dennis Geiger: That sounds good. Looking forward to next week. Thanks guys. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chris Morris for any closing remarks. Chris Morris: All right. Thank you operator. In closing, we’d like to again commend our team for the exceptional results they continue to produce at our stores across the country. Thank you all for joining. We look forward to keeping you apprised of our continued progress on our growth initiatives and revealing more details about our long-term strategic plan at our Investor Day next week. Thank you. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Follow Dave & Buster's Entertainment Inc. (NASDAQ:PLAY) Follow Dave & Buster's Entertainment Inc. (NASDAQ:PLAY) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Quantum Corporation (NASDAQ:QMCO) Q4 2023 Earnings Call Transcript June 6, 2023 Quantum Corporation misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.04. Operator: Greetings. Welcome to Quantum’s fourth quarter and fiscal year 2023 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session […] Quantum Corporation (NASDAQ:QMCO) Q4 2023 Earnings Call Transcript June 6, 2023 Quantum Corporation misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.04. Operator: Greetings. Welcome to Quantum’s fourth quarter and fiscal year 2023 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Brian Cabrera, Quantum’s Chief Administrative Officer. Thank you, you may begin. Brian Cabrera: Good morning and thank you for joining today’s conference call to discuss Quantum’s fourth quarter and fiscal 2023 financial results. I’m Brian Cabrera, Quantum’s Chief Administrative Officer. Speaking first today is Jamie Lerner, our Chairman and CEO, followed by Ken Gianella, our CFO. We’ll then open the call to questions from analysts. Some of our comments during the call today may include forward-looking statements. All statements, other than statements of historical fact, to be viewed as forward-looking, including any projections of revenue, margins, expenses, adjusted EBITDA, adjusted net income, cash flows or other financial, operational or performance topics. These statements involve known and unknown risks and uncertainties we refer to as risk factors. Risk factors may cause our actual results to differ materially from our forecast. For more information, please refer to the detailed descriptions we provide about these and additional risk factors under the Risk Factors section in our 10-Q and 10-K filed with the Securities and Exchange Commission. We do not intend to update or alter our forward-looking statements once they are issued whether as a result of new information, future events or otherwise, except of course as we are required by applicable law. Please note that our press release and our financial statements we make during today’s call and the management statements we make during today’s call will include certain financial information in GAAP and non-GAAP measures. We include definitions and reconciliations of GAAP to non-GAAP items in our press release. Now I would like to turn the call over to our Chairman and CEO, Jamie Lerner. Jamie? Jamie Lerner: Thank you Brian, and thank you all for joining us today. Earlier today, we announced our results for our fourth quarter and full fiscal 2023 with revenue results that exceeded the high end of guidance. We are pleased with the revenue results, we feel good about the supply chain, and we’re excited about recent product launches, but we have work to do in fiscal year 2024 to improve our bottom line results. Today, Ken and I will walk through actions we have taken to strengthen our company and delivered adjusted EBITDA of at least $20 million, as we described in our press release. Turning to Slide 3, here is a brief overview of the results from the quarter and the full fiscal year. We finished the quarter with $105.3 million in revenue, above the high end of guidance and an increase of 10.7% year-over-year, non-GAAP gross margin of 35.5%, adjusted EBITDA of $1 million compared to $400,000 a year ago, driven by higher revenue and improved operating performance. For the full fiscal year 2023, we delivered revenue of $412.8 million, an increase of 10.7% year-over-year primarily driven by strong demand from hyperscale customers and growth in our video surveillance business. Non-GAAP gross profit in fiscal 2023 was $147 million or 35.6% of revenue, primarily driven by a higher mix of low margin hyperscaler business along with inflationary cost pressures in our supply chain. Adjusted EBITDA in fiscal 2023 was $11.8 million. Now turning to Slide 4, I would like to share some operational insights from the quarter. We exceeded revenue and EBITDA guidance in fiscal Q4 based on another strong quarter of hyperscale sales, a sequential increase in royalty revenue, and improved operational execution. We had an incredible year of hyperscale sales with two times revenue growth versus the prior year. As we discussed, that segment is characterized by generally lower margins, so the hyperscale business has had a strong influence on our revenue and margin mix profile. In addition to strong hyperscale sales, we are pleased with the progress we are seeing in our video surveillance business and improving our efforts to sell the full portfolio of products. We continue to see improving conditions internationally and we are starting to realize the results of our transformation work, especially in the Americas. As an example, we are seeing a higher volume of large deals becoming a bigger component of our revenue mix in the pipeline. As part of the sales transformation, we are directly engaging in larger enterprise deals, especially in areas of repatriation of data back on premise from cloud providers. We also are extremely encouraged that our end-to-end portfolio of products is gaining traction supporting AIML projects and expanding deeper to other verticals. An illustration of this was a large scale deal we closed in the financial sector at one of the largest banks in Asia and a Fortune 500 company. We are also working on several OEM partnership opportunities with global technology providers. Just this past quarter, we secured an active scale OEM win at a global provider of video streaming solutions that will add to our subscription ARR in fiscal year 2024. Expanding our solution footprint at existing accounts is a key part of our strategy. It is also notable that in fiscal Q4, we were selected by a west coast Major League Baseball team to provide AI-driven analytics for their video and image content. This team is an existing Quantum StorNext customer, and we are able to drive broader engagement with them to help them catalog, analyze and enrich their content to drive better fan engagement. This is a perfect example of our end-to-end strategy coming together and represents the opportunity in front of us to move from storing data to analyzing, managing and enriching it to drive improved business outcomes. These sales highlights are just an example of our sales transformation strategy. As we focus our execution to improve revenue mix, this includes growing total annual recurring revenue. Another positive indicator in fiscal year 2023 was that we grew the subscription ARR by 81% year-over-year to $13.4 million in subscription ARR, and over $22 million in TCB bookings. We anticipate our continued innovation will accelerate future growth of subscription ARR into new markets for us, such as the high growth all-flash storage market. Driving improved operational efficiency is another part of our transformation. Our supply chain continues to stabilize and improve with greater parts availability and at lower cost, and we expect that this will carry forward into fiscal year 2024. Also, our focused efforts to improve working capital and decrease inventory yielded positive results to further strengthen our company. As we execute our strategy, it is important that we operate our company to drive profitable growth. To that end, we recently implemented a global efficiency plan and worked with our lenders to improve our strategic flexibility by securing additional liquidity through an upsizing of our existing debt. Ken will discuss these items in more detail during his prepared remarks. Turning to Slide 5, I would like to give you an update on our product innovation progress. On April 3, we announced Myriad, a new all-flash storage platform for the enterprise. This is a huge milestone for the company and introduces a totally modern software design to one of the highest growth segments in storage right now. The initial reception has been incredible, starting with phenomenal press coverage and positive reception from industry analysts and experts. We then showcased Myriad at the NAB trade show, which is the largest broadcast trade show in the world, with an opportunity for us to meet with our customers in this space. The reception from our customers and partners has been outstanding. They were frankly blown away that Quantum has been able to develop an all-new software-defined storage platform to address this space, and the innovation was recognized by the industry with Myriad winning three industry awards, including this year’s NAB Show Product of the Year. We also introduced the latest version of our unified surveillance platform software at the ISC West trade show in March. The unified surveillance platform is the culmination of our strategy to combine the best software innovation from Pivot 3 with a totally modern software platform that can run on any hardware. The unified surveillance platform has also been recognized with multiple industry awards and will be a key opportunity for us to build on the success we achieved in our video surveillance business this year. With the introduction of Myriad and the unified surveillance platform, Quantum now offers end-to-end solutions for the world’s biggest unstructured data workloads, including AI and machine learning, corporate video for entertainment, branding and communications, video surveillance, massive data lakes for archiving and digital preservation, and data protection. Only Quantum offers solutions that cover the entire data lifecycle, from high speed ingest and processing through forever data archiving, along with AI-enabled data cataloging and monitoring software for managing and enriching unstructured data. Now I’d like to turn it over to Ken to walk through our financial results in more detail. Ken? Ken Gianella: Thank you Jamie. Please turn to Slide 7 and I’ll provide an overview of the financial results, starting with our fiscal fourth quarter. As Jamie previously highlighted, strong operational execution in the fourth quarter of 2023 drove revenue above the high end of our guidance at $105.3 million. This was approximately an 11% increase year-over-year, representing our strongest fiscal fourth quarter since fiscal 2017. This growth was led by another strong quarter of secondary storage accounting for 42% of total revenue, up 1,000 basis points year-over-year on continued strong sales of hyperscalers. Adjusted EBITDA in the fourth quarter was $1 million and above our guidance. This represents a 2.5 times improvement compared with $400,000 in the prior year quarter, driven primarily by higher revenue. Now turning to Slide 8, I’ll provide a breakdown of this quarter’s revenue results and the year-over-year trends. Our presentation of revenue has been enhanced to better show the performance of our primary and secondary storage systems from both perpetual license and subscription delivery. Services on this slide is highlighted as our traditional Quantum services only and does not include subscription. Primary storage revenue was $14.4 million, down approximately 8% both year-on-year and sequentially. Secondary storage systems revenue increased 40% year-over-year and decreased 12% sequentially to $46 million, or approximately 44% of total revenue. While our sales to hyperscale customers were down sequentially, the significant traction we have achieved in the hyperscale vertical continued with 62% year-over-year growth. Looking at our services business, revenue in the fourth quarter was $29.9 million, down approximately 6% year-over-year due to a continued decline in support renewal revenue driven by end of service life on our older tape product lines. We anticipate the decline in service revenue to begin to level off in the first half of this fiscal year. Next in devices and media, while there was some sequential improvement, revenue was down approximately $600,000 or 5% year-over-year. Finally, royalties in the quarter increased sequentially and year-over-year to $4 million. Moving to Slide 9, I want to provide a review of our annual recurring revenue and subscription metrics. Total annual recurring revenue, or ARR for the full year 2023 was approximately 38% of our total revenue at $155.9 million, with a gross margin on the combined business being approximately 62%. As a company, we are focused on improving our total ARR by maximizing our Quantum service opportunities to both our partners and customers globally, combined with our strategic shift to delivering more of our solutions via software and service subscriptions. Our subscription offering is a strong proof point of the success of our business transition efforts. The subscription portion of our total ARR increased approximately 81% year-over-year and approximately 20% sequentially in the fourth quarter to $13.4 million. Today, we have over 734 cumulative active customers with over 78% of our new software sales being subscription, up from only 25% in the prior year. As a reminder, Quantum now has subscription offerings that span our full portfolio, with the exception of tape, plus we are very encouraged by the progress we are seeing in the renewal of initial subscriptions in early fiscal 2024. Now turning to Slide 10, let’s review our fourth quarter GAAP results. GAAP gross margin for the fourth quarter was 30.2%, which reflected the unique product mix that we discussed last quarter as well as a $5.3 million non-recurring inventory reserve adjustment caused by pandemic-driven excess and obsolescence of certain inventory due to legacy products being discontinued. GAAP net loss in the fourth quarter was $13.6 million or a loss of $0.15 per share. The increase in loss per share was primarily due to the previously mentioned gross margin and, as anticipated, higher operating expenses. Now turning to Slide 11 for non-GAAP metrics, non-GAAP gross margin for the fourth quarter was 35.5% compared with 38.4% in the prior year quarter and 36% sequentially. As previously mentioned, we had a large life science deal in Europe that was dilutive to gross margin but a strategic account for us to grow long term. Non-GAAP operating expenses were $37 million in the fourth quarter, which was flat year-over-year and an increase from the $34.5 million last quarter. The expected sequential increase was due to end of year commissions, seasonally higher payroll taxes, and an increased investment in sales and marketing initiatives. Non-GAAP adjusted net loss in the fourth quarter was $3.7 million or a $0.04 loss per share, and finally adjusted EBITDA in the fourth quarter was $1 million and above our guidance. Now turning to Slide 12, I’ll provide brief highlights of our fiscal 2023 results. Full year 2023 total revenues increased $40 million or by approximately 11% to $412.8 million. Growth was driven by strong performance in secondary storage systems with our hyperscale customers. For the full year 2020, adjusted EBITDA was essentially flat with the prior year at $11.8 million. This was largely a reflection of a higher mix of hyperscale business and supply chain-related headwinds in the first half of the year, which pressured gross margins. On a positive note, during the latter part of the fiscal year, supply chain headwinds and inflationary cost pressures began subsiding, and we anticipate this trend to continue into fiscal 2024. Moving to Slide 13 for a breakdown of fiscal year revenue results and the associated historical trends, primary storage revenue for the full year 2023 was $57.6 million compared to $60.7 million in the prior year. Exiting fiscal year 2023, we are seeing positive signs of recovery of our primary storage systems going forward due to increased market demand, the introduction of our Myriad platform, and our multiple year investment in our U.S. and international sales teams. Secondary storage systems revenue for the full year 2023 increased 48% or $175.5 million as we continued to see significant growth of our hyperscale business over the last two years. While we anticipate revenue in our secondary storage solutions to come down from fiscal 2023 levels, we expect our higher margin DXI, active scale object storage, and scaler tape storage solutions all to gain traction with large enterprise companies seeking a more affordable solution as repatriation of their data from cloud-based environments continues to accelerate. Next looking at our traditional Quantum services business without subscriptions totaled $123.6 million in 2023. While end of life services on older tape products have impacted our services business over the last few years, we anticipate this stabilizing in the first half of fiscal year 2024. Total device and media revenue for 2023 decreased to $42.4 million, and finally total royalties for the full year were $13.7 million, primarily reflecting the transition to the latest generation and higher capacity LTO-9 node. We anticipate this to stabilize to an annualized royalty rate of approximately $11 million to $12 million going forward. Now please turn to Slide 14 for an overview of debt and liquidity at the end of the quarter. Cash, cash equivalents and restricted cash at the end of the fourth quarter were approximately $26 million compared with $5.5 million a year ago, driven by proactive cash management and strong end of quarter collections. Outstanding debt split between term and our revolver was $91.4 million and our net debt position was $65.4 million. We anticipate our working capital will continue to improve and we are pleased with the progress on our overall cash conversion metrics. Heading into next year, we believe it is important to create greater strategic flexibility and have a clear plan for improved profitability in fiscal year 2024; as such, turning to Slide 15, I’d like to start with an overview of actions we have taken subsequent to the end of the quarter. Recently we proactively secured an additional $15 million of liquidity and received greater covenant flexibility from our current lenders to better position the company as we bring our recent product innovations to market. As Jamie discussed, our path to improved profitability is focused execution on improving revenue mix and driving global efficiencies. Improving revenue mix is a key lever to expanding gross margin and our earnings. This includes getting back to growth in our primary storage systems not only in our existing markets but expanding into new enterprise verticals with our Myriad solution. We are seeing pipeline increase in large enterprise opportunities, including repatriation of data from the cloud and expansion of enterprise AI and machine learning programs. Equally important to driving improved revenue mix is the streamlining of our operations. While we have made progress over the last year, our work is not done. To that end, there are several self-help global efficiency initiatives we are undertaking that I’d like to share with you. First, improved operational efficiency – we are actively executing on several projects, including improving manufacturing and logistics productivity, clawing back inflationary impacts from the last couple of years with value engineering efforts combined with a continued focus on reduced travel and discretionary spend. Second is leveraging our global footprint. The goal is to expand our presence and focus areas both domestically and internationally, including our growing international centers in Kuala Lumpur, Bangalore and Guadalajara. We believe investing more in focused locations will drive deeper collaboration, more effective processes, lower facility costs, and create a more effective operation as we move forward as an organization. Third is a new cost reduction initiative. Turning to Slide 16, let me provide some insight on these efforts. As we execute our vision and our strategy, it is important that we operate our company to drive profitable growth. To that end, we have begun a cost reduction action that will initially impact over 10% of our global workforce. We anticipate these actions will result in an annualized net savings of approximately $14 million fully realized exiting fiscal year ’25. With a payback in less than six months, we anticipate a fiscal year 2024 non-GAAP P&L savings of approximately $7 million from our Q4 ’23 exit run rate. As we move forward, we will continue to evaluate our performance, take measured actions as necessary while balancing a strong customer experience and level of support that ensures we continue to deliver innovation and high quality of service to our customer. Now to close out, please turn to Page 17 and I’ll review the company’s guidance for the first quarter and full fiscal year 2024. First, we anticipate total revenue in the first quarter to be $97 million plus or minus $3 million. We expect non-GAAP adjusted net loss per share for the first quarter to be breakeven plus or minus $0.02 per share, based on an estimated $93.3 million shares outstanding. Adjusted EBITDA for the first quarter is expected to be approximately $1 million. We also are introducing guidance for the full year 2024 with revenue expected to be $415 million plus or minus $10 million, non-GAAP adjusted EPS of $0.01 plus or minus $0.10, and adjusted EBITDA is expected to be at least $20 million for the full year. To add some color to our guidance, as I mentioned earlier, we do anticipate a decline in our secondary systems year-on-year due to declining hyperscale business. We also anticipate those declines being replaced with an improving revenue mix of higher margin primary and secondary systems. We foresee a stabilizing supply chain and decreasing inflationary environment combined with our global efficiency initiatives that, at a minimum, drives our year-over-year improvement. To be clear, the management team’s expectation is to return the business to significantly higher earnings performance than our current outlook. We have a path and are working to accelerate our efforts through sales execution on growth and improved revenue mix, driving improved operational efficiencies, creating synergies and scale by leveraging our global footprint, and achieving our targeted cost reductions. We covered a lot today, and before I hand it back to Jamie, I’d like to say after my first quarter here at Quantum, I’m super excited to be here. The team is focused and extremely optimistic about our company, our transformation, and we are excited about our future. I look forward to catching up with you in the weeks and months ahead. With that, I’ll now hand the call back to Jamie for closing remarks. Jamie Lerner: Thanks Ken. We’re truly excited about the future. We finished the year with positive momentum and a major new product introduction in Myriad. We laid the foundation for end-to-end enterprise sales growth in the Americas and internationally. We see the supply chain stabilizing and inflationary pricing subsiding. We are executing on our transition to subscription ARR and we have strengthened our company with increased strategic and capital flexibility to execute on the growth of the business. We expect these developments combined with the global efficiency plan’s cost improvements will allow us to significantly increase earnings growth this year and continuing our journey to elevating this company back to the kind of earnings potential we and our shareholders expect. With that, let’s open it up for questions. Operator? Q&A Session Follow Quantum Corp (NASDAQ:QMCO) Follow Quantum Corp (NASDAQ:QMCO) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator instructions] Our first question is from George Iwanyc with Oppenheimer & Company. Please proceed. George Iwanyc: Thank you for taking my question. Jamie, maybe you can expand a little bit about what you’re seeing from a macro environment perspective. If you look at the various regions and verticals, are there any spots of weakness that you’re still managing through? Jamie Lerner : Yes, I mean, let me answer that across a couple of different dimensions. Probably the first and most obvious thing is that the supply chain environment has changed drastically. Parts availability, almost everything is in an all-clear state. We’re not paying up-charges to get things, and in some cases we’re even seeing parts and materials getting discounted to incentivize them to move more quickly as people have loaded up inventory. The other things that I’m seeing, I am seeing our hyperscale customers slow down a bit. I’m seeing them still buying, but I would say the rate’s slowing down a bit as they adjust their inventory levels and think about the outlook for their business, or re-think that. I’m also seeing a newer trend, which is I’m seeing certain organizations bringing large amounts of data back from the cloud for a variety of reasons. Some of them are just pure cost savings. I think if they plan to leave data in or archive data for 20, 30 or 40 years, I don’t think they’re looking at paying a monthly bill for 40 years and they’re looking at ways to use their own IT resources to do that. I’m also seeing people doing that for security reasons and to have greater control over important data, so I’m seeing a number of very large projects that involve just bringing data back from a variety of cloud and other outsourced models and bringing that under a company’s own control. But in terms of the macro, I am not seeing in the segments we share–that we serve, I’m not seeing large pull back. In the movie-making business, I’m not seeing slowing down. Sports and entertainment, I’m not seeing a lot of slowdowns. I’m seeing most enterprises buying at a normal and healthy clip. I think most large enterprises view IT as something that’s very strategic, and I think they’re protecting those budgets. I think people are looking at AI as an area to gain efficiency and be more strategic, so more and more investments in IT, and I think people are looking at other areas if they have to cut costs. Cutting IT, I think people are trying to protect those investments because I think most companies compete with data. They compete with their access to data and their analysis of data. George Iwanyc: Thank you for that. Maybe just to be clear, on the hyperscale side with the demand you’re seeing, have you fully worked through your backlog at this point, and are you kind of at a steady state on the shippable backlog level? Ken Gianella: Yes, we’re not giving the exact backlog level, but I can tell you it’s about normalized for where we would be going, year-over-year. The backlog that was super large that we were working off of, that was mostly due to supply chain constraints that we’ve worked through over the last couple quarters, so it’s more back to normalized levels that we stated before, somewhere between the $10 million to $20 million range. George Iwanyc: Okay, and just finishing up with one last question for you, Ken, with the cost reduction activity that you’re planning, is that mostly going to be taking place over the next several months and you get to an opex level that you see as being sustainable after the first quarter of the year? Ken Gianella: Yes, it’s going to happen really over the next couple weeks, the majority of it, and then we’re going to see another slug coming in towards the back half of the year as we work through some international and regulatory locations. I think that when you think about the profile of it, we’re going to see about $7 million of opex savings coming in, in this fiscal year based off of a Q4 2023 exit rate, and then we should see the other half of it coming in by the end of FY25. George Iwanyc: Thank you. Operator: Our next question is from Craig Ellis with B. Riley. Please proceed. Craig Ellis: Yes, thanks for taking the question. Guys, I just want to say thanks for the very granular transparency in the deck – really helpful. I’ll just start with a revenue question. Clear on the trajectory overall with secondary storage customers at the hyperscale level moderating their pace of purchase intensity, primary starting to pick up. Not looking for explicit guidance, but if we look beyond fiscal first quarter, how does that dynamic play out in the fiscal second quarter? Does that mean we could see revenue step down one more time before we start to re-accelerate, or how we do weigh the different gives and takes that you’re seeing in the business? Jamie Lerner: Yes, I mean, what we’re trying to do, I hope it’s somewhat obvious. We need to bring our margins up, and we bring our margins up based on the segments we sell to. If you think about a hyperscale sale, that could be margins as low as 18%, whereas you look at federal government sales could be as high as 70%, so that’s a pretty big margin range. We’re putting a lot of emphasis on our high margin areas – software sales, North American sales, large enterprise sales, solution sales, and trying to bring down or turn the volume down a bit on our low margin business, which can be hyperscaler sales, certain OEM sales, tape media, things of that kind. I don’t think you’re going to see–we’re trying to avoid any kind of upheaval, where you see massive changes, but we’re trying to bring down some of the lower margin sales while bringing up the higher margin parts of our business, and we’re doing that through our channel incentives, we’re doing that through our sales compensation plan, we’re doing it through our marketing efforts, and what we’re trying to do throughout this year is keep the revenue flat while bringing the revenues up significantly in our high margin products. You see things like primary storage coming up as high as 25%, you see our enterprise sales coming up 25% to 30% as we bring down some of the larger pieces of our sales that are more–I wouldn’t call them completely empty calories, but they’re certainly less nourishing than our higher margin business. We’re trying to manage that so you won’t see any big drops, but really shifting the mix towards higher margin products and services. Ken Gianella: Yes, and I’ll just add onto that, Jamie, is when you think about the services business over the last few years, with the end of life runoff that we’ve seen, the team–you know, we had a change over there and the team has done a great job of stemming the runoff there, finding ways to extend some of these product life–product service life, in some cases, and we do see that subsiding by the back half, or the first half of this year. We should see going into the second half that stabilizing and potentially going back up, so if you think about our services business, just the legacy Quantum service business, that carries anywhere from high 50s to low 60s in margin, and so preserving that and then growing that again is a key part of our total ARR strategy. Craig Ellis: That’s real helpful, nailed the first question and anticipated the second one on services. Moving on, talking a little bit further on opex, it sounds like with the different levers that the company has, we’ll be seeing $7 million of benefit this year. Is that mostly in the back half of the fiscal year to get to that $7 million, Ken, or would we see some of it as early as fiscal 2Q? Ken Gianella: It’s ongoing right now, so we started–we had a lot of things going on this quarter, as you can see from our release, in order to get ourselves healthy and back in productivity mode. We have those elements going on right now, and so we would expect to start seeing benefit of that in Q2 and then heading into the back end of the year, to pick up the rest of the $7 million. I think you’re going to see a little bit of help of that coming through in Q2 and the rest coming in Q3. Craig Ellis: One more model question and then–on products. On the model side, helpful to see what you’ve done with debt and taking it up another $15 million to give you some operational flexibility. What does that mean for quarterly interest expense, Ken? Ken Gianella: We expect it to bump up a little bit. Looking at what’s in the marketplace today, I think that we worked with our existing lenders to get a very favorable deal for where we were at on a blended basis. Our debt only goes up 67 BPs, so I think it’s a really good deal overall. We’re only expecting to see a little bit more interest payment in the year. Craig Ellis: Got it, and then finally back to you, Jamie, when Myriad was announced, we spoke and you were very excited about it, and then it was richly awarded at NAB, as you noted. What is your sales team hearing on potential Myriad uptake as we move through fiscal ’23, and how are you thinking about potential revenue impacts to the business, either in late fiscal ’23 or fiscal ’24, on more of a qualitative than quantitative basis, perhaps, at this point? Jamie Lerner: Yes, as you said, we announced the product, we have put it in front of analysts and gotten a lot of praise around the product. We are now pitching it to customers, and certain customers are starting to install it and run benchmark testing with it, run different use case testing, and we’re extremely encouraged. What we’re learning is the product is very unique. It’s much more modern than the products that we’re competing against, so it has many more capabilities in very modern AI and ML use cases. It has certain features and capabilities that make it very unique for AI and ML especially, including integrated metadata tagging, and we’re pretty encouraged. The other thing that we’re really excited about, and we may have underestimated, is that every time we would sell Myriad as a high speed analytics or high speed platform, it usually has a data lake that is a form of secondary storage where data waiting to be analyzed resides, and we’re seeing that as every time we sell Myriad, we expect to sell active scale or active scale cold storage as the data lake, and then also sell management software that’s moving data from the data lake into the high speed analytics area and then back, and doing metadata tagging, doing data classification, doing different forms of analysis, and so we’re really seeing it evolve into where a Myriad sale would typically drive with it active scale cold storage and likely also drive with it CATdb. It’s almost like an analytic ecosystem that we would sell, so that’s been really encouraging to see that develop. In terms of looking forward, my best view into that is by watching the pipeline, and I would say it’s the fastest growing pipeline we have inside the company right now, so I think it’s as we suspected. It’s the fastest growing market in storage and you can see it by its pipeline growth relative to other products, so we’re pretty encouraged but at the same time, it’s a new product and we’ve got to get it through its initial launch, get it through all of its trials and then get it moving in the market. But yes, it will have revenue impact this year. We’ve modeled it very conservatively until we start to see POs coming in, but there will be revenue impact in this fiscal, for sure. Craig Ellis: That’s really helpful. Thanks Jamie, thanks Ken. Operator: Our next question is from Eric Martinuzzi with Lake Street Capital Markets. Please proceed. Eric Martinuzzi: Hey Jamie, the cadence of business in Q4, given the success on the numbers, I would anticipate that you saw kind of a normal February up from January, and March up from February. Was that how things played out? Jamie Lerner: Yes. Typically January and February are very slow for us, especially in Europe, and then you really hit the buying season in March, that’s really what we saw. Things really accelerated in March for us. That always puts a lot of pressure on the supply chain to build and ship that quickly, but yes, it–slow January and very rapid March. Ken Gianella: And to add to it, this was the best fiscal Q4 we’ve had since 2017, so you look at the numbers that were coming through, a lot of that was aided by the improving supply chain also, that when these things came in, in March, historically we had to just sit back on it and ship– Jamie Lerner: They’d go to backlog. Ken Gianella: Yes, it goes right to backlog, and so with this loosening of the supply chain and our improved operational performance this quarter, we were able to get that out the door, and that’s why you saw the higher end beat. Jamie Lerner: Yes, that was a big difference. I mean, a year ago, we’d order a product and it could be–a simple product like a server, and it would be months to get a network card. Now we order a server and it can ship in, like, two days. We get an order and servers can be at the customer site in a week to two weeks. It’s just a very–and not in all cases, but that wasn’t even thinkable a year ago, and now products are just shipping off the shelf, a lot like–a lot more normalized. That had a big impact. Eric Martinuzzi: Got it. Then for the Q1 outlook, it’s a little bit below where I was modeling. Anything that you saw in April or May regarding the normal seasonality here? Did we have maybe a tough comp on the hyperscaler side from a year ago? Jamie Lerner: Yes, I think that’s probably where you see things happening. The hyperscalers are–you know, it’s a big part of our revenue and it’s slowing down a bit, and whereas a year to two years ago we were the only company that had a hyperscaler tape offer, now two other companies now offer something similar to us, and you can imagine through the supply chain pressures, the hyperscalers want to be sourcing from multiple vendors to manage their risk, so we’re sharing some of that load with other players as well. Ken Gianella: Yes, in the investor deck online, we’ve tried to give a little bit more color when you look at the verticals of how we go at it. Hyperscaler is going to be less of a mix when we look at this fiscal year. Obviously that helps with the total rotation for margin, as we talked about, but on the near quarters, that’s going to be some pressure to the top line, but we would expect the margins to improve to offset that. Eric Martinuzzi: Okay. Then you talked about gross margins rising from the 35.5%, was the non-GAAP gross margin in Q4. What are you targeting by year end? Ken Gianella: Well, for the full year in this mix, I’d love to see us somewhere between 37% to 38% in total gross margins. If you look at that, that’s a number of things that are driving that. One is the improved mix that we have; number two, as Jamie was saying, the overhead and the increased pricing from the inflationary pressures we saw for expediting goods and services, we expect that to come down pretty dramatically, but also our manufacturing organization–you know, Eric is running that and I think he’s done a really great job of finding efficiencies within the total org and finding ways to bring our costs down from low cost manufacturing. I think you combine those three together, we’re feeling really positive about the margin rotation this year. The second piece, and I don’t want to discount it, some of these actions that we’re taking, this isn’t just an opex action. There’s things that we’re doing within our margin profile, specifically within our services business. We really didn’t do a good job of keeping pace with the runoff of revenue in that business and we let the margins drop down to put a 5-handle on it. I think again with the leadership that Jamie put in there, with Ross and the team, really excited about what Ross is doing and the products and services that we’re going to be offering to customers for an uplift. That service mix change will also help with that, but then you look at what he’s doing with the org – the synergies that we can get from globalization and moving org to lower cost regions to help service and maintain these product sets, that’s going to get us to a much better margin position going forward. Eric Martinuzzi: Then last question is on the balance sheet. Obviously you made the borrowing move after the close of the fiscal year. Do you have a pro forma cash and debt balance, maybe as of the end of May or whenever you took the loan out? Ken Gianella: I don’t have that to give right now, but we can probably make that public. The way we carry forward, because I didn’t want to do a walk of what we actually did during this quarter, but if you think about the dollars taken down, it’s probably plus or minus another $10 million. Eric Martinuzzi: Okay, great. Thanks for taking my questions. Operator: Our next question is from Nehal Chokshi with Northland Capital Markets. Please proceed. Nehal Chokshi: Yes, thank you. With respect to the guidance, which I think is characterized as being down seasonally, but then you also talked about how you expect hyperscalers to be down year-over-year for you guys as well, so it is fair to say that you’re expecting secondary storage to be the main component of your down Q-over-Q for the June Q? Ken Gianella: Listen, if we categorize it with hyperscaler in secondary, the way we do today, yes – secondary is going to be down Q-on-Q. But I think that we’re expecting to see some improvement out of the primary business this quarter, which is going to help the cause, but also you’re going to see services coming down slightly, as I said. It’s going to be more towards the end of Q2 that you’re going to see that stabilizing, so that’s going to be down a little bit in the quarter too. But it’s primarily the secondary portion of it and the hyperscaler segment within that, that is the decrease. Nehal Chokshi: Okay, and given that the hyperscaler portion is relatively low calorie, why then–and also given that the March Q had this negative impact from the dilutive lighthouse deal, I’m a little bit surprised to see that the guidance effectively is flattish Q-over-Q. Can you walk us through those dynamics there? Ken Gianella: Well, I think when we come into the quarter, we’re looking to be somewhere around that 36% to 37% gross margin, and again all these things that we see movement on, there is still some mix of hyperscaler in there that is going to have an impact on the lower revenue numbers. It’s purely just a number of going from 105 down to that 97 range that we’re in, but then you have to add on these actions that we’re anticipating. We didn’t start them until this week, so I’m still carrying a little bit higher opex in the first two quarters, a little bit higher selling expenses–in the first two months, I mean, I apologize, in the first two months, including some higher sales and marketing in those first two months that is dragging that down. Nehal Chokshi: I see, okay. Can you guys size what your expectation is for hyperscalers in terms of the year-over-year decline for fiscal year ’24? Ken Gianella: We don’t want to give the specific piece of it, but I can tell you it’s going to be pretty significant drop year-over-year. It’s probably going to be normalizing a little bit more towards what we did in ’22 versus what we did number-wise in ’23. Nehal Chokshi: Got it, that’s very helpful. Then you did mention that you are seeing a pipeline increase from large enterprises – that’s really great to hear that. Can you give a little bit more detail as far as–you gave workload, but you didn’t talk about the products that you’re actually seeing for. Jamie Lerner: Yes, we’re seeing a couple things. One is we’re putting a lot of emphasis on back-up and our DXI product, which is a de-duplication and compression back-up target. We’re seeing a lot of large deals there. I think we said in our prepared remarks, we did north of a $10 million deal with a Fortune 50 bank with DXI, so seeing those kind of large deals come together is good to see in that business. It’s probably our highest margin product. The other business that is accelerating very quickly and a little bit unexpectedly is the active scale cold storage product, which is essentially for storing enormous amounts of data for very long periods of time, and we’re seeing people use this for storing movie and film footage, we’re seeing people store video surveillance footage, autonomous vehicle footage, anyone who has just large sums of data–the national labs, that they want to keep for long periods of time, so that offer has really begun accelerating and we have probably over 10 deals in our pipeline that are over $5 million, so they’re large, large, usually north of 100 petabyte, often north of 500 petabytes data, just enormous data repositories, so. That product is gaining a lot of traction, and then StorNext for non-media and entertainment use cases, analytic use cases, analyzing large amounts of unstructured data, being just a high speed file system for unstructured data, and also strength in its traditional area, media and entertainment. StorNext is also a key part of that, but those are the products we’re really placing in the enterprise – active scale, StorNext, and DXI. Nehal Chokshi: Awesome, thank you for that color. Operator: Our next question is from John Fichthorn with Dialectic Capital. Please proceed. John Fichthorn: Yes, hey guys. Thanks for taking the question. A lot of things sound good as we sit here, and yet it’s hard to kind of parse some of that out in your numbers. I think it’s because you’ve got a lot of different moving parts in your business – you’ve got some things with bad margins that were growing, and some things with good margins that weren’t growing. A lot of that is now reversing in theory going forward. You’ve said some things like primary storage could be 25% this year – I didn’t know whether that was 25% growth or 25% of revenues. Ken Gianella: Twenty-five percent growth. John Fichthorn: Twenty-five percent growth? Great. I assume you’re factoring Myriad into that, and so that is in the guidance for this year, maybe conservatively. I guess my first comment, you can comment on it but it isn’t necessarily intended to be a question, is it’d be great if you could on the next quarter or next year, think about ways to if you’re now focused on EBITDA over top line, which is what it sounds like you are effectively, if you could break that out at a segment level so that we can really kind of analyze what you guys are looking at when you’re driving the business, so we can measure whether you’re succeeding or not, because it’s very difficult to kind of look at the numbers now and know whether you’re accomplishing your goals, to a large degree. On the gross margin side specifically–yes, go ahead? Jamie Lerner: I just want to comment that I heard that feedback from you and others when we were talking about it, and I encourage folks to look at our investor deck that we put out there this quarter on top of our earnings deck. We do give a little bit of a color breakout of the segments and the verticals of what we’re doing in a little bit more detail to help with that rotational view. You just gave me a good in to give a little advertisement there for folks to go check out that investor deck. John Fichthorn: Cool. I have not seen it – I was looking at your earnings deck here. But you mentioned for gross margins at year end, 37% to 38%, and you’re kind of coming into the quarter 36% to 37%. I would have kind of expected a little bit more gross margin improvement. Did I hear that wrong or is that what the target is, and if so, why is it so anemic? Then further, where do you think you can get to on gross margin and over what time period? Ken Gianella: Yes, so part of this, and you said it at the top of your comments, was around the rotation and a lot of moving parts. We still have this declining services business that we have to work through. There’s still a nice slug of hyperscale that is in there, that we’re rotating out the hyperscale and we’re rotating back in the primary and the secondary product sets that Jamie was talking about earlier, so you have those three moving parts all happening at the same time there that as we take action going into the back half of the year with the cost savings that we’re looking it, it’s going to rotating back up in a positive way. I think it’s just a matter of mix and rotation back up to get to the higher levels, so if we can start rotating and we get towards that higher end of the range and we see more of the primary and secondary come on as we anticipate, because the guidance I was giving was more on that midpoint as we start rotating more towards the higher end, I would expect those numbers to rotate up more into the 38% to 39%, maybe starting to peak at 40% as we get that rotation. John Fichthorn: So you said peak at 40, and I just want to make sure what you’re saying is– Ken Gianella: Peaking at 40. John Fichthorn: So you can start to see 40 at the end of this fiscal year, is what you’re hoping for? Ken Gianella: If we get to the higher end with the rotation of primary and Myriad starts picking up, absolutely. John Fichthorn: Then longer term, what do you see yourself building towards with gross margin? Like looking out, I’m not looking for specific guidance for FY25, but just kind of curious, you’re focused on–I mean, is the Myriad gross margin 60 and is the things you’re growing into, as opposed to moving away from, where do you see that gross margin getting to longer term? What could this business look like? Ken Gianella: Well, in that investor deck that we put out there, we restated what we’re going for those goals. We want to see 45%-plus gross margin. In the primary business with Myriad alone, the margins in that business when you think about the rotation traditionally are high 40s, low 50s. With this Myriad product line coming on, we want to see that rotation continuing more into the 50s. The secondary business, once you pull out hyperscale, it’s a pretty healthy business, especially with DXI – it’s one of our largest margin products that we have out there. Those underlying products, that can be carrying mid-40s type of gross margin to it, too. Getting services healthy – services dipping down into the mid-50s, high 50s, not where we want it to be. That business can be up into the 60s also. The other piece, that we really didn’t talk about a lot, but we are really, really stressing the amount of subscription and how we’re rotating there. Going from 25% a year ago of new sales being subscription to over 78% of our sales being subscription based now, and looking at a 60%-plus margin with that, that’s an awesome rotation that the sales team is doing there and the great traction that we’re seeing. I guess, John, what I’m trying to say is the proof points that we’re driving and why we feel confident we can get back to the mid-40s is all in the rotation of the primary coming back, driving the subscription portion of that versus being a one-time sale, and then getting services healthy again and having that be in the 60s. Those elements of those three things combined with the self help of the lower cost of production, that’s why we feel confident that the trends going out of ’24 into ’25, ’26, etc., we can get back up into the 40s-plus. John Fichthorn: So help me, just last question, drill down on this software subscription concept. It would seem like if you’ve seen the attach rate, I don’t know what else to call it, go from call it 20s to 70s, that I would see a higher revenue jump than I have year-over-year. Look, the revenue growth is great, it’s still a small number though, so if I’m all of a sudden getting 70% of my sales attaching to a software sale, why am I not seeing that, a double digit quarterly revenue number, for example? Where can that get to? Maybe flesh that out a little bit for us, if you would. Ken Gianella: Right, well I want to break the two out. I was very specific on the new sales that were coming in. We still have a lot of legacy sales, so think of it as a 40/60 split – 40% being new sales to new customers, those are coming through a subscription, where the add-on to legacy customers that were already in perpetual, they tend to want to add on a perpetual, so we’ve got to get that rotation for both new and legacy into the subscription side, John. I don’t know if that answers your question, but that’s the data point. John Fichthorn: Got you, so it’s the new sales as opposed to the legacy that is that, so you’re succeeding in new customers and new sales, they have now a very high attach rate, and as that blend increases versus legacy, that will drive the growth? Ken Gianella: Spot on, John. John Fichthorn: All right, thanks guys. Operator: This concludes our question and answer session. I would like to turn the conference back over to management for closing comments. A – Jamie Lerner: All right, I’d like to thank everyone for attending today, and if you have further questions or want to speak to us directly, Ken and I are always available. Thank you everyone. Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation. 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GitLab Inc. (NASDAQ:GTLB) Q1 2024 Earnings Call Transcript June 5, 2023 GitLab Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.14. Darci Tadich: Thank you for joining us today for GitLab’s First Quarter of Fiscal Year 2024 Financial Results Presentation. GitLab’s Co-Founder and CEO, Sid Sijbrandij; and GitLab’s Chief Financial Officer, […] GitLab Inc. (NASDAQ:GTLB) Q1 2024 Earnings Call Transcript June 5, 2023 GitLab Inc. misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.14. Darci Tadich: Thank you for joining us today for GitLab’s First Quarter of Fiscal Year 2024 Financial Results Presentation. GitLab’s Co-Founder and CEO, Sid Sijbrandij; and GitLab’s Chief Financial Officer, Brian Robins will provide commentary on the quarter and fiscal year. Please note, we will be opening up the call for panelist questions. [Operator Instructions] Before we begin, I’ll cover the Safe Harbor statement. During this conference call, we may make forward-looking statements within the meaning of the federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements in our business, please refer to our earnings release distributed today in our SEC filings, including our most recent quarterly report on Form 10-Q and our most recent annual report on Form 10-K. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we undertake no duty or obligation to update or revise any forward-looking statement or to report any future events, or circumstances, or to reflect the occurrence of unanticipated events. We may also discuss financial performance measures that differ from comparable measures contained in our financial statements prepared in accordance with US GAAP. These non-GAAP measures are not intended to be a substitute for our GAAP results. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release, which along with these reconciliations and additional supplemental information are available at ir.gitlab.com. A replay of today’s call will also be posted on ir.gitlab.com. I will now turn the call over to GitLab’s Co-Founder and Chief Executive Officer, Sid Sijbrandij. Sid Sijbrandij: Thank you for joining us today. I want to start off by thanking so many of you for the well-wishes I’ve received regarding my health. I’m doing well and I remain committed as ever to GitLab success. I’m pleased with how our business performed in the first quarter of FY’24. We exceeded our own guidance for both revenue growth and non-GAAP profitability. We executed well towards our goal of making our customers successful on our AI-powered DevSecOps platform. This quarter we generated revenue of $126.9 million. This represents growth of 45% year-over-year. Our dollar based net retention rate was 128%. Our first quarter results continued to demonstrate improving operating leverage in our business. Our non-GAAP operating margin improved by almost 1700 basis points year-over-year and we remain committed to growing in a responsible manner. I want to start this call with one of the most exciting technology developments of our time. AI and ML. AI represents a major shift for our industry. It fundamentally changes the way that software is developed, and we believe it will accelerate our ability to help organizations make software faster. I’m excited about this new wave of technology innovation, and we continue to focus on incorporating AI throughout our DevSecOps platform. We’re innovating at a fast pace. In 1Q, we delivered five new AI features and in the first half of May alone, we delivered five additional features. All of these are available to customers now and we continue to iterate on Code Suggestions. This feature allows developers to write code more efficiently by receiving Code Suggestions as they type. Code Suggestions is available on gitlab.com for all users, while in beta, we expect Code Suggestions will be generally available later this year. One of the guiding principles with Code Suggestions is to make it available and accessible to all developers everywhere. We also extended language support, so that more developers can realize the benefits of AI on our platform. In 1Q, we increased language support from the initial six languages to now 13 languages. Code Suggestions is uniquely built with privacy first as a critical foundation. Our customers proprietary source code never leaves GitLab’s cloud infrastructure. This means that their source code stays secure. In addition, model output is not stored and not used as training data. AI is not only changing how software is developed, it’s also amplifying the value of having a DevSecOps platform. DevSecOps is a category that we created and we’re seeing it enter a mainstream adoption phase. We are seeing industry analysts recognizing this. I’m pleased to share that GitLab was recently recognized as the only leader in the Forrester Wave for integrated software delivery platforms 2023. We are excited to see the market mature and recognize the value of an integrated software delivery platform, a strategy that GitLab has followed from the start. This quarter we had many conversations with senior level customers, but one with a CTO from a top five European bank really stands out. At first, we focused on many of our differentiated features that only a DevSecOps platform can provide. For example, we talked about the benefits of value stream dashboards, DORA metrics and compliance on a single platform. When the conversation moved into AI, the CTO said something extremely interesting. He said, cogeneration is only one aspect of the development cycle. If we only optimize cogeneration, everything else downstream from the development team, including QA security and operations breaks, breaks because these other teams involved in software development can’t keep up. This point, incorporating AI throughout the software development life cycle is at the core of our AI strategy. Today, our customers have the ability to use Code Suggestions for co-creation, suggested reviewers for code review. Explain this vulnerability for vulnerability remediation, value stream forecasting for predicting future team efficiency and much more. We’re proud to have ten AI features available to customers today, almost three times more than the competition. Applying AI to a single data store for the full software development lifecycle also creates compelling business outcomes. We believe that this is something that can only be done with GitLab. We see a lot of excitement surrounding AI at the executive level. We are hearing from customers that AI is motivating them to assess how they develop, secure and operate software through a new lens. Enterprise level companies who may not have been in a market until 2024, 2025, 2026 are re-evaluating their strategies. On top of that, there’s new personas entering the mix. As chief information security officers navigate these new AI powered world, they are working to empower their teams to benefit from AI and apply appropriate governance, security compliance and auditability. In all, we believe that AI will increase the total addressable market for several reasons. First, AI will make writing code easier, which we believe will expand the audience of people such as junior and citizen developers who build software. Second, as these developers become more productive, we see software becoming less expensive to create. We believe this will fuel demand for even more software. More developers will be needed to meet this additional demand. And third, we expect customers will increasingly turn to GitLab as they build machine learning models and AI into their applications. As we add ModelOps capabilities to our DevSecOps platform, this will invite data science teams as new personas and will allow these teams to work alongside their DevSecOps counterparts. We see ModelOps as a big opportunity for GitLab. Expanding the addressable market will also create an opportunity to capture greater value. Later this year, we plan to introduce an AI add-on focused on supporting development teams. This new add-on will include Code Suggestions functionality. We anticipate this will be priced at $9 per user per month billed annually. This add-on will be available later this year across all our tiers. All of this innovation accentuates a broader theme for our business. The differentiation between a Dev and a DevSecOps platform. We believe that an AI-powered platform focused solely on the developer persona is incomplete. It is missing essential security operations and enterprise functionality. Remember, developers spend only a small fraction of their time developing code. The real promise of AI extends far beyond code creation. And this is where GitLab has a structural advantage. We are the most comprehensive DevSecOps platform in the market. Features like Code Suggestions and Remote Development are important accelerants for developer efficiency. And today, GitLab has more AI features geared towards developers than our competitors. However, that isn’t enough. In order to achieve a ten times faster cycle time on projects, enterprises need an end-to-end platform that works across the entire software development life cycle. Let me describe some of GitLab’s key security operations and enterprise differentiators. For security only GitLab has dynamic application security testing, container scanning, API, security, compliance management and security policy management. In operations, only GitLab has feature flags, infrastructure as code, error tracking, service desk and incident management. And for enterprises only GitLab has portfolio management, OKR management, value stream Management, DORA metrics and design management. Let me illustrate the value of a DevSecOps platform with one of our customers, Lockheed Martin. Lockheed Martin’s customers depend on them to help them overcome their most complex challenges and to stay ahead of emerging threats. Their customers need the most technologically advanced solutions. Lockheed Martin’s engineering teams require speed and flexibility to meet the specific mission needs of each customers. They also require shared expertise and infrastructure to ensure affordability. Lockheed Martin has a history of using a wide variety of DevOps tools and needed to improve automation, standardize security practices and collaboration. They choose to go big with GitLab, greatly reducing their tool chain and cutting complexity while reducing costs and workload. Lockheed Martin team has reported eighty times faster CI Pipeline builds 90% less time spent on system maintenance. They’ve retired thousands of Jenkins servers. Lockheed Martin continues to grow with GitLab and is looking to migrate even more projects to their DevSecOps platform. One of their software strategy executives said by switching to GitLab and automating deployment teams have moved from monthly or weekly deliveries to daily or multiple daily deliveries. Lockheed is a great example of the power of a DevSecOps platform and we see this in other use cases as well, such as compliance. In the quarter, a large health care provider purchased GitLab Ultimate for a platform features. They needed to meet specific compliance requirements from their auditors. They determined that GitLab is the best way to achieve their objectives. Another customer we expanded business with in Q1 is NatWest Group, a relationship bank for the digital world. NatWest Group is focused on delivering sustainable growth and results of fostering a better, simpler banking experience. Last year, NatWest Group chose GitLab dedicated. He wanted to enable their engineers to use a common cloud engineering platform to deliver a better experience for customers and colleagues. Five months into the program, we are pleased that NatWest has reported shorter onboarding times and productivity gains. This led to NatWest choosing GitLab professional services to accelerate their transformation by supporting training certifications and developer days. In summary, we’re confident in a strong value proposition that GitLab provides to customers. GitLab is the most comprehensive AI-powered DevSecOps enterprise platform. The significant return on investment, quick payback period and well-documented positive business outcomes are resonating globally. We’re trusted by more than 50% of the Fortune 100 to secure and protect their most valuable assets. We also believe we’re in the early stages of capturing an estimated $40 billion addressable market, a market that we’ve seen evolve from point solutions to a platform from DIY DevOps to a DevSecOps platform. And AI will speed up different aspects of software creation and development. This in turn creates the need for a more robust security compliance and planning capabilities. In today’s era of rapid innovation, the power of a platform like GitLab to enable faster cycle times truly shines. I’ll now turn it over to Brian Robins, GitLab’s Chief Financial Officer. Brian Robins: Thank you, Sid, and thank you again for everyone joining us today. I’d like to spend a moment discussing the macro environment, the financial impact of our recently implemented premium pricing change and provide some insights into the financial impact of our AI products. Then I will quickly recap our first quarter financial results and key operating metrics and conclude with our guidance. Let me first touch on some of the watch points I discussed on prior calls. We continue to see sales cycles remaining at 4Q levels due to more people involved in deal approvals. Contraction improved over 4Q, but is higher than prior quarters. Like 4Q, contraction is driven almost entirely by lower seat counts with minimal down tearing. I was pleased with the bookings predictability in 1Q. It was much better than 4Q. As we mentioned on the prior call, we raised the price of our premium skew for the first time in five years. Over that time frame, we added over 400 new features, transitioned from a Dev platform to a DevSecOps platform. We shared that we expected the premium price increase of minimum impact in FY’24 with greater impact in FY’25 and beyond. The price increase which took effect on April 3rd is going as planned. We only had one month of renewals impacted by the price increase in the quarter. To-date, customer churn is unchanged for the premium customers who renewed in April and our average ARR per customer increased in line with our expectations. Now on to the way we are thinking about the financials and the impact of our AI products. We continue to invest in people and infrastructure to support AI. While we have had some teams working on AI features, we recently shifted additional engineers from other teams to support the work on AI. As a result, this has not led to significant incremental expenses on engineering talent. Additionally, we have made investments in our cloud provider spend to support our AI and R&D efforts. In addition, we also continue to leverage partners help drive our AI vision. This has included partnership announcements with Google Cloud and Oracle. The Google Partnership allows us to use Google Cloud AI functionality to make our own AI offerings better by leveraging their toolset. The partnership with Oracle makes it easier for our customers to deploy their own AI and machine learning workloads using Oracle’s cloud infrastructure. Both of these partnerships help create strategic differentiation for our customers in a financially responsible manner. Now turning to the quarter. Revenue of 126.9 million this quarter represents an increase of 45% organically from the prior year. We ended 1Q with over 7400 customers with ARR of at least $5,000 compared to over 7000 customers in the fourth quarter of FY’23 and over 5100 customers in the prior year. This represents a year-over-year growth rate of approximately 43%. Currently, customers with greater than 5000 ARR represent approximately 95% of our total ARR. We also measure the performance and growth of our larger customers who we define as those spending more than 100,000 in ARR with us. At the end of the first quarter of FY’24, we had 760 customers with ARR of at least $100,000 compared to 697 customers in 4Q of FY’23 and 545 customers in the first quarter of FY’23. This represents a year-over-year growth rate of approximately 39%. As many of you know, we do not believe calculated billings to be a good indicator of our business. Given that prior period, comparisons can be impacted by a number of factors, most notably our history of large prepaid multiyear deals. This quarter, total RPO grew 37% year-over-year to 460 million and cRPO grew 44% to 324 million for the same time frame. We ended our first quarter with a dollar based net retention rate of 128%. As a reminder, this is a trailing 12 month metric that compares expansion activity of customers over the last 12 months with the same cohort of customers during the prior 12 month period. The dollar based net retention of 128% was driven by lower seat expansion and contraction due to seats. The ultimate tier continues to be our fastest growing tier, representing 42% of ARR for the first quarter of FY’24, compared with 39% of ARR in the first quarter of FY’23. Non-GAAP gross margins were 91% for the quarter, which is slightly improved from both the immediate preceding quarter for the first quarter of FY’23. SaaS represents over 25% of total ARR, and we’ve been able to maintain non-GAAP gross margins despite the higher cost of delivery. This is another example of how we continue to drive efficiencies in the business. We saw improved operating leverage this quarter, largely driven by realizing greater efficiencies as we continue to scale the business. Non-GAAP operating loss of 15 million or negative 12% of revenue compared to a loss of 24.8 million or negative 28% of revenue in 1Q of last year. 1Q FY’24 includes 5.6 million of expenses related to our JV and majority owned subsidiary compared to 3.7 million in 1Q FY’23. Operating cash use was 11 million in the first quarter of FY’24 compared to 28.2 million use in the same quarter of last year. Now let’s turn to guidance. We are assuming the macroeconomic headwinds and trends in the business we have seen over the last few quarters continue. There has been no change to our overall guidance philosophy. For the second quarter of FY’24, we expect total revenue of 129 million to 130 million, representing a growth rate of 28% to 29% year-over-year. We expect non-GAAP operating loss of 11 million to 10 million and we expect a non-GAAP net loss per share of negative $0.03 to negative $0.02, assuming a 153 million weighted average shares outstanding. For the full year FY’24, we now expect total revenue of 541 million to 543 million, representing a growth rate of approximately 28% year-over-year. We expect non-GAAP operating loss of 47 million to 43 million and we expect non-GAAP net loss per share of negative $0.18 to negative $0.14 assuming a 153 million weighted average shares outstanding. On a percentage basis, our new annual FY’24 guidance implies a non-GAAP operating improvement of approximately 1200 basis points year-over-year at the midpoint of our guidance. Over a longer term, we believe that a continued targeted focus on growth initiatives and scaling the business will yield further improvements in unit economics. The guidance has us on track to achieve cash flow breakeven for FY’25. For modeling purposes, we estimate that our fully diluted share count is 173 million. Separately, I would like to provide an update on JiHu, our China joint venture. Our goal remains to deconsolidate JiHu. However, we cannot predict the likelihood or timing of when this may potentially occur. Thus, for modeling purposes for FY’24, we now forecast approximately 29 million of expenses related to JiHu compared with 19 million in FY’23. These JiHu expenses represent approximately negative 5% of our total implied negative 8% non-GAAP operating loss for FY’24. Our number one priority as a management team is to drive revenue growth, but we’ll do that responsibly. There has been no philosophical change in how we run the business to maximize shareholder value over the long-term. Before we take questions, I’d like to thank our customers for trusting GitLab to help them achieve their business objectives. Also want to thank our team members, partners and the wider GitLab community for their contributions this quarter. With that, we’ll now move to Q&A. To ask a question, please use the chat feature and post your question directly to IR questions. We’re ready for the first question. Operator: A – Darci Tadich: Our first question comes from Rob with Piper Sandler. Q&A Session Follow Gitlab Inc. Follow Gitlab Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Rob Owens: All right. I think I did that correctly after three years of using Zoom. Good afternoon, guys. Sid Sijbrandij: Hey, Rob. Good afternoon. Rob Owens: Curious to hear an update on customer conversations. Obviously a stronger than expected quarter, but we are seeing this deceleration, I think, across all high-growth tech companies. So both Gen AI — in the macro, how should we think about pressure on net retention rates, customer acquisition that’s coming from customers taking a more prudent approach in the current budgetary environment versus, I guess, rethinking needs for Dev headcount and re-evaluating which Dev tools to purchase just given all the Gen AI innovations lately? Sid Sijbrandij: Yeah. Thanks, Rob. And before I answer that question, maybe an update on my health. I just completed my last round of systemic chemotherapy. So happy about that. Rob Owens: Congratulations. Sid Sijbrandij: Thanks. And also no sign of detectable disease, and I’m excited about GitLab’s future and continuing my role as CEO and Chair. Yes, lots of things to unpack in your question. We see the macro trends continuing, and that’s putting pressure on seat count. That was the same last quarter, and we anticipate that trend to continue. At the same time, we’re super excited of what the macro is doing to the mindset of customers, because they say, hey, now we — it’s time to consolidate. And at the same time, we see that the analysts are seeing that, hey, this is consolidating as a market. So we believe that DevOps platform is going to be the way that people will consolidate. And we have the most comprehensive DevSecOps platform, which is also great if you look at the application of AI. We’re able to apply AI not just for Code Suggestions, but apply it across the entire spectrum. We have more than 10 features that we were able to ship. And those 10 features, they drive value at every part along the stage. And as for how that influences the TAM, which you alluded to, we think AI is going to make it easier for more people to enter the fray. So we think it was a supply of more people using the product. At the same time, when you see that software development becomes easier, we believe there’s going to be more demand for it. Software development used to be very expensive. AI makes it more affordable. There’s going to be more demand. And more demand, again, means more people entering the fray. And last but certainly not least, it’s an opportunity for us to manage not just the code that companies have, but also their models. And that’s what we do with our MLOps functionality. We already allow you to run experiments with GitLab. We want to extend to a full MLOps managed platform where we add the data engineers to the constituents that use GitLab. Rob Owens: Great. And if I can sneak a quick one in for Brian. Just regarding DBOs in the linearity of the quarter, was that either large deals at the end? Or was it very back-end weighted? And if I look at that receivable base and assume collections on it, looks like you could turn the corner from a cash flow perspective relatively soon. So any commentary on turning free cash flow positive? Thanks. Brian Robins: Yeah, I’ll touch on DSOs, and I’ll touch on free cash flow breakeven. And so from a DSO perspective, we were more weighted towards the end of the quarter. But the good news is that we — our amount of bad debt over the last three years has not exceeded 1%, and our age receivables has been very, very consistent. And so some of our European customers have requested Net 45, Net 60. And so we’ve accommodated that just because of the macro and the bad debt expense being so low. From a free cash flow breakeven perspective, we committed to be free cash flow breakeven in FY 2025. And we’ve also stated some of the actions that we’ve taken previously will accelerate our path to profitability, but haven’t given a specific time line on that. Rob Owens: All right. Thanks, guys. Brian Robins: Thanks, Rob. Darci, you’re muted. Darci Tadich: Up next, we have Joel with Truist. Joel Fishbein: Thank you. And Sid, I’m sending prayers to you, and congrats on making it through the treatment. Sid Sijbrandij: Thank you. Joel Fishbein: Brian, just a quick follow-up for you on Rob’s question. Congrats on the margin improvement. I think that’s — you’ve done a really good job. Can you give us a little bit more color on some of the things that you’re doing to continue to drive towards cash flow breakeven while still investing in some of these new initiatives that you’re doing, which obviously you’ve spent a lot of time talking about some of these AI programs that are coming out. And then just as a follow-up to that, have you like tested this $9 increased — license increase to your customer base and whether or not that they’ll — there’s going to be any pushback there? Thank you. Brian Robins: Yes, Joel, absolutely. Thanks for the question. As Sid and I have always stated since we went public is the number one objective at GitLab is to grow, but we’ll do that responsibly. And we’ve tried to demonstrate that every quarter. And so nothing has changed in that front. Our non-GAAP gross margin percent went up to 91%, even though we continue to have really high SaaS growth and SaaS is greater than 25% of our overall revenue. And so we’re continuing to look at all areas within the business where we can optimize, but we aren’t doing that at the expense of growth because that’s the number one objective at the company. I think we demonstrated that across all cost categories and we’ll continue to look at that quarter-over-quarter. On the $9 increase, we haven’t tested that yet. From a guidance perspective, most of the cost for that is in headcount and cloud costs, and that’s included in the guidance that we gave. And so we don’t expect any changes from a guidance perspective. Joel Fishbein: Thank you. Darci Tadich: Next, we have Sterling with MoffettNathanson. Sterling Auty: Thanks. Hi, guys. Sid, congratulations as well on the completion of the treatments. Hopefully, you got a chance to actually ring the bell. Brian just — and Sid just another follow-up question just on the pricing. So you touched upon it, but I want to make sure to put a fine point here. Did it have any impact on win rates or length of deals where maybe customers were asking and negotiating a little bit harder because of the price increase? Or anything in terms of size of initial lands that may have been impacted because of the price increase? And if not, does that actually change when you think some of the benefits of the pricing increase will actually flow through the revenue line? Brian Robins: Yes. Thanks, Sterling. I guess for everyone on the call, let me just briefly touch on the price increase. We haven’t raised prices in five years. And over that time period, we added 400 new features to the platform. And so that was the genesis of the price increase. The guidance we gave last quarter and today include the price increase. As you know, the price was effective in early April. And so we really only had a short period of less than a month for that. But I am happy to say that the renewal rates and the churn and the land of new customers have been better than expected. And so we’re happy with the results that we’ve seen in just that one month time period. Sterling Auty: All right. Great. Thank you. Darci Tadich: Our next question comes from Matt with RBC. Matthew Hedberg: Hey, guys. Great. Thanks for taking my questions and I’ll offer my congrats, Sid. That’s the best news of the call, really good to hear you doing well. I noticed Ultimate ticked up. I believe, Brian, you said it was 42%, which, last year, was kind of flattish, really the whole year. I was curious what was driving that? Is that sort of AI showing up some of those migrations? Is it more of the not security? Or perhaps is it — is there any of the price increase on premium that’s maybe driving folks to Ultimate? Brian Robins: Yes. Thanks, Matt. When we talk about Ultimate, as we said before, is we don’t set the sales compensation to basically compensate on Ultimate versus Premium. We want to try to take as much friction out of the process. For the consumer as well, we do the same on SaaS and self-managed as well. And so Ultimate, the strength in Ultimate is really based on the underlying value that we’re driving to our customers. The ROI on Ultimate, Forrester did a study, it was 427% over three years, and payback was around six months. And so when I looked at the quarter and looked at sort of Premium, Ultimate and sort of the breakout between contraction, churn, first order and expansion, Ultimate had — churn was consistent with a bunch of prior quarters. Contraction was very consistent. Our growth was just as good as prior quarters, and we had a really strong first order quarter as well. And so Ultimate continues to do well. It’s our fastest-growing tier, and we’re happy with the results. Matthew Hedberg: That’s fantastic. And then maybe just if I could follow up with one with Sid. One of the questions that we get from developer — from investors the most is, does Gen AI put pressure on Dev, developer seat count. I think you talked about a little bit in your prepared remarks, but maybe could you put a finer point on sort of the question of P times Q. And does the number of seats go down in the future? Or do you think it stays consistent or maybe even goes up? Sid Sijbrandij: Yes. We believe that generative AI will expand the market. So first of all, you make the product easier. Like coding today is hard, and AI makes it easier. So we expect the citizen developers, these junior developers to start coding. That code needs to be managed somewhere. And that is in GitLab. The second thing is you make it — you — when a developer can do more, you bring down the price, and that should increase demand for development and software development activities. Third, what you have is today is a DevSecOps platform, but we’ve already articulated that we want to be a place where you manage not just code, but also MLOps. MLOps is the management of data and the management of models. Models are harder to manage than code. They change over time, and they have a lot of risks, security risks, discrimination risks, risks that you’re doing the wrong thing, risk that they are outdated. So it’s a really interesting space to expand the product to. And for example, today, if you have an experiment in MLFlow, you can link it to the experiment in GitLab. And in the future, we’ll plan to come out with a model registry in GitLab. So those are all reasons why we think the market will expand. One other way to look at it is you have generative AI. It produces more code. All that codes also needs to be secured, also need to put in operations. So if you don’t have a good DevSecOps platform, you create a bottleneck at the beginning. That bottleneck is solved with the DevSecOps platform. Matthew Hedberg: Thank you Darci Tadich: We will now hear from Koji with Bank of America. Koji Ikeda: Hey, guys. Thanks for taking the questions. Maybe a question for Sid or Brian here. I wanted to ask you a question about how you plan on attacking the other 50% of the Fortune 500 or I’m sorry, the Fortune 100 that you don’t have. Is it still a primary land-and-expand strategy? Or is it going to be more of a higher level sale for these customers? I was just kind of hoping you could dig into that a little bit more, please. Sid Sijbrandij: Yes. I think it’s certainly that it is both the bottoms-up sale but also the top-down sales. So we have a direct sales motion, but also a channel sales motion that’s getting more important. Channel sales, think of our partners, AWS and GCP, where we work with them to go to customers. And we’re talking to CTOs, CSOs, CIOs, and we help them see the picture. What we commonly do as a value stream analysis. We point out all the different tools they use throughout the cycle and how that adds up in cycle time. And with GitLab, they’re going to save on tooling costs, they can save on the cost of integrating that tooling. They can make their people more productive, and they can go faster through that cycle and get initiatives out. So it’s certainly something we’re going to market with. And as you said, our goal is 100% of the Fortune 100. Koji Ikeda: Got it. And maybe a follow-up here for Brian on kind of going back to free cash flow. This quarter, free cash flow is higher than non-GAAP operating income. And I recall there’s some cash flow mechanics around contract duration that should be mostly be out of the model by this point. So is that right with the cash flow mechanics? And does free cash flow trend higher than non-GAAP operating income from here on an annual basis? Just could you just dig into that just a little bit more for me, please? Brian Robins: Yes, absolutely. When we joined — when I first joined the company, we were not incentivizing the sales force to do multiyear deals because we had such a high gross retention rate. And so we really pushed for one year deals in this. That’s why you saw billings and RPO is — go down and wouldn’t grow at the same rate as cRPO or short-term calculated billings. But we still continue to have prepaid multiyear deals within our existing book of business. And so as those contracts renew, you’ll see some lumpiness in our billings and collections, and Q1 was one of those quarters. Koji Ikeda: Got it. Thank you. Brian Robins: Thank you. Darci Tadich: Next, we have Michael with KeyBank. Michael Turits: Hey, guys. Brian Robins: Hey, Michael. Michael Turits: Can you hear me? Sorry about that. Brian Robins: We can. Go ahead. Michael Turits: So can you talk again you know Brian you said about how competition has gone. Microsoft, obviously, they have been very visible around Copilot. You announced a lot of features. But how has the sort of day in and day out competition gone. As you said, Brian, sales cycles have not extended, but are people sizing you up against each other and differently. How are they entering this discussion about whether or not [Technical Difficulty] Brian Robins: Yes. I think I got most of it, Michael. And I think I’ll repeat the question was how has the sales cycle changed with between us and Microsoft, and what — if you had noticed any change — noticeable things within the quarter. So one thing to note this quarter is on last earnings call, I talked about how the first month of the quarter was very different than the second and third month of the quarter. This quarter is really predictable. And so I was happy with the predictability of the quarter. Week Three, we called the quarter and landed really close to that. The sales cycles in first quarter remained at fourth quarter levels. And so there wasn’t a lot of change there. As I talked about earlier, Ultimate being greater than 50% of the bookings and continue to do well. I think that shows some of the differentiation between us and Microsoft. The hyperscalers as well had a great quarter as well. They grew over 200% year-over-year from a bookings perspective. And also this quarter, we had lower discounting than the previous quarter. And so the trends with Microsoft remain pretty consistent where we still don’t see any competition at about 50% of the deals. We see them in very little deals, but there is more discussion around OpenAI, ChatGPT and Copilot. All right. Darci, we’ll go into the next one. Darci Tadich: Derrick with Cowen is next. Derrick Wood: Great. Thanks. And Sid congrats on the news. I wanted to start, in the press release, you talked about an expanded partnership with Oracle and a new AI/ML offering, enabling customers to speed up model train and inference. Can you give us a little more detail around those new partner initiatives? And then just from a broader perspective, how you’re thinking about the Gen AI related revenue opportunities in the quarters ahead? Sid Sijbrandij: Yes, thanks for the question. So we’re really excited about our partnership with Oracle Cloud. They have a great customer base. And what it means is that our customers now can now run AI and ML workloads on DPU-enabled GitLab runners on the Oracle Cloud infrastructure, and that’s a great powerful infrastructure. Additionally, we’re available in Oracle’s marketplace, expanding our distribution. So our strategy, with AI in mind, is to partner closer with the hyperscalers. And the toughest one is Microsoft. We try to partner there too, but with everyone else, we see a lot of momentum, and that’s AWS, GCP and Oracle. We want to get closer. We want to enable our customers to run their normal workloads, their AI workloads there, and where you can expect us to have more announcements going forward. Derrick Wood: Okay. Maybe a quick one for you, Brian. Appreciate getting more exact numbers on net revenue retention rates. Kind of looking forward and with respect to your guidance for the rest of the year, is there any kind of target ranges that you’d guide us towards? Or how we should be thinking about trends around gross retention and expansion factors? Brian Robins: We didn’t give out the specifics of those metrics. What I will say is this quarter — last quarter was more predictable. And so it makes it easier from a modeling perspective. And everything is factored into guidance. And so we didn’t give specific metrics for those. Derrick Wood: Got it. Okay. Thank you. Darci Tadich: Kash with Goldman Sachs. Kash Rangan: Okay. Great. Thanks for taking my question. Sid good to see that you’re recovering very well and congratulations on the quarter. It looks like business stabilized for you guys. I had a question on the generative AI capabilities. At what point are we looking to — is there any need for further differentiation of GitLab versus the competition? This auto code generation feature that has been made much off, right? Is that a real sticking point in conversations? Do you think the customer base really values and appreciates the broader set of AI capabilities that GitLab has to offer? So it looks like there is a bit of a perception issue in the market that you don’t have those kinds of features that the competition appears to have. If you can debunk that mix for us, that will be great. And then one for you, Brian, what does the month of May look like from a linearity standpoint? The net expansion rates that you saw as improving in the March quarter, it does hold up in the month of May as well. Thank you so much. Sid Sijbrandij: Thanks, Kash. Like in AI, you have the code generation. If you just produce a whole bunch more code, then it’s going to get log jammed later down the pipeline. You also need to do more security fixes. You need to deploy more. So we’re really fortunate that we have a single application, a single data store for the entire DevSecOps cycle, and we can apply to AI to all of them. And that’s led us to having three times as many publicly usable AI features as our competition. That is a big advantage. As long as at the beginning that, of course, you also need the code suggestions. But having the whole rest make sure that if you get more effective there, it works, and you get a faster cycle time throughout and that’s a really exciting development. Kash Rangan: And Brian I had one for you. Yeah, thank you. Brian Robins: And just on the second part of the question, as you would expect, we track a number of metrics internally from top of the pipeline to bottom conversion rates, piecing, expansion, churn, contraction and so forth. And I’m happy quarter-to-date, things are as expected. And so like I’ve mentioned last quarter, it was more predictable in fourth quarter and quarter-to-date and we’ll see how the quarter finishes out, but it’s as expected on all those metrics that we track internally. Kash Rangan: Great. Good to see the quarter and the results. Thank you so much. Sid Sijbrandij: Thanks, Kash. Darci Tadich: Next is Karl with UBS. Karl Keirstead: Thank you. Maybe, Brian, I’ll point this to you. So as all of us try to run back of the envelope math about what the $9 per seat monetization plan might mean for fiscal ’25, can you offer any guardrails as to things we should keep in mind so we’re — maybe we’re a little bit tight on what it could mean. And I guess maybe as two quick follow-ups. Is there any reason to believe that it wouldn’t be applicable to all of your paying users? Or does it feel like it would be relevant only for a subset? And then on top of that, do you think this could actually accelerate the conversion of the free user base to the paid user base such that the opportunity set is beyond our estimate of what you’re paying user base looks like? Thank you. Brian Robins: Lots in there to unpack. Just on FY 2025, we haven’t given out guidance for next year yet. And so I really can’t comment on that. The $9 that Sid talked about in the script is baked into our guidance for this year. Karl Keirstead: Okay. But Brian does it — could it accelerate a free-to-paid conversion? I’m not asking you for fiscal ’25 guidance, just kind of framework as we try to model out what it could mean. Anything you’d offer up as we take our best shot? Brian Robins: I think that all that we’re doing is to make the developer, the security and operations persona is more efficient and to allow and make better, faster, cheaper, more secure. And so I think anything that you do that enables that should help out on all the metrics that you track and model. Karl Keirstead: Okay. Great. Congrats on the quarter. Brian Robins: Appreciate it, Karl. Darci Tadich: We will now hear from Jason with William Blair. Jason Ader: Yeah. Hi, guys. Can you hear me okay? Brian Robins: We can. Jason Ader: All right. Great. I wanted to ask about whether you’re exploring a consumption element to your pricing model and how that might work, especially on the cloud side. Sid Sijbrandij: Yes, thanks for that. We already have consumptives elements in our model. So for example, for compute and for storage, you pay on a consumption basis. We’re adding features to that consumption, for example, in GitLab 16 released on June 22nd, we released MacOS runners, we released Linux runners, we had the Oracle partnership where we have more AI runners, DPU runners. So that is a small part of our revenue today, but we’re releasing additional features. I think over time, you see that the licensing is going to become more flexible. We have cloud licensing today and that allows us to be more flexible in what you pay for. For example, the add-on we are envisioning for AI, right now, it’s efficient to something if you use it, you pay for it, otherwise not. We’ll see what we end up releasing, but that’s what we’re thinking about. So I think you’re right that the mindset of customers is going more consumption, and we don’t — we want to be meeting the expectations there. Jason Ader: Got you. All right. And then one quick follow-up just on that AI SKU. What is going to be included in that SKU beyond Code Suggestions? Sid Sijbrandij: Right now, we’ve only talked about Code Suggestions being part of it. Jason Ader: Perfect. Thank you. Good to see you looking good, Sid. Sid Sijbrandij: Thanks, Jason. Appreciate it. Darci Tadich: Gregg with Mizuho. Brian Robins: We don’t see him. We can go to the next one. Darci Tadich: Pinjalim with JPMorgan. Pinjalim Bora: Great. Thank you for taking the questions. Sid, good to see you doing well. Sid, maybe one on MLOps. Can you help us understand where are we in the maturity curve for GitLab with respect to MLOps. Is DataOps kind of the gap at this point? I’m trying to understand with the current craze of kind of developing Gen AI application, are you seeing new or existing customers kind of talking about using GitLab as part of their MLOps workflow when they’re thinking about building this Gen AI apps? And then one follow-up. The $9 per user per month add-on is that basically an extension into visual code? Is there a difference between a SaaS user or a self-managed user? Sid Sijbrandij: Yes. Thanks for that. So to answer the last question first, that $9 will be the same $9, whether you’re a SaaS user or a self-managed user. You’ll be able to use the Code Suggestion features in our Web IDE as well as in the usual editors like Visual Studio Code. Regarding ModelOps, we’re really, really early. So I don’t want to oversell this. It’s a vision of where we’re going to the future, of where we see the TAM expanding. Today, we have the functionality to link experiments in MLFlow to GitLab, and the next feature that will come out is a model registry. And when you have a model registry, that’s going to form the basis of new functionality we can do is then you have the model kind of control in GitLab as well, and you can start adding more functionality. We expect that MLOps functionality to come before the DataOps functionality. The model learning looks a lot more like code in many ways than the data. So it’s kind of the logical step is first models and then data. With data, it’s — we don’t have functionality yet and that will come later. I think it’s — the thing to know is that we have the ambition. We have the ambition to go beyond code. We have the ambition to manage your code, your models and your data because we think the application of the future is going to have all three, and all three are going to be governed. All three are going to have security and compliance questions that you want your tool, your DevSecOps platform to figure out for you. And that’s why we are doing this, not because it’s easy, but because it’s super, super useful, and because every application is going to have interactions between the three, if we can bring all those constituents together, that’s going to be super valuable for our customers. Pinjalim Bora: Very helpful. Thank you Darci Tadich: Next is Mike with Needham. Mike Cikos: Hey, guys. You have Mike Cikos on the line here and thank for taking the question. First one for Sid, and Sid, great to hear on the health. That’s tremendous news, and I appreciate you giving us all an update. Wanted to circle up on the AI add-on that we’ve been talking about. And I know the Code Suggestions is the only one that we’re talking to today that’s going to be part of that add-on. Can you help us think through, will GitLab be offering up AI features or certain products, however you want to phrase it, independent of that add-on? Or are you going to have to adopt that AI add-on be able to reap the benefits of the AI technology investments that you guys are making today? And then I have one follow-up for Brian. Sid Sijbrandij: Yes, it’s a great question. Like will every AI, piece of AI functionality be in that add-on? And how does it work? Will there be additional add-ons? Will it be part of Premium or Ultimate? Those are pricing and packaging questions. We’re still looking into today so I can’t comment on that. It’s a valid question though. Mike Cikos: Okay. And to Brian then, if I just look at Q1, obviously, the revenue was well ahead of the guidance and your expectations. Can you help us think through what was better than expected during the quarter? And similarly, what is management embedding in its guidance, if I look at the much more, I guess, modest sequential revenue growth that we’re now looking for in 2Q? Brian Robins: Yes. Thanks for the question, Mike. I was happy with the predictability in the quarter, as I states earlier. When we talked about guidance on the last call, because we had more variability in fourth quarter, the range got higher. And so we looked at the bottom end of the range and selected that. And so if you compare us 1Q to 4Q, sales cycles remained at 4Q levels. I did discuss how the hyperscalers bookings were over 200% year-over-year. We also had the lower discounting, and I touched on the strength of Ultimate in the quarter. And so the guidance approach hasn’t changed. When we look at the history of what we’ve done and we look at the assumptions that we have in the model, we have a very detailed bottoms-up model to come up with guidance. And we use the same guidance approach given the macro conditions, and that’s how we planned. Mike Cikos: I’ll leave it there. Thank you guys. Brian Robins: Appreciate it. Darci Tadich: Let’s try Gregg with Mizuho. He has reconnected. Gregg Moskowitz: All right. Thank you very much. Glad the connection is holding. And Sid very glad to hear the encouraging news regarding your health. I’d like to follow up on ModelOps, and I know it’s really early. I do think the native registry is an interesting enhancement. And just curious to get your expectation with regard to attracting data science teams to the platform going forward as that starts to ramp? And then I have a follow-up for Brian. Sid Sijbrandij: Yes, because it’s really early, we want them to work together hand in hand. You see that many changes need both the change in the code and a change in the models and it’s going to lead to different data being outputted. So these changes that today happen in different platform, different tool chains and sometimes very manual. We expect that it’s going to be more and more important to happen on the same level. You think about the financial industry, what you execute, what you have to prove to your auditors is going to be based on procedural code plus a model you’re running, plus that model you’re changing based on data that you need to prove like what data did you use to train the model that, that was then called from your code, that’s the questions we need to answer, that our customers need to answer, and we want to help them do that in a way that’s friction-free where it’s not up to the developers to document it each and every time but the platform just takes care of it and you only have to point out a transaction and you can immediately see how you did that. And that’s really hard to achieve today without a platform. And that’s what we’re going for. As I said very, very early, but I hope a compelling ambition. Gregg Moskowitz: All right. Very helpful. And then for Brian, in the Q4, you mentioned that your NRR decreased almost equally, I think, across seats, tier upgrades and price yield. Any change to that mix in the Q1? Brian Robins: It’s been relatively the same. And so seats is about 50%. Price increase is about 25%, and the last is 25%. So there really hasn’t been any change whatsoever. Gregg Moskowitz: All right. Perfect. Thank you. Darci Tadich: Next is Nick with Scotiabank. Nick Altmann: Awesome. Thanks, guys for taking the questions and Sid great to hear you’re doing well. Just a follow-up on Matt’s question on the Ultimate mix ticking up. It sounds like some of the strength there was driven from a business that was up for renewal in a smaller price point delta between Premium, Ultimate, and it also sounds like there was some strength there just on net new customers landing at Ultimate. But I’m just curious given there’s more renewal businesses as sort of we progressed through 2Q in the second half, should we expect the Ultimate mix to continue to uptick here? Thanks. Brian Robins: Yes. Thanks for the question, Nick. As we said before, and I think it’s worth saying again, we don’t compensate the sales team to sell Ultimate versus Premium. And so that is an output and not something that we’re solving for. We want to deliver the best solution for the customer and get them a quick time to value and a positive business outcome. And so Ultimate had strength in the quarter. It’s really driven by compliance, security and all the additional product features that Ultimate has. When you go through and look at Ultimate and look at expansion, first orders and so forth, Ultimate performed well in a lot of the categories as expected. And so where we saw some pockets of weakness was really in Premium on expansion of our existing clients as well as the contraction. Churn was relatively low, but we still saw some contraction as well. And so like I said, Ultimate had a good quarter. There was some pockets of weakness in premium, I’ll call them watch points that we continue to watch. But overall, happy with what we delivered. Nick Altmann: Great. Thank you. Darci Tadich: Our final question comes from Ryan with Barclays. Ryan MacWilliams: Thanks for squeezing me in. Sid, how are enterprises evaluating adopting AI for their code development today? So like what are some of the key items that they would grade you on? And would this happen via something like an RFP process? Or would this be something that they handle internally? Thanks. Sid Sijbrandij: Thanks. I believe it’s more organic today. They’re trying different things. I think what is really important to a lot of customers is the privacy of their code. And what they’re looking for is a provider who can guarantee that, for example, the output of the models that they ask questions to isn’t used for other models. So that’s something that’s top of mind for us as we build our features. Other than that, it also has to be kind of accessible to everyone in the company. It has to work on the most popular editors. And we have a lot of revenue from self-managed. So we want to make sure that, over time, functionality also is available to self-manage customers where they can connect to the Internet to offer that functionality. Ryan MacWilliams: So are you seeing a lot of questions from customers around securing the output of code from large language models? Sid Sijbrandij: I think it’s top of mind for customers is that the — with some of the third-party services today, you don’t get a guarantee that the output isn’t used to train the Code Suggestions for another organization. And that’s certainly top of mind for them. Ryan MacWilliams: Appreciate that. And one for Brian. Do you see any pull forward of demand or early contract negotiations from customers looking to take advantage of that $24 transition price in the quarter? Brian Robins: I’ll answer this, but this is the last one, Ryan. We got to close out and get back on the call backs. We did not allow early renewals. Your contract had to be up renewal two weeks prior to expiration. And so there was no pull forward in the quarter related to that. Ryan MacWilliams: Okay. Thanks, guys. Darci Tadich: That concludes our 1Q FY’24 earnings presentation. Thanks again, once more, for joining us. Have a great day. Follow Gitlab Inc. Follow Gitlab Inc. 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HealthEquity, Inc. (NASDAQ:HQY) Q1 2024 Earnings Call Transcript June 5, 2023 HealthEquity, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.41. Operator: Good day and welcome. I would now like to turn the conference over to Richard Putnam to HealthEquity’s Earnings Call. Please go ahead. Richard Putnam: Thank you, Sara. Hello, everyone. Welcome […] HealthEquity, Inc. (NASDAQ:HQY) Q1 2024 Earnings Call Transcript June 5, 2023 HealthEquity, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.41. Operator: Good day and welcome. I would now like to turn the conference over to Richard Putnam to HealthEquity’s Earnings Call. Please go ahead. Richard Putnam: Thank you, Sara. Hello, everyone. Welcome to HealthEquity’s first quarter of fiscal year 2024 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity and joining me today on the call is Jon Kessler, President and CEO, Dr. Steve Neeleman, our Vice Chair and Founder of the company, and Tyson Murdock, the company’s Executive Vice President and CFO. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results for the first quarter of fiscal 2024 was issued after the market close this afternoon. The financial results included contributions from our wholly owned subsidiaries and accounts they administer. The press release also includes definitions of certain non-GAAP financial measures that we will reference today. A copy of today’s press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management’s view as of today, June 5, 2023, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed inour annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. At the conclusion of our prepared remarks, we will open up the call for Q&A with the help of our operator Sara. One final announcement before we hear from Jon, due to some conflicts recently encountered, we are postponing our Investor Day that was planned for July 11, to be at a later to be announced date. Once we have rescheduled the date, we will provide you with the press release and invitation. Now, over to you, Jon. Jon Kessler: Hi, everyone, and thank you for joining us for a healthy start to fiscal 2024. I will discuss Q1 key metrics and our view on performance, and Tyson will detail Q1 results, as well as our raised guidance for the fiscal year, and Steve is here for Q&A. In Q1, the team delivered double-digit year-over-year growth in revenue, which was plus 19%, adjusted EBITDA, which was plus 48%, and HSA assets which were plus 10%. HSA members grew 9%, total accounts grew 4% muted by the previously discussed change in COBRA methodology. HealthEquity ended Q1 with 15 million total accounts, 8 million HSAs and 22 billion in HSA assets, all kind of round numbers, and 10% more of our HSA members became investors year-over year, invested assets grew 12%, despite a dicey market. Team Purple started the selling year off strong with 134,000 new HSAs opened during the quarter, that’s down 25,000 year-over-year and we expected a drop given the comp to last Q1’s blistering job growth and turnover rates economy wide, but we’re particularly pleased actually that, that was nearly offset by new employer adds, including across the board for HSAs. In addition, at this time last year, we saw transfers of HSAs from banks that were exiting the business. Obviously, this year, and given the competition for cash, we did not see that same activity. Enterprise logo wins that will onboard later in the year were up noticeably year-over-year, driven by an expanded net partner footprint and employers seeking win-wins in anticipation of a tough calendar ‘24 benefits renewal. For the full-year, we are increasingly confident that increased HSA adoption at the employer level will help to offset lower macro job growth. Q1 saw some daylight on CDV growth, our CDV members grew accounts in the quarter by excluding COBRA as a whole by 4% and by 1%, if you simply exclude the aforementioned adjustment of COBRA accounting methodology. Health CDVs, FSAs and HRAs were strong, as the onboarding of significant new logos offset some seasonal runoffs, commuter maintained its slow rebound, extra ACA exchange subsidies continue to negatively impact COBRA uptake and therefore activity fees and to compensate for that, the team has begun raising fixed fees with good early success, which is very much needed. While there’s much wood to chop on service fees, service costs actually fell by 40 basis points year-over-year, even as revenue increased despite wage gains for our team members as we benefited from a much calmer service environment versus a year ago quarter. As we discussed last quarter, rapid improvement in service tech continues to drive more interactions to chat and automated responses and we believe there is more to come of this over the longer term. Q1 also provided a preview of what we believe is to come over the longer term with respect to custodial fields — fees as — fields — fees is like fields plus yields that will be fields, good luck with that transcriber. As yields on our ladder bank deposit portfolio rose out of the COVID debts and more members chose enhanced rates for or chose enhanced rates for their HSA cash. You saw the strength of our model over the course of the quarter as we talked about in March. High short-term rates provided a boost to income on CDB client health loans as well. All of this adds — added up to strong and resilient cash flow from operations, which as Tyson will detail, led to a return to GAAP profitability in Q1, allowed management to reduce outstanding — which allowed management to reduce outstanding balance on HealthEquity’s variable rate term loan A debt and enables us to continue to invest in future growth and innovation. Mr. Murdock will now detail the financial results and outlook. Tyson Murdock: Thank you, Jon. I will highlight our first quarter GAAP and non-GAAP financial results and a reconciliation of GAAP measures to non-GAAP measures is found in today’s press release. First quarter revenue increased 19% year-over-year. Service revenue was $105.1 million, up 1% year-over-year and custodial revenue grew 59% to $94.4 million in the first quarter. The annualized interest rate yield on HSA cash was 232 basis points. Interchange revenue grew 7% to $44.9 million. Gross margin was 60% in the first quarter this year versus 54% in the year ago period. Net income for the first quarter was $4.1 million or $0.05 per share on a GAAP EPS basis. Our non-GAAP net income was $42.8 million for the first quarter and non-GAAP net income per share was $0.50 per share, compared to $0.27 per share last year. While higher interest rates increased custodial yields and generated interest income, they also increased the rate of interest we pay on the remaining $287 million term loan A to a stated rate of 6.6%. Adjusted EBITDA for the quarter was $86.6 million and adjusted EBITDA margin was 35%, a more than 700 basis point improvement over last year. Turning to the balance sheet, as of April 30, 2023, we used $54 of cash to reduce our outstanding variable debt resulting in a quarter end balance of $226 million of cash and cash equivalents with $873 million of debt outstanding net of issuance costs. We continue to have an undrawn $1 billion line of credit available. For fiscal ‘24, we’re raising guidance and now expect the following, revenue in a range between $975 million and $985 million. GAAP net income to be in the range of $9 million to $14 million. We expect non-GAAP net income to be between $164 million and $171 million, resulting in non-GAAP diluted net income between $1.88 and $1.97 per share based upon an estimated 87 million shares outstanding for the year. We expect adjusted EBITDA to be between $333 million and $343 million. As Jon mentioned, we are basing fiscal ‘24 interest rate assumptions, embedded in guidance on forward-looking market indicators, such as the secured overnight financing rate and mid-duration treasury forward curves and fed funds futures. We are raising the expected average yield on HSA cash to approximately 235 basis points for fiscal ‘24, while the average credit rating or HAS members receive on — the average credit rating HSA — rates on HSA members receive on HSA cash remained flat sequentially. We continue to bake in a 20 basis point increase by the end of fiscal ‘24. As a reminder, the crediting rate, our HSA members receive are determined in accordance with the formula in our facility agreements with them. Our guidance also reflects the expectation of higher average interest rates on HealthEquity’s variable rate debt versus last year, partially offset by the reduced amount of variable rate debt outstanding. Our guidance includes a smoother, seasonal cadence of revenue and earnings, which were disrupted last year by heavier first-half service costs, as we exited the pandemic and also the rapidly rising rate environment that benefited last year’s second-half disproportionately. We expect that interchange revenue seasonally would be more normalized this year and as suggested earlier, a relatively stable interest rate environment over the remainder of this year. We assume a projected statutory income tax rate of approximately 25% and a diluted share count of 87 million, which now includes common share equivalents as we anticipate positive GAAP net income this year. Moving to positive GAAP net income is going to impact our GAAP tax strangely this year. As you know, because of the impact of discrete tax items, the calculated tax rate on a low level of pretax income can look squarely, such as Q1’s calculated 59% tax rate. Based on our current full-year guidance, we expect roughly a 50% GAAP tax rate for fiscal ‘24. As we’ve done in recent reporting periods, our full fiscal 2024 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded. And with that, we now have a — we know you’ll have a number of questions, so let’s go right to our operator for Q&A instructions. Thank you. Q&A Session Follow Healthequity Inc. (NASDAQ:HQY) Follow Healthequity Inc. (NASDAQ:HQY) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Glen Santangelo with Jefferies. Please go ahead. Glen Santangelo: Yes, thanks and good evening and thanks for taking the question. Hey, Tyson, I just had a couple of quick financial questions, if I could, just to sort of help us sort of model this thing more correctly. It says now that you have total HSA assets of $14. 1 billion could you give us a sense for how much of that fits in variable and maybe how much of it you’re investing in? Is it still a third, a third, a third, is that the right way to think about it? And the reason I ask is because we’re trying to assess not only this year, but next year and I know you don’t want to comment on fiscal ’25, but at the current yield curve, it sort of looks like the yield would be even much more year-over-year in ’25 versus ‘24. Nice one, you don’t know if I’m thinking about that math correctly and I’ll stop there. Thanks. Tyson Murdock: Yes, good question. So the variable interest rate portion, of course, is getting smaller with the enhanced rate push. We don’t need as much of that, so there’s not as much impacting. Another thing to consider is the fact that, obviously, the rates last year accelerated so substantially over the course of the year that the second-half was impacted by that — on that variable component. So people got very concerned about, well, how much of that variable component. But based on the size of that amount, it’s not very big. And it’s going to be obviously more consistent even though you may see a curve that sort of curves down. So that’s kind of one area. The next is a question that we get, when you think about how the assets run through the model. Again, they get more consistent as we move into enhanced rates and that has its own liquidity factors. But you think you’re thinking about the FDIC portion, which of course is lumpy because of the M&A that occurred over all those years. So think back about the WageWorks Acquisition, the Further Acquisition and those type of things. And the fact that as we go through integration processes on those, we place those assets into five-year contracts. And so they have to sit in those five-year contracts for five years. And then that causes as when you look back over time, you probably get a smaller amount that rolls off in this next year than you might think when you think about maybe what you mentioned, which is the one-third, one-third, one-third, based on sort of the three-year duration you might get off of those five-year placements. So what I’m telling you is that the number is smaller than that one-third. You have to go back quite back in time, even prior to the acquisition, to determine sort of what that — prior to those big acquisitions to look at what that looks like. And so it will be a smaller number. So Jon, I don’t know if you want to make any additional comments to that. Jon Kessler: We I was keep going. We’ll see what we here. Thanks, Glen. Glen Santangelo: Thank you, very much. Jon Kessler: I will say that was just for other analyst benefit. That was a one-part question. That wasn’t a four-part because we’re not starting with the four-parters. First off, Glen, I was going to pull — I don’t know, some other analysts do does four, five part questions. Sorry, I’m sorry, Sarah. I didn’t mean to interrupt. Operator: Alright. No problem. Our next question comes from Stan Berenshteyn with Wells Fargo. Please go ahead. Stan Berenshteyn: Hi, thanks for taking my questions. First, I just want to make sure I called this correctly. You said you’re increasing service fees that your employers are paying, and it seems like you’re early in that. Can you just give us thoughts on the methodology? And how long do you expect until everybody is on board with the new pricing? Jon Kessler: Well, in particular, that comment refers and now Tyson is chuckling at me because we had a small bet about whether anyone would ask about this, which I just lost — so thank you for asking. But what I was really commenting on there was, in particular, this is several quarters where COBRA has been a bit of a drag for us. And although I will say overall, we were glad to see a black number on CDB and an almost crookedy looking black number on CDB ex COBRA. So that was pretty good. But my comment was focused on COBRA. And there, the real issue is that we now have in place for several more years now, incremental subsidies, sort of, sometimes humorously referred to as it’s the extra Affordable Care Act. I think that’s by the proponents of these things. And they were originally put in place from the pandemic, but they’ve been extended for a couple of years. And the result of that is lower COBRA uptick. So that doesn’t necessarily change the offer rates, but it does affect what we call activity fees in COBRA. And so naturally, the way we should be making up for that is increasing the service fee component. And like all of our products, COBRA is sold both directly and through our channel partners, in particular, in this case, our health care partners. So we want to work with them carefully, but we have begun to roll out modest fee increases for the service fee component to, kind of, make up that difference. And I think people understood that, that was kind of coming, because the service — the cost of delivering service hasn’t fundamentally changed. So it’s really focused on COBRA. And again, the idea isn’t that this is going to drive some major magic, but we do want the overall CDB growth number from a revenue and so forth perspective to ultimately be a black number. It’s not going to be the driver of our growth, but we don’t want it to be dragging us again. Stan Berenshteyn: Got it. And then maybe just a quick follow-up, and I don’t know if you have any money on this. But just back to your prepared remarks, I think you commented that you had more focus on chat-based communications. Can you maybe just give us an update on the adoption of text-based communications within your member base? And then maybe related to that, are you seeing any opportunities to enhance member communication with maybe like generative AI technology that’s coming up? Thanks. Jon Kessler: So I don’t think there was money on either of these. By was there is a — there are a number of wagers around whether the term — those two initials that you just mentioned would appear out of my mouth. And I’m going to see if I can — like it’s more whether I can get through without it more than anything else. Let’s find out. But let’s say this in all seriousness, I do think that it’s fair to say that for us and others, the advances in these areas have really accelerated our ability to automate communications on a lot of the more basic queries that we get and deliver ultimately what from the member’s perspective is rated to be a superior experience. So we have seen — if you were to look at a chart of text-based and then automated text-based over the course of the last, really, six or eight months, it has gone up quite a bit. Both have gone up. I believe and I may be off here, but in rough turns right now, one out of every six or seven of our transactions is text-based. And of those transactions with our members’ interactions, of those between one out of three, and almost one out of two are automated. And so yes, the new stuff is helping, and I think it’s going to help. I mean the nature of my commentary is, again, if you look at service cost, service costs fell year-over-year. Now there are some other things going on as I acknowledged in the script. Last year’s comp was — let’s say last year first quarter service cost was not good. So that certainly helped. But even if you factor that out, we did very well. And so I think there’s a lot more to come here in terms of our ability to both simultaneously improve member experience and reduce costs on the service line. Stan Berenshteyn: Awesome. Thanks so much. Richard Putnam: Thanks, Stan. Operator: Our next question comes from Anne Samuel with JPMorgan. Please go ahead. Anne Samuel: Hey, thanks so much for taking my question and congrats on the great results. Jon, you spoke earlier in your prepared remarks about your strength in new employee adds for HSAs kind of coming in a little bit better than you had expected. I was just wondering if you could talk a little bit more about that. What are you seeing? Is it labor growth, better enrollment. What’s driving that? Jon Kessler: So interesting, in our expectation, as I suggested in the prepared remarks, was, and we’ve tried to communicate this for quite a while, was that when — was that we really were benefiting from both growth in the labor market and turnover in the labor market. And in fact, if you look at last year, sort of the variance year-over-year with the exception of Q4, kind of maybe including Q4, kind of came down as turnover in the economy kind of came down and job growth kind of relative to Q1 of last year kind of came down. So now turning to this first quarter, I mean the way I look at it is that, basically, the growth of new logos, meaning at this point in the year, mostly smaller employers that would be starting in February, March, April, a few holdovers from January that were late, that kind of thing. But those numbers almost offset the reduction in what I would call kind of purely organic, same employer growth relative to last year. And so that’s pretty good when you think about the fact that in the economy as a whole, we’re producing jobs at about 55%. It’s still extraordinary, but we’re producing jobs at about 55% of the rate that we did last Q1, this Q1. And I don’t know what’s shaking or if you all can hear that shaking. But hopefully, it’s nothing. Oh, I do know it’s shaking. It’s a big drill. We got an interesting scene outside. But — and also, when you consider that turnover, particularly voluntary turnover, has declined in the economy as a whole pretty significantly, and so we feel pretty good about that. We did have fewer transfers of HSAs from smaller banks, as you might imagine, folks trying to hang on to those accounts in a period where banks have been trying to hang on to deposits, and that accounted for the biggest portion of the delta year-over-year. So I guess my basic view is that if you look at the full year, we have some level of confidence that new logo growth is going to be sufficient to, if not fully offset, at least significantly offset what are — what we expect to be a reduction in the strength of the labor market in the course of the year. And so that was meant to be a statement of confidence and, hopefully, will be interpreted that way. Anne Samuel: That’s great to hear. Thank you. Richard Putnam: Thanks, Anne. Operator: Our next question comes from George Hill with Deutsche Bank. Please go ahead. George Hill: Hey, good evening, guys. And thanks for taking the question. Jon, this might be kind of a dovetailed question on Anne’s question that was just asked. But I thought I heard you say in your prepared commentary that you’re seeing increased HSA adoption at the employer level that will kind of offset job growth. So I guess my question is like, are you guys seeing an underlying change in the adoption of HSA levels that is kind of different from the historical trend of them growing 3%-ish a year? And would be interested to hear you talk about what’s driving that like in the underlying adoption rate. Jon Kessler: It’s early in the year, obviously. And — but when you look at our, I guess, conceptually, you can think of it as our pipeline, meaning our wins that will onboard later in the year, they have — they are also well ahead of last year. And I do think that what’s going on underneath that, actually, let me ask — since we have Steve on the line, Steve, you’re out there. I don’t know if there are any employer prospects in your current undisclosed location, but maybe. Can you talk a little bit about what’s driving that activity at the employer level and with our partners? Steve Neeleman: Absolutely. And I would have been with you in New York, but I wasn’t invited. But anyway, George, didn’t hear your voice. Look, I just think that — we talked about this in the past. I remember when we had — we did have a nice large name brand employee that came on in the first quarter with an HRA, which has helped on the CDB stuff. And then more broadly, as we look at employers and what they’re looking at towards the end of the year, I think most of the employers are thinking, you know what, costs are up, inflation is up. I think a lot of them are — especially in the midsized are anxiously awaiting to see what’s going to happen on the health care claims. Since most people on this call that know health care, they realize that hospitals are seeing higher labor costs. And at some point, you’re going to have to translate this through to higher cost to payers, which ultimately ends up getting paid for by employers and things like that. And so — and then if you just kind of wrap in the employer’s own wage inflation issues and more broad inflation issues. I think most employers are saying, look, we know HAS. They read our case studies, and they see big brand name companies that are doing HSAs in kind of novel, interesting ways. We’ve got a case study out there where an employer figured out that you could fund lower income people’s accounts more when you find higher income people’s accounts, which drives higher adoption in lower areas where we used to see lower adoption on some people that are now starting to have accounts more. So that all combined with our kind of our Engage360 MAX enroll initiatives, where we’re getting more and more employers signing up to allowing us to be able to reach out to their people in advance even of enrollment and take out these things, I think, are resulting in the fact that we’re just executing better. And you never want a recession to be a factor of the drug of our business because we know it hurts all businesses, and we know it does offset with just as Jon pointed out, lower overall job growth. But we do think that HSA is because of the cost savings they can bring to employers because of the tax savings and tax savings revolves and employers that it is one of these things that tends to start to get more interest when you’re in a tougher economic environment. So that’s what we’re seeing, George. And we’re doing a better job, honestly, than we’ve ever done before, thanks to our marketing and our inside sales teams. And we look out and just getting the word out. I think it’s a combination of things. But as far as the new logos are concerned, and Jon spoken to that, but we’re kind of fingers crossed. We’ve had some really good sales here, and we’re looking forward to bringing on some of these great new clients this year. George Hill: That’s super helpful. And if I could have what I hope is a very quick follow-up. Just a lot of us on the health care side are tracking the growth of the GLP-1 drugs that tend to come out of the gate pretty expensive and tend to blow through people’s deductibles pretty quick. I was just wondering if you guys are seeing any impact at all on HSA balances or an increase in volatility, the balances through the GLP-1 drugs? Jon Kessler: No, not yet. George Hill: Okay. Easy answer. Thank you. Richard Putnam: Thanks, George. Jon Kessler: Thanks, George. Operator: Our next question comes from Greg Peters with Raymond James. Please go ahead. Greg Peters: Well, good afternoon, everyone. Jon Kessler: Hey, Greg. Greg Peters: Steve, I’ll invite you to New York if Jon won’t just in case that matters. Steve Neeleman: Very kind of you. Thank you. Greg Peters: Yes. I guess can you comment on the seasonality in general administration and merger integration-related expenses? The reason why I’m asking is they came in a little bit below where I was certainly thinking, and I noticed you didn’t change in merger integration guidance for the full-year. I would have thought that would have tapered off through the year, but it seems like you’re sticking with that number. So just some detail on that would be helpful. Tyson Murdock: Yes. I mean we’re sticking with the number. We got to spend it, and I think if the timing of it is just it’s getting so small now that the timing may add some volatility to it, Greg, is what I would say. So and then you mentioned G&A as well. Greg Peters: Yes. Tyson Murdock: I want to make sure I understand that question a little bit more. Maybe just… Greg Peters: I’m just — I’m sorry, just inside the P&L, there’s a line item, general and administration expense. And I’m just — it came in a little bit lighter than I was just wondering if there’s anything going on inside there or if that’s, sort of, the normalized expectation that was evident in the first quarter. Tyson Murdock: Yes, I may go a little bit further just because you brought that line. I just — last year, we had some stock comp forfeiture right in there. So if you look at last year versus this year, you’ll see that it goes up actually. But from a trend line perspective over a long period of time, of course, we’re trying to get some of the synergies running through there and things like that from that, so I think you see some of that as well. But it’s a pretty small volatility in my mind if you just look at the longer-term quarters going back through time. So I hope that answered what you’re trying to ask. Greg Peters: I think so. I can take the rest off-line. My other question was just on debt paydown that’s running ahead. What’s your expectation for the year on that? Tyson Murdock: Just we’ll take it as we go. I mean we’ll look at what it is. What we did there is we paid off the principal payments for quite some time. So you won’t see any short-term portion of that anymore. And so cash accumulation is going to help that. And I’m talking about the next couple of years, we won’t have principal payments on it. We were able to elect it that way. So we thought that was a positive thing to do for the business and just make a bite at it. Greg Peters: Okay. Makes sense. Thanks. Richard Putnam: Thanks, Greg. Operator: Our next question comes from Sandy Draper with Guggenheim. Please go ahead. Sandy Draper: Thanks very much and congrats on the strong quarter. This is one question about seasonality, but it applies to two lines. So first off, just trying to make sure, sort of, asked a little bit earlier, Tyson, when I’m thinking about either sequentially or year-over-year, the change in account or revenue per account, I’m trying to get the dynamics of the strong growth in HSAs lower price. You’re starting to see some uptick in the CDBs, at least sequentially. But you’re still down, by my math, about $0.07. So should we be thinking about sort of flattish? Or is it the season should be thinking about a year-over-year change? And how do we think about seasonality there? And then I wasn’t quite clear what you referenced when you commented about normal seasonality on the interchange with how you’re usually thinking about it. The first quarter is the highest drops down for the next two and then steps back up in the fourth quarter, but maybe not for the first quarter. Is that what you’re applying? So I just want to make sure I’ve got the seasonality of those two target. Tyson Murdock: Sure. Yes, I mean the second part, I think I’ll take that, but you already kind of gave the answer. We just want to reiterate that that’s how that seasonality works. And so you may see from a perspective of a little bit of better growth rate, maybe this quarter, okay, that’s fine, but it’s really just that same seasonality. And what we really are trying to make sure on that seasonality comment in the script is just that if you look back over time, we had pandemic, we had — last year, we had an acquisition even a couple of years ago, right, that plays in that I just feel like people — I want to make sure people understand that the quarters are a little bit more sequential and that we don’t want people to get out of theirselves. The other thing to mention there, too, is just the impact from the variable rates that we’re playing into the second half of last year as well. So that’s kind of a longer answer to your question. And so again, just reiterating on top of that, the interchange portion of that is just normalized. And Jon, you’re going to take the first part. Jon Kessler: Yes. I mean, Sandy, the first part of your question was really about, I think, was about unit service fees and meaning service fees over total accounts. And I think you’ve kind of got all the right pieces. I mean the bulk of service fees, as you know, come from the CDB side of the business. And so as HSAs grow total accounts, there’s a little bit of downward pressure there just from a mix shift perspective. But we seem to be holding our own there pretty good, and I think that’s a fair way to look at the full-year. I’d probably just leave it there. Sandy Draper: Got it. That’s helpful. Thanks. Richard Putnam: Thanks, Sandy. Operator: Our next question comes from David Larsen with BTIG. Please go ahead. David Larsen: Hi, congratulations on the good quarter. Can you talk a little bit more about your expectations for yield? I think you said it came in at 232 bps for the quarter. I think it was 211 bps last quarter. The guide, I think you said, is 235. Is that accurate? And then over what period of time will you expect to realize the benefit from the increase in the federal funds rate that has occurred over the past year? Will that take a couple of years? And I guess what I’m getting at is why only, I think, the 3 basis points of incremental yield between now and year-end. Thanks. Jon Kessler: Yes. So during the year, during any particular fiscal year, the real variability that we see during the year is around the relatively small portion of our HSA cash that’s in variable instruments. And last year, as you know, rates shot up throughout the year as that funds rate did. And that really explains most of the increase that you saw there, plus the fact that we had good growth in cash and so forth. And so this year, it’s — again, we’ll see what really happens. But as you know, our guidance is based on forward curves now. And our guidance, if you kind of look at forward curves, you can see we sort of, in terms of variable rates, kind of peak up and then swing down. Our basic view is that the result of that is a much smoother situation over the course of the year relative to last year and similar to many prior years. And so our guidance is in that way. So what you said at the outset, yes, it is absolutely correct. David Larsen: Okay. Great. And then can you maybe just talk a little bit about the interchange revenue? I think it was short a very, very good pop sequentially. I mean, what are the key drivers there? I mean is it commuter revenue? Is it health care utilization and general utilization in the hospital and physician office environment? Just any additional color there would be very helpful. Jon Kessler: Yes. I think the answer is the commuter does help a little bit because it is outgrowing. But really, a way to look at it is that the growth we saw in interchange, kind of, mirrors the growth in, for lack of a better term, accounts with cards and so on a year-over-year basis. So that’s our new HSAs and some of our CUVs. So it’s really — that’s pretty much what it is. David Larsen: Okay. Great. And if I could just squeeze one more in there. The HSA members, it was really flat sequentially. If we adjust for COBRA, what would that have been? And then when do you expect to fully comp the COBRA impact? Jon Kessler: Could you ask that one more time? I’m sorry [Multiple Speakers] David Larsen: The number of HSA members relative to Jan ’23, it was up a little bit sequentially, but looks kind of flat to me actually. Just is that because of the COBRA impact? And when would you expect to fully comp that? Jon Kessler: Well, I think what you’re referring to is total members. Let’s just say HSA members are up 9%, total accounts on a year-over-year basis. You’re talking sequentially. Richard Putnam: And to that point, David, our fourth quarter is when HSAs come in, there isn’t a lot of HSAs. Jon Kessler: Right. You have 1035 open and some closures. So your growth is going to be, what, $100 or 90 or something. And that’s on the base of $8 million. So it’s the first quarter is the answer to that in. David Larsen: Great. Thanks very much. Jon Kessler: Thanks, David. Operator: Our next question comes from Scott Schoenhaus with KeyBanc. Please go ahead. Scott Schoenhaus: Thanks. Congrats, guys. Thanks for taking my question. Apologies if I missed it, but state where you book the book of businesses in terms of enhanced rate? And did you reiterate your 30% target for the end of the year? Jon Kessler: I didn’t know that thing you risen to the level of something we reiterate. But yes, it’s still our target. Scott Schoenhaus: Okay. And where are you currently at, Jon? Jon Kessler: We’re a few hundred basis points shy of that. We’re going to get there. Scott Schoenhaus: Great. Great. And just a question on the M&A environment. I know that it has been kind of slower than you expected given that these banks want to hold on to the sticky HSA assets. Has anything changed from three months ago when you made those comments? Jon Kessler: Fundamentally know, I do think that — I think it’s a point where because — let me back up and say one thing, which is, as other analysts have noted, we have a ladder strategy. And some of our competitors have a more exposed strategy, either by virtue of the way they’re structured or otherwise. And so if you’re more exposed, and I’m not thinking about the small banks, but maybe some of the other competitors, if you’re more exposed to lap to short rates, this might be a time where you’re really looking at this because if you think that things are going to get wild and wooly with short rates. And so there’s a little bit of that kind of chatter. But fundamentally, I mean, look, the fact that we did a pay down and so forth suggest that we feel like this is a period where we’re more accumulating capital than spending it. And I think that’s probably fair. And again, it also impacts our new HSA openings in the sense of just smaller HSA transfers that occur from smaller banks. Scott Schoenhaus: Thanks for the color. Richard Putnam: Thanks, Scott. Operator: Our next question comes from Stephanie Davis with SVB Bank. Please go ahead. Stephanie Davis: Hey guys. Congrats on the quarter and thank you for taking my question. So I hate to be the one to bring up bank turmoil. But last quarter, we did have a lot of discussions around enduring impact from some of the events in March and how it can maybe create greater demand for your sticky HSA deposits, and the bank turmoil has continued. So I was wondering if you’ve seen any greater interest in custodial partnerships, from folks like additional banks or if you’re still mostly focused on second-story banks and avoiding the regional bank opportunity? Jon Kessler: So I’m going to say yes to your first question. And on your second question, what we really concern ourselves with is from our perspective, and it’s not — we concern ourselves with the general quality of the institution. And it’s not that we’re, how do I say, it’s not that we’re — at the end of the day, the FDIC is going to back our members. It’s more that we want to have long-term relationships, and so we don’t kind of want it to be a one and done situation like some SEC colleges and — but not Florida. It’s every graduated. And so… Stephanie Davis: And my colleges in this question, like Florida. Jon Kessler: I mean, Florida is awesome. Everyone knows it. Everyone knows it. They got this huge — I could use those two letters that everyone’s talking about these days. Florida is killing anyway. So we’ll move on from there. But the answer to your first question is yes, and the answer to your second question is, we’ll look at those things. We don’t — we’re not — this isn’t a cash deployment season, but we want to build relationships that are going to last with different institutions on where we are. Stephanie Davis: So let’s do a follow-up on that then. Is there any other way to get more granularity on the yield on side? Just — I mean you had the giant magnitude of the beat. So is it the contract renegotiations came in better than expected, maybe not from regional banks, something else? Was it floating rate mix? Was it enhanced rate mix? Like how enduring is this? And how much could it be an intra-quarter impact? Jon Kessler: I don’t think it’s a huge inter-quarter impact because of most of the renegotiations and the like that we do are at the end of the year. So this — the benefit we saw in the first quarter was principally a result of the movement to enhance rates and the — and then the benefit on variable cash, so from a yield perspective. So I would think that this could be a benefit to us at year-end. But on the other hand, there’s a lot of stuff floating around at year-end, and year-end a long time away. I will say one of the benefits of the enhanced rates program as it matures over the course of multiple years is that we’re going to have less of this year-end thing. And so you won’t — we won’t all be holding our breath for December and January every year, and that will be good. Stephanie Davis: I’ll keep quite. All busy. Alright, thanks. I’ll hope back in the queue. Jon Kessler: That’s not a name we mentioned, because recruiters listen to these things. Say it. Operator: Our next question comes from Mark Marcon with Baird. Please go ahead. Mark Marcon: Hey, good afternoon and congratulations. And Steve, we would be thrilled if you were here in New York with us. So we’re super glad here. Jon Kessler: I didn’t even know I had any authority over where Steve went. That’s a new thing. And I’m sorry, Mark, go ahead. Mark Marcon: And we’re looking forward to seeing you guys tomorrow. But just a very short question and then a little bit of a longer one. But the super short question is on the enhanced yield product, is the duration structure the same as what you’ve had on your traditional bank partnership agreements? Jon Kessler: So our cash commitment under enhanced rates is a little bit different. It’s typically a 5-year cash commitment. However, the reason we can do that is that we are — that whereas in the bank products, we have to have separate products to provide for the liquidity. Here, the liquidity is built in. So the actual average duration, if you want to think about it that way, when you account for the fact that there’s a portion that we have, we can pull in and out whenever we want is much closer to our three-year inside track. Mark Marcon: How sensitive is that portion of the enhanced deal product to changes in yields in the overall market? Is it a… Jon Kessler: It’s built in — the liquidity component is built into the underlying rate we receive. So again, all of this is designed to produce. In addition to a higher yield overall, it’s designed to produce smoothness over time. We want to get you all as best as we can out of the business, at least for the short and medium term of being fixed income analysis. Mark Marcon: Okay. Great. And then what — just wanted some general comments with regards to the competitive environment. I mean you’re clearly — you continue to gain the most share and continue to grow rapidly. But just wondering, how has that evolved, say, over the last 2 years? What’s your perspective, Jon? Jon Kessler: I guess I would generally say that what we’re seeing over this period of time is a continuation of trends that we’ve seen for a long time. If you look at the seven-year information that came out, I think it came out since we last announced. In addition to showing — and maybe it was just before, I can’t remember. But in addition to showing that we had maintained our number one position in terms of both assets and accounts, it does show a consolidation. And that really, if you look at it among the five or five largest players, the growth has principally come from, in market share terms has principally come from HealthEquity and Fidelity. And we do compete with each other, obviously. But we also — and you can see this in the average balances, we also fish in somewhat different ponds in terms of Fidelity, also doing a lot of rollover business and the like as people retire. And so I think that’s the main — what I’ve seen is that we’re really benefiting at the expense of some other players. I guess I would say one other thing, Mark, that isn’t — it’s not something that’s always very exciting to talk about on these calls. But as we discussed back in March, the team had a very, very good year from the perspective of execution on service to our clients and to their broker partners and our retirement partners and our health partners at the end of the year. And I think that’s helping in terms of new logo wins. I really did. When people have a good experience at the end of the year, like the brokers, they’re more likely to send business your way in the next year. And that’s very much to the credit of Angelique Hill and the service team and our technology team led by Eli Rosner on the tech side and Merv and Larry on the security and IT side. So I just think that plays a role as well. Richard Putnam: Thanks, Mark. Mark Marcon: Terrific. Thank you. Look forward seeing you tomorrow. Jon Kessler: Yes, sir. Richard Putnam: Hey, Mark. [Indiscernible] Mark Marcon: But next time. Jon Kessler: There’s still red eye, don’t say it. I would call your bluff. Steve Neeleman: I like you, Mark, when there’s snow on the ground and there’s no snow back there. So… Jon Kessler: He’s a skier. Who’s next? Operator: Our next question comes from Allen Lutz with Bank of America. Please go ahead. Allen Lutz: Thanks for taking the questions. I guess one for Tyson. You talked about the enhanced rate product kind of going from 0 to a goal of 30% this year. So over three years from nothing to 30% of the book. But I’m looking at the custodial cost of goods sold line, and that really hasn’t moved as a percent of custodial cash over that time period. And I’m looking at the enhanced rates here, and they’re obviously higher than the core rate that you’re paying out to the consumer? So I’m just curious, is there something going on with the type of consumer that’s electing for the enhanced rates? Do they have a much smaller cash portfolio than the average, just normal customer? I’m curious what the disconnect is there. Thanks. Jon Kessler: Yes, I’m going to take this 1 because it’s really — the answer has much more to do with the marketing and so forth. So there are two things going on there. First, keep in mind that the uptake rate among new account holders is very high. And by definition, new account holders have smaller balances. And so we have not — so the impact has been pretty modest in terms of if you sort of fold the whole thing into our custodial expense. Now that will change over time in relative terms relative to what would have occurred with cash. But that’s really the big answer to your question. So — it’s not a function perhaps of like Fed election one way or the other. It is a function of the fact that you are that the product is the people who are most likely to see it are you’re brand new to us, and you’re making a decision upfront about where you’re going to go. And something like, I want to say, 85% to 90% of our new enrollees are choosing enhanced rates. The second point I would make is that people who keep very large cash balances, the kind that earn relatively high rates, they’re typically doing that precisely, because they place very high value on the FDIC component of it, right? Otherwise, they would be investing those dollars or putting them in a short-term bond fund or what have you. And so in a funny way, it’s not entirely unreasonable to expect that those folks would stay in FDIC cash. Allen Lutz: Got it. Thank you very much. Jon Kessler: I thought about this question, too. We were curious about it over the last few quarters. And this is the first time in this form anyone’s asked about it, but that’s the answer. Richard Putnam: Thanks, Allen. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks. Jon Kessler: So first of all, thanks, everyone. I’m sorry if you’ve already pre-purchased Cabana ware, we’ll do our best, like Richard. We did get this thing done in under an hour, which is something to celebrate for you as well as for us, and particularly for Richard. And I think there’s a double standard on the length of answers, mine, where I think, on average, the shortest. But nonetheless thank you all, and I appreciate the team’s work on a great quarter. And we will, if not earlier, see everyone back in September. Bye-bye. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Follow Healthequity Inc. (NASDAQ:HQY) Follow Healthequity Inc. (NASDAQ:HQY) We may use your email to send marketing emails about our services. 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Sprinklr, Inc. (NYSE:CXM) Q1 2024 Earnings Call Transcript June 5, 2023 Sprinklr, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.01. Operator: Ladies and gentlemen, thank you for standing by, and welcome to Sprinklr’s First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the […] Sprinklr, Inc. (NYSE:CXM) Q1 2024 Earnings Call Transcript June 5, 2023 Sprinklr, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.01. Operator: Ladies and gentlemen, thank you for standing by, and welcome to Sprinklr’s First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. Please limit your questions to one with one follow up, so we will have time to go through all the questions. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Eric Scro, Vice President of Finance, for introductory remarks. Please go ahead, Eric. Eric Scro: Thank you, Doug, and welcome, everyone, to Sprinklr’s first quarter fiscal year 2024 financial results call. Joining us today are Ragy Thomas, Sprinklr’s Founder and CEO; and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we’ve made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today’s call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP. With that, let me please turn it over to Ragy Thomas. Ragy Thomas: Thank you, Eric, and hello, everyone. Thank you for joining us today. Before we jump to our quarterly results, there are a few things I like to share. First is that on July 12, we will be hosting our first ever Investor Day at the New York Stock Exchange. We look forward to seeing many of you in person and sharing more details about Sprinklr’s vision and business strategy. The second, you saw the 8-K we filed on May 15th about John Chambers resigning from our Board as of June 14, but remaining as an advisor. We want to take a moment to publicly thank John for his contributions as a Board member since joining our Board in 2017. John is one of the most caring and hardest working executives I know, and if anyone deserves a little time back in his life, it would be him. While John will no longer have board commitments, we are grateful that he’ll stay on as an advisor and continue to be a coach, mentor, and a friend to all of us. Next, we are excited to welcome Trac Pham to our Board of Directors. His appointment will become effective on June 15, and Trac will also be a member of our Audit Committee. Trac most recently served as the CFO at Synopsys with a broad remit across finance, business development strategy, and IT. Trac is a great culture fit for Sprinklr and given its vast experience scaling a multibillion dollar business a great addition to our Board. The management team and I are looking forward to working with him and tapping into his broad expertise. So, let’s jump into the results of our first quarter. We are very, very pleased that Q1 was another strong quarter that exceeded guidance across all key metrics. Q1 total revenue grew 20% year-over-year to 173.4 million and subscription revenue grew 24% year-over-year to 157.7 million. With our continued focus on operational efficiency, I’m also delighted to report that we generated 11 million in non-GAAP operating income for the quarter. These results are driven by a few key things that are top of mind for all of us. First, we believe we are creating a new category of enterprise software for the front office. We call it unified customer experience management. As we hear constantly from some of the best brands in the world, there’s a clear need for a front office platform to eliminate siloed technology team’s data, and to create seamless customer experiences as simple as it might appear. These seamless experiences are impossible to create across the multitude of channels, functions, business units, and markets that most large companies have and operate in today. Unified CXM is differentiated at its core by a unified AI powered architecture that spans all of these different silos and it’s fueled by publicly available and mostly unstructured data and conversation. And that just cannot be supported by the current CRM and CDP relational database package. This approach of unifying the front office benefits both customers and brands. Customer experiences improve and brands can reduce costs, mitigate risk, and increase productivity for growth. We recently hosted our first Analyst Summit in Dubai where approximately 20 well-respected industrial analysts joined us and our customers. It was very encouraging to see them speak to our customers and validate our vision. We have made some of their quotes and references available for you in the presentation on our IR website. But one quote worth mentioning came from an IDC analyst who said, ‘built on an already robust architectural framework, Sprinklr appears to be set up well to address its ambitious growth plan.’ The second point for us is, is that we are very, very excited to see AI finally become mainstream. As all of you who’ve been tracking us from beginning and are at our IPO, you know that AI has been foundational to a platform from the very, very beginning. It’s woven into every fabric of our unified platform. And if you read our IPO prospectus, it should be very clear that it was and always has been a key differentiator for us. Sprinklr is the system of record for unstructured external and conversational data for some of the best brands in the world. And we’ve been training over 2,000 AI models with over 100 million training data points in over 100 languages across over 70 industries and sub industries for five years. And that accuracy that we’re able to achieve with the training, I don’t believe can be matched by any other company in our space in the short-term. A recent announcement regarding Sprinklr AI+ is the next evolution of our AI. Sprinklr AI+ includes generative AI capabilities through an open AI integration across all our product suite. With generative AI, our AI becomes even more powerful. We delivered over 30 features AI features in our last release. We have another 25 planned for our next. Some of these features include smarter responses, generated recommendations, content summarizations, which help customers with more relevant and specific auto responses and increase agent productivity. For example, one of our streaming customers improved the agent’s acceptance of Sprinklr smart responses, which are the suggested responses that we provide for agents by 300% after we enabled AI plus. Every company will embrace AI sooner or later. What I believe will separate winners from losers is whether AI is a feature for you or is it at the core of everything you do. So, despite the macro environment, we are very pleased with how we’re managing what’s in our control with our go to market strategy, productivity, and execution. Specifically, we’re excited about the progress we’re making it – to make it easier to sell, which has been a top priority for the company. This past quarter, we made several key hires in the service overlay team to add expertise in-depth to our CCaaS offering go to market and we continue to verticalize to enable quicker time to value in faster deployments. We are now up and running to CCaaS with a couple of more key industries, including financial services and airlines. We’re also doubling down on our partner ecosystem and we’ve recently partnered with some amazing companies like Intelisys and Foundever, which are beginning to result in deals that we want together in the field. As you all know, partners are critical, especially in the context and the space and we remain committed to training and onboarding them as rapidly as we can. And finally, last quarter, we discussed our self-serve offerings, Sprinklr Social event. Feedback has been in incredibly positive in terms of how easy it is to use and the product is opening the door as we anticipate for larger deals. This past quarter, a very large media company, actually started with social advance and now in conversation with our sales team to expand to multiple geographies and product suites. I’d love to provide a brief update on Sprinklr Service and our continued momentum as a disruptor in the CCaaS space. Our vision is to help customers transform the contact center from a voice focused cost center to a more efficient and effective AI powered omnichannel revenue center by unifying it with marketing and sales. IT buyers find Sprinklr to be a great fit for their needs as they consolidate point solutions in the contact center stack to a platform that’s built on a single code base with a very extendable architecture. During the first quarter, we saw meaningful CCaaS deals close across all three of our primary theaters. During the first quarter, we continue to add new customers and expand with existing customers, including world-class brands like Avis, Garmin, Lululemon, [Tuma] [ph], Spirit Airlines and Wilton. Let me give you a few examples of how customers are currently using Sprinklr. Starting with service and showcasing the power of the unified CXM platform is an expansion win in Q1 with the top 5 Global Technology company, which renewed and expanded their business to over $15 million in ARR with Sprinklr. They are now using 40 Sprinklr products across all of our product suite in over 13 languages. Sprinklr service is now a critical part of the deployment at this client, enabling guided workflows, knowledge bases for agents, customers, video chat, co-browsing, and AI powered agent assist capabilities like smart comprehension, pairing, and responses. Through Sprinklr, this client can now detect issues within 5 minutes as opposed to the 30 minutes to 45 minutes it used to take previous enabling them to expand their support coverage and improve their SLAs through increased actionability, AI, and automation. Another service story is with Americana, one of the largest restaurant companies in the Middle East and Africa. Americana originally began partnering with Sprinklr to build-out an actionable voice of the customer and customer service program. This program gathers life, actionable voice of customer insights across all digital and voice sources to provide enhanced resolution. Our platform and the implementation of it has helped Americana reduce response time now to minutes. With the expansion last quarter, Americana now has implemented Sprinklr across 10 brands in multiple countries across several 1,000 restaurants. Another example is a new logo, Hilti, a leading multinational manufacturing company with over 30,000 employees, who signed interestingly a 7-year deal with Sprinklr as a new customer using – to use our inside, social, and marketing solutions. This is an amazing example and a testament to how strategic Unified-CXM is for large enterprises. Another example is the expansion of a strategic partnership with Roche, one of the largest pharma companies in the world. Using Sprinklr, they have now laid the foundation for global intelligence teams to provide holistic insights across social, digital, and traditional media including print and broadcasting stations. The consolidation and analytics based on real time data display is, it plays a key role in Roche’s vision to become One Roche as it enables diverse siloed stakeholders across the pharma and diagnostic divisions in over 100 countries to make informed decisions and proactively respond in crisis situations and obviously is driving growth and optimizing strategies. Before wrapping up, I’d like to take a moment to celebrate our incredible engineering team who as always make all of this possible. Their speed of innovation and dedication continue to differentiate Sprinklr in the marketplace. In closing, we are very pleased with our start to FY 2024. We’re encouraged by the engagement and momentum we’re seeing from customers industry analysts, influencers, around three things. First, a new category of front office software. We call it Unified-CXM, but the simple idea that teams and data and technology and customer journeys have to be unified at the architecture level and that a disconnected set of point solutions won’t work. Two, AI is well on its way to being mainstream and customers are super excited with our AI first approach and generative AI plus integrations that give them I think is customer facing superpowers. And our focus, lastly, third, our focus on efficient execution, which is helping us drive strong momentum across our product suite. We remain committed to our vision of becoming the world’s most loved enterprise software company innovating for our customers, succeeding with our partners, and delivering shareholder value and in the long-term executing for growth and continued profitability. Thanks to our customers, partners, and our employees for hard work and results and thanks to our investors for believing in our vision. Let me hand the call over to Manish. Manish Sarin: Thank you, Ragy, and good afternoon everyone. As you heard from Ragy, we’re pleased with our start to FY 2024. For the first quarter, total revenue was 173.4 million, up 20% year-over-year and above the high-end of our guidance range. This was driven by subscription revenue of 157.7 million, which grew 24% year-over-year also above the high-end of our guidance range. One of the key drivers of subscription revenue outperformance was the timing of new bookings, which was front loaded in Q1 and the commensurate benefit to Q1 subscription revenue was approximately 2 million. Services revenue for the quarter came in at 15.7 million. Our subscription revenue based net dollar expansion rate in the first quarter was 122%. As we have discussed in the past, the NDE statistic is not something we monitor as part of growing our business, but is a byproduct. As macroeconomic conditions moderate renewal rates and customer upsells and new logo acquisition continues to increase, we expect NDE to moderate in the coming quarters. Our current expectation is for NDE to settle in the mid-to-high teens percentage range over the next few quarters. As of the end of the first quarter, we had 115 customers contributing $1 million or more in subscription revenue over the preceding 12 months, an increase of seven sequentially, which is a 28% increase year-over-year. Turning to gross margins for the first quarter. On a non-GAAP basis, our subscription gross margin was 82.8% as we continue to drive efficiencies in our cloud operations, leading to a total non-GAAP gross margin of 76.2%. We continue to generate efficiencies in sales and marketing and have shown consistent improvement in S&M spend over the last several quarters. Sales and marketing expense in the first quarter is now 48% of revenues, compared to 56% in Q1 of last year. This is an 800 basis point decrease year-over-year. The sequential increase in S&M spend in Q1, compared to Q4 of FY 2023 is largely attributed to sales activities slated for the start of the year such as sales kick-off, as well as costs related to the Q1 restructuring we had discussed on the Q4 earnings call. We also realized operating leverage from G&A, which decreased by 100 basis points year-over-year. Turning to profitability for the quarter, non-GAAP operating income was 11 million, equating to a non-GAAP net income of $0.06 per share. This 6% operating margin for the quarter was a result of revenue over performance, improved gross margins, coupled with operating expense discipline across every department and is the third consecutive quarter of non-GAAP profitability. It is also worth noting that in Q1, we had approximately 3 million in tax credits related to the release of valuation allowances in our Brazil and Japan entities. Had we not realized these credits, the tax provision on Q1 would have been approximately 2.2 million, in-line with our prior guidance. Lastly, on the topic of profitability. For the first time ever as a publicly traded company, we posted positive GAAP net income for the quarter totaling 2.8 million or $0.01 per share. While we were the beneficiary of one-time tax credits allowing us to achieve GAAP net income profitability faster than expected, we remain committed to achieving GAAP net income profitability on a full-year basis for FY 2024. In terms of free cash, we generated 14.3 million during the first quarter, [an] [ph] 8% margin compared to an adjusted free cash flow of 6.2 million in the same period last year. This cash flow generation contributed to our very healthy balance sheet, which now stands at 604.4 million in cash and equivalents with no debt outstanding. Calculated billings for the first quarter were $170.5 million, an increase of 23% year-over-year. As of the end of Q1, total remaining performance obligations or RPO, which represents revenue from committed customer contracts that has not yet been recognized was 708.1 million, up 23% compared to the same period last year and CRPO was 478.8 million, up 19% year-over-year. The sequential decrease in RPO and CRPO can be attributed to a handful of large multi-year deals that are up for renewal in Q2 and therefore not included in both RPO and CRPO. Moving now to Q2 and full-year FY 2024 non-GAAP guidance and business outlook. As you heard today, long-term demand trends and engagement for Sprinklr remains strong. However, we recognize that the macroeconomic environment continues to be uncertain and our current assumption is that the broader macro trends from the last few quarters are likely to continue throughout FY 2024. For Q2 FY 2024, we expect total revenue to be in the range of 172 million to 174 million, representing 15% growth year-over-year at the mid-point. Within this, we expect subscription revenue to be in the range of 158 million to 160 million, representing 20% growth year-over-year at the midpoint. As we had mentioned on the Q4 earnings call, we expect approximately $30 million in services revenue in the first half equating to approximately 14 million of services revenue here in Q2. Concurrently, we expect services margins to dip here in Q2, driven by our ongoing investments in CCaaS service delivery and managed services such that our overall services margins for the first half of FY 2024 are effectively breakeven consistent with our commentary on the Q4 earnings call. We expect non-GAAP operating income to be in the range of 11 million to 13 million, and non-GAAP net income per share of $0.04 to $0.05 per share assuming 270 million weighted average shares outstanding. For the full-year FY 2024, we are raising both our subscription and total revenue outlook for the year. We now expect subscription revenue to be in the range of 649 million to 653 million, representing 19% growth year-over-year at the midpoint. This is an increase of 5 million, which represents the full magnitude of the Q1 beat and the subscription revenue guidance raise for Q2. As we alluded to on prior earnings calls, we have been investing in making our products easier to implement and therefore, accelerating the time to value for customers. In addition, we have also been cultivating a partner ecosystem around delivering our product suites such that we expect our service delivery partners to take on a larger proportion of the services revenue attached in delivering our product. In-light of these dynamics, we are reducing the FY 2024 services revenue guide from 66 million to 62 million. With this change, services revenue for FY 2024 will be approximately 9% of total revenues. We expect total revenue to be in the range of 711 million to 715 million, representing 15% growth year-over-year at the mid-point. For the full-year FY 2024, we are raising our non-GAAP operating income estimate to now be in the range of 51 million to 55 million equating to a non-GAAP net income per share of $0.19 to $0.21, assuming 273 million weighted average shares outstanding. This implies an approximately 7% non-GAAP operating margin at the midpoint. Note, the increase of 10 million at the midpoint represents the full beat for Q1 and the accompanying raise for Q2. In deriving the net income per share for modeling purposes, we estimate 13 million in interest income for the full-year with 4 million of that to be earned here in Q2. Furthermore, a $6 million total cash provision for the full-year FY 2024 needs to be added to the non-GAAP operating income range just provided. We estimate a tax provision of 2.5 million here in Q2. We are tracking to be GAAP net income positive for the full-year FY 2024 consistent with our comments on the Q4 earnings call. Billings in Q2 are expected to grow in the high teens, growing slightly slower than subscription revenue, but faster than total revenue. We expect the Q1 beat and any Q2 upside in billings to flow through for the full-year FY 2024. For modeling purposes, I would assume the same billing seasonality in FY 2024 as in FY 2023. With respect to free cash flow, in Q2, we have a large annual payment due to one of our public cloud partners. As such, Q2 free cash flow is expected to be negative and coming around negative $15 million. Consistent with our prior commentary, we expect to be solidly free cash flow positive on a full-year basis. As a quick reminder, Ragy, the broader Sprinklr management team, and I are eager to share more details about our business and financial profile with you at our upcoming Investor Day on Wednesday, July 12, and look forward to seeing many of you there. Lastly, I would like to thank all our employees for their dedication and passion for what we are building at Sprinklr. During an uncertain macro environment, I’m also grateful for the confidence that our customers have placed in us. We remain focused on building a track record of successful execution and operating discipline across the business. And with that, let’s open it up for questions. Operator? Q&A Session Follow Sprinklr Inc. Follow Sprinklr Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question. Raimo Lenschow: Perfect. Thank you. I had two, if I may. First one – and congrats on a great quarter. First one is on the Services push that you’re kind of doing now, and thanks for the updated guidance there, that kind of explains a lot. If you think about what’s the nature of the relationship with the Service partners, like, are they kind of building it as a bigger digital transformation in the front office – a bigger practice there or is it kind of more Sprinklr specific what you’re seeing there in terms of how they are thinking about building and working with you? And then I had one follow-up. Ragy Thomas: Yes. So, Raimo, this is Ragy. Good to connect always. So, there are two things I would point out. First is, our broader partnership ecosystem that we’ve been developing with the systems integrators like Deloitte and Accenture, are more on the digital transformation and the broader ecosystem, as you’ve outlined. What is interesting now is, we’re developing a second category of partnership and more specifically in the customer service space, and there’s a pretty interesting ecosystem there of peripheral partners, implementation partners, consulting partners. They’re very focused on the contact center industry. So, we’re rapidly expanding that aspect of our partnership ecosystem, which was something that in the past we hadn’t done. Raimo Lenschow: Yes. Okay. Perfect. And then the other big debate that happens in the market at the moment is like was that front office first maybe, kind of overinvested a little bit in 2021, and now we have like a digestion period, and now we can slowly start looking forward again. In your customer conversations, what do you see in terms of like thinking about ongoing investments, do you see a change in the nature of the conversation that you have here? And I’ll leave it with that and congrats again from me again. Ragy Thomas: We’re seeing a palpable change from our biggest and best customers for the, let’s say, 20 or 30 customers I spoke to that are large. I’d say a large customer for us is over 1 million. And as you probably know, we actually have several that are over 10 million now and increasingly more over 15 million. What we’re finding is the platform is sticking. What we’re finding is companies are expanding across business units. What we’re finding is that companies are expanding across channels, and they are expanding across markets. So, you know we have two vectors of growth. One is more products and more cross-sell capabilities across products and product suite. The other one is expanding across business units and market. That’s a less understood part of our expansion strategy because you have a single instance architecture where the new business unit that comes along or the new market that gets added, it suddenly has global collaboration and visibility. Raimo Lenschow: Okay, perfect. Thank you. Congrats again. Ragy Thomas: Thank you. Operator: Our next question comes from the line of Pinjalim Bora with J.P. Morgan. Please proceed with your question. Unidentified Analyst: Hey, guys. This is [indiscernible] on for Pinjalim. Thanks for taking our questions. Just for the first one, you launched the self-service product at the end of March, which should really help with the top of the funnel dynamics. Can you just maybe provide some more additional color around the new self-service products and just the uptake there? Thanks. Ragy Thomas: So, we are – it’s been – like we said last time, it’s been a fairly controlled roll-out because what we wanted to do is get the product and the dynamics of someone using the product, right, which I’m very happy to report that the feedback is very, very strong. We are now in the process of increasing the reach using traditional and digital marketing capabilities to get more people to that top of the funnel to try. It’s working really well as companies in our target market, who are smaller teams going on there, try and testing out and giving us great feedback. And I’d say, over the next two to three quarters, we’ll be putting more resources and more focus on that to build that out as a very hopefully, potentially big lead generation and try before you buy channel. Unidentified Analyst: Great. And then just a quick follow-up. Related to the macro, it sounds like that the environment has been relatively consistent. You did call out some moderation in the retention going forward. Could you maybe just unpack that a little bit for us? Thank you. Ragy Thomas: Yes. So, we’ve always said that. I think, for the last now three quarters, we’ve consistently said that the environment is steady. So, what we’re seeing is more scrutiny, careful spend, measured spend, more people approving deals, and that continues. We’re not seeing it change. What I’d point out is, as we get into CCaaS, get into the partner, unlocking the partners, as you probably know already, CCaaS deals take longer. There are very formal RFP processes and multiple stakeholders outside consultants and lots of people involved. And change management is a huge deal in that space. So, as we lean more, you’re going to see sales cycles increase a little bit, but we don’t think it’s a macro thing, but we’re seeing very strong reception. We’re running several proof of concepts, and we’re able to show agent productivity and average case handling time reduced by 20%, agent productivity go up by 30% in many cases. So, it’s very promising. Now, we got to get scale and get a few deals through the sales cycle. Unidentified Analyst: Thank you and congrats on the quarter. Ragy Thomas: Thank you. Operator: Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your question. Elizabeth Porter: Great. Thank you so much. I wanted to ask on generative AI, just given how topical it is. We see a lot of interesting press releases across the broader landscape, specifically for generative AI, including Sprinklr AI+. So, how do you view what generative AI capabilities really become table stakes versus real incremental monetizable solutions? And how should we think about the road map for new Gen AI features? And what forms of monetization make the most sense for Sprinklr? Ragy Thomas: Well, I’m glad you asked the question. Look, you know that if you read a prospectus, we’ve been seeing this for 5 years, and we are thrilled that generative AI is adding wings to our own AI and raising broader awareness. I think, as we said in the prepared remarks, there’ll be two kinds of companies, one that is adding a feature on the AI and got five things going. And others that deeply go back to their core architecture and embed AI. And I think over time, the latter will clearly be the winner. They will be the AI companies, not people who use AI. Having said that, for us, AI is a fundamental differentiator across the front office. As you know, we have several hundred features in every product suite. And most, I can just wrap it up, maybe in the call back, I’ll show you a slide. You take any product that we have, any feature, that center more than 60%, 70% of that is enhanced using AI. Now how do we monetize AI is very, very interesting. Awareness helps us, and I think there are additional monetization opportunities that are not obvious right now for companies that are completely and just see base, this is going to be a deflationary situation for them. For us, and companies like us, who’ve fluidly transition between agent base cases, community-based cases, knowledge-based, self-resolution and who can charge for licensing and enterprise licensing that includes AI regardless of the agent hours, I think it’s a good thing. And we are exploring different pricing models like case-based pricing, insight based pricing. And you know our insights product is completely based on AI and price on a licensing basis based on the value we create. So, we see this as a net positive for us. In the short-term, we’re going to use this to differentiate massively and the awareness is doing wonders for us. We are having C-level conversations as the AI platform, as the traditional older companies have struggled. And everyone’s talking a big game, but we can prove it. We’re showing 90% accuracy in actionability, when you look at the random method and ask you, should I act on it? Is it engaged? We’re showing 30% better sentiment accuracy, we’re showing 25% to 30% better routing with our smart routing, agent productivity is [indiscernible]. So, we’re doing proof of concepts where we’re showing in some cases, twice as better accuracy and AI capabilities. I’ll give you a specific example because everyone’s talking generically. We’ve always had the concept of smart responses. So, if you’re using Sprinklr in a context, enter the agent is guided to [indiscernible], why don’t you use say this, offer that. That’s a smart response that the system is nudging the agent to do. I mean that had good usage, but when we added the generative AI integration and expanded it, now the agent is getting a full script and so he can just read off where they’re having the process and rephrase. And the adoption, as we called out, has gone up 300%. So, that’s the kind of quantum leap that suddenly makes AI a lot more accessible and visible from an external user synthesizable way as opposed to in the back end. So, I think it’s going to just really help us differentiate in a big way. Elizabeth Porter: Great. Thank you. And as a follow-up, I was wondering if you could talk about the success you’ve seen on new customers and launching new initiatives like that new logo team or focusing partners to source deals. I understand you don’t report the customer count number, but any color on how those initiatives are taking hold would be helpful. And historically, about two-thirds of the business has been driven by existing accounts. Can we expect that to change over time? Ragy Thomas: Look, I think there is precedent for very sustained long-term growth without having to just keep adding logos. And as a very high-end enterprise company, I think we are very well placed with the likes of companies like ServiceNow, where we’re seeing our top customers buy more and more and more growth. And I think that’s a very sustainable long-term growth driver for us. Now, we want to continue adding more customers, and we have identified as we said last time with this focus on go-to-market, we’ve identified a target customer base of 43,000 companies. So, through everything we do, we’re only trying to reach those companies, and we’re not chasing anybody else. So, the focus continues to be on growth and not logo count. We’ve put dedicated teams. And I think that’s 1 of 10 things we’re doing. And I think almost all those things are first principle space, and we – it’s a multi-quarter thing. So, we don’t have any early results to report, but it looks very promising. Elizabeth Porter: Great. Thank you. Ragy Thomas: Thank you. Operator: Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet: Hi, good evening. Thanks for taking the question. I was maybe curious on all the success around the contact center and Sprinklr Service space overall. What are you finding that you’re replacing most often or are any of these, sort of net new contact center type of engagements that you’re seeing? Ragy Thomas: Matt, we’re seeing two distinct patterns. Well, one is, we’re finding that companies with 50 agents to, let’s say, 500, maybe even 1,000 agents have all the problems that large 5,000 agent contact centers have in terms of workforce optimization, routing needs and ticket volume and a whole bunch of things. And we’re finding that, that market specifically is craving for a unified solution because they can’t afford to buy 6 or 7 and then integrate it together. So that’s – what we think of as a right-to-win segment for us, and we’re seeing success in that market. Second is the large enterprise deployments. Now, we’re seeing success there, but these are larger drawn out, protracted proof of concept to RFPs to replacements where we are encountering traditional vendors like Avaya and Genesys a lot. And essentially, what’s going on there is, we have opportunities where it’s long-term, and we’re going after the whole thing. And we have a lot of like lower-hanging fruit in terms of just augmenting the core voice infrastructure that is working with about seven of our AI-based products. So that suite is our contact center CCAI product suite for the service industry. So, you can just deploy that as a pack on top of your current traditional voice infrastructure. And in many cases, because they’ve already been using those capabilities for digital or social with Sprinklr, it is a much easier lift. Does it make sense? Matt VanVliet: Yes. No, that’s very helpful. Thank you. And then maybe just a quick follow-up on the services gross margins and just, kind of thinking about that more long-term. If you can push more of that work to some of the partners maybe ignoring the potential business development side or kind of top of the funnel, but as you just look at kind of how that could impact gross margins over the longer-term, maybe just help us think about how framing that out is also a cost benefit analysis here for the model? Manish Sarin: Hi, it’s Manish. I think that’s a great question because we’ve been spending a lot of time evaluating the kind of services opportunities we take on board. And I think this is consistent with the comments we’ve given on the last earnings call, whereby we were looking to partner with firms that could develop an ecosystem of delivery capabilities around us, whereby we could transition some of the, let’s just say, less attractive margin business to them. So our view, once we are through with this transition and the investments that we are making in CCaaS delivery, managed services, which is a lot more higher margin that we should be in the circa 20%, give or take, over the long-term. Now these can obviously go up depending on any quarter that we might be in. But given where we are right now, that’s what we feel comfortable looking out over the next year or so that, that sort of margin profile probably is achievable. Does that make sense? Matt VanVliet: Yes, that’s great. Thanks for taking the question. Operator: Our next question comes from the line of Michael Berg with Wells Fargo. Please proceed with your question. Michael Berg: Hi, thanks for taking the question and congrats on the quarter. I wanted to touch on the shape of the quarter. You noted that it was front-end loaded. I was curious if there was – just looking at some of the Q4 statistics, if there were some larger deals that fell out of Q4 into Q1, and that’s what drove part of the upside shape with the quarter. And then secondarily to that, is there anything meaningfully different that you’re seeing in the demand environment more broadly? Thank you. Manish Sarin: Yes, that’s a great question. So, there weren’t any deals that flopped over from Q4 into Q1. Now, we, like any other enterprise software company do believe that a lot of our new business is back-end loaded. And we’ve been fairly consistent in how we then model it out and guide the Street to, but of course, we can’t predict customer buying behavior. And every once in a while, we do run into a situation where, for a variety of reasons, the customers have a desire to purchase one of our product suites and that was the case here in Q1. And consistent with our prior commentary, we were fairly transparent in pointing out when that happens and the additional benefit that accrued to us here in Q1, which, as I pointed out in the prepared remarks, was approximately $2 million. So, if you sort of factor that into both the guide as well as what Q1 results look like, you would see a more normalized, sort of revenue pattern. Michael Berg: Helpful. And then going back to the Services piece, do you have a long-term target goal in terms of the mix there? Like how can we see that shaping up over time? Manish Sarin: And with that, in particular, you’re referring to as a percentage of overall revenue? Michael Berg: Correct. Manish Sarin: Or the mix within Services? Michael Berg: Services as a mix of overall. Manish Sarin: Yes. So, if you go back a couple of years, Services for us was almost 12% of overall revenues. And we did feel, as a management team, we wanted to sort of bring that down partly because we were all driven by trying to make the suites much more easier to implement, providing value to the customers in a much more expedited fashion. And so, I think where we are right now is just under, call it, [9-odd percent] [ph], it is probably a respectable level. So, as I look out over the longer term, somewhere between 8% and 10% seems to be the right spot for us. The mix within Services obviously will migrate more towards managed services or CCaaS service delivery, sort of more higher up the value chain, if you will, versus just your [plain vanilla] [ph] implementation. And that might obviously lead to a better margin profile in the longer-term, as I said earlier. So, I think where we are probably is what you should expect more at a steady state level. I will, however, admit that we’re in a fast-evolving industry. And we’re trying our level best to adjust our economic model toward the customers’ demand. And should things change, we would be transparent with the Street on future earnings calls. Michael Berg: Helpful. Thank you. Operator: Our next question comes from the line of Patrick Walravens with JMP. Please proceed with your question. Patrick Walravens: Great. Thank you. Ragy, how do you expect your competitive environment to evolve over the next three years? And maybe in particular, it seems like Amazon is making a lot of progress in the contact center space, and I know you have a partnership with them. So, if you could touch on that element of it too, that would be great? Ragy Thomas: Absolutely. So Patrick, as you know, we started out in the social space right. Our legacy with a lot of little companies that we’re competing with. We evolved from that to the digital space where we were competing with bigger companies, but still endpoint solution world or companies who have bought some of these and been selling this together using invoice engineering, if you will. Where we have evolved to is, we have mainstreamed and we are mainstreaming every one of our product suite. So, that’s very important for the market to understand. So, we’ve got four product suites. The Service product suite, the Insights product suite, the Marketing product suite, and our Social product space. And each one of those are evolving to a mainstream category. And the easiest way to understand is, what we’re doing and have done with, frankly with the service space, right? We started with Social service. Now, we have digital. Now, we’re in the CCaaS space. So, now we’re obviously competing with the likes of the Avayas and the Genesis and a lot of Zendesk and other companies who are in that enterprise space. That’s a very large TAM. The contact center market, as you know, is about $800 billion, and that’s including tech and labor. And as you know, the tech is only a small single-digit percentage. What’s super exciting is now the – a good chunk of the $800 billion is at play because AI will actually expand the tech market into and [beat] [ph] into the labor cost mitigation opportunity. So, we know that’s a major market. We know we’re doing a replacement sale. We know we have a better product. We know we are AI-based. So, it’s become easier. So, a competitive set is involved to a very different group of companies. That’s the same thing we’re going to do in marketing. That’s the same thing we’re doing in Insights, where we’re going to be adding more voice of the customer capabilities, as I outlined in the prepared remarks. We have – increasingly we’re doing deals where the customer is using us as a voice of the customer platform in addition to their survey-based platform. So, at some point, it should be obvious that we add surveys, and we are incredibly competitive there. So, that’s a strategy and our competitive set will evolve. You know very clear, I’ve mentioned many, many times that our goal is to become the third or the fourth platform in the enterprise. You go buy Salesforce, such as CRM suite. You go buy Adobe, it takes care of your website and analytics, Microsoft can and should be your stack and then you have Sprinklr and that’s a platform that unifies it and connects a lot of those other – replaces a ton of point solution somewhere between 5 and 25 and connects to the other three. And that is the [stated stack] [ph]. Let me now switch gears and talk about how we see the cloud providers. Now, it’s very interesting the way the market is moving. The infrastructure providers are going to keep coming up the stack. And so, you’ll see the market with the past players, the communication service providers and all of that. I think that’s – they are going to bleed into each other. We’re coming from the very top of the app stack. We’re a pure play application player, operating system play. That’s – it’s all code. It’s all software. We have no data aspirations with. It’s all license based, and it’s all part of the architecture. And we’re agnostic across channels, and we provide a unified way to communicate across channels and business units. So, I think they will eventually connect, but right now, it’s a great complement to each other. So, we see ourselves as great partners to Amazon, great partners to Microsoft, great partners to Google, and we actually do several deals together every quarter. Now obviously, do they bleed into each other a little bit, possibly. But in the front office, you’re going to see everybody bleed into each other. And I think what I would bet on, if I were you, is a truly platform architecture. Because invoice engineering is pretty tough to pull off over the long run. Patrick Walravens: That’s super helpful. Thank you. Ragy Thomas: Thank you. Great questions. Operator: [Operator Instructions] Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question. Tyler Radke: Yeah, thank you. Good evening. I wanted to just ask you about how you’re seeing some of the large renewals shape up. I think you talked about some large renewals expected here in Q2. Some of the other larger front-office players have talked about some renewal pressure. We’ve heard anecdotes of shelf ware and seats that have gone undeployed. How are you expecting your renewal rates to trend? And if you could just remind us on the composition of your revenue base that’s seat space versus usage or interactions based? Thank you. Ragy Thomas: Okay. So, there are two questions there. The first one is, what are we seeing in our larger deals in terms of renewal? Well, now I’ll tell you, once you buy into the Sprinklr approach, we keep growing. And true story now we have customers who call us first before they go put out an RFP or open it up to a point solution and say, hey, do you guys do it, because they’ve bought into the – attuned the AI models, they’ve set up the governance. They’ve got the analytics. I’ll give you an example of a very, very large as a top 5, probably top 3 tech company that expanded their marketing services with us. And the idea was there was an agency breach that happened and issue that resulted in ad spend that was not governed and approved. So, they just paused spending till everybody got on Sprinklr, so that they can be compliant, right? And so they can have governance and visibility and they can have a global editorial calendar. So, I can confirm to you, and you know we had one customer that paid us over [15 million] [ph]. And if you count the number of customers that are paying over [10 million] [ph], that’s going up as well. And so, we’ll both share more details on our Investor Day, but we love what we are seeing at the very top of the market that we love it. We love that. It’s just cementing our position as the third or fourth platform. Now, you also know we’ve been obsessed unlike many other companies about value delivery in our aspiration to try and build a company that people are going to love. So, value delivery is super, super important for us. Everything is backed up by a business case. And so, we’re not seeing the shelfware compression that you’re seeing. We’re seeing it as well from, for – our customers are telling us they are seeing shelfware compression from other vendors, thankfully. And fortunately, that’s not us. Tyler Radke: Thanks. That’s helpful. And then are you able to talk about the mix of revenue versus interactions or usage? Ragy Thomas: Yes. So, we don’t really have any usage-based pricing at the moment. So, we’ll have flat enterprise products that you buy like some AI SKUs or you have seat based high sensory buy or you have tier based, like, for example, our Insights product is based on how much – what tier of data are you consuming, right? So, I don’t know whether that qualifies as usage. We think of it as you’re buying a license. So, it’s not like you, if you don’t use all of that, you get money back, but you just get push into a different tier, if you go. So, they’re committing to a license always. And I think it’s a pretty good mix. Our Insights product is all based on AI and quantity of data that they ingest and process. Our CCaaS is again, we have community products and knowledge-based products and other things at the license based, and then you have the contact center that’s seat-based and we’re very open to other pricing models there as well like flat fee and enterprise license models. So, it’s a healthy mix. I couldn’t tell you exactly how that is split. Tyler Radke: Okay. That’s helpful color. So, then I wanted to just follow-up again on the contact center wins. It sounded like you saw some large ones in the quarter. You talked about some airlines and financial services. Did I hear you correctly that are you – in those larger deals, are you kind of complementing them initially? In other words, you’re not displacing one of these large incumbents in terms of the seats, you’re kind of complementing with the potential road map or optionality to displace them longer-term or – was just curious on those two examples, kind of your role? Thank you. Ragy Thomas: Both, both, Tyler. So, we have – our typical route is, we’re the digital care solution to start with social plus digital, right? It used to be social, now social plus digital. And that’s where they first, kind of see the power of AI agent productivity, time to respond, all of that gets better very quickly. And I can also confirm that we have several early pilots, conversations, proof of concepts with large wall-to-wall plays. And we’re very invested in it, which will be a drag on short-term bookings, right, because these are larger longer-term plays and there’s significant people and resources being committed to moving that along. Our hope and aspiration is we publicly stated is to become a pretty serious CCaaS player. And so that requires us to, kind of overinvest early on. So, the fruits of that labor will probably take a few quarters. But we’re able to show remarkable business results, Tyler. So, that’s that – we know that’s the right strategy, and it allows us to put our head down and not think about this quarter or next quarter, but think about the next 3 years to 5 years. Operator: Our next question comes from the line of Michael Turits with KeyBanc. Please proceed with your question. Michael Vidovic: Hi. This is Michael Vidovic on for Michael Turits and thanks for taking my question. You talked about the early traction you’re seeing with the self-service offerings, but is there any indication at this point that will help you move down market, call it, longer-term? Or are you really just seeing these products help you land the [43 customer count] [ph] you talked about earlier? Thanks. Ragy Thomas: Michael, more of the latter. We are not looking to go down market. Let me be very, very clear. So, if you are coming to a website, we’re actually not contacting anybody who’s not in our target list of 43,000 companies. So, it’s not that people wake up and go find us, right? And some day, we’ll be ranked very high in [that year] [ph], but that day is not today. So, we’re very intentional in terms of driving the audience to our self-serve products, and that is only in our target segment. So, it’s not a volume game for us. And our intention, at least I can say in the medium term is to stay very focused. There is a lot of upside to them in the market we play. So, it’s not going down market at all. Michael Vidovic: Got it. Thanks. And then just now that we’re past May here, any trends or changes between now and Q1 that you’d call out? Thanks. Ragy Thomas: Now, and – you mean just in the last month or so? Michael Vidovic: Right. Ragy Thomas: Look, I think everyone’s talking about generative AI, that is super exciting and I think the awareness of AI broadly is helping us differentiate and people are paying more attention to performance metrics. Look, I think the noise is going to subside and the winners will be declared over the next few years. I love what I’m seeing in terms clients thinking of us as a strategic partner, companies thinking of us as the system [Technical Difficulty] companies thinking of us as you are the – well, I had a customer that I was speaking to who said to us that they’re paying Sprinklr more than they’re paying Adobe and it was very surprising. And sure, it’s just value based. I’m not saying all companies in all industries. So, that’s something that I’m personally very excited about being a strategic partner in the C-suite. And I can also tell you that increasingly, we’re talking to the C-suite and we’re having a lot less difficulty getting to and holding a conversation and demonstrating a value to a CIO and CMO than we ever did before. Because I think the point solution versus platform, that game is up and people want to consolidate point solutions and CIOs want to talk to companies who can rip out 5, 10, 20 of those at a time. Operator: Our next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question. Arjun Bhatia: Hi, guys. Thanks for taking the question. Ragy, for you, just on the contact center opportunity. Can you just help me understand how you’re delineating, what’s a contact center deal versus service deal? Is it where it’s sitting, whether it’s the marketing team or the service team because you’ve had this product in market for some time. And then just to follow up on that, the growth strategy there, does that focus – do you see that focusing more on existing Sprinklr customers or is this a way to, kind of get maybe some of the holdouts on to your platform? Ragy Thomas: So Arjun, the good news is, everything that we’re referring to in our service bucket is a seat that’s assigned to somebody in the customer service department, okay? So, it’s almost always in the contact center, but it’s real customer service. If you are a marketing user engaging with a customer, you’re probably that – revenue goes under the social bucket or the marketing bucket. So, everything we’re talking about is service, which is very interesting for us. It’s a customer service seat. The second thing I want to point out is, for us, a customer service seat is a customer service seat. So, you may choose to activate five channels and call it social. You may choose to activate 30 and just do only digital or you may activate voice and go entire contact center. It’s all the same for us. And I’ll give you a real story with one of the largest of the 15,000 seat contact center we implemented at the bank that we talked about before. In the contact center, before Sprinklr, there were a bunch of people with the e-mail customer service capability. So, if you e-mail them, hey, I want to increase my credit card limit, they literally would e-mail you back because that’s all they could do. They were e-mail agents. And so you would send an e-mail Sunday night, you go to work Monday. That case wouldn’t get close till Friday when you come back and send an e-mail to respond. With Sprinklr, this is just – they came into this analyst summit and said the story, it was amazing, because now the e-mail agent gets that request, hits the call button, talks to the guy and say, hey, can you submit your proof of income blah, blah, blah. And that case resolution went from weeks and days to hours and minutes. So, you just turn things on and off and just – you are buying the exact same capability, which is what we mean by true omnichannel. Arjun Bhatia: Understood. All right. That makes sense. And then one for Manish. You talked about just some – maybe some downward pressure on net retention rate coming up in the next few quarters here. Is that – are you anticipating some renewal headwinds from customers? Maybe just walk us through some of the assumptions that you’re baking in there because you did raise the subscription revenue guidance? I’m just trying to square the two. Manish Sarin: Yes. So, we raised the subscription revenue guide for the full-year by the full beat of Q1 and the raise for Q2. So, I don’t think the issue is, are we expected – expecting any churn? But look, we live in a fairly uncertain macro environment. And I just didn’t want investors to start feeling that the 120% was sort of set in stone for the rest of the year. So, just trying to be cautious there. And the commentary that I’ve provided in the prepared remarks will square with the 19% subscription growth rate for the full-year. So, I think this is us in this period of as we look out over the next three quarters, what we are expecting in terms of new business, renewals, all of that captured together is what I was trying to give commentary on. Arjun Bhatia: Okay, perfect. That’s helpful. Thanks guys and great quarter. Operator: There are no further questions in the queue. I’d like to hand the call back to management for closing remarks. Ragy Thomas: Well, thank you, operator, and thank you all for joining us today. I’d like to first thank our employees and our partners and most importantly, our customers for their trust and continued business. We look forward to updating you all again soon as we continue on this exciting journey of creating a new category and aspiring to create the world’s most loved enterprise software company. Thank you very much, and have a great evening. Manish Sarin: Thank you. Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day. Follow Sprinklr Inc. Follow Sprinklr Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

In this article, we discuss the 10 best big name stocks to buy now. If you want to skip our detailed analysis of these stocks, go directly to 5 Best Big Name Stocks to Buy Now. The US economy and big business giants have a closely intertwined relationship, with these large corporations playing a significant […] In this article, we discuss the 10 best big name stocks to buy now. If you want to skip our detailed analysis of these stocks, go directly to 5 Best Big Name Stocks to Buy Now. The US economy and big business giants have a closely intertwined relationship, with these large corporations playing a significant role in shaping the economic landscape. They contribute to the growth of the US economy by driving productivity, innovation, and job creation. These companies invest heavily in research and development, which leads to the development of new technologies, products, and services. Their investments in capital infrastructure and expansion projects stimulate economic activity and create employment opportunities, supporting economic growth at both the national and local levels. Big companies are major employers, providing a significant number of jobs across a wide range of industries. They create both direct and indirect employment opportunities, contributing to lower unemployment rates and promoting economic stability. These companies often offer competitive wages, benefits, and career advancement opportunities, attracting a skilled workforce and enhancing labor market dynamics. Big business giants also have extensive supply chains, encompassing numerous suppliers, manufacturers, distributors, and service providers.  Their purchasing power and demands can influence the operations and growth of their supply chain partners. As a result, these companies have the ability to support and shape the growth of smaller businesses within their supply chains, contributing to job creation and economic development. Many big companies are multinational corporations that operate globally. Their international operations contribute to the US economy through exports, foreign direct investment, and global market expansion. Their ability to compete globally enhances the competitiveness of the US economy, supporting trade and generating economic gains. Surprisingly, the US economy is currently in a healthy state, considering the challenges it has faced, including the global pandemic, supply chain disruptions, and the impact of a war on a major global energy supplier. The labor market conditions alone provide strong support for the belief that the economy can achieve a desired soft landing, which is not uncommon despite claims suggesting otherwise. Although inflation remains a concern, it is much less worrisome than it was a year ago.  If US policymakers can avoid any detrimental policy decisions, such as failing to raise the debt ceiling, the outlook is positive that the economy will continue to innovate, generate employment opportunities, and produce goods and services after a few quarters of slower growth. According to the US Bureau of Economic Analysis, the current-account deficit of the United States decreased by $12.2 billion, or 5.6%, to reach $206.8 billion in the fourth quarter of 2022. The revised deficit for the third quarter was $219.0 billion. In terms of current-dollar gross domestic product (GDP), the fourth-quarter deficit accounted for 3.2%, which was a decline from 3.4% recorded in the third quarter. The US economy experienced a slowdown in the early months of 2023, with a growth rate of 1.1% on an annual basis. This decline in growth can be attributed to higher interest rates and a banking crisis that had a negative impact on various sectors. The Bureau of Economic Analysis released these latest figures, indicating a significant deceleration at a time when concerns about a recession are already looming, partly due to worries that the banking sector’s challenges will restrict lending. In comparison, the US economy had grown at an annual rate of 2.6% during the last quarter of 2022.  However, households continue to increase their spending, particularly on services like entertainment and travel, driven by pent-up demand. Business investment remains strong, especially in information-processing equipment and software. Some of the best big name stocks to monitor in this context include Microsoft Corporation (NASDAQ:MSFT), Atlassian Corporation Plc (NASDAQ:TEAM), and Zoom Video Communications, Inc. (NASDAQ:ZM). However, investment in nonresidential structures remains weak due to an oversupply of office buildings and retail spaces. The housing market experiences a true recession, with a significant slump.  Economic experts believe inflation will gradually settle back by late 2023 as demand for goods slows and businesses address their supply chain issues. However, this decline in inflation might be temporary as wages rise due to the continued strength of the labor market, leading to higher costs and prices. The Federal Reserve, despite its attempts to control inflation in 2022, has found it challenging to slow down the hot labor market enough to have a significant impact, resulting in inflation settling at approximately 6%. Nominal interest rates have reached levels that would have been considered burdensome a few years ago, but the overall economic activity remains relatively strong.  Our Methodology For this article, we selected big name stocks and ranked them based on overall hedge fund sentiment. Big name stocks are companies that have global brand capital and more than 100 hedge fund holders. We have assessed the hedge fund sentiment from Insider Monkey’s database of 943 elite hedge funds tracked as of the end of the first quarter of 2023. The list is arranged in ascending order of the number of hedge fund holders in each firm.  Best Big Name Stocks to Buy Now 10. UnitedHealth Group Incorporated (NYSE:UNH) Number of Hedge Fund Holders: 116  UnitedHealth Group Incorporated (NYSE:UNH) operates as a diversified healthcare firm. It is one of the best big name stocks to buy now. It is also one of the most reliable dividend players in the health market. For the past two decades, the company has consistently paid a dividend to shareholders. These payouts have registered consistent growth in the past thirteen years. On June 7, the firm declared a quarterly dividend of $1.88 per share, an increase of close to 14% from the previous dividend of $1.65 per share.  On May 30, JPMorgan analyst Lisa Gill maintained an Overweight rating on UnitedHealth Group Incorporated (NYSE:UNH) stock and lowered the price target to $562 from $595, updating models across the managed care coverage.  At the end of the first quarter of 2023, 116 hedge funds in the database of Insider Monkey held stakes worth $11.7 billion in UnitedHealth Group Incorporated (NYSE:UNH), compared to 110 in the preceding quarter worth $11.4 billion.  Just like Microsoft Corporation (NASDAQ:MSFT), Atlassian Corporation Plc (NASDAQ:TEAM), and Zoom Video Communications, Inc. (NASDAQ:ZM), UnitedHealth Group Incorporated (NYSE:UNH)  is one of the best big name stocks to buy now.  In its Q2 2022 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and UnitedHealth Group Incorporated (NYSE:UNH) was one of them. Here is what the fund said: “UnitedHealth Group Incorporated (NYSE:UNH) also contributed to performance during the quarter. United’s operating income grew +3% on difficult year-ago comparisons as benefits members utilized more services compared to last year. Optum Health grew operating income +40% as more patients are enrolled in the Company’s value-based care services. The Company estimates nearly a third of all medical care is unnecessary and represents an opportunity to capture savings for both patients. Optum’s integrated platform of patient data, IT, and service providers are focused on driving out these unnecessary costs and should serve as the engine for long-term, mid-teens earnings per share growth.” 9. Alibaba Group Holding Limited (NYSE:BABA) Number of Hedge Fund Holders: 128 Alibaba Group Holding Limited (NYSE:BABA) provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People’s Republic of China and internationally. It is one of the best big name stocks to buy now. The company, like other tech competitors, is trying hard to capture the AI market. Recent reports suggest that the firm intends to incorporate a ChatGPT-like artificial intelligence technology into its meeting and messaging applications, aiming to enhance user experiences and communication efficiency.  On April 23, Susquehanna analyst Shyam Patil maintained a Positive rating on Alibaba Group Holding Limited (NYSE:BABA) stock and lowered the price target to $160 from $175, noting that Chinese macro appears to have improved somewhat and cost discipline continues to pay off. At the end of the first quarter of 2023, 128 hedge funds in the database of Insider Monkey held stakes worth $5.8 billion in Alibaba Group Holding Limited (NYSE:BABA), compared to 113 in the preceding quarter worth $5.6 billion.  In its Q3 2022 investor letter, Polen Capital, an asset management firm, highlighted a few stocks and Alibaba Group Holding Limited (NYSE:BABA) was one of them. Here is what the fund said: “Alibaba Group Holding Limited (NYSE:BABA) is the leading e-commerce company in China. The stock was weak over the quarter as they reported a quarterly revenue decline. The company has been heavily impacted by the continued covid-19 lockdowns throughout China and the aggressive rate increases and a deteriorating outlook for China’s economy have weighed heavily on the stock. The share price has also been under pressure due to the U.S. Securities and Exchange Commission’s plans to delist Chinese tech stocks in 2024 if they do not provide access to audit files.” 8. Salesforce, Inc. (NYSE:CRM) Number of Hedge Fund Holders: 136    Salesforce, Inc. (NYSE:CRM) provides customer relationship management technology that brings companies and customers together worldwide. It is one of the best big name stocks to buy now. On June 7, the firm announced that it was partnering with Google Cloud in a collaboration that will enable companies to leverage their data and utilize custom machine learning models to predict customer needs. This partnership builds on the previous collaboration between the two companies, expanding their data sharing initiatives and developing AI-powered customer service and marketing solutions.  On June 1, investment advisory BMO Capital maintained an Outperform rating on Salesforce, Inc. (NYSE:CRM) stock and raised the price target to $245 from $230, noting that Salesforce margin and free cash flow story remains strong.   At the end of the first quarter of 2023, 136 hedge funds in the database of Insider Monkey held stakes worth $9 billion in Salesforce, Inc. (NYSE:CRM), compared to 117 in the preceding quarter worth $8 billion.  In its Q3 2022 investor letter, Oakmark Funds, an asset management firm, highlighted a few stocks and Salesforce, Inc. (NYSE:CRM) was one of them. Here is what the fund said: “Salesforce, Inc. (NYSE:CRM) has become a dominant global player in sales, customer service, commerce and marketing software over the past 20 years. The company earns 80% gross margins and grows 20% organically. Plus, virtually all of its revenue is recurring. We see Salesforce as a great business that we’ve admired from afar for a long time. More recently, the organization has made some changes at the top that prompted us to take a closer look at the stock. New CEO Bret Taylor and CFO Amy Weaver are bringing a culture of financial discipline. We believe this renewed focus on profitability and capital return, combined with Salesforce’s strong underlying business characteristics, will yield strong results. The current valuation of 3.9x next year’s revenues represents a significant discount compared to publicly traded peers and recent private market values in the software space that have similar growth profiles. We view this discount as an opportunity to invest in a great business at a good value.” 7. Uber Technologies, Inc. (NYSE:UBER) Number of Hedge Fund Holders: 144 Uber Technologies, Inc. (NYSE:UBER) develops and operates proprietary technology applications worldwide. It is one of the best big name stocks to buy now. In late May, the company announced that it would be joining hands with Waymo, an American autonomous driving technology company, to provide self-driving taxis. This collaboration aims to integrate Waymo’s autonomous driving technology into Uber’s ride-hailing platform. By combining their expertise, the companies intend to offer a new transportation service that utilizes self-driving vehicles. On May 3, Deutsche Bank analyst Benjamin Black maintained a Buy rating on Uber  Technologies, Inc. (NYSE:UBER) stock and raised the price target to $46 from $44, noting the firm reported another strong quarter and a very impressive Q2 gross bookings and EBITDA guide.  At the end of the first quarter of 2023, 144 hedge funds in the database of Insider Monkey held stakes worth $5.6 billion in Uber Technologies, Inc. (NYSE:UBER), compared to 135 in the preceding quarter worth $5.7 billion.  In its Q2 2022 investor letter, RiverPark Funds, an asset management firm, highlighted a few stocks and Uber Technologies, Inc. (NYSE:UBER) was one of them. Here is what the fund said: “Uber Technologies, Inc. (NYSE:UBER) is a global technology platform that enables the transportation of people and products across cities and countries. The company’s three main business lines are 1) Mobility where the company is the number one or two player in the app-based personal transportation market in 10,000+ cities globally, 2) Delivery- (Uber Eats in the US) home delivery of prepared meals, grocery, liquor, and increasingly general retail products in seven of the top ten GDP markets globally, and 3) Freight- the largest global marketplace for end-to-end freight solutions including one million digitally connected truck drivers. In the company’s most recent quarter, it grew gross bookings 35% year over year, consummated transactions with 115 million unique customers, completed 1.7 billion trips a month, and all three divisions were adjusted EBITDA positive (…read more) 6. NVIDIA Corporation (NASDAQ:NVDA) Number of Hedge Fund Holders: 132       NVIDIA Corporation (NASDAQ:NVDA) provides graphics, computing and networking solutions. It is one of the best big name stocks to buy now. On May 28, the firm unveiled the DGX-GH200 AI supercomputer, designed to accelerate artificial intelligence research and development. The system delivers impressive performance with 8 NVIDIA A100 GPUs, interconnected with NVIDIA NVSwitch technology. The DGX-GH200 offers high-speed networking, enhanced storage capacity, and improved energy efficiency for advanced AI workloads. On May 25, investment advisory Morgan Stanley maintained an Overweight rating on NVIDIA Corporation (NASDAQ:NVDA) stock and raised the price target to $450 from $304, noting the surge in AI was paying off sooner than expected for the firm.  Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in NVIDIA Corporation (NASDAQ:NVDA) with 17.9 million shares worth more than $4.9 billion.   In addition to Microsoft Corporation (NASDAQ:MSFT), Atlassian Corporation Plc (NASDAQ:TEAM), and Zoom Video Communications, Inc. (NASDAQ:ZM), NVIDIA Corporation (NASDAQ:NVDA) is one of the best big name stocks to buy now.  In its Q1 2023 investor letter, Fred Alger Management, an asset management firm, highlighted a few stocks and NVIDIA Corporation (NASDAQ:NVDA) was one of them. Here is what the fund said: “NVIDIA Corporation (NASDAQ:NVDA) is a leading supplier of graphics processing units (GPUs) for a variety of end markets, such as gaming, PCs, data centers, virtual reality and high-performance computing. The company is leading in most secular growth categories in computing, and especially artificial intelligence and super-computing parallel processing techniques for solving complex computational problems. Simply put. Nvidia’s computational power is a critical enabler of Al and therefore critical to Al adoption, in our view. As such, we believe Nvidia is a long-term high unit volume growth opportunity. During the period, NVIDIA reported fiscal fourth-quarter results that met expectations, as the company navigated. through an inventory correction associated with the broad macroeconomic slowdown. Moreover, management gave fiscal year earnings guidance that was better than analyst estimates. noting strong year-over-year growth in gaming and data centers. Management’s constructive assessment of 2023 prospects. coupled with the rapid rollout and adoption of generative Al offerings, led to positive share price performance.”   Click to continue reading and see 5 Best Big Name Stocks to Buy Now.   Suggested Articles: 11 Best Low Risk Dividend Stocks To Invest In 15 Biggest Nanotechnology Companies in the World 11 Best Pet Stocks To Buy Disclose. None. 10 Best Big Name Stocks to Buy Now is originally published on Insider Monkey......»»

Nvidia (NASDAQ:NVDA) is the most popular stock on the planet right now. It’s surged 25% in just 24 hours… And it’s ... Read more Nvidia (NASDAQ:NVDA) is the most popular stock on the planet right now. It’s surged 25% in just 24 hours… And it’s getting closer and closer to becoming the ninth company to ever achieve a $1 trillion market cap. I’ve been a huge fan of Nvidia for years. Back in 2018, I said: “If I could only buy one stock for the next five years, it would be NVDA.” Readers who acted on my guidance back then could have made a 480% gain. But after such a big run-up, many investors want to know: Is Nvidia still a buy? Avoid This Costly Mistake Investors often underestimate how much disruptors can grow. From 2009 to 2013, Amazon (NASDAQ:AMZN) stock gained 680%. At the time, most “experts” said the easy money had already been made. In 2013, CNN even called Amazon “one of the most overvalued stocks.” But from 2014 to its peak in 2021, Amazon had soared 845%. Wall Street “analysts” have also written off Tesla (NASDAQ:TSLA) for years. Early investors who refused to listen are sitting on 15,000% gains. Bottom line: Disruptors can surge for years and years. That’s the case with Nvidia, too. Nvidia sits at the center of the world’s hottest tech trend—artificial intelligence (AI). Its specialized GPU computer chips are the “brains” powering AI machines. From 2012 to 2018, NVDA surged nearly 2,000%. The stock was trading at record levels. Who wants to buy a stock after such a run-up? Looking back now, the ensuing sell-off was barely a blip on the radar: Today, many investors are balking at the thought of buying NVDA. It’s more than doubled this year… and it’s trading at a record valuation. How could you buy it? But… Mega-winner stocks like NVDA can run further and faster than you can possibly imagine. Wait for the “right” valuation, and you’ll be left behind at the bottom of every cycle. I’ve seen it play out time and time again. Here’s the bottom line: AI Doesn’t Exist Without Nvidia Its GPU chips perform millions of calculations simultaneously, processing vast amounts of data. That’s different from how other computer chips work. Most computer chips—like the one powering the laptop or phone you’re reading this on—calculate one by one. This makes GPUs ideal for training AIs to think like humans. And no other firm makes better GPUs than Nvidia. It’s not even close. This is why Nvidia already dominates 95% of the AI GPU market. Nvidia also dominates the market for AI stocks. Today, there are few “real” AI stocks to invest in. I’m talking about ones actually making significant money from AI. Yet… there are trillions of dollars chasing this trend. That means a lot of money is going to go into a handful of stocks. This week’s huge move in Nvidia is evidence of this. Put simply, if you want to invest in AI today, Nvidia is the top choice. It’s where all the money will go. This Signal Will Tell Me When To Sell Nvidia… I’m waiting for a high-profile AI firm to go public. This could signal AI is toast… and that Nvidia’s dominant rise is over. I’m struck by how many times the leading company in a hot sector goes public… marking “the top.” The AOL Time Warner merger in 2000—still the largest ever—culminated in the dot-com bust. The Blackstone (NYSE:BX) IPO in 2007 coincided with the top for financial markets and preceded the Great Recession. Glencore’s (OTCMKTS:GLNCY) 2011 listing marked the peak in the commodity super-cycle. Coinbase’s (NASDAQ:COIN) IPO looks like it marked a top for crypto at the very least. We’re at least a year or two away from a high-profile AI IPO. Most AI firms are still in the start-up phase. They haven’t even begun disrupting the big players. At least not in any meaningful way. This tells me the AI trend has a long way to go before it matures—and that NVDA can keep climbing. Article by Stephen McBride – Chief Analyst, RiskHedge To get more ideas like this sent straight to your inbox every Monday, Wednesday, and Friday, make sure to sign up for The RiskHedge Report, a free investment letter focused on profiting from disruption. Expect smart insights and analysis on the latest breakthrough technologies, the big stories the mainstream media isn’t reporting on, and much more… including actionable recommendations. Click here to sign up......»»

MongoDB, Inc. (NASDAQ:MDB) Q1 2024 Earnings Call Transcript June 1, 2023 MongoDB, Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.19. Operator: Thank you for standing by, and welcome to MongoDB’s First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, […] MongoDB, Inc. (NASDAQ:MDB) Q1 2024 Earnings Call Transcript June 1, 2023 MongoDB, Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.19. Operator: Thank you for standing by, and welcome to MongoDB’s First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Brian Denyeau with ICR. Please go ahead. Brian Denyeau: Great. Thank you, Latif. Good afternoon, and thank you for joining us today to review MongoDB’s first quarter fiscal 2024 financial results, which we announced in our press release issued after the close of market today. Joining me on the call today are Dev Ittycheria, President and CEO of MongoDB; and Michael Gordon, MongoDB’s COO and CFO. During this call, we will make forward-looking statements, including statements related to our market and future growth opportunities, the benefits of our product platform, our competitive landscape, customer behaviors, our financial guidance and our planned investments. These statements are subject to a variety of risks and uncertainties, including the results of operations and financial conditions that could cause actual results to differ materially from our expectations. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks described in our Annual Report on Form 10-K for the year ended January 31, 2023, filed with the SEC on March 17, 2023. Any forward-looking statements made on this call reflect our views only as of today and we undertake no obligation to update them, except as required by law. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I’d like to turn the call over to Dev. Dev Ittycheria: Thanks, Brian, and thank you to everyone for joining us today. I’m pleased to report that we had another strong performance in the first quarter and we continue to execute well despite challenging market conditions. I will start by reviewing our first quarter results before giving you a broader company update. But first, I would like to personally invite all of you to the Investor session at MongoDB.local New York City to be held at the Javits Center on June 22. Please email ir@mongodb.com if you’re interested in attending. Now turning to our results. We generated revenue of $368 million, a 29% year-over-year increase and above the high-end of our guidance. Atlas revenue grew 40% year-over-year, representing 65% of revenue. And we had another strong quarter of customer growth, ending the quarter with over 43,100 customers. Overall, we delivered a strong Q1. We had a very healthy quarter of new business acquisition. We added approximately 2,300 customers during the quarter, the highest number in over two years, including over 300 new direct sales customers with notable strength in our Enterprise channel. Our ongoing new business success is due to the mission criticality of our platform and sharp execution by our go-to-market teams, who are navigating a difficult selling environment by remaining laser-focused on our North Star acquiring new workloads. In fact, this quarter, we acquired a record number of new workloads from our existing customers. Moving on to Atlas consumption trends. Q1 consumption was ahead of our expectations but remains below the levels we saw prior to the macro slowdown that began last year. Michael will share more detail on this. Finally, retention rates remained strong in Q1, reinforcing the enduring value in our platform. We are pleased with our results this quarter, especially given the difficult macro environment. It’s clear, customers continue to scrutinize our technology investments and must decide which technologies are a must have versus a merely and nice to have. We believe that our Q1 performance and continued new business strength demonstrate that MongoDB is clearly a must have for customers. In today’s digital economy, most companies express their business strategies through software. They use software to deliver their core value proposition, provide customers with great experiences and drive operational efficiency. MongoDB is an essential platform in this drive for innovation, making us the critical investment priority. Our customers ranging from the largest companies in the world to cutting-edge startups use our developer data platform to develop and run mission-critical applications. As these applications become successful, customers spend more with MongoDB. In other words, their spend on our platform is directly aligned with the usage of their underlying application, therefore, the value they derive from it. While the growth rate of existing applications can vary based on a number of factors including macro conditions, the relationship between application usage and growth — application usage growth and MongoDB spend has remained consistent. We believe this is a testament to how well our value proposition is aligned to our customer success. Thinking about a long-term opportunity, I feel exceptionally confident about our core underlying growth driver, the need for companies to use software as a competitive advantage. Customers have ever-increasing expectations for better products, services and experiences, and companies rely on custom-built suffer to deliver these expectations better and faster than the competition. As I’ve said many times in the past, a durable competitive advantage is built through custom software, it cannot be obtained with an off-the-shelf product. Since most companies understand that they and their competition are all differentiating themselves through software, the speed of software development becomes existential. A McKinsey report found that companies that score in the top quartile of developer velocity generate revenue growth that is four times to five times faster than companies in the bottom quartile. MongoDB is built for speed. We believe AI will be the next frontier of development productivity — developer productivity and will likely lead to a step-function increase in software development velocity. We know that most organizations have a huge backlog of projects they would like to take on, but they just don’t have the development capacity to pursue. As developer productivity meaningfully improves, companies can dramatically increase their software ambitions and rapidly launch many more applications to transform their business. Consequently, the importance of development velocity to remain competitive will be even more pronounced. Said another way, if you are slow, then you’re obsolete. Moreover, the shift to AI will favor modern platforms that offer a rich and sophisticated set of capabilities, delivered in a performance and scalable way. We are observing an emerging trend where customers are increasingly choosing Atlas as a platform to build and run new AI applications. For example, in Q1, more than 200 of the new Atlas customers were AI or ML companies. Well finance startups like Hugging Face, Tekion, One AI and [Nuro] (ph) are examples of companies using MongoDB to help deliver the next wave of AI-powered applications to their customers. We also believe that many existing applications will be re-platformed to be AI-enabled. This will be a compelling reason for customers to migrate from legacy technologies to MongoDB. To summarize, AI is just the latest example of the technology that promises to accelerate the production of more applications and greater demand for operational data stores, especially the ones best suited for modern data requirements such as MongoDB. We look forward to telling you more at our Investor session on June 22. Now I’d like to spend a few minutes reviewing the adoption trends of MongoDB across our customer base. MongoDB’s developer data platform continues to gain momentum as customers across industries and around the world are running their mission-critical projects on Atlas. Organizations, including Anywhere Real Estate, GE Healthcare and Intuit are leveraging the power of our developer data platform. GE Healthcare has turned to MongoDB’s developer data platform to manage the lifecycle of its IoT devices, imaging, ultrasound and other patient-care devices from deployment to retirement. They selected Atlas for its effective management, scalability, built-in security and multi-cloud support. GE Healthcare’s use of Atlas helps healthcare providers enhance productivity by reducing the complexity and time required to manage databases, resulting in an 83% decrease in data retrieval time and enabling faster deployment of IoT devices. Many customers are turning to MongoDB to free up their developer’s time for innovation, enabling them to move faster and deliver better customer experiences, while driving cost-savings. This includes China Mobile, Tata Digital and Grant Thornton International. China Mobile provides mobile voice and multimedia services via its nationwide mobile telecom network across Mainland China and Hong Kong. It is the world’s largest mobile network operator by total number of subscribers. The telecom leader is using MongoDB to support one of its largest and most critical push services, which sends out billing details to more than 1 billion users every month. Prior to MongoDB, the tech team relied on Oracle. But as the user numbers increase, performance degraded. Despite large investments, it was still taking too long to do basic requests like finalize and deliver bills to users. As a result, China Mobile migrate this service to MongoDB after comprehensive testing and evaluation of alternatives. By taking advantage of MongoDB’s native [sharding] (ph), they were able to improve performance by 80% and go from 50 Oracle machines to just 12 machines for the same workload. This service now handles all current requirements and is set up to scale with future growth. Digital transformation is redefining how organizations operate, and MongoDB is helping customers on this journey by delivering the developer data platform that powers the migration from on-premises to the cloud. Companies including Shutterfly, Radio and Bendigo and Adelaide Bank are example of customers leveraging MongoDB in their transformations. A leader in the HR and job finding tech space shifted from MongoDB Community to MongoDB Atlas during its journey to migrate its entire infrastructure from on-premises to the cloud. They selected MongoDB Atlas to give its developers full autonomy over their data, while freeing up the time they previously spent managing their database system to focus on innovation and improving the end user experience. During their migration journey to Atlas, the company identified [indiscernible] significant infrastructure reduction and subsequent cost-savings. In addition, the company has experienced 250% faster query performance and 300% faster right throughput on their applications built on Atlas. In summary, I’m pleased with our first quarter results in a difficult macro environment. Our ability to win new workloads remain strong and Atlas consumption trends were better than expected. We also believe that AI will accelerate application development, which would further stimulate demand for MongoDB. We continue to invest to maximize our long-term growth opportunities. With that, here’s Michael. Michael Gordon: Thanks, Dev. As mentioned, we delivered a strong performance in the first quarter, both financially and operationally. I’ll begin with a detailed review of our first quarter results, and then finish with our outlook for the second quarter and full fiscal year 2024. First, I’ll start with our first quarter results. Total revenue in the quarter was $368.3 million, up 29% year-over-year. As Dev mentioned, we continue to see a healthy new business environment, both in terms of acquiring new customers, as well as acquiring new workloads within existing customers. To us, this is confirmation we remain a top priority for our customers and that our value proposition continues to resonate even in this market. Shifting to our product mix. Let’s start with Atlas. Atlas grew 40% in the quarter compared to the previous year and represents 65% of total revenue compared to 60% in the first quarter of fiscal 2023, and 65% last quarter. As a reminder, we recognize Atlas revenue primarily based on customer consumption of our platform and that consumption is closely related to end-user activity of the application, which can be impacted by macroeconomic factors. Let me provide some context on Atlas consumption in the quarter. As Dev mentioned, consumption growth in Q1 was above our expectations. This outperformance was broad-based and driven by stronger growth in underlying application usage. While Q1 consumption trends were better than expected, the growth remains below the levels we had experienced prior to the beginning of the slowdown in Q2 of last year. Turning to Enterprise Advanced. As you know, we will be facing very difficult EA compares throughout fiscal 2024, and Q1 was no exception as evidenced by our slower year-over-year EA revenue growth. However, EA revenues were up sequentially, which is better than what we had anticipated in our Q1 guidance. This is despite the fact that Q1 is typically a seasonally slower new business quarter for EA. Turning to customer growth. During the first quarter, we grew our customer base by approximately 2,300 customers sequentially, bringing our total customer count to over 43,100, which is up from over 35,200 in the year-ago period. Of our total customer count, over 6,700 are direct sales customers, which compares to over 4,800 in the year-ago period. As a reminder, our direct customer count growth is driven by customers who are net-new to our platform as well as self-serve customers with whom we’ve now established a direct sales relationship. We saw a strong quarter of customer — of direct customer additions in our enterprise channel. The growth in our total customer count is being driven primarily by Atlas, which had over 41,600 customers at the end of the quarter compared to over 33,700 in the year-ago period. It is important to keep in mind that growth in our Atlas customer count reflects new customers to MongoDB in addition to existing EA customers adding incremental Atlas workloads. We had another quarter with our net expansion — ARR expansion rate above 120%. We ended the quarter with 1,761 customers with at least $100,000 in ARR and annualized MRR, which is up from 1,379 in the year-ago period. Moving down the income statement. I’ll be discussing our results on a non-GAAP basis unless otherwise noted. Gross profit in the first quarter was $279.9 million, representing a gross margin of 76%, which is up from 75% in the year-ago period. We’re very pleased with our gross margin progression, especially in the context of Atlas representing 65% of our overall business. Our income from operations was $43.7 million, or 12% operating margin for the first quarter compared to a 6% margin in the year-ago period. The primary reason for our strong operating income results versus guidance is our revenue outperformance. In addition, Q1 benefited from the timing of marketing programs, internal events and other expenses, which we now expect to incur later in the year. Net income for the first quarter was $45.3 million or $0.56 per share based on 81.5 million diluted weighted average shares outstanding. This compares to net income of $15.2 million or $0.20 per share on 77 million diluted weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow. We ended the first quarter with $1.9 billion in cash, cash equivalents, short-term investments and restricted cash. Operating cash flow in the first quarter was $53.7 million. After taking into consideration approximately $2 million in capital expenditures and principal repayments of finance lease liabilities, free cash flow was $51.8 million in the quarter. This compares to free cash flow of $8.4 million in the first quarter of fiscal 2023. I’d now like to turn to our outlook for the second quarter and full fiscal year 2024. For the second quarter, we expect revenue to be in the range of $388 million to $392 million. We expect non-GAAP income from operations to be in the range of $36 million to $39 million and non-GAAP net income per share to be in the range of $0.43 to $0.46 based on 82.5 million estimated diluted weighted average shares outstanding. For the full fiscal year 2024, we expect revenue to be in the range of $1.5 billion to $2 billion to $1.542 billion. For the full fiscal year 2024, we expect non-GAAP income from operations to be in the range of $110 million to $125 million, and non-GAAP net income per share to be in the range of $1.42 to $1.56 based on 83 million estimated diluted weighted average shares outstanding. Note that the non-GAAP net income per share guidance for the second quarter and full year fiscal 2024 includes a non-GAAP tax provision of approximately 20%. I’ll now provide some more context around our guidance, starting with Q2. First, I want to remind you that Q2 has three more days than Q1, which is a tailwind for Q2 Atlas revenue. Second, we expect to see a sequential decline in the EA business after a stronger than expected Q1. Third, we recently signed a few large licensing deals, most notably a renewal and extension of our relationship with Alibaba. Those deals have an upfront license revenue component, which will positively impact our revenue in Q2 by roughly $10 million. You will see this impact in other subscription revenues, the portion that is neither Atlas nor EA. Finally, we expect to see a significant sequential uptick in expenses since we have some of our largest sales and marketing events in Q2, most notably MongoDB.local in New York. Turning to our updated full year guidance. First, we are increasing our revenue expectations for the rest of the year because Atlas Q1 exit ARR is now higher than previously expected given the stronger Q1 performance. Second, we continue to expect that Atlas consumption growth will be impacted by the difficult macro environment throughout fiscal 2024. Our revised full year revenue guidance continues to assume consumption growth that is in line with the average consumption growth we’ve experienced since the slowdown began in Q2 of last year. In other words, our usage growth assumptions for the remainder of the year remain unchanged from what we provided our initial guidance range for fiscal 2024 last quarter. Third, we continue to expect that the year-over-year growth of Enterprise Advanced will be impacted by the difficult compares from the prior-year period. Finally, thanks to strong Q1 performance and the increased revenue outlook, we are meaningfully increasing our assumption for operating margins in fiscal 2024 to 7.7% at the midpoint of our guidance, an improvement of approximately 300 basis points compared to fiscal 2023, while continuing to invest to pursue our long-term opportunity. To summarize, MongoDB delivered strong first quarter results in a difficult environment. Our new business performance and strong total customer net additions demonstrate the continued demand for our developer data platform. While we are pleased that Atlas Q1 consumption growth was above our expectations, we continue to be mindful of the environment, taking a step back from the near-term trends. We are incredibly excited about the opportunity ahead and we’ll continue to invest responsibly to maximize our long-term value. With that, we’d like to open up to questions. Operator? Q&A Session Follow Mongodb Inc. (NASDAQ:MDB) Follow Mongodb Inc. (NASDAQ:MDB) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Yes, sir. [Operator Instructions] Our first question comes from the line of Raimo Lenschow of Barclays. Your question please, Raimo. Raimo Lenschow: Thank you. My first question before I have to follow-on — follow-up question. Dev, if you — everyone talks about AI at the moment and Mongo in theory always kind of view as an operational database. How do you fit into this kind of new AI world? You mentioned some of the names and some of the projects that would look really exciting. But how does Mongo kind of fit into this new world? And I had one follow-up for Michael. Dev Ittycheria: Yeah. Sure, Raimo. First, we expect MongoDB to be a net beneficiary of AI. And the reason being is that as developer productivity increases, the volume of new applications will increase, which by definition will create new apps, which means more data stores. So driving more demand for MongoDB. Second, developers will be attracted to modern platforms like MongoDB because that’s the place where they can build these modern next-generation applications. And third, because of the breadth of our platform and the wide variety of use cases we support that becomes even more of an impetus to use MongoDB. As I mentioned that we’ve had over 200 customers just in last quarter who are running AI apps on Atlas. Some of those includes some very cutting-edge well-financed startups like Nuro and Hugging Face and Tekion. We have a high degree of existing customers who are engaging with our field organizations on AI use cases. And so the demand for using MongoDB to build and run these AI apps is very high. Raimo Lenschow: Okay. Perfect. Thank you. And Michael, if I look at the update or the significant upgrade to the profitability outlook, like, obviously, you had your budgeting cycle to come up with the initial guidance. So what has changed besides maybe slightly higher revenue to kind of come up with these kind of much higher numbers? And obviously, we all like that. But like, what drove that? Thank you and congrats from me. Michael Gordon: Thanks. Yes. The big driver of the improved bottom line output is the stronger Q1 performance and then the upgraded revenue outlook and it’s really just sort of flowing through to the P&L. Raimo Lenschow: Okay. Perfect. Thank you. Operator: Thank you. Our next question comes from the line of Sanjit Singh of Morgan Stanley. Your line is open, Sanjit. Sanjit Singh: Thank you for taking the questions and congrats to the MongoDB team on a strong start to the year. I wanted to start off — just a question on the environment. As we talked — as we listen to the [Hyperscalers] (ph) report, their results seem some of the cloud infrastructure ecosystem reported results. We’re all trying to get a sense of where are we in sort of the cloud optimization budget scrutiny sort of cycle. It sounded like from what you guys are saying that you guys are executing well, but things are still pretty tight from a budget environment perspective. So wanted to get your sort of latest perspective on whether you see cloud spend and optimization headwinds fading anytime soon? And then what you saw in May that potentially gave you maybe some leading indicators on where things may be headed? Dev Ittycheria: Yes. So first point I’d make, Sanjit is that, we don’t really see optimization as a trend because there’s a direct link between app usage and our revenue, right? So the more the apps are used, the more revenue that drives. And consequently, when apps are used less, the less revenue we get. And so, there’s a one-to-one correlation between usage and revenue, which as you can imagine, when the customers are building these apps, they want their apps to be used. So that’s really what’s happening in terms of what’s driving our revenue. In terms of what’s happening in terms of the macro environment, I definitely agree with you that it’s tough out there, but what we see is innovation is still a priority. We see that customers really want to leverage software as a competitive advantage. We had very strong new business numbers. We added 2,300 customers this year. Our six figure customer count grew 28% year-over-year and our Atlas growth was 40% year-over-year. So like these are pretty good signs that customers are still prioritizing innovation and they’re doing so leveraging modern platforms like MongoDB. So I would also say that our go-to-market channels have to really focus on and are doing a really good job on qualifying these opportunities, being able to separate customers who are serious versus customers who may be just wanting to kick the tires. And again, as I mentioned earlier, it’s all about us acquiring high-quality workloads. If we can hire — acquire high-quality workloads, onboard them well and make sure they’re served as well, good things will happen; and that’s happening. And we had a record number of new workloads added this quarter from existing customers. Sanjit Singh: I appreciate the perspective, Dev. I just wanted to follow up on Raimo’s question on AI. And I guess the context is that, you guys have proven that the document model has been very, very scalable in terms of addressing multiple different types of workloads and different data types. So in the context of large language model applications and customers trying to build applications with large language models and the rules of vectors and vector databases, from your guys’ perspective, is this a use case that MongoDB can address? And any sort of product updates or anything on the product road map to address this part of the market? Dev Ittycheria: Right. So — and maybe I’ll just do a little primer just so everyone is on the same page. The results that come from training and LLM against content are known as vector embeddings. And so content is assigned vectors and the vectors are stored in a database. These databases then facilitate searches when users query large language modeling with the appropriate vector embeddings, and it’s essentially how a user searches match to content from an LLM. The key point, though, is that you still need an operational data store to store the actual data. And there are some adjunct solutions out there that have come out that are bespoke solutions but are not tied to actually where the data resides, so it’s not the best developer experience. And I believe that over time, people will gravitate to a more seamless and integrated platform that offers a compelling user experience. And I do want to say it’s still very early days. I think people tend to overestimate the impact of new trends in the short term but underestimate them in the long term. So it’s very early days. And I think you’re going to see a lot of things happening over the course of the next few months and quarters and years, but we feel we’re in a very good position to take advantage of this new trend. Sanjit Singh: I appreciate the comments, Dev. Thank you very much. Operator: Thank you. Our next question comes from the line of Brad Reback of Stifel. Your question please, Brad. Brad Reback: Great. Thanks very much. Dev, last quarter you talked about a couple of very large financial institutions beginning to migrate, I believe it was hundreds of apps. I know you talked about better usage trends this quarter. Was that — did those migrations impact this quarter? Or is that more something we should expect in the coming quarters? Dev Ittycheria: No, they’ll — I mean — so one, we’re obviously we are very happy about customers wanting to migrate a large percentage of their applications to MongoDB, but that takes time, right? It’s not going to happen overnight. And so, that’s going to happen over the long term and so that’s something that’s a trend that we’re feeling good about. I would say, in terms of the usage trends, it’s again tied to our customers’ underlying business. And so the applications of building on MongoDB are clearly being used. They’re driving value, which consequently drives our revenue; and we feel really good. And again — so that drives us to go acquire more workloads, high-quality workloads, that we can then onboard quickly. And then that drives future usage, so that’s the real focus for us. That’s focus on the input metrics that drive the outputs that you see. And that’s an example what happened this quarter. Brad Reback: That’s great. And then Michael, real quick. Since the year got off to such a great start here, does it impact your hiring plans for the rest of this fiscal year? Thanks. Michael Gordon: Yes, thanks for the question, Brad, yes. Strong start to the year, no major changes. Obviously all that’s factored into the full year guide, and you can see the significant upgrade in the bottom line outlook. We are obviously continuing to invest for the long term, though, and believe that we can walk and chew gum at the same time. Brad Reback: That’s great. Thanks very much. Operator: Thank you. Our next question comes from the line of Brent Bracelin of Piper Sandler. Your question please, Brent. Brent Bracelin: Thank you. Dev, what drove the record number of new workloads migrating to the platform? You flagged that in the comments there. It seems a little too early for Gen AI to be driving the number of new workloads, so what drove that [indiscernible] as well? Thanks. Dev Ittycheria: Yes. Like I said, I think people tend to overestimate the impact of a trend like AI in the short term. And so I will clearly say it wasn’t AI that drove the acquisition of workloads. It was really sharp execution by go-to-market teams. We have really focused our teams to acquire workloads either through the acquisition of new customers or the acquisition of workloads in existing customers. It’s all about acquiring workloads, so our incentive mechanisms, management attention and focus is all about this North Star about acquiring new workloads. And I saw — and I think you’ve seen the results of that showing up in Q1. Brent Bracelin: Great, blocking and tackling and walking while chewing gum. Sounds like it’s working for you. My follow-up is really around a vector feature engine as you think about AI. How important is layering in vector feature engines inside of the Mongo database? Is that on the docket? How should we think about vector functionality inside of Mongo going forward relative to attracting more Gen AI workloads? Thanks. Dev Ittycheria: Again, for generating content that’s accurate in a performant way, you do need to use vector embeddings which are stored in a database. And you — but you also need to store the data and you want to be able to offer a very compelling and seamless developer experience and be able to offer that as part of a broader platform. I think what you’ve seen, Brent, is that there’s been other trends, things like graph and time series, where a lot of people are very excited about these kind of bespoke single-function technologies, but over time, they got subsumed into a broader platform because it didn’t make sense for customers to have all these bespoke solutions which added so much complexity to their data architecture. I don’t want to preempt what we’re going to be talking about on June 22, but I encourage you to attend because that’s where we’ll share a little bit about our AI strategy. Brent Bracelin : Looking forward to it. Thank you. Operator: Thank you. Our next question comes from the line of Kash Rangan of Goldman Sachs. Your question please, Kash. Kash Rangan: Thank you very much. Congratulations on the quarter, great start to the year. One for Dev and one for Michael. Dev, you’ve talked about relation of database displacements for a while now, so how are those deployments coming along? And are you increasingly able to open the door for even bigger deployments in the future? That’s one. And one for you, Michael. It now appears that you have a cadence where you — despite challenging consumption trends on a per-customer basis, you’ve been able to add new customers at record pace, so results have been actually quite resilient. So how does this make you think about the business model ahead? I mean, are you at a point where the new customer momentum more than offsets declining consumption growth trends that you have better visibility into your business than you did probably, say, a year back, six months back? Thank you so much. Dev Ittycheria: Yes, what I would say is, I think, in the short term, the consumption trends are clearly tied to our customers’ underlying business. The only way we can really influence that is, over the long term by acquiring more and more workloads either through from existing customers or acquiring new customers. And so, we’re really focused on what we can control, which is all about acquiring new customers and new workloads. And obviously there’ll be puts and takes in every quarter, but our go-to-market organization is very, very focused on this. And we do that not just from our sales organization but also from our self-serve business. And then we also just don’t just focus on acquiring but also making sure they’re onboarded properly, they’re serviced properly so that those workloads grow well and the customer’s experience with those workloads is very positive so they continue to add new workloads to our platform. That’s ultimately the things that we can control and that’s what we’re really focused on. And you talked about… Kash Rangan: [indiscernible] Dev Ittycheria: Yes. Sorry. So we are seeing — again, part of acquiring a workload is acquiring a relational workload and replatforming it on MongoDB, so when we say acquiring a workload, you should not always assume it’s a new workload. It could be an existing workload that people want to replatform. We talked about the China Mobile example where it was a very, very large workload servicing a very, very large user population. And they just weren’t getting the performance benefits that they needed for such a large set of — such a large implementation, so that was their catalyst to basically migrate to MongoDB. And I want to be clear. There’s always going to be some catalyst. There’s got to be some compelling event for a customer to do so. It could be for cost reasons. It could be for performance reasons like in China Mobile. Or it could be that they’re — they can’t add new features fast enough on a brittle legacy platform so they need to migrate to a new modern platform where they continue to service their own business well. So those are the drivers and that’s a big focus for us as well. Operator: Thank you. Our next question comes from the line of Karl Keirstead of UBS. Your question please, Karl. Karl Keirstead: Thank you. Maybe this will go to Mike. Mike, if we could unpack the 2Q guide a little bit. First, on the $10 million onetime lift from Alibaba, if you could just clarify the entirety of that lens in other subscription. None of it lands in Atlas or EA. And is there any follow-through on that, Alibaba? Or is it truly onetime 2Q? And then I’ve got a quick follow-up. Michael Gordon: Yes. So it will show up — first of all, it’s not just Alibaba in the $10 million, but Alibaba is the one that people understand and know and we had a joint press release about. And it’s certainly driving a healthy chunk of that. It does show up in that kind of other, other line, so it’s not showing up in Atlas or in the EA line items, just for sort of clarity around the geography. The extension of the deal, we initially signed a multiyear deal with them. This extends that contract. The structure has minimum commitment levels, and so what runs through the P&L is the minimum commitment level. So obviously, to the extent that there is outperformance above this further increased level, like, that could impact things. We have seen those historically. That’s part of what led to the early renewal and extension given the success of the joint offering. Over the time since we’ve launched it, we’ve seen an 8 times increase in their end user consumption. And so that’s what sort of gave them and obviously us collectively the confidence to sort of extend that. Karl Keirstead: Okay, great. Thanks, Mike. And then further on the 2Q guide, the three extra days relative to Q1, does that loosely offer kind of an added three point sequential boost? And then secondly, in terms of the overall demand assumptions you’re using to drive that 2Q guide, is it sort of similar broader trends that you’ve seen in the last couple of months? Or Mike, are you assuming things get better or things get a little worse? Thanks. And that’s it for me. Michael Gordon: Yes. So you’re correct. The Q2 days, it does affect because it’s consumption and it’s recognized as it’s utilized. So that is a tailwind to Q2 relative to Q1 by those few extra days. The — in terms of the broader assumptions, the primary driver of the increase in the fiscal 2024 full year guide is the fact that Atlas outperformed in Q1. Therefore, our starting Atlas ARR for Q2 is higher. We have not changed our outlook for the expected growth over the balance of the year. And so, we’re not seeing things get worse. We’re not assuming things get better or deteriorate further, and so it’s consistent with our view that we had 90 days ago. Karl Keirstead: Yes. Super helpful. Thanks Mike. Michael Gordon: Thank you. Operator: Thank you. Our next question comes on the line of Tyler Radke of Citi. Your question please, Tyler. Tyler Radke: Yes. Thanks very much for taking the question. So Dev, in your opening remarks, you talked about how AI can kind of provide a new opportunity for modernization of existing applications. And I’m just curious, from your perspective, how you see this playing out. Or do you — when do you think that this starts to accelerate the pace in which companies modernize their apps? And maybe how you’re preparing your go-to-market team to tackle that opportunity. Dev Ittycheria: Yes. Tyler, we’re already seeing high customer engagement of customers already talking to us about new AI use cases that they want to build and run on MongoDB, so that’s obviously a very positive trend. Again it’s early days, so I don’t want to suggest that there’ll be some step function increase in consumption or revenue, but the trend is obviously real. As I mentioned, we already saw like over 200 customers who are AI companies who are deploying apps on MongoDB. And I would argue that there’s an emerging trend that Atlas is one of the preferred places for AI companies to go to build apps, and so we feel really good about our positioning. And I think we feel like it will be definitely a tailwind given that with all of the AI assist tools around cogeneration and improving developer productivity, the capacity of a development team in a typical organization will only increase. There’s statistics that say it can increase anywhere from 15% to 30%, 40%. I think it’s still early days to determine what percent is real, but it will definitely increase, which by definition will increase the number of applications developed, which will then obviously drive more demand for MongoDB. Tyler Radke: That’s helpful. And I assume the answer is too early, but as you look at those 200 customers or so and maybe some existing ones that were already on the platform, is there any way to think about quantifying the AI-related revenue and — or maybe where you think about that for the full year? Dev Ittycheria: I think it’s way too early, Tyler. I think it’s also really tied to the market and the product market fit of those customers’ businesses because obviously, if those customers do well, then we’re a beneficiary. If they’re not doing well, then obviously they’re not going to drive a lot of consumption. So it’s really tied to the product market fit of those companies, but the general trend that we are very pleased about is that, there’s a lot of people leaning towards MongoDB in terms of thinking about the next set of AI apps that they’re building. Tyler Radke: Great. Thank you. Dev Ittycheria: Thanks, Tyler. Operator: Thank you. Our next question comes from the line of Jason Ader of William Blair. Your question please, Jason. Jason Ader: Thank you. I just wanted to ask about the linearity of consumption through the quarter and then any comments you have on consumption in the month of May? Michael Gordon: Yes. So I’d say clearly March and April were better than we expected given the outperformance of our revenue numbers. And so that’s great to see. In general what we’ve seen since the start of the slowdown is certainly some month-to-month variability, but in general, like, some pretty reasonable ranges. And to the extent that when we see ranges that diverge at the start of Q2, the more pronounced holiday slowdown that we saw, we tend to call those out, but we feel that we’ve seen a pretty consistent level of sort of macro-affected or post-macro growth rates of existing expansion. That was what was included in our guide and that’s what’s initially for fiscal 2024. And that’s also what’s in our guide for the balance of the year. Jason Ader: Okay, just — yes. I mean what’s a little hard to reconcile is I understand the sort of onetime pop in Q2, but for the back half, I mean, it just seems like growth is going to slow down massively year-over-year. I’m just trying to understand. If you’re not assuming anything different on the macro, why would that be the case? Michael Gordon: Yes. So what I would say is, when we look at it, you’ve got a higher starting Q2 ARR as a result of the strong Q1 performance. And as you flow through the same cohort expansion, for lack of a better phrase, over the balance of the year, that’s what leads to the improved revenue outlook that we have. And so, we’re actually seeing stronger growth on a year-over-year basis for the back half of the year than we thought at the beginning of the year. Jason Ader: Got you, all right. And then one quick last one for you, Michael, on the gross margin outlook. I think your long term — unless it changed, I think it was 70%. And you’re running now in the mid-70s. It seems like Atlas has really been above your expectations in terms of the gross margin. Any comments on just sort of like, call it, the next couple of years on gross margin? Michael Gordon: Yes. So we have not specifically guided to gross margin. You are correct. We have outperformed our expectations on gross margin. Our gross margin progression plan, particularly as it relates to Atlas has been very strong. I would not have forecast such high gross margins with Atlas at almost two-thirds of our revenue. And so we’ve continued to execute incredibly well there. I would just go back to your comment around sort of our long-term target model was 70-plus. And so I think I feel significantly more confident in delivering against that now that we’ve got Atlas at a much higher percent of the revenue. Atlas still is dilutive on a margin basis, but clearly we’ve meaningfully narrowed that gap and outperformed our own plan, both in terms of the rate and pace of achieving the improvements, as well as, as we’ve kind of pulled additional levers, we’ve gotten more value out of the levers that we had identified along the way. And that’s what’s put us in this strong position. Jason Ader: Thanks guys. Operator: Thank you. Our next question comes line of Fred Havemeyer of Macquarie Capital. Your question please, Fred. Fred Havemeyer: Thank you. I wanted to also follow up on margins with respect to Atlas. I think, as your company is going through a transition from, of course, like more term licenses, towards Atlas being more of a consumption-based model, it’s exciting to see the margin upside flowing through as revenue is coming through, but I wanted, I think, a refresher on how to think about just essentially unit — sorry, just on how to think about margin progression with Atlas in play. Just generally, once customers have signed and you are through that period of, of course, recognizing commissions, et cetera, and customers are expanding on that Atlas, how should we think about that incremental revenue contribution contributing, of course, to profitability? Michael Gordon: Sure. So I’ll try and tackle it a couple of different ways, Fred. So I think in general what you see is Atlas revenue is consumption oriented. I think people understand that. We have this very close value linkage, and so it maps quite tightly to the underlying application usage for our customers and their end users. And so I think the key thing when you compare it to the 606 implications particularly of enterprise advanced and the term license revenue is, while it’s not ratable — and I do think sometimes there’s the tendency to confuse it was ratable. It is spread over the duration. If we just assume a one year contract, which most of our contracts are, you’ll get the same revenue over the time, but with the enterprise license — enterprise events license, you’ll see that upfront revenue being lumpier, right? That’s part of the reason why we talk about and go to great pains to explain the EA compares and some of those other things. So that’s really the big driver. You get the same revenue, but there’s less upfront. I think the other thing that’s important to understand in terms of the financials is really the cash flow dynamics and understanding that. As we’ve talked about for the last several years, we’ve been deemphasizing upfront commitments, trying to reduce the level of friction, trying to focus on acquiring more workloads and getting more workloads on the platform. And the result of that is spending less time on upfront commitments. Atlas now has — about 80% of Atlas does not flow through deferred. And so that’s just a very different dynamic when you start thinking about less from the income statement but more kind of away from the other parts of the balance sheet and some of the other calculations that you all do. Fred Havemeyer: Thank you very much. Operator: Thank you. Our next question comes from the line of Kingsley Crane of Canaccord. Your question please, Kingsley. Kingsley Crane: Great, yes. So I would like to ask a question about the replacement opportunity and in just a slightly different way. So we’re all excited about this AI theme. I know this is more longer term, but do you think that AI workloads creation, app replatforming can act as a catalyst for share shifts as relational DBs are less prepared to support these workloads? Dev Ittycheria: I think, over the long term, that’s definitely the case. I think you’re seeing that, I mean, people forget that the relational database has been around for almost 45 years, right? So — and so it’s a technology that’s worked well for a long period of time, but it really doesn’t suit the needs of modern applications. And as applications get more and more sophisticated, have more performance and scale requirements, people need to consider moving to more scalable platforms and that’s our strength. And China Mobile, again, is a great example of that. And that’s not even AI apps. Kingsley Crane: Okay. Great. Thank you. Operator: Thank you. [Operator Instructions] Our next question comes from the line of Michael Turits of KeyBanc. Your line is open, Michael. Michael Turits: Hi, guys. Good evening. So I want to come back to the usage trends. So I want — maybe explain it, but I’m not sure. So what really drove the better-than-expected usage in 1Q? I know you said that execution was great, which is awesome. And then [Multiple Speakers] in terms of expectations for the rest of the year? Michael Gordon: Sorry. Say the last part of the question again, Michael. Michael Turits: So what drove the better-than-expected usage in Q1? But then for the rest of the year, you’re expecting a return to your prior assumptions regarding usage growth. Dev Ittycheria: Yes. So let me try and clarify it. So first, the strong execution, I think, that Dev was talking about really ties more to the new business environment, which remember is very valuable for the medium to long term, but the near term is much more governed by the performance of existing applications. So that, what drove the outperformance of that was stronger underlying usage of those applications, right? So when you think about the underlying queries, right, the reads and writes of those applications, more activity. That drove more consumption and so that’s what drove the outperformance. And when you think about the — as I mentioned, there’s a little bit of variability period to period, but other than sort of the start of the downturn in Q2 of last year and the more pronounced holiday slowdown, it’s been in a fairly reasonable range. That was the range that we’ve seen the performance in for Q1. That’s the range that we saw the performance was — in our Q1, our guide at the beginning of the year for the full year. And so there’s no real reason to change that outlook for the balance of the year. We’re not assuming things get materially better. We’re not assuming things get materially worse, and we don’t have any data that would suggest either of those directions. Michael Turits: And then just a quick follow-up. I know you talked about Atlas not running through deferred, but it was actually EA that was a little stronger this quarter. So what would maybe explain it? But why did we see that sequential decline in deferred revenue that we haven’t typically seen? Michael Gordon: Yes. I go back to a couple of thoughts. One, billings in general is not a super helpful metric for us. And I know we’ve said that for — really since going public, I guess, but it — increasingly, I think that, that is true. Certainly, as roughly two-third of the business is Atlas and as I mentioned, about 80% of that does not flow through deferreds, but also what that means is that a larger portion of what will run through deferreds is EA. And you saw EA grew more slowly on a year-over-year basis. And Q1 tends to be a seasonally slower quarter for new EA business. Michael Turits: Okay. All right. Mike and Dev. Thanks very much. Michael Gordon: Thanks. Operator: Thank you. Our next question comes from the line of Mike Cikos of Needham. Your question please, Mike. Michael Cikos : Hi, guys. Can you hear me all right? I apologize. The operator might have tuned… Brian Denyeau: Yes, all good, no problem. Michael Cikos : Awesome. If I could just follow up on Michael’s last question there. And one of the things I wanted to highlight, on that EA strength in Q1, I believe we were expecting EA to actually decline sequentially. And you guys delivered some slight outperformance there. And I guess, broadly if we look back over the last couple of quarters, EA has really outperformed expectations. Can you help us think through what is driving that EA outperformance; and I guess, with more specific color to Q1, where that outperformance came from? Dev Ittycheria: Yes. You have to — thanks for your question, Mike. You have to remember that one of our strengths is people can run MongoDB anywhere. And there’s still a large percentage of workloads and a lot of customers who still run a lot of important workloads on premise. I think the journey to the cloud is far from over. And the attraction of starting with MongoDB on premise is that they, customers then get optionality to — at some point in time, if they ever choose to move to the cloud, they don’t have to rewrite the application. It’s a much more graceful migration than having to replatform on to another technology when they want to move that workload to the cloud. So that is a very attractive part of the MongoDB value proposition. And beyond that, obviously, [indiscernible] is people value MongoDB’s ability with a flexible document model. The highly distributed and scalable platform just gives enormous benefits whether it’s on-prem or in the cloud. And so, that’s something that people also value, so we still see a lot of demand. Obviously Atlas is the biggest growth engine of our business, but there’s still a lot of customers who lean into EA. Michael Gordon: Yes. I would just add, we were expecting enterprise events to be down. And so the fact that it had a slight sequential gain, It was great to see and speaks to all the points Dev is underscoring. I would just remind people that, to the point, EA did have a very strong year last year. And so we do face very difficult compares throughout the year on enterprise advanced. And I just think it’s important to understand that because you can see the slower growth rate on EA shining through in Q1. Michael Cikos : No, that’s great. And I appreciate you reiterating the difficult comps there, Michael. I think, if I can just follow up with a two parter, maybe more for Dev here, but first, I know that you’re really citing the sharp execution from the go-to-market teams with respect to the number of new workloads or customer wins. I wanted to sanity check. Has relational migrator in any way played a role in landing these workloads and customers? That’s the first part. And the second part would be can you just give us an update on how the investments are tracking as far as enhancing features around time series and search capabilities on MongoDB. Dev Ittycheria: Yes. So on the first question, again while we do have customers, some customers, migrating relational workloads to MongoDB, I would not say relational migrator was a huge lever in making that happen. We’re very excited about the prospects of relational migrator and helping to reduce the cost and time to migrate relational apps to MongoDB, but we’re still early in that journey. With regards to time series and some of the other capabilities, we feel really good about the platform. Uptake is high. And we plan to do a pretty broad set of announcements at our MongoDB.local New York on June 22, so stay tuned for some announcements then. Michael Cikos : That’s great. I’ll see you guys in New York in June. Thank you very much. Dev Ittycheria: We look forward to it. Operator: Thank you. Our next question comes from the line of Firoz Valliji of Alliance Bernstein. Your question please, Firoz. Firoz Valliji: Hi. Thank you taking my question and congrats on a great quarter. Maybe, the first one on the consumption trends. So you have talked about revenue being linked to consumption. And we have seen consumption level come down over the past few quarters. Is it fair to assume that, in next couple of quarters, consumption level may reset at a new normal and then maybe resume growth from that level? Or is it hard to call bottom on the per-user consumption level? And then I have a follow-up. Thank you. Michael Gordon: Yes. So what I’d say is we have — I would just say, when we look at our outlook, there’s no reason, based on the data that we have, to assume things get materially better or materially worse. And that’s what’s included in our guidance for the balance of the year. And that’s consistent with what we thought in last quarter’s call, when we provided our initial view. And when we look at where we are now and the outlook, I think that’s the right view, so I don’t think that there’s any particular data that would point to things suddenly becoming better or becoming materially worse. Firoz Valliji: Got it. And so recently, we heard from another data platform [indiscernible] seeing some of the customers move data out of the platform to maybe economize on costs. Are you seeing anything similar? Or do you see pockets of workloads where that might occur on MongoDB’s platform as well? Dev Ittycheria: Yes. So if I understood your question, you’re saying are people moving — you’ve seen other companies have talked about customers moving data out of their platforms. We have not seen that trend. As we said, our consumption is tied to the application usage. And you have to remember, if customer builds an application, they want that application to be used, so if the application is not being used, in some ways, that’s not a good thing for a customer. That being said, our revenue is driven by usage, so when usage goes up, our revenue goes up. And when usage goes down, our revenue goes down, but it’s very linked to the underlying trends of that customer’s business, so the link to — from value to price is highly correlated. So we don’t have customers who are “trying to move data off Atlas”. That’s not a phenomenon that we see. Firoz Valliji: Perfect. Thanks. It’s very helpful. Operator: Thank you. Our next question comes from the line of Howard Ma of Guggenheim Partners. Your question please, Howard. Howard Ma: Thank you squeezing me in off the hour mark. Can you just quickly comment on whether or not relational migrations are contributing more to growth relative to greenfield plus subsequent expansion? And if you could frame that within the 2,300 net adds in the quarter too, that would be great. Thank so much. Michael Gordon: Yes, sure. Thanks for the question, Howard. No, I would say generally consistent is what we’ve seen. I wouldn’t particularly call out a particular spike up. Obviously there’s the China Mobile case study or vignette that Dev walked through, and you can always find those in every quarter. It continues to be a healthy part of the business, but I wouldn’t uniquely call that out as sort of particularly driving the results, although it’s obviously a big part of our long-term market opportunity. Howard Ma: Okay. Great. Thanks so much. Michael Gordon: Thank you. Operator: Thank you. I would now like to turn the conference back to Dev Ittycheria for closing remarks. Sir? Dev Ittycheria: Thank you. I just want to again just close by saying that we had another strong quarter of new business performance, while Atlas consumption rebounded from last quarter. We remain laser-focused on our North Star, which is acquiring new workloads from both new and existing customers. We do believe AI will increase the velocity of software development and, in turn, the number and sophistication of new applications developed. And we believe that this increase — this will increase demand for powerful and comprehensive platforms like MongoDB over the long term. So with that, we want to thank you for your time today. And we look forward to seeing you on June 22 at the Javits Center in New York City. Thank you. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Follow Mongodb Inc. (NASDAQ:MDB) Follow Mongodb Inc. (NASDAQ:MDB) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Salesforce, Inc. (NYSE:CRM) Q1 2024 Earnings Call Transcript May 31, 2023 Salesforce, Inc. beats earnings expectations. Reported EPS is $1.69, expectations were $1.61. Operator: Welcome to Salesforce Fiscal 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I would like to hand over the […] Salesforce, Inc. (NYSE:CRM) Q1 2024 Earnings Call Transcript May 31, 2023 Salesforce, Inc. beats earnings expectations. Reported EPS is $1.69, expectations were $1.61. Operator: Welcome to Salesforce Fiscal 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I would like to hand over the conference to your speaker, Mike Spencer, Executive Vice President of Investor Relations. Sir, you may begin. Mike Spencer: Good afternoon and thanks for joining us today on our fiscal 2024 first quarter results conference call. Our press release, SEC filings, and a replay of today’s call can be found on our website. With me on the call today is Marc Benioff, Chair and CEO; Amy Weaver, President and Chief Finance Officer; and Brian Millham, President and Chief Operating Officer. As a reminder, our commentary today will include non-GAAP measures. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings and press release. Some of our comments today may contain forward-looking statements and are subject to risks, uncertainties, and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions and other factors that could affect our financial results is included in our SEC filings, including our most recent report on Forms 10-K, 10-Q, and any other SEC filings. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. And with that, let me hand the call to Marc. Marc Benioff: Thanks, Mike, and thank you all for being on the call. On our last call in March, we told you about how Salesforce had radically accelerated our transformation to profitable growth. We share with you how we hit the hyperspace button across the key areas of our transformation, restructuring for the short and long-term, reigniting our performance culture by focusing on productivity, operational excellence, and profitability, prioritizing our core innovations that drive customer success, building even stronger relationships with you, our investors. Our Q1 results show that we continue to make great progress. As I said in March, we’re just getting started with this incredible transformation. We continue to scrutinize every dollar investment, every resource, and every spend and we’re transforming every corner of our company. Our progress over the last 5 months, while it’s very impressive and I cannot be more grateful to our entire team for their leadership. In fact, you may hear me say that several times on this call. Our transformation drove our Q1 financial results. As I said, on our last call, well improving profitability is our highest priority. As a result, we significantly exceeded our margin target for the quarter, delivering a non-GAAP operating margin of 27.6%, up 1,000 basis points year-over-year, incredible. And there’s no greater point of evidence to our transformation than this amazing result following the tremendous operating margin Q4. In Q1, we delivered 8.2 billion in revenue, up 11% year-over-year and 13% in constant currency. We had some amazing wins in the quarter with Northwell Health, Paramount, Siemens, Spotify, NASA, and the U.S. Department of Agriculture, among others. We delivered 4.5 billion in operating cash flow up 22% year-over-year. Our remaining performance obligation ended the quarter at 46.7 billion, an increase of 11% year-over-year. And through Q1, we’ve now returned more than $6 billion in share repurchases. As a result for the third quarter in a row, we ended the quarter with fewer shares year-over-year another amazing point of evidence on this incredible transformation. Now, turning to our financial guidance, while the economy is not in our control, our margins are, which is why we’re raising our margin target for the full fiscal year. For FY 2024, we’re raising our non-GAAP operating margin to 28%, an improvement of 550 basis points year-over-year and we remain confident that we’ll hit 30% non-GAAP operating margins in the first quarter of fiscal year 2025. We could not be more excited about our progress. We’re maintaining our fiscal year 2024 revenue guidance of approximately 34.5 billion to 34.7 billion over 10% projected growth year-over-year. I couldn’t be more proud of how our team has come together, stepped up, and delivered these results. I’ve also been asked numerous times this quarter by our investors and our customers, how we’re able to make so much progress so fast and deliver these incredible numbers? It’s very simple. It’s our Ohana culture. It’s our superpower. And again, I’d like to thank our amazing team for this incredible accomplishment. Last quarter, I told you of how our AI team is getting ready to launch Einstein GPT, the world’s first genitive AI for CRM. At TrailheadDX in March in front of thousands of trailblazers here in San Francisco, that’s exactly what we did. At its foundation, Einstein GPT is open and extensible. Customers can connect to multiple large language models, including from partners like OpenAI and Tropic and others. This is a whole new way to work for our customers, users, and trailblazers. Users on Salesforce are seeing new AI generative features across all of their most common workflows. And while many of these will be created by Salesforce developers, far more will be created by our incredible trailblazer ecosystem. For low code of trailblazers, Einstein GPT will provide a toolset to design generative AI apps built on [reusable props] [ph]. For pro code trailblazers, Einstein GPT will offer an extensible ecosystem of LLM providers with configurable grounding. And Einstein GPT is the combination of tremendous research and engineering by our world-class AI team, and I’d like to congratulate them on this amazing result. And one more amazing result, this week, Einstein, Salesforce Einstein that we’ve been talking about for so many years on these calls, will generate an incredible 1 trillion predictions for our customers, an incredible milestone on our AI journey. We saw more of the incredible work of our AI team at our New York City world tour this month when we demonstrated Slack GPT. Slack is a secure treasure trove of company data that generative AI can use to give every company and every employee their own powerful AI assistant helping every employee be more productive and transforming the future work. Slack GPT can leverage the power of generative AI to deliver instant conversation summaries, research tools, and writing assistance directly in Slack, and you may never need to leave Slack to get a question answered. Slack is the perfect conversational interface for working with LLMs, which is why so many AI companies are Slack first and why OpenAI, ChatGPT, and Anthropic Squad can now use Slack as a native interface. Slack is also delivering integrated sales and service experiences powered by native GPT to be the best interface for all of our Salesforce customers and there’s a lot more magic to come with Slack and generative AI. In this month, we also announced Tableau GPT. At our Tableau conference, we had over 8,000 in-person attendees. Tableau GPT simplifies data analysis for all of our users enabling anyone to inquire about their data using Einstein GPT and obtain AI driven insights at scale. The intelligence and automation that Tableau GPT provides is tremendously important in this area of hyperscale data that we’re all entering. The coming wave of generative AI will be more revolutionary than any technology innovation that’s come before in our lifetime or maybe any lifetime. Like Netscape Navigator, which opened the door, to a greater Internet, a new door has opened with generative AI and it is reshaping our world in ways that we’ve never imagined. Every CEO realizes they’re going to have to invest in AI aggressively to remain competitive and Salesforce is going to be their trusted partner to get them to do just that. Every CEO I’ve spoken with sees AI as a revolution beginning and ending with the customer, and every CIO I’ve spoken with wants more productivity, more automation, and more intelligence through using AI. A great example [of deploying] [ph] this technology is Gucci. We’re working with them to augment their client advisors by building AI chat technology that creates a Guccified [indiscernible] service, well, incredible new voice, amplifying brands, storytelling and incremental sales as well. It’s an incredibly exciting vision for generative AI to transform which was customer service into now customer service, marketing, and sales, all through augmenting Gucci employee capabilities using this amazing generative AI, but we can only do all of this with trust. Our customers need to understand where their data is going and they must be able to maintain data integrity and access and privacy controls. Large customers must maintain data compliance as a critical part of their governance, while using generative AI and LLMs. This is not true in the consumer environment, but it is true for our customers, our enterprise customers who demand the highest levels of this capability. Where customers who for years have used relational databases as the secure mechanism of their trusted data, they already have that high level of security to the row and sell level. We all understand that. And that is why we have built our GPT trust layer into Einstein GPT. The GPT trust layer gives connected LLM secure real time access to data without the need to move all of your data into the LLM itself. It’s an incredible breakthrough for our customers and working with LLMs in a secure and trusted way. While they’re using the LLMs, the data itself is not moving and being stored in the LLM. That is what our customers want. They can be sure that the customer data is where they know it is, where they can be assured that it is for their compliance and for their governance. And I cannot be more excited about our AI CRM and delivering on this future of trusted AI through our new Salesforce GPT trust layer. Finally, I can’t talk about AI without talking about the success of our data cloud. Data Cloud is the heart of customer 360 and now our fastest growing cloud ever. Data Cloud created a real-time Intelligent Data Lake that brings together and harmonizes all of our customers’ data in one place. In Q1, we closed one of our largest healthcare industry deals ever with Northwell Health, New York’s largest private employer. They have 21 hospitals, 900 patient – 900 outpatient facility or ambulatory facilities, and their own medical school all in New York. By integrating DataCloud with Health Cloud, Tableau, MuleSoft, while our entire customer 360, Northwell is improving patient care by bringing together its vast data resources to create a single source of truth and using AI to govern data, use, and maintain regulatory compliance. This is the future of our customers and our industry. It’s AI, plus data, plus CRM. And of course, this AI revolution is just getting started, which is why we’ve invested 250 million in our new AI venture fund to fuel startups developing our trusted generative AI vision. We’ll be talking more about this at our AI Day event on June 12th in New York City, and I hope that you’ll join me there. To wrap up, we’re transforming every corner of our company. We’re laser focused on our short-term and long term restructuring, improving productivity and performance, prioritizing our core innovations and delivering for our shareholders. As a result, productivity is up, profitability is up, revenue is up, cash flow is up, and we dramatically increased our margin guidance. And just like the cloud, mobile and social well, AI, this revolution is a new innovation cycle. It’s going to be a new spending cycle as well, which is going spark a massive new tech buying cycle. And we’ve led the industry through each of these cycles and I couldn’t be more excited for our future as we continue on a path to our long-term goal to make Salesforce the largest most profitable enterprise software company in the world, and the number 1, safest and most trusted AI CRM. With that, Brian, I’ll turn it over to you. Brian Millham: Thanks, Marc. As Marc said, we’re continuing our transformation across every part of our company. Our focus on performance culture and operational excellence contributed to our strong first quarter results. Since our last call, we’ve removed layers to get closer to our customers and to complexity out of our business to help us accelerate through the rest of the year. We clearly defined our return and remote office guidelines for our employees, and it’s been great to get together even more in our offices and with our customers around the globe. I had the chance to visit [many of our office] [ph] this quarter and the energy is incredible. As you heard from Marc, our transformation plan continues to deliver top and bottom line growth as we help our customers increase productivity, drive efficiency, and become AI First Companies. But we’re still operating in an uncertain macro environment. Customers continue to scrutinize every deal, and we see elongated deal cycles and deal compression, particularly in our more transactional revenue streams like SMB, create and close, and self-serve. Also in Q1, our professional service business started to see less demand for multi-year transformations, and in some cases delayed projects as customers focused on quick wins and fast time to value. But for this reason, we saw strong performance from some of our fast time to value efficiency focused products with sales performance management, sales productivity, and digital service all growing annual recurring revenue above 40% in the quarter. As customers look to reduce complexity and achieve faster time to value, they’re expanding their adoption of Salesforce clouds, a key growth strategy for us. The world’s most recognized companies are relying on Salesforce more than 90% of the Fortune 100 used Salesforce and they average more than five of our clouds. This is why we’re so excited about our AI plus data plus CRM strategy. As Marc explained, we’re building Einstein GPT and Data Cloud into every cloud and our Customer 360 and we’re perfectly positioned to help our customers harness the phenomenal power of AI. Our core offerings remain resilient. In Q1, 9 of our top 10 deals included sales, service, and platform. Industry clouds continue to be a tailwind to our growth, and we saw momentum with great customers like Northwell, USDA Rural Development, and NASA who we showcased at World Tour DC in April. Once again, eight of our industry clouds grew ARR above 50%. I met with hundreds of customers in the quarter and we hosted 700 meetings in our innovation centers with our top customers and prospects. Generative AI is top of mind for all of them. As they look to benefit from the intelligence automation and cost savings that Salesforce is uniquely positioned to deliver. We’re seeing tremendous appetite for our new generative AI products starting with Einstein GPT, Slack GPT, and Data Cloud. Our generative AI products will be a catalyst for our future growth. As Marc mentioned, Data Cloud continues to be one of our fastest growing products and we had great wins in the quarter with companies like Major League Soccer and Giorgio Armani. Armani uses Data Cloud to deliver hyper personalized online and in-store experiences, real time engagement, and curated shopping recommendations. We can see how Data Cloud and Einstein GPT are going to create experiences that weren’t possible before and really drive growth. In an environment where customers are optimizing their current [tech stacks] [ph], integration and automation continue to be efficiency drivers. MuleSoft again delivered strong results with wins at Siemens, [Cinnova] [ph], and Vodafone. For the first time, Salesforce was ranked number 1 in integration by market share in the latest IDC software tracker, a great testament to our MuleSoft team. Tableau is unleashing the power of our Data Cloud, unlocking customer data and delivering actionable real time insights. In the quarter, we had great wins at customers like Union Bank of the Philippines, Discovery Financial Service, Moderna, ADT Solar, and Alaska Air. We’ve made great investments to reaccelerate Tableau, including new leadership along with product innovations like Tableau GPT, and revenue intelligence, now one of our fastest growing add-ons. I’m really encouraged by the Slack team who has created an ambitious product roadmap with generative AI at the center. In Q1, we saw amazing momentum with customers like the California Office of Systems Integration, Paramount Global, Breville, and OpenAI, and rolled out an AI ready platform, Slack Canvas, and app integrations with ChatGPT in Anthropic’s Claude. Overall, I could not be more thrilled with our offerings and the market position, especially as it relates to delivering on the promise of AI. We’re looking forward to continuing the energy and momentum at our AI day in just a couple of weeks. I’m very proud of the teams and of our partners. Their focus on customer success continues to be outstanding. As Marc said, our productivity is up, profitability is up, revenue is up, cash flow is up. We’re increasing our margin guidance and sales forces leading the way as the number one AI CRM. Now, over to you Amy. Amy Weaver: Thank you, Brian. As Marc said, a key part of our transformation to profitable growth is short and long-term restructuring of the company. We have now largely completed the restructuring announced in January, and we’re completing our comprehensive operating and go to market review. As we shift to the implementation phase, we’re executing against three key pillars, optimization of resources and organization structure, product investment prioritization, and operational rigor. We continue to view sales and marketing and G&A as the primary drivers of leverage. While R&D remains an important investment area. Our profitable growth framework, disciplined capital allocation strategy, and opportunity to drive shareholder value are represented in our actions and in our results. Now, turning to our results for Q1’s fiscal year 2024, beginning with top line commentary. For the first quarter, revenue was 8.2 billion, up 11% year-over-year or 13% in constant currency with the beat primarily driven by strong momentum in MuleSoft, and more resilient core performance. Geographically, we saw strong new business growth in parts of EMEA and LatAm, specifically Switzerland, Italy, and Brazil, while we experienced continued pressure in the United States. In Q1, the Americas revenue grew 10%, EMEA grew 12% or 17% in constant currency. And APAC grew 16% or 24% in constant currency. From an industry perspective, manufacturing, automotive, and energy all performed well, while high-tech and financial services remained under pressure. Q1 revenue attrition ended the quarter at approximately 8%. As expected, we saw a modest increase in Q1. Partially attributed to the inclusion of Tableau in the metric. We also noted some incremental weakness in our marketing and commerce attrition. As Marc said, non-GAAP operating margin finished strong in Q1 at 27.6%, driven by our disciplined investment strategy and accelerating our restructuring efforts. Q1 operating cash flow is 4.5 billion, up 22% year-over-year. This includes a 910 basis points headwind from restructuring. Q1 free cash flow was 4.2 billion, up 21% year-over-year. Turning to remaining performance obligation or RPO, which represents all future revenue under contract. This ended Q1 at 46.7 billion, up 11% year-over-year. Current remaining performance obligation or CRPO, ended at 24.1 billion, up 12% year-over-year in both nominal and constant currency, ahead of expectations driven by strong core performance, partially offset by continue, create, and close softness. And finally, we continued to deliver on our capital return commitment. In Q1, we returned 2.1 billion in the form of share repurchases bringing the total returned to more than 6 billion since the program was initiated last August, representing more than 38 million shares. Before moving to guidance, I wanted to briefly touch on the current macro environment that Brian discussed. The more measured buying behavior persisted in Q1. And as Brian noted, in Q1, we started to see weakness in our professional services business. We expect these factors to persist, which is incorporated in our guidance. Let’s start with fiscal year 2024. On revenue, we are holding our guidance of 34.5 billion to 34.7 billion, representing over 10% growth year-over-year in both nominal and constant currency. The strength in our Q1 performance is offset by the pressure in our professional services business previously discussed. For fiscal year 2024, we are raising non-GAAP operating margin guidance to 28%, representing a 550 basis points improvement year-over-year. This guidance increase is driven by the acceleration of our restructuring efforts and also includes reinvestment in targeted areas, namely in R&D. I’m proud of our progress and remain confident in our trajectory as we progress towards our 30% non-GAAP operating margin target in Q1 2025. We also remain focused on stock based compensation and continue to expect it to improve this year to below 9% as a percent of revenue. Before moving to EPS, on restructuring, we now expect the charges in FY 2024 to come in towards the higher end of the range previously provided in our last earnings release. As a result of these updates, we now expect fiscal year 2024 GAAP EPS of $2.67 to $2.69, including estimated charges for the restructuring of a $1.11. Non-GAAP EPS is now expected to be $7.41 to $7.43. And we are raising our fiscal year 2024 operating cash flow growth to be approximately 16% to 17%, which now includes a 14 point to 16 point headwind from restructuring. As a reminder, we will see an increase in our cash taxes in fiscal 2024 as we draw down our remaining net operating losses. CapEx for the fiscal year is expected to be slightly below 2.5% of revenue. This results in free cash flow growth of approximately 17% to 18% for the fiscal year. Now to guidance for Q2. On revenue, we expect $8.51 billion to $8.53 billion, growth of approximately 10% in both nominal and constant currency. CRPO growth for Q2 is expected to be approximately 10% year-over-year in nominal and constant currency. Our guidance incorporates the momentum of our execution in Q1, offset by the persistent measured buying behavior and a decline in professional services fixed fees contribution. The professional services impact represents approximately a 1 point headwind to growth. For Q2, we expect GAAP EPS of $0.79 to $0.80 and non-GAAP EPS of $1.89 to $1.90. And as we focus on shareholder return and disciplined capital allocation, we continue to expect to fully offset our stock based compensation dilution through our share repurchases in fiscal year 2024. In closing, we continue to transform every corner of the company. We are hyper focused on delivering the next wave of innovation led by Data Cloud and Einstein GPT. And Salesforce is well-positioned to remain the market leader in this new AI first world. We are committed to delivering long-term shareholder value, and I personally want to thank our shareholders for their continued support. Now, Mike, let’s open up the call for questions. Mike Spencer: Thanks, Amy. Operator, we’ll move to questions now. I ask that everyone only ask one question in respect for others on the call. In addition, I’d like to introduce Srini Tallapragada, our Head of Engineering, who will be joining us for Q&A today. With that Emma, let’s move to the questions. Q&A Session Follow Salesforce Inc. (NYSE:CRM) Follow Salesforce Inc. (NYSE:CRM) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Your first question today comes from the line of Kirk Materne with Evercore. Your line is open. Kirk Materne: Hi, yes. Thanks very much and congrats on a good start to the year. Marc, you’ve been through a number of cycles from a technology perspective. I was just kind of curious where you think we are in terms of people investigating AI versus when the spending cycle around it might kick-in? Can you just give us an idea of, you know, sort of your thoughts on that and really just the opportunity for you all to monetize AI with your product base? Thanks. Marc Benioff: Well, I think this is the absolute question of the day, which is we are about to enter an unbelievable super cycle for tech and everyone can see that. This is an incredible opportunity for not only Salesforce, but our entire industry. I mean, perhaps only a year ago or less than a year ago, no one on this call even knew what GPT was. Today, ChatGPT is the fastest growing consumer product of all time, and has transformed many, many lives. It’s definitely not just the technology of this lifetime, but maybe any lifetime. It’s an incredible technology. And every company is going to have to transform because every company is going to have to become more productive or automated more intelligent through this technology to be competitive with other companies. And just yesterday, I’m in a room here at the top of Salesforce Tower on the 60th floor, and we have the CEO of a very large bank here. And like every other sales call I’ve made in the last quarter, there’s only one thing that customers want to talk about, and that’s artificial intelligence and specifically, generative AI. Of course, we have been a leader in this area with Einstein, more than 1 trillion transactions delivered this week, but these are primarily predictive transactions built on machine intelligence, machine learning, and deep learning. But in 2018, deep learning evolved and became much more sophisticated and became generative as these neural networks expanded their capabilities and also the hardware went to another level as well. So, now we have this incredible new capability. It’s a new platform for growth, and I couldn’t be more excited. But yesterday, there were many questions from my friend who I’m not going to give you his name because he’s one of the – the CEO of one of the largest and most important banks in the world. And I’ll just say that, of course, his primary focus is on productivity. He knows that he wants to make his bankers a lot more successful. He wants every banker to be able to rewrite a mortgage, but not every banker can, because writing the mortgage takes a lot of technical expertise. But as we showed him in the meeting through a combination of Tableau, which we demonstrated and Slack, which we demonstrated, and Salesforce’s Financial Services Cloud, which he has tens of thousands of users on, that banker understood that this would be incredible. But I also emphasize to him that LLMs, or large language models, they have a voracious appetite for data. They want every piece of data that they can consume, but through his regulatory standards, he cannot deliver all that data into the LLM because it becomes amalgamated. Today, he runs on Salesforce, and his data is secure down to the row and cell level. He knows that readers don’t block [riders] [ph] that there’s all types of security provisions and regarding who can see what data about what account or what customer. And when you put it into an LLM, those permissions are not understood. So, that is a very powerful moment to realize that the way that LLMs operate is in a way state where they’re kind of consuming all this data and then giving us that information back out, well, that Salesforce’s opportunity. That’s why we built this GPT trust layer. And through the GPT trust layer and rebuilding all of our apps, including Slack and Tableau, but as we demonstrated him yesterday, a new Sales Cloud, a new Service Cloud, a new marketing cloud, and what we’ll show on June 12 in New York City, a complete reconceptualization of our product line. What that means for this customer and for every customer is that they have an opportunity to transform their business. And for Salesforce, that also means an opportunity to transform ourselves and for our industry, a new super cycle where every company will have to transform to be AI first. Operator: Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Elizabeth Porter: Great. This is Elizabeth Porter on for Keith Weiss. Thanks for the question. I wanted to ask on the potential disruption from rebooting the sales enablement process. Are we past the point of seeing disruption or could that be a future risk? And if so, how is it included in guidance. The CRPO guidance for 10% looks like a bit of a slowdown despite the easier comp. And Amy, you called out pro services a one-point headwind. But just any other factors we should keep in mind that may create a challenge over the next couple of months? Thank you. Marc Benioff: Well, I’ll tell you that. I think that as you know, in Q1, we went through tremendous disruption with human resources in our company, and it was very disruptive to all of our Ohana. And I’m so grateful to them for how they supported the whole company, all the customers and themselves during what was probably one of the most disruptive quarters that I’ve seen and yet we delivered these incredible numbers and this incredible technology vision going forward. In terms of enablement of the sales organization, its ability to kind of move forward, that is not, I would say, a material part of what happened in the quarter or what’s going to happen for the year. Our sales organization remains with a very high level of productivity, but let me turn it over to Brian to speak directly to his strategy on delivering the year. Brian Millham: Yes, Marc, thank you. I appreciate it. And Elizabeth, thank you for the question. I think you’re referencing some comments we made on previous calls about enablement being an important strategy for us as we saw during the pandemic, not as many of our AEs and SEs and leaders were as enabled as we would like. We’ve made those changes, and we’ve really invested in the time to make sure our AEs understand our product portfolio, the entire customer 360, and we’re on sort of the next generation of enablement. As Marc just talked about, this new AI wave is going to create a huge opportunity for us. And we need to make sure that we’re investing in the enablement to bring our teams along. It’s been a very short window around this innovation, and we’ve got some work to do on this, but we’re very, very excited with our path forward, our position in the market. All that we’re doing with our customers, the demand we’re feeling from our customers. Marc mentioned it, and I had the same experience, every CEO in the world is talking to us about generative AI right now, and we are investing heavily to make sure our account executives, our sales teams, in fact, the entire company is able to articulate our value proposition to our customers. So, Amy, I don’t know if you have any further comments there? Amy Weaver: Sure. Elizabeth, you mentioned CRPO in professional services, so let me jump in on that. For our guide for this next quarter, we are seeing some pressures from the macro situation and then also specifically from professional services. And there’s a bit of a nuance with ProServ that I want to make sure people understand. So, if you back up, our customers can contract for professional services in two ways, either on a time and materials basis, which is typically used for smaller projects or on a fixed fee, kind of milestone basis. For purposes of CRPO, we only include projected revenue from fixed fee deals. One of the things that we are seeing right now is not only a professional services as a whole same pressure, but more customers are choosing to contract on a time and materials basis, which is not included in our CRPO. So, as a result, we’re seeing, kind of a double pressure there. And I’m expecting a full one-point headwind to CRPO for the quarter from professional services. Mike Spencer: Thanks Elizabeth. Emma, let’s move to the next question please. Operator: Your next question comes from the line of Brad Sills with Bank of America. Your line is open. Brad Sills: Oh, wonderful. Thanks. I wanted to ask a question to Brian, I think, here on the efforts here to improve productivity. You mentioned removing some layers here. My question is, we think of all these actions that you’re taking as drivers of margin expansion, but are you starting to see some early traction here on the sales productivity front, such that perhaps that’s driving some upside here across the business, perhaps larger deals now that you’re seeing coming out of the field and pipeline and some of the deal closure? Thank you so much. Brian Millham: Thanks, Brad, for the question. I really appreciate it. As you know, we’re operating in a constrained environment right now. And so, we are really focused on this productivity measure and metric for our organization right now, investing heavily, as I mentioned earlier, and the enablement part of our organization. Also looking at other ways to drive productivity. And one of the things that we’re talking quite a bit about right now is pricing and packaging, bringing together logical products that we can be selling in a single motion versus our go-to-market, which is largely aligned by product., how do we focus on a larger average deal size for every transaction, and so big investments on that front, really a strong focus on productivity as it relates to moving people up market as well. We’re thinking about self-serve in the bottom end of our market. How do we drive a self-serve motion, automated motion at the low end of our market to bring our account executives upmarket to drive higher productivity in the sales organization? So clearly, a big motion for us right now. Feel very good about our big deal motion. Actually in Q4, we saw some – sorry, in Q1, we saw some very good big deal execution from the team. That is not really an area that has held us back. We feel very good about our ability to transform companies and transact these large businesses. It really is the velocity business that has held us back a bit on our create and close some of the SMB transactions. So, we have a clear focus in this area to drive the productivity with our plans going into Q2 and beyond into Q4. Mike Spencer: Thanks, Brad. Emma, next question please. Operator: Your next question comes from the line of Brent Thill with Jefferies. Your line is open. Brent Thill: Amy, regarding Americas, that was a pretty large decel, one of your slowest growth quarters, I think, ever in Americas. The rest of the world did decel, but maybe not quite as the magnitude of the Americas. Can you just speak to what happened there in that region? Amy Weaver: Sure. So thanks, Brad, for the question. The Americans did see a deceleration, a 10% year-on-year revenue growth, compared to 17% in EMEA and about 24% in nominal APAC. We are continuing to see most of the pressure in North America. There were some real pockets of acceleration in EMEA and in LatAm, particularly in Switzerland, I think Brazil, Italy. So, we are seeing some good things, but North America has taken the brunt of the deceleration. Brian, do you want to come in and see if you can address that in more detail? Brian Millham: Sure. Yes. I think when we think about our business from an industry perspective, we have a very nice footprint of our great technology companies and financial services company, both of which were a bit slower than we would have liked in the Americas in Q1. And so, as we think about the all-in size of our Americas business, those industries felt a little bit more of the economic headwinds in the quarter in Q1. And so, I think a bit of a slowdown from that perspective is a result you’re seeing in the Americas business. Mike Spencer: Thanks, Brent. Emma, next question please. Operator: Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open. Mark Murphy: Thank you very much. And I’ll add my congrats. So Marc, it feels like the tech and software industry has had a recession without the broader economy being in a recession quite yet, and that’s very unusual. Do you think with all the purging and optimizing of IT budgets, which is already taking place, plus Salesforce’s headcount optimization already being underway that perhaps the next recession might actually be more manageable or easier to navigate than what you had seen in some of the prior cycles? Marc Benioff: Well, I think that this is a great question. And I tried to address it on the last call. I just really think you have to look at 2020, 2021 was just this massive super cycle called the pandemic. I don’t know if you remember, but we had a pandemic a couple of years ago. And during that, we saw tech buying like we never saw. It was incredible and everybody surged on tech buying. So, you’re really looking at comparisons against that huge mega cycle. And that is what I think is extremely important to understand, the relative comparisons. And that is where my head is at, which is I am constantly comparing against what happened in 2021, but also looking at 2020 and 2019. That’s a little bit different than 2008 and that’s a little bit different than 2001. We didn’t exactly have these huge mega cycles that kind of we were exiting. And I – that’s also what gives me tremendous confidence going forward and what we’re really seeing is that customers are absorbing the huge amounts of technology that they bought. And that is about to come, I believe, to a close. I can’t give you the exact date, and it’s going to be accelerated by this AI super cycle. Mark Murphy: Thank you. Mike Spencer: Thanks, Mark. Emma, next question please. Operator: Your next question comes from the line of Brent Bracelin with Piper Sandler. Your line is open. Brent Bracelin: Good afternoon. I wanted to circle back to the generative AI discussion, if we could. I totally understand how large enterprises are turning to Microsoft, given the productivity tools and suite that they have, but as you start to engage with customers, what’s resonating relative to the Salesforce Gen AI journey? Is it the data layer and Customer 360 messages resonating? Is it the app layer around sales automation functionality that you’re going to offer? Just double quick on what customers are coming to Salesforce and engaging the you around some of the new things that we’ll hear about it sounds like in June. Marc Benioff: Well, I think that when you look at our artificial intelligence strategy, which we’re talking to the largest, most important companies and governments in the world, it has to be architected around security. It has to be architected around compliance, around trust. It has to be architected around governance. And this is very important. And of course, we’re also architecting it around being open. That is, we’re working with many AI companies to provide the best solutions for our company. Of course, we have a tremendous relationship with OpenAI. We also just invested in Anthropic [indiscernible] many of these companies. But I think ultimately, this is going to be a solution that enterprise customers are going to come in and make sure that their data is protected. And it’s also protected down at the user level. And Srini, do you want to come in and talk about exactly what we’re doing to make sure that we’re delivering the best possible solutions for our customers for AI? Srini Tallapragada: Yes, Marc. So, I think I met about 70 customers in the last quarter. And like Marc was saying, the only conversation everybody is interested is on – and while everybody understands the used cases, they’re really worried about trust. And what they are looking for us is guidance on how to solve that. For example, so we are doing a lot of things as the basic security level, like we are really doing tenant level isolation coupled with zero retention architecture, the LLM level. So the LLM doesn’t remember any of the data. Along with that, they – for them to use these used cases, they want to have – they have a lot of these compliances like GDPR, ISO, SOC, [Quadrant] [ph], they want to ensure that those compliances are still valid, and we’re going to solve it for that. In addition, the big worry everybody has is, people have heard about hallucinations, toxicity, bias, this is what we call [model trust] [ph]. We have a lot of innovation around how to ground the data on 360 data, which is a huge advantage we have. And we are able to do a lot of things at that level. And then the thing which I think Marc hinted at, which is LLMs are not like a database. These intra-enterprise trust, even once you have an LLM, you can’t open the data to everybody in the company. So, you need ability to do this – who can access this data, how is it doing both before the query and after the query, we have to build that. And then we have to be not only open, but also optimized. We are running an open – the way we’ll run is, we’ll run like a model [indiscernible] because one of the things everybody has to watch out is it’s great, but what about the cost to serve, not all models are equal. So, we are going to run this and pick very – we are going to pick a very cost-optimized curve, so the value is very high. And our Salesforce AI research has a lot of sales for state-of-the-art models and industry cases, which we are optimizing to run at very low cost and high value. Add to that, we’ve got the Trailblazers platform, which allows low code, high code, and many other things, and we’re going to optimize sort of jobs to be done for each industry and jobs. That’s really what they’re looking for because they have been using our AI platform. Like Marc mentioned, we already do 1 trillion transactions per day. And by the way, the data cloud, just in a month, we are importing more than 7 trillion records into the data layer, so which is a very powerful asset we have. So, coupled with all of this is what they are looking for guidance and how we think we can deliver significant value to our customers. Marc Benioff: Srini, I want to ask you a question. In January, you published a paper in nature from your research team, which was called large language models, generating functional protein sequences across diverse families, and you really showed something amazing, which was that deep learning language models have shown this incredible promise that you just articulated in various biotechnological applications, including protein design, engineering, and you also described very well one of our models that we’ve created internally, ProGen, which was a language model that can generate protein sequences with predictable function across large protein families. I was very impressed with that. And the entire research team deserves a huge amount of congratulations. So, when you look at that, especially dramatically and semantically correct natural language sentences for diverse topics or how you’re going to use that inside our platform against other models that you’re seeing like Llama, OpenAI’s model, Anthropic and others, when will Salesforce use our own models like [CoGen] [ph], ProGen, T-code, our lit model, when will we use an outside commercial model like an OpenAI or an Anthropic? And when will we go to an open source model like we’ve seen emerge so many of those, including like Llama. Srini Tallapragada: Yes. I think you hinted something very important. I think, as you know, Marc, we have – our I research team is one of the best-in-class model – state-of-the-art models from different areas. The way we are thinking of it is like anything else, where the world is going to go, which we strongly believe is going to be multiple models. And depending on the used case, you will pick the right models, which will provide you the value at the lowest cost. Where we have to run with highly regulated industries, where the data cannot leave the trust boundary or where we have significant advantage, where we can train on industry-specific data or Salesforce-specific – 360-specific data, like, for example, our FX model are helping our customers implement or our flow, we will use our internal model. Where we need more generated image models or something where it needs public image databases, we may use a coherent or an OpenAI. It depends on the use case and which is why, at a given request, a secure trusted gateway will decide smartly which is the best used case, which is the model, and we always keep running the [indiscernible], which is what I mean. So today, one particular model may be good. Tomorrow, something else will come, and we’ll behind the team flip it, but our customers don’t need to know that. We will handle all of it. We’ll handle the model trust. We’ll handle all the compliances and all behind the scenes. And this is always what we promise to our customers, we’ll always future-proof. That’s the Salesforce promise to our customers so that they can focus on the business used cases. Marc Benioff: So just one last follow-up question. You’ve described very well the GPT trust layer, which I think is going to be a significant amount of value added that we’re going to provide to our customers that’s going to be quite amazing. And then you develop these specific grounding techniques, which are going to allow us to keep our customers’ data safe and not be consumed by these voracious large language models, which are so hungry for all of our customers’ data. What is going to be the key to actually delivering this now across regulated industries? Srini Tallapragada: I think the key is innovations we are doing, which people will see starting next month is around what we call [from generation] [ph] and grounding. These are techniques, which we’ll have to do, but it will work only because we have – all of this as based on underlying data. We have the Data Cloud, where we have all the 360 data, which is there. So, we’re able to ground these models and do it. So, there are a lot of other techniques, which are very technical, which we put it on our block. But that’s the innovation that we’re doing. And you have to remember that Salesforce also is a metadata model. So, we have a semantic understanding of what our customers are trying to do. We’re going to leverage the Metadata platform and do this grounding automatically for our customers, of course, while keeping the trust. That’s the base line. Marc Benioff: Absolutely. Thank you so much, Srini. Mike Spencer: Emma, next question please. Operator: Your next question comes from the line of Raimo Lenschow with Barclays. Your line is open. Raimo Lenschow: Hi, thank you. Question for Amy or Brian maybe more. The improvement in profitability or the raised guidance for profitability and cash is that all timing? Can you talk a little bit about that? Is it just timing or are there other factors we should consider in here? Thank you. Amy Weaver: So Raimo, well I’ll start and then I can turn it over to Brian for a little bit more color. So, in terms of the great Q1 that we just saw, really pleased to see us coming in at 27.6% and also really pleased about the 28% – [the raise] to 28% for the full-year. What really drove the 27.6 was two things. It were the actions that we took that we announced in January with the restructuring. Executing on that, as well as having a very disciplined reinvestment strategy, and that led to that. And that’s also where we’re going to see this going through the rest of the year, driving the expansion 28% and then also putting us on track for the 30% margin in Q1 of next year. As I look through overall at transformation, I would really divide it into two stages benefits that we’re getting from that initial transformation. And again, that’s what you’re seeing in Q1 and this year. And then the second stage, which is really as we’ve been going through this comprehensive operating and go-to-market review, that review is going to enable the second phase of our transformation, and that’s something that’s going to be ongoing and long-term over the next few years. You’ll see benefits to our margin in outer years beyond FY 2024. Brian, anything you would add? Brian Millham: Yes, thanks for the question. When we think about longer-term structures, we obviously took the action in Q1. But longer term, we’re looking at things like how do we leverage comp plan redesign to drive better efficiencies in our organization going forward. How do we continue to look at self-serve at the low end of the market to drive better efficiencies in our organization. So, resellers as a potential investment that we’ll make in emerging markets is long-term leverage on the efficiency gains. So lots of things that we’re doing that will be in sort of the Phase 2 oriented around process improvement and systems improvement. And again, as I mentioned, top plan design that will drive better efficiencies in the organization. Mike Spencer: Thanks, Raimo. Emma, let’s go to next question please. Operator: Your next question will come – is from Karl Keirstead with UBS. Your line is open. Karl Keirstead: Okay. Great. I’ll direct this to Amy as well. Amy, congrats on that margin improvement. I’ve got a two-parter both related to margins. First, what is the timing of the receipt of that Bain operational review that might ostensibly kick off the second phase of cost cutting? And then secondly, you and Brian talked about this reinvestment in R&D and investing heavily around AI. I’m wondering if those planned investments are greater than you anticipated when you initially set the guidance three months ago, such that you need to run a little bit harder on OpEx management to offset it and keep delivering on your stated margin targets? Thanks so much. Amy Weaver: Great. Thanks, Karl. So first on the timing. As I mentioned, we’ve been doing this end-to-end comprehensive operating and go-to-market review. The entire company has been involved in that. There’s really no stone unturned. We’re getting close to the end of that process, and then we will be moving into the implementation. You’ll be hearing more about that in future quarters. Turning to reinvestment. We are keeping a very close eye on reinvestment, very excited particularly about artificial intelligence. So, much of what Srini has been talking to you about, I don’t view this as a greater investment from what we were looking at earlier. We’re really going along with our current plans. We are looking at operating expenses management, and we’re looking at it seriously every day, but that’s not something that has changed. Mike Spencer: Thanks, Karl. Operator, we’ll move to our last question now, please. Operator: Our last question comes from the line of Kash Rangan with Goldman Sachs. Your line is open. Kash Rangan: Hi, thank you very much team. Congratulations on putting up terrific operational results, and a good cash flow, good margins, et cetera. Marc, you talked about a super cycle of buying and technology in the years ahead. Can you just parse for us, if you don’t mind, what is new about generative AI as far as Salesforce as opportunities are concerned, netting out against what Einstein has been able to accomplish for you – for the company? And how does it show up in the product in terms of productivity? What are the scenarios by which customers can experience this amazing productivity? And how can you charge more for delivering that, kind of value? Thank you so much. Marc Benioff: Well, thanks, Kash, for giving me the opportunity to talk about our AI vision, and I’m also going to ask Srini again to fill in some of the details. But I think it started to occur to me – I think folks know, I have – my neighbor is Sam Altman is the CEO of OpenAI, and I went over to his house for dinner, and it was a great conversation as it always is with him. And he had – he said, Oh, just hold on one second, Marc, I want to get my laptop. And he brought his laptop out and give me some demonstrations of advanced technologies that are not appropriate for the call. But I did notice that there was only one application that he was using on his laptop and that was Slack. And the powerful part about that was I realized that everything from day 1 at OpenAI have been in Slack. And as we kind of brainstormed and talked about – of course, he was paying a Slack user fee and on and on, and he’s a great Slack customer. We’ve done a video about them, it’s on YouTube. But I realize that taking an LLM and embedding it inside Slack, well, maybe Slack will wake up. I mean there is so much data in Slack, I wonder if it could tell him what are the opportunities in OpenAI? What are the conflicts, what are the conversations? What should be his prioritization? What is the big product that got repressed that he never knew about? And I realized in my own version of Slack at Salesforce, I have over 95 million Slack messages, and these are all open messages. I’m not talking about closed messaging or direct messaging or secure messaging between employees. I’m talking about the open framework that’s going on inside Salesforce and with so many of our customers. And then I realized, wow, I think Slack could wake up, and it could become a tremendous asset with an LLM consuming all that data and driving it. And then, of course, the idea is that is a new version of Slack. Not only do you have the free version of Slack, not only do you have the per user version of Slack, but then you have the additional LLM version of Slack. And for each one of our products in every single one of our categories, there’s that opportunity to upsell and cross-sell into the next version of generative AI, not just with Slack, but you can also imagine, for example, even with Salesforce, the ability as we’re going to see in June, that many of our trailblazers are amazing low-code, no-code trailblazers, but soon they’ll have the ability to tap in to our LLMs like ProGen and Cogen that have the ability to code for them automatically. They aren’t coders. They didn’t graduate computer science degrees. And if they need to write a sophisticated Apex code or other code, it can be a challenge for them, but because you know what is there only 8 million or 10 million coders in the whole world – but now with LLMs, everybody can start to code. That’s an amazing productivity and augmentation of everybody’s skill set. And that’s a great way to look at what could happen, for example, with our core products, but even with Tableau, which has tremendous programmatic engine as well or even MuleSoft, which is a highly programmatic product that then coupled with an LLM can have the ability to go forward. But of course, those LLMs are highly trained models for those specific types of code, and then that is something that we would add on either through partnership or through our own LLM, as Srini described, it’s another layer of value that we can provide to our customers. In all cases, customers are going to be more productive. They’re going to be more automated, and they’re going to be more intelligent. And as we look at some of the examples that we’ve given like at the New York World Tour, you saw our Marketing Cloud do something very cool that it couldn’t do even just 6 months ago. It segmented the database on its own. It wrote an e-mail on its own. Of course, it required editing, and it also built a landing page on its own. That was amazing. Or as we saw at the Tableau conference, we saw Tableau being able to create its own visits or visualizations that was incredible. And what we saw at our Trailhead DX, we saw Einstein GPT which started to do these amazing next-generation things. And I think in each of these areas, we can offer more value, but we must do it in the auspices of trust, data integrity and governance. And that is what we have been working on now for a considerable amount of time. Of course, we’ve led – we have always wanted to be the Number 1 AI CRM. And we are, if you look at Einstein’s transaction level, I think that that’s enough evidence right there. But I think this idea of generative AI, this starts to reconceptualize every product and we will start to build and develop not only extensions to all of our current products, but entirely new products as well. And we have a lot of exciting ideas of things that we can do to help our customers connect with their customers in a new way using generative AI. Srini, do you want to come in and talk about that? Srini Tallapragada: Thanks, Marc. So, I think the way I see it is this AI technologies are a continuum that is predictive then they generate, and the real long-term goal is autonomous. The initial version of the generative AI will be more in terms of assistance. And like Marc was saying, we are seeing like the most common used case everybody understands implicitly is self-service bots or in the call center or agent-assistant assistance, which I think really helps productivity. But the other used cases, which we are going to see, and in fact, I have rolled out our own code LLMs in our engineering organ, we are already seeing minimum 20% productivity. And in those cases… Marc Benioff: Well, that’s a very key point. Isn’t it? That you’re seeing a 30% productivity increase in your own engineers using our own LLM. Srini Tallapragada: 20%, we are seeing minimum. In some cases, up to 30%. Now, a lot of our customers are asking the same. We are going to roll Einstein GPT for our developers in the ecosystem, which will not only help not only the local developers to bridge the gap, where there’s a talent gap, but also reduce the cost of implementations for a lot of people. So there’s a lot of value. This assistant model is where we’ll see a lot of uptick. And then I think the fully autonomous cases, for example, in our own internal used cases with our models, we are able to detect 60% of instance and auto remediate. That requires a little bit more fine-tuning and we’ll have to work with specific customers to get to that level of model performance. So, I see this is just the start of this [cut] [ph]. The resistant model is the initial thing to build trust and a human in the loop and validate it. And then as the models get better and better, we’ll keep taking used cases where we can fully automate it. Marc Benioff: And address this one issue that a lot of customers come in like they did yesterday, and they tell us they think they’re just going to take all of their data, all their customer data, all of their information and put it into an LLM and create a corporate knowledge base, and it’s going to be one amalgamated database. Why is that a false prophecy? Srini Tallapragada: Because even today, any example you see, even though we have hundreds of Slack channels, there are a lot of specific Slack channels, which only you want access to. You don’t want that. LLM doesn’t know. There is no concept of – it combines all this information. So, unless you put the layer both before who can access the data and then when it generates response, what he can do, you don’t want one wealth manager to generally generate a report, an account report where you’re mixing customers’ balances. So there are a lot of trust issues we have to solve. So, LLMs are good for a lot of very creative generative used cases, initially, where it’s public data that everybody can use it. Those are used cases. I think there is enough of low-hanging fruit in the initial phases with assistant model, which we’ll solve. The really complex automated cases, the role level, record level sharing, we have a lot of techniques, which we are developing, which we will do. It’s also a research area, too. That one, I think we should be tempered with expectations, but there’s enough of, like I said, the develop, for example, I gave product example there’s enough of productivity which we will get. Marc Benioff: Well, we’re really excited to show all of this technology at our AI Day on June 12 in New York City. And then also when we get to [Dreamforce GPT] [ph], we’re going to have an incredible demonstration of this technology. Mike Spencer: So with that, we want to thank everyone for joining us today, and we look forward to seeing everyone over the coming weeks. Have a great one. Operator: This concludes today’s conference call. You may now disconnect. Follow Salesforce Inc. (NYSE:CRM) Follow Salesforce Inc. (NYSE:CRM) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Guidewire Software, Inc. (NYSE:GWRE) Q3 2023 Earnings Call Transcript June 1, 2023 Guidewire Software, Inc. beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.14. Operator: Greetings, and welcome to Guidewire’s Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow […] Guidewire Software, Inc. (NYSE:GWRE) Q3 2023 Earnings Call Transcript June 1, 2023 Guidewire Software, Inc. beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.14. Operator: Greetings, and welcome to Guidewire’s Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Alex Hughes, Vice President of Investor Relations. Thank you, Mr. Hughes, you may now begin. Alex Hughes: Thanks, Comal. I’m Alex Hughes, Vice President of Investor Relations. With me today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on management’s current expectations as of today and should not be relied upon as representing our views of any subsequent date. Please refer to the press release and risk factors and documents we file with the SEC, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q filed and to be filed with the SEC. For information on the risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release, a reconciliation of additional data are also posted in the supplemental on our IR website. With that, I’ll turn the call over to Mike. Mike Rosenbaum: Thank you, Alex. Good afternoon and thanks for joining us today. We had a strong third quarter highlighted by sustained demand for InsuranceSuite Cloud and ARR and profitability both exceeding guidance. We were pleased with overall software revenue led by 34% subscription revenue growth. However, services revenue was below expectations, primarily due to the timing of revenue from a few complex engagements, which we will address later in the call. We were thrilled to see continued improvement in subscription and support gross margins, which more than offset the services shortfall. Our cloud gross margin trajectory drove operating income outperformance and gives us confidence to raise our full year outlook for operating income. A few highlights of the quarter relating to our main corporate objectives where that we closed eight cloud deals and sales momentum remains solid ahead of our seasonally strong fourth quarter. Cloud deployments were also strong with eight go-lives in the quarter across both commercial and personal lines. And we continue to drive improved cloud efficiency with subscription and support gross margins, finishing 5 points above expectations. Before I go into more detail, let me just make a couple of comments about the P&C insurance industry. The service industry and the core system use case well requires a platform that reliably and securely addresses and ensures complex business requirements while also providing for greater agility and innovation. Sales cycles and deployment projects are lengthy, complex and sometimes arduous, but when we win a customer and we successfully deploy a customer in production, we establish a durable relationship with significant lifetime value. I believe our hard work demonstrated execution with Guidewire Cloud platform and the growth of our ecosystem have clearly established us as the cloud leader in our market and have positioned us well to serve the top insurance carriers in the world. From this position, we will continue to expand the breadth and depth of our solutions and ecosystem to help insurers drive innovation and improve decision that scale. The second point I would like to make is about the macroeconomic environment and its impact on our P&C customers. The industry is generally resilient to economic cycles, but it is not immune. The inflation driven increase in claims expense has had an impact on the profitability of many insurance companies and is causing scrutiny on near-term investments and budgets. Given this backdrop, we are pleased to see our momentum on strategic deals and projects continue to progress, and we remain confident in our sales outlook. Our industry is adept at managing market cycles and its cycle has the undercurrent of the ever increasing need for innovation and agility in the market, which strengthens our strategic positioning with customers. The value of being on our platform is increasingly clear as carriers navigate the current cycle. So while I’d say we are navigating through this environment well, it is appropriate to acknowledge that expense pressures are present. With that said, let me turn to discussing our Q3 results in a little more detail before handing it over to Jeff to cover the financials. As I said earlier, it was a strong quarter with eight cloud deals, seven of which were for InsuranceSuite. In addition to insurers seeking to modernize legacy mainframe systems, we are starting to see an increased interest in replacing previously modernized on-prem systems, which is a very positive market development for us and a great validation of the investment we’ve made in the Guidewire Cloud Platform. Deal volume in Q3 was well balanced with three new logos, three migrations, and two expansions. First, let me walk through our new customer wins. Texas Farm Bureau, a Tier 2 ensure headquartered in Waco, Texas, selected fall InsuranceSuite Cloud to modernize their existing portfolio of legacy and on-prem core systems. We look forward to helping them achieve improve system performance and operational excellence, staying current on functional and technical capabilities via Guidewire Cloud updates. Taking advantage of Guidewire’s extensive marketplace offerings and improving agent and customer experiences. We were also fortunate to welcome a rapidly up and coming Tier 3 carrier to the Guidewire community. This commercial insurer selected Guidewire as their long-term partner and will use InsuranceSuite Cloud to retire legacy systems and transform core operations across policy, billing, claims, digital, and data. Predictive analytics was a key differentiator in this hard fought competitive deal and it represents a key mid market win for us, as this progressive carrier has substantial growth aspirations. And the insurance company of Prince Edward Island a growing Canadian property and casualty carrier selected Guidewire Cloud platform to expand their product line and streamline operations so that they can efficiently and effectively support growth in commercial markets across Canada. Turning to cloud migrations, we saw a country mutual a Tier 2 carrier focused on personal and commercial lines across 19 states elected to upgrade their on-prem ClaimCenter system to the cloud. And they also expanded their Guidewire footprint selecting PolicyCenter Cloud for its commercial and agricultural lines of business. A Tier 2 provider of reinsurance and insurance will migrate to PolicyCenter on Guidewire Cloud platform and expand to additional lines. Advanced product designer capability within PolicyCenter Cloud was a key differentiator to increase agility and support their growth strategy. And the Home Building Compensation Fund, a provider of safety net insurance for homeowners in Australia who are faced with incomplete or defective building work will migrate to InsuranceSuite Cloud. Finally, looking at expansions, CNA, a top 12 commercialized carrier based in Chicago expanded their investment in ClaimsCenter Cloud to support additional commercial lines and a Tier 4 insurer expanded their insurance now investment to include additional lines. This brings the total number of wins for the Guidewire Cloud platform to 20 for the year. Over 70% of this total was with Tier 1 and 2 insurers, which I think really validates the approach we have taken to ensure we can support the most demanding customers in the world as well as provide a system suited to the success of the Tier 3 through 5 customers that make up a significant proportion of our customer base. The improving maturity of our platform is also reflected in the increased cadence of cloud production go lives. In Q3, we added another eight cloud deployments, bringing the total number of customers live on Guidewire Cloud platforms to nearly 40 with healthy activity in both personal and commercial lines. In personal lines, some of the deployments included Auto Club of Southern California, the largest member of the AAA federation with 16 million members and the Guidewire customer since 2004, went live with InsuranceSuite on Guidewire Cloud platform. In addition, a large insurer with over 2 million customers across the Nordics and performing 90,000 claims per year and 4,300 new policies per day went live with PolicyCenter, ClaimCenter and BillingCenter on GWCP. With respect to Commercial Lines, some of the deployments included a commercial trucking and specialty insurer based in South Carolina deployed PolicyCenter on GWCP, to drive scale, operational efficiencies and innovation for agents and customers, a provider of commercial lines to multiple industries across 20 states went live with ClaimCenter on Guidewire Cloud Platform to further reduce claims processing times and automate claims adjustments and costs. And an insurer of over 1.5 million Texas workers deployed PolicyCenter, ClaimCenter and BillingCenter on GWCP to further improve operational excellence and customer satisfaction. All of these deployments represent incredible work by our customers’ project teams, our Guidewire service teams and our ecosystem partners. As I mentioned earlier, this is a community that is increasingly leading cloud deployments, and I’m pleased to see it continue to expand. SIs now have over 22,000 Guidewire consultants as of the end of April, up 27% year-over-year. Moreover, the number of cloud certified consultants increased 67% year-over-year to approximately 7,300. These are important stats because a healthy partner ecosystem helps to drive customer success, but also because it is critical to providing ever-increasing predictability and cost efficiency to our customers and prospects. We are committed to enabling SIs to serve increasingly as the prime integrator on cloud projects. This will inevitably lead to Guidewire services revenue growth slowing relative to the growth of the total services ecosystem and allows us to focus on a more scaled services model that drives expert services in coordination with the SIs and retains the scale required for delivery of new products and strategically important projects. This approach will provide us with a more durable and profitable service model. The services revenue shortfall we saw in the quarter speaks to the importance of this. Earlier in our cloud journey, we took on complex fixed fee arrangements where we leveraged SIs as subcontractors. This was both to actually deliver the work but also to fuel the SI cloud ecosystem. For the past year and going forward, we are limiting subcontracting and fixed fee arrangements, and we are seeing DSIs step into the prime role on most cloud projects. As this portfolio of early projects are completed and the services margin burden associated with these early cloud customers will lessen. Turning to our solution partner ecosystem, we also continued to grow the number of partners on the Guidewire marketplace. This collection of integrated applications amplifies the total platform innovation for our customers and serves as a powerful differentiator for us. We now have 180 solution partners in our marketplace and we have added six new solution partners in areas such as providing more granular and accurate property data for better risk scoring and enabling greater workflow automation and speed. We are building a powerful cloud platform where greater innovation will layer on over time and where customers can accept this innovation more easily and with less integration friction. An example of a recent strategic partnership showing good momentum on our platform is one with One Inc., where we are seeing strong interest from insurers to incorporate its technology to enable a more frictionless payment experience for their customers. I would also like to briefly discuss generative AI and large language models and their exciting potential for Guidewire and the insurance industry. First and I think the most important consideration as it relates to Guidewire is that insurers begin to look at their systems and processes to evaluate if they are equipped to take advantage of this technology shift. They will realize that modernization is a key first step. We believe that insurers who have already modernized their core systems will be dramatically better positioned to take advantage of the potential this technology provides. Those who are still relying on legacy systems will be held back and will be reconsidering that approach, and I believe this could support efforts to justify modernization initiatives. Second, generative AI has the potential to make developers more productive, which in turn will drive more efficient implementation projects and improved product innovation. I think it’s likely that in the course of 12 to 18 months, most developers internally and in our services organization and in our SI ecosystem, will be able to leverage large language models to support software development and project execution. Third, like a lot of software companies and many of the companies in our solution partner ecosystem, we are working on incorporating large language model-driven product enhancements into our cloud product suite that will enhance the value of the products we offer to our customers. Broad-based productivity gains should be a logical outcome of embracing generative AI, and we expect that our cloud-based product suite will be an enabler of this. Overall, generative AI has tremendous potential to have a positive impact on our mission, and we look forward to taking a leadership position in how the industry adopts generative AI in the months and years to come. Finally, let me spend a minute on leadership in the organization. I was very happy to announce the addition of Michael Howe to the Guidewire team as Chief Product Officer. Michael is a long-time veteran as the insurance technology industry, having led product at Applied Systems for over a decade. He will lead product strategy and product marketing here at Guidewire. We are now in a position to build on the tremendous progress Diego de Vale and the engineering team have made in establishing our cloud platform and InsuranceSuite product releases. Michael will help us increase and optimize our focus on product innovation and the alignment of our data and analytics solutions with our core. While Diego continues to lead platform growth, performance and scale, which is all foundational to everything else we do. With that, I’ll turn it over to Jeff to discuss the financials. Jeff Cooper: Thanks Mike. I want to highlight a few topics as I walk through the financial results in the quarter. First, as Mike noted, sales momentum continues to be strong. And notably, we are seeing more new customer wins and new modernization programs. We are also seeing some insurers looking to replace core systems put in place over the last decade or two as they evaluate their cloud strategies and want to ensure they have a partner that is investing to grow and innovate with them. This is an exciting development for us. At the same time, we are seeing steeper ramps than last year, which means the initial ARR impact of new sales activity is lower in the first year, but fully ramped ARR is preserved. This combined with the macro backdrop are the primary reasons healthy sales activity is not translating into a higher ARR outlook for the year. Second, continued sales momentum, combined with better-than-planned execution on cost controls and efficiency initiatives are driving cloud margins ahead of our FY ’23 expectations. Our subscription and support gross margin trajectory gives us increased confidence in the long-term earnings power of our operating model. Third, in the services portion of our business, we are working through a number of very complex core system modernization programs. A handful of these are fixed bid arrangements where changes in the project plan can impact the timing of services revenue. A couple of programs had an adverse impact on services revenue in the quarter vis-à-vis our forecast by approximately $4 million. Finally, turning to cash flow, we are seeing slower collections than we expected in our model. Accounts receivable grew by $43 million over Q3 last year and over 60% of that incremental ARR is coming from payments outstanding for over 30 days. In the quarter, we also shifted our operating bank account from Silicon Valley Bank to Bank of America, which did have a brief disruption to our collections cadence, but this is now resolved. Given slower collections, combined with the fact that we have approximately $150 million in collections due in the last five days of our fiscal year, we’ve adjusted our cash flow expectations for the year. This adjustment to timing of collections has no impact on the long-term cash generation assumptions we have discussed with you all at our Analyst Day. Now turning to the results for the quarter. Third quarter ARR ended at $722 million ahead of our expectations. This represents 17% year-over-year growth on a constant currency basis. Total revenue was $207.5 million. This finished below our outlook due to services revenue results. All product components of revenue were either better than or in line with our expectations. Cloud strength continues to be visible with subscription revenue — within subscription revenue, which grew 34% year-over-year to $89.1 million. Subscription and support revenue was $107.5 million, up 24% year-over-year. License revenue was $50.5 million, down 6% year-over-year. Services revenue was $49.4 million, down 13% year-over-year. As I mentioned previously, we had two Guidewire lead programs where project replanning resulted in an adjustment to the time lines and as a result, an adjustment to the revenue recognition timing. This was an approximately $4 million impact when compared with our outlook last quarter. Additionally, there has been increased scrutiny on services statements of work that has caused some streamlining of scope or pushing more services work to lower-cost partners, which resulted in lower-than-expected billings in the quarter, and this accounted for approximately $2 million to $3 million. Turning to profitability for the quarter, which we will discuss on a non-GAAP basis. Gross profit was $107.7 million. Overall gross margin was 52%. Subscription and support gross margin was 55% compared to 47% a year ago. We are thrilled with the progress we’re making on subscription and support gross margin, which continues to track ahead of our expectations. Services gross margin finished at negative 2% compared with positive 4% a year ago. We have been expecting positive margin in Q3, but revenue headwinds impacted margins in the quarter. We continue to be confident in our services strategy to return to profitability in the fourth quarter and beyond. Operating loss was $12.2 million, better than our expectations due to strong subscription and support gross profit and lower-than-expected operating costs. These factors more than offset the impact of services margin shortfall in the quarter. Overall stock-based compensation was $35 million. Stock-based compensation expense was up 6% year-over-year in Q3 and up 3% year-over-year through the first three quarters of 2023. We ended the quarter with $807 million in cash, cash equivalents and investments. As of the end of Q3, the accelerated share repurchase program was settled in full with the delivery of an additional 648,000 shares of common stock, which resulted in total repurchases under the ASR of 3.2 million shares at an average purchase price of $61.93 per share. Also in Q3, we repurchased an additional 207,000 shares at an average price of $77.19 per share. Turning to our outlook for the full fiscal year 2023. We are adjusting our ARR outlook to $745 million to $755 million. As I previously mentioned, we are seeing healthy sales activity and expect this to continue in Q4, but we are seeing steeper ramps this year. This results in less ARR in the first year of new sales arrangements. However, we are still preserving attractive fully ramped ARR terms in these arrangements. So while ARR growth this year is expected to be approximately 13% at the midpoint, I expect fully ramped ARR to grow at 14% to 15%. We will also provide more detail on fully ramped ARR at year-end as this is a metric we discuss on an annual basis. As a reminder, our ARR outlook assumes foreign currency exchange rates as of the end of the last fiscal year, and then we update exchange rates at year-end. Last year, the year-end exchange rate adjustments to ARR were negative $19 million. If exchange rates stay the same as current rates, then we would expect a negative $5 million adjustment at year-end largely driven by the dollar strengthening versus the Canadian dollar. With respect to revenue, we are increasing our expectations for subscription, subscription and support and license revenue. We are adjusting subscription revenue to approximately $349 million, a positive adjustment of $1 million. We are adjusting subscription and support revenue to approximately $426 million, a positive adjustment of $1 million, and we are adjusting license revenue to approximately $261 million, a positive adjustment of approximately $5 million to $6 million. We are lowering our services revenue expectations by $10 million to $12 million. As a result, our outlook for total revenue is $890 million to $900 million, a $4 million adjustment at the midpoint. Turning to margins and profitability, which we will discuss on a non-GAAP basis, we expect subscription and support gross margins to be between 54% and 55% for the year, an increase of 3 percentage points when compared to our outlook last quarter and 8 to 9 percentage points from the Q4 call. We expect services gross margins to be around breakeven for the year. This implies a Q4 improvement that assumes the successful completion of ongoing fixed bid arrangements. As a result, we now expect overall gross margins of approximately 54% for the year. With respect to operating income, we expect between a $4 million operating loss and a $6 million operating profit for the fiscal year. We expect stock-based compensation to be approximately $140 million, representing 2% growth year-over-year. Given this, combined with the impact of our accelerated share repurchase program and our active repurchase program, we expect fully diluted shares to decline by approximately 1 million shares this fiscal year. As mentioned above, we are adjusting our cash flow from operations expectations to between $10 million and $40 million. Finally, as we look ahead to fiscal year 2024, we feel it is prudent to wait until after our fourth quarter before discussing ARR growth expectations. With respect to profitability, we are committed to demonstrate non-GAAP operating margins of 6% or higher and GAAP operating margins of negative 10% or better. We will continue to monitor both GAAP and non-GAAP operating income metrics. But we expect to ultimately measure our success in hitting targets that capture the real cost of Guidewire and our shareholders associated with stock-based compensation. With that, let’s open the call for questions. Q&A Session Follow Guidewire Software Inc. (NYSE:GWRE) Follow Guidewire Software Inc. (NYSE:GWRE) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from Dylan Becker with William Blair. Please proceed with your question. Dylan Becker: I appreciate the question and certainly get the product versus services side here. Maybe, Mike, for you, I think you noted some of those existing on-prem customers seeing accelerated migration activity. I wonder how much of that is a function of kind of the updated garbage release here and that the shift to, I think, three product releases annually versus two, maybe widening the functional gap kind of the on-prem capabilities versus the cloud. And from a go-live perspective now maybe having more of those customers that are — that can validate that update versus upgrade kind of type of framework you guys have talked about? Mike Rosenbaum: Thanks for the question, Dylan. I appreciate the insight. It certainly helps. I’d say in addition to those I don’t know, topics, which I’ll discuss briefly. I think the most important thing, it’s just our experience and our track record running these programs at scale going live over the special go lag weekends repeatedly now, something that we’re getting better and better at. And so, just building the overall confidence in the ecosystem, in the community of P&C customers, I think it is helping us. The shift to three releases a year, I think is also — it’s great and it helps. I think the most important thing is what you should read into that is more and more confidence that we have in that we can execute these updates seamlessly. Now we’re still working through that with our cloud customer base and with the new customers. This is a different approach that this whole P&C ecosystem, the entirety of the way that this all operates throughout the world is changing, and we are changing it. But I think customers especially those that have been on the journey with us for a couple of years now and are seeing it and our experience in it are very excited about the potential that it offers. Just personally, I know I commented a little bit on generative AI. I am very much looking forward to the idea that we have production cloud customers where we can put these changes into updates and then get them shipped out to customers seamlessly, and they can hopefully just literally turn them on. It’s just a very, very different operating model than Guideware has been operating under, and the industry has been operating under for the last 20 years. And I think it is — that is helping us drive the continued sales activity that we’re seeing. So thanks for the question. Dylan Becker: Yes, makes total sense. And then I think you made a comment as well around kind of obviously some of the carrier pressures around elevated claims. Would think, again, core modernization can help address this, and there’s a lot of optionality on the data side. But wondering what kind of role like maybe digital twins could play in the future evolution of insurance and real-time data connectivity to help carriers predict with a more holistic view, maybe risk analysis and then maybe even preventative risk mitigation. Mike Rosenbaum: Yes. That’s a deep strategic question, and I think it is top of mind as carriers think about modernization and getting to a core platform that provides sort of an agile ability to roll out new innovative products that take advantage of some of the connectivity and IoT like IoT-enabled characteristics that you’re describing. I’m not sure I’d go so far as to say those things would have prevented the cycle that we’re in right now. I think inflation jumped up and caught lots of industries by surprise, and has this impact that just has to be worked through. It’s just sort of a normal cycle. I guess, normal in the sense that if there is inflation, there will be a disconnect between you’re feeling that — you’re feeling the impact of that inflation and claims versus being able to adjust premiums and readjust the policies that support — to support the risk actually, in the replacement costs. But certainly, there is a lot of excitement in the overall industry about modernization in general and the ability for it to reposition insurance companies somewhat around providing risk mitigation services and actually just controlling the risk as opposed to sort of paying for things that break, actually using the industry and the relationship to prevent that risk, prevent that breakage, reduce the expense of mishaps and perils. And so that is an exciting part of what we do. And I think, Todd, to the core system equation to the data and analytics equation, which makes these models more possible. So, I love the question and it’s definitely part of the story and what we’re selling to customers. Operator: Thank you. Our next question is from Peter Heckmann with D.A. Davidson. Please proceed with your question. Peter Heckmann: With the ACO lives this quarter, can you talk about how many live modules you have? And what percentage of ARR is now either live or committed to migrate to the cloud. Mike Rosenbaum: Say again, the last clause in your sentence, I missed it. Peter Heckmann: Sure, sure. So just — and trying to think about what percentage of ARR is now either live or committed to migrate to the cloud? I mean something in the range of 50%, 55%. Mike Rosenbaum: Okay. So let me — let me pivot to Jeff in a second. I just want to say like there’s a couple of things that are included in the statistics. We talk about the number of customers that are live. Within each customer, they’re going to sometimes have one instance, but oftentimes, we’ll have many instances. So when you dig into the actual number of instances of, say, ClaimCenter or PolicyCenter or PolicyCenter for a particular line of business, there might be and often is multiple instances that are live in production. And then each of those, depending on whether or not it’s an established line of business or a new line of business for that carrier will carry with it a certain amount of DWP, right? So very — the biggest go-lives for us in terms of scale are when you have like a fully deployed ClaimCenter or a PolicyCenter, BillingCenter implementation on-prem, and we moved that to our cloud. And then immediately, you have all that DWP operating on the cloud instance on the cloud on the production instance. In terms of factory, Jeff can give you a sense of this. Cloud ARR is now larger than non-cloud ARR at Guidewire. And that has to do with the price point as much as it is the momentum in the count. But certainly, the predominance of the — or the majority of the ARR at the Company now is associated with cloud. Jeff Cooper: And Pete, the way we measure cloud ARR is that once a customer commits to go into that path, we count them in our cloud ARR calculation. So as of the end of last year, we were just over 50% of our ARR was coming from cloud ARR. And our expectation that we said at Analyst Day is that we’d be in the 58% to 62% range of total ARR coming from cloud this fiscal year. And I think that’s still in line with our overall expectations. But we’ll update on that particular metric that you’re in. Mike Rosenbaum: Yes. I would just add, we obviously know this. We obviously track this very closely internally, like the percentage of that ARR that is live or is still in a project to go live, right? But we don’t — that’s not in my script or in my head because it’s not something we talk about publicly, but it’s obviously something that we pay very, very close attention to. And look, the culture at the Company, and we have a very, very good track record of this is that 100% of that will successfully get to production. That’s the commitment we make. And I think as part of the brand promise that is Guidewire. Despite these projects being complicated and hard, we are standing shoulder to shoulder with these customers and partners and making sure 100% of that is eventually live in production. Sometimes takes longer than a year because the price is complicated, but it all does — or at least the intention is and the commitment is culturally that we will get it all live. Peter Heckmann: All right. That makes sense. And then to your point on underwriting losses nationwide for insurance carriers, something like $30 billion of underwriting losses in the last two years. But won’t that lead then to further price increases for premium that could potentially lead to a higher growth in DWP over the next couple of years? Mike Rosenbaum: Yes. That’s the expectation. It should. The system went in balance is equal on both sides of that equation and the overall system can operate profitably. And over time, based on the variety of ways we contract for our core systems, that TWP will flow into Guidewire and complicated growth bands and barriers and thresholds that need to be crossed in order to trigger those increases. But generally, yes. This — like I said, this is a bit of a headache, let’s say, or maybe issue for us in the short term, working through this and causing, like I said in the script, a little bit of scrutiny around short-term expenditures. But in the long run, the industry is equipped to deal with this. And I think Guidewire as a system providing innovation and agility facilitates carriers being better able to absorb this. And one of the reasons why we think sales activity continues to be solid heading into the fourth quarter. Operator: Thank you. Our next question is from Kevin Kumar with Goldman Sachs. Please proceed with your question. Kevin Kumar: I wanted to double click on the ramp deal activity. Jeff, can you help us frame the types of multiyear ramp deal structures you’re closing? And maybe how that compares to prior years? And how much of a headwind is it in the initial year or years? And kind of how steep is that ramp compared to kind of maybe historical levels? Jeff Cooper: Yes. It’s a good question. And it’s interesting because last Q4 we saw a little bit less ramp activity and a bit more kind of smaller starts that would grow in a more organic fashion. So a little bit surprised this year to see a bit higher ramp activity. And interestingly, we are also seeing our deal portfolio skew a bit more than we expected towards new modernization programs and new customer wins versus migrations. And migration’s always had fairly kind of steep ramp elements attached to them because we count a booking as the incremental ARR that’s being added to Guidewire. And sometimes, they’re already paying ARR and a term license fee, and it takes a little while to get up and running and live in the cloud. And so oftentimes, there’s not a big uplift associated with ARR associated with migration. So seeing higher ramps this year is both a little bit of an interesting fact pattern, but a positive fact pattern. It means that customers and prospects are willing to make big multiyear commitments to Guidewire and this path with Guidewire. So, we are seeing a little bit — we used to raise steeper ramps, which means kind of the starting point to the endpoint that the growth is bigger in those committed ramps than what we saw the prior year. And the prior year was notably a little bit shallower in terms of the overall all ramp activities. We saw some smaller starts rather than big commitments. So it’s a mix. It’s — I was a little bit surprised to see that. But in general, we are pleased to see especially new customer wins and even some competitive displacements, which is very exciting for us to see, and we’re seeing healthy fully ramped ARR events. But I do think some of the near-term cost-conscious pressures that are existing in the insurer installed base is having a little bit of impact on kind of their appetite to sign up for new spend over the first year or two. But we’re certainly capturing an attractive fully ramped ARR. Kevin Kumar: That’s helpful context. And then maybe just on the subscription and support gross margin. Obviously, a nice outperformance there, higher than the guide you gave. Is that just a function of kind of continued cost discipline anything else you’d call out there? And then how are you feeling about cloud infrastructure investments and the ability to reach $1 billion in ARR with minimal kind of incremental costs? Jeff Cooper: Yes. So we are very pleased with the efficiency gains we’re seeing in the platform. The engineering team has done a lot of work to help us manage our overall cloud infrastructure costs. And so that is continuing to exceed our expectations, which is a big positive. Another area of cloud COGS at this point in the cloud journey is cloud updates and upgrade costs. And we did see a little bit of those costs push out. So when I think about the outperformance in the quarter, if you think about 5 percentage points, about 2.5 percentage points was related to just core efficiency gains vis-à-vis our expectations, and the other was a little bit of this work getting pushed out. We tend to model this work very conservatively. So we’re not surprised by a lot of work coming into a quarter that was unforecasted, but that was the primary drivers of the outperformance in the quarter. Operator: Thank you. Our next question is from Ken Wong with Oppenheimer. Please proceed with your question. Ken Wong: Maybe the first one for Mike. Just in terms of the scrutiny of IT budgets, I guess, how has that materialized for Guidewire versus just broad IT spend pullback? And if that has hit sales conversations, is that more on the edges of your products? Or is that actually impacting core systems? I would love to get a sense for kind of how that may or may not materialize. Mike Rosenbaum: Yes. Okay. Thanks for the question. I would say — I would say — my sense is Guidewire is more immune to this than most, okay? I think people think about Guidewire investment in the Guidewire project very strategically. Five-year duration, 10-year duration is a very legitimate conversation one of which I had this quarter, that company is not thinking about as much the day-to-day, quarter-to-quarter cash flow as they are thinking about what are we doing for the next 10 years. So in general, Guidewire’s more immune to this than probably most IT spend. But it does exist, right? And so you bring it up — I bring it up because it’s like the ability for us to manufacture deals, the ability for us to accelerate things in a climate where the general man set is conservatism as it relates to budget, it just makes it a little bit harder. The things that were already in flight and the plans that were already in place are continuing to progress, and does give us confidence in the outlook we’ve provided for Q4. But it is a bit of a headwind, and it is coming up much more in the last few months than it has in the past. And so I thought it was worth mentioning. That said, I do want to stress, and this was — we touched on this in one of the earlier answers to one of the earlier questions, this is a cycle. There is an adjustment period that we believe the industry will process through. And then I think things will get a bit back to normal, and it will open up and the budgets will loosen a bit, and we’ll be able to create a bit more acceleration even beyond what we’ve got right now. So hopefully, that helps you give you a sense of things. Ken Wong: Yes, super helpful. I really appreciate all the thoughtful color there. And then, Jeff, just wanted to maybe dig into the cash flow reduction. How much of that is maybe a byproduct of the lower top line, kind of trimming the ARR a little bit on the services side versus what was just pushed out because of timing, collection, things of that nature, which hopefully you guys can recapture in future quarters? Jeff Cooper: Yes. The majority of it was just given the environment that we’re seeing in some of the dynamics that Mike just talked to, putting a bit more conservatism into our collections assumptions vis-à-vis what’s going to be billed and invoiced in Q4. So that is the big part of it. We have the services — the overall services billing also had an impact. But if you think about — that’s probably a pretty small percentage of the adjustment to cash flow. Most of it is just the timing of collections and making sure we build some more conservatism. We are seeing a bit more process and bureaucracy that insurers are putting in place before they make large vendor payments and we’re having to jump through those hoops and certainly, the shift in our operating bank account in the quarter didn’t help as we had to kind of go through a lot of revalidation to make sure that everything was in order. So that created a bit more process. That’s behind us now. But as we look ahead, we just felt it was prudent to build more conservatism into our collections forecast. Operator: Thank you. Our next question is from Rishi Jaluria with RBC. Please proceed with your question. Rishi Jaluria: Wonderful. Mike, I wanted to go back to the generative AI theme. I’m really glad to hear kind of the way you’re talking about it. And some of the transformational effects for Guidewire, I want to think about the impact on the industry itself, right? Not only does it force some of the peak drivers to modernize and kind of catch up and migrate to the cloud. But what’s the potential for P&C insurers to actually change the way they do view the business and maybe even more importantly, the way that they interact with customers? And what sort of impact do you think that can have on the overall spending environment as it pertains to budget for Guidewire? And then I’ve got a quick follow-up. Mike Rosenbaum: Yes. Thanks for the question. So I spoke recently at a Guidewire event and kind of talked about how you can think of these things on a spectrum sort of near term to long term and you can get a little bit wrapped up in how dramatically impactful it can be to systems like insurance in the long run. But I think you’re making a bit of a mistake if you do that and missing out on the potential for us to just generally improve process efficiency and operational efficiency and all the little things that we do every day. And I think there’s — it’s not just Guidewire thinking this. There’s plenty of industry analysts who are looking at this and looking at the insurance industry, and you just see some potential or maybe a lot of potential to better — to operationalize these models and use them with human beings in the loop. Not to replace human beings, but to augment human beings and make people more productive in managing sales processes, managing customer service, managing claims, making sure that all of those processes are more and more efficient. It’s like 100s and 100s of little tiny details that can be managed more effectively through systems like Guidewire. I think that there is a very important story to be told and granted this stuff needs to be built and fleshed out and rolled out and proven, but it’s exciting to see something with this much potential and very accessible. The other thing I was saying to the audience there was that one of the things I really, really like about these generative AI and large language model solutions is they don’t necessitate a replacement of a system like Guidewire. You can just augment what you’re already using Guidewire for. Now I think if you’re running a legacy mainframe system, it will be much more difficult for you to augment that system and that workflow with generative AI, and I think that, that might drive these transformations. But it’s just like Guidewire with a cloud API. You can call out — you can grab some information call out to a model and get an answer back and that helps the person who’s on the phone with agents or a customer and it makes the process more efficient. So I’m very excited about this. I think a lot of people in the industry are very excited about it. We’re excited to, over the next few months, start to roll this out and start to think about how do we productize it. And I just talk for five whole minutes maybe, and I haven’t even touched on the implementation side of it. As I said, I think that the developer productivity component of this technology is very, very exciting. And I also expect it will improve. We’re not yet at the point where we can give you estimates for objective measures of the productivity improvements. But there’s a lot of engineers who are super excited about this. And so hopefully, that gives you a little bit of color about where we are, how we’re thinking about it and how we think it will have an impact on the industry. Rishi Jaluria: Yes. Got it. That’s really helpful. I appreciate all the thoughts there. And then I wanted to go back to some of the dynamics around ramped ARR. And maybe — I know you talked about this kind of a little bit of a surprise seeing that versus the smaller lands with potential upside that we saw last year. But what’s driving, in your opinion, that change in behavior? And maybe as we see some of those shallower lands or whatever you want to call it, the smaller lands from last year, as those kind of come up for renewal, should that be kind of a driver if you put it — think about our models that might lead to a little bit of an uptick in ARR and potential ARR acceleration? Mike Rosenbaum: Yes. I mean, as I said, I think it’s an exciting pattern that insurers in this environment are tackling large strategic programs and making big commitments in investments with Guidewire. And we’re seeing that in the total contract values that support these ramped agreements. In terms of the shift over last year, it was a bit interesting. Last year, we saw a bit slower starts kind of dipping their toe in the water type of dynamic. And there was a thought that maybe that would persist and that could have a pretty big impact on how we think about our model if that was the way that the industry chose to adopt and buy. I think it’s a positive fact pattern that we’re seeing some of these bigger commitments this fiscal year. But it is driving — what — the way we — just to give you a glimpse into how we think about this is so we measure a booking. A booking for Guidewire is the average ARR that’s delivered over a five-year period. And then we have certain metrics that we look at internally such as what is the ratio between the Year 1 ARR to that average ARR over a five-year period. And that ratio — our model is quite sensitive to that ratio. And so if you see that ratio go down a little bit. It means that there’s — and the bookings levels are the same. It means you’re adding really attractive fully ramped ARR, but the Year 1 dynamics that are a little bit lower than what we had modeled. So it’s just one of these multiple levers that we have to manage through, and we try to provide some insights into that. For a period of time, I thought fully ramped ARR may fade into the background of relevant metrics because if insurers are buying a bit smaller and growing in a more organic fashion then that metric would just be a little bit less relevant. But as we’re executing through this year, we’re seeing that metric outpace ARR growth once again, which is — gives us confidence as we think about the long term but does create some dynamics that we have to manage through expectations. What was the second — was there another part of the question? Rishi Jaluria: No. You covered everything. Really appreciate guys. Thank you so much. Operator: Thank you. Our next question is from Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet: I guess just one more on sort of the higher mix of fully ramped ARR or fully ramped deals. How should we, I guess, think about that over the next couple of years of from both a backlog perspective on the implementation side and then related to that overall staffing needs for the services group, especially as you push more to SIs in general? Mike Rosenbaum: Yes. And I think what I don’t want to do is make this out to be a bigger deal than it is. I mean we saw ramped activity look more akin to what we saw two years ago. And coming out of last year, we adjusted our models a little bit to make those ramps a little bit shallower. So I don’t want to overplay this, but it is a dynamic that we wanted to call out in the business. And how it relates to the services engagement is pretty detached, right? So — and what we’re seeing in the services part of our business is a part of our longer-term strategy to shift more and more of this work to our — to the partner community, and we had to go through a cycle of certifying and enabling the partners to lead these programs. And that’s what we are starting to see more and more of today, which will allow us to build a more scaled and durable services organization in support of the broader ecosystem who will take the lead in managing these programs. Jeff Cooper: And I just want to say, I don’t expect the manpower in our services organization to go down I just think as the overall economy of Guidewire implementations to grow more of that growth will flow to the SI partners, and it will flow to Guidewire. I think there’s a very important role that our team plays in — with respect to this. At these expert services that we can provide, especially around new product introductions and strategic projects, and there’s just going to be some percentage of the prospect base. The potential customers that want to have Guidewire take a role in the implementation. And it’s important for us to maintain that manpower. So I wouldn’t be thinking that this is going to contract just that it will grow more slowly than the overall ecosystem as we shift to this more durable — more leverage model. Matt VanVliet: Yes, makes sense. And then, I guess, on a few of the answers, you talked about a number of customers wanting to lean more into data and really the analytics behind a lot of that. And it sounds like more projects are maybe going live with those implemented originally. But curious on how that overall demand cycle is impacting kind of the upsell, cross-sell motion versus now just being included from the start because of the value perceived by the customers? Mike Rosenbaum: Yes, it’s a great question. I think we’re doing a much better job sort of designing the product to be — to work together, to be integrated from the beginning, to be pitched and sold and packaged and marketed and then the sales process described as one unified solution that can solve, of course, system modernization problem, but also deliver business benefits through predictive analytics. And so it’s exciting to see very often the economic justification for the modernization is attached to efficiency gains that can be either significantly or partially produced with predictive analytics. There’s been a lot of excitement for not just the predictive analytics, but also the sort of operational machinery for what I’d say, deploying the prediction into a user experience that actually causes end users to change their behaviors. And I think the industry in general, and this is not just insurance, but sort of the industry overall, the world of IT is pretty good at making analytics and pretty good at making analytics predictions and not as good at activating those predictions and causing a business change. And so a part of what we’re producing here and what customers are excited about, is that we’ll be able to take these algorithms and turn them into practical useful predictions that end users will be able to use to either make better decisions about underwriting risks or make better decisions about processing claims, and that’s exciting. And it’s a bigger and bigger part of the story and the reason that a customer makes the decision to go now with the Guidewire project. So that’s exciting to see, and I hope it will continue to improve — and we’ll see, but my expectation is generative AI, large language model supported, capabilities augment that and kind of fit right into the same story I just told you about our predictive analytics capabilities. Operator: Thank you. Our next question is from Joe Vruwink with Robert W. Baird. Please proceed with your question. Joe Vruwink: A little bit on the last topic since you brought up analytics. But just on that new logo win with the Tier 3 carrier, the mid-market does seem a bit more competitive of late. What are you finding to be the differentiator for Guidewire when you’re winning in that segment or Tier 3 through 5 outside of Tier 1 through 2 is something like analytics catching on? Or would you maybe point to some broader themes there? Mike Rosenbaum: Yes, great question. I’ll give you the themes. I think, number one, it’s important that there is valuable that we bring a complete solution that is consistent across claims, policy billing, right? So I think the larger carriers probably have more horsepower, maybe more capacity to be able to tolerate different systems for different use cases. But with these smaller companies, more limited IT organizations, a consistent platform with one approach to integration, data, analytics, configuration, one vendor, the whole stack, the full suite, the whole insurance business process operating very cleanly. That’s important. I think that one vendor being responsible for the predictive analytics and that part of the equation is also very valuable to these customers. The other thing that’s coming up is just — and I kind of touched on this before, it’s just track record of success that we’ve got. I think 40 some and customers in production. We’ve got multiple years now of track record and experience running this. We’ve got a vision for these three releases a year. And I think that customers see that momentum. And I think that, that does factor into the decision-making process in a significant way and helps us. And I wanted to say something because I’m surprised actually nobody asked this question yet, Jeff and I touched on this. Like in this quarter, we’re seeing conversations about competitive displacement that I have not seen in my four years at Guidewire is like we mentally think of these systems as being the main frame been replaced and this package has been deployed. And we started to think of it as like that TAM is removed. But now it’s coming back up. And these systems that are now at this point, maybe more than a decade old, these companies are talking to us about what’s our potential for replacing them. And that’s a very, very exciting development. It’s a great conversation to have. And I think the reasoning behind that interest has a lot to do with all the reasons I just gave you about why that tier of the market is interested in Guidewire. So I think it all plays to — it all plays to our strengths right now. Joe Vruwink: And I’ll just quickly follow up on that last point. I think in the past, you said like 20% to 25% global DWP. You manage that of what remains half of that remainder is on a mainframe system. You’re really talking about like that half is maybe just unbounded at this point. I mean it’s all up for grabs? Mike Rosenbaum: Yes. I think if you play it out, if you play that concept out, yes, you could say all of that is now up for grabs. Now it obviously depends on which vendor you’re talking about and when the implementation was done and what are the unique circumstances associated with that implementation, it’s probably too exaggerated to say that it is completely all up for grabs. But part of that segment of the market is up for grabs. And that — like I said, that’s a very exciting thing to see, and I think is unlocked a bit just based on time but also based on the momentum and the innovation that we’ve established and are proving through our execution. Operator: Thank you. Our next question is from Michael Turrin with Wells Fargo. Please proceed with your question. Michael Turrin: Just one for me. Going back to just some of the other comments. So the 3Q ARR came in ahead of the prior guide. The fiscal Q4 compared to the full year is more a tightening of the range. I appreciate you not wanting to turn this into a call around ramp deals. But is the second half impact you’re characterizing last quarter there, the difference between what was previously expected? And is that more what’s driving the decision to wait for Q4 before framing the prelim growth outlook as you historically have? Or is some of that also just macro fiscal Q4 being important and that’s what’s driving the decision process there? Any further context is helpful. Jeff Cooper: I think you’re thinking about it right. That’s exactly our thought process. I mean I also think it in prior years when we assess the analyst models and looked at what was out there, if there was something that we felt that was critical to get in front of that we had visibility into, we would try to do that. But given kind of where we are and how critical Q4 is for establishing the right framework for the next fiscal year, we felt like it was prudent to kind of wait until that is completed. Operator: Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question. Parker Lane: I’ll just ask one in the interest of time. Mike, I was wondering if you could talk about the share migrations that carry expansion as part of the project and the general appetite you see for customers that are embarking on the cloud journey to either hit the ground running and just make sure they have a successful cloud migration or widen the scope of what they’re trying to achieve? Mike Rosenbaum: Super question. This is a dynamic, which we also have noticed. And very often, it is the, let’s call it, the modernization projects to modernize something that causes the conversation about, let’s do the cloud upgrade of the existing implementation as well. Sometimes it’s the other way around where we’re talking about a cloud upgrade or a version upgrade, and that causes the conversation about new lines of business or modernization around another component of the core system. But what triggers these things are — deals like this, they need triggers. They need compelling events. They need business related objectives that can drive the projects and the deal for us. And so like I said, a lot of times, this is, hey, we’ve got an initiative to do X, Y, Z in our business. We need a modern system to do that. Okay, that we have Guidewire for claims already, and we’re happy. And so let’s talk about policy. And then the well, we’re going to do policy on cloud, how should we think about claims? Should we move that to cloud also? And that’s the way that the conversation goes and evolves and it results in migration and an upgrade. And there’s just a variety of different ways that those conversations can happen, but those compelling events are created and driven by these business objectives. And so that’s a dynamic that we’re absolutely seeing right now and are excited about just continuing it. And so it’s like there the fact like it kind of relates also to this idea that we are a very good solution for a full suite offering, where you can do everything in a very consistent way. One vendor, one approach to configuration, one approach to data and analytics and integration, one approach to the marketplace partners and having a consistency across these core systems, claims, policy and billing really just facilitates a better end-to-end insurance process. And it’s a big part — the value prop that we’ve provided. And even — it’s like not competitors, but just like Guidewire. It’s pretty unique in the landscape for P&C core systems in that — from the InsuranceSuite perspective, all of these — all of these products have been built organically at Guidewire. They haven’t been acquired or kind of bolted together through acquisition. It’s like this has been built and crafted by great engineers, great teams at Guidewire over the course of many, many years and 100s of users of implementations. And that’s a big part of our success. So I appreciate the insight in the question and it’s definitely one of the things driving a lot of these deals right now. Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to CEO, Mike Rosenbaum for closing comments. Mike Rosenbaum: Thanks very much. So I just want to thank everybody for participating in the call today. We’re obviously thrilled with the continued cloud momentum across new and existing customers, Tier 1 and Tier 2 insurers, while also driving margin improvement. I was particularly happy to see the continued improvement in margins. There’s been a huge effort here at the Company to make that happen, and this was a great validation of that hard work. And so we’re very excited about the future. Very excited to have a great Q4, and we look forward to talking to everybody again at the end of our fourth quarter at our next call. So thanks very much. Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Follow Guidewire Software Inc. (NYSE:GWRE) Follow Guidewire Software Inc. (NYSE:GWRE) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

ChargePoint Holdings, Inc. (NYSE:CHPT) Q1 2024 Earnings Call Transcript June 1, 2023 ChargePoint Holdings, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.17. Operator: Ladies and gentlemen, good afternoon, my name is Lisa, and I’ll be your conference operator for today’s call. At this time, I would like to welcome everyone to the […] ChargePoint Holdings, Inc. (NYSE:CHPT) Q1 2024 Earnings Call Transcript June 1, 2023 ChargePoint Holdings, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.17. Operator: Ladies and gentlemen, good afternoon, my name is Lisa, and I’ll be your conference operator for today’s call. At this time, I would like to welcome everyone to the ChargePoint First Quarter Fiscal 2024 Earnings Conference Call and Webcast. All participant lines have been placed on a listen-only mode to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the call over to Patrick Hamer, ChargePoint’s Vice President of Capital Markets and Investor Relations. Patrick, please go ahead. Patrick Hamer: Good afternoon and thank you for joining us on today’s conference call to discuss ChargePoint’s first quarter fiscal 2024 earnings results. This call is being webcast and can be accessed on the Investors section of our website at investors.chargePoint.com. With me on today’s call are Pasquale Romano, our Chief Executive Officer and Rex Jackson, our Chief Financial Officer. This afternoon we issued our press release announcing results for the quarter ended April 30th, 2023, which can also be found on our website. We’d like to remind you that during the conference call, management will be making forward-looking statements, including our outlook for the second quarter of fiscal 2024. These forward-looking statements involve risks and uncertainties many of which are beyond our control and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today and we undertake no obligation to update these statements after the call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-K filed with the SEC on April 3rd, 2023 and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call which reconcile to GAAP in our earnings release and for certain historical periods in the investor presentation posted on the Investors section of our website. And finally, we’ll be posting the transcript of this call to our Investor Relations website under the Quarterly Results section. And with that, I’ll turn it over to Pasquale. Pasquale Romano: Thank you, Patrick, and thank you all for joining us today. We delivered a strong first quarter. Revenue was at the high end of our guidance range at $130 million and non-GAAP gross margin sequentially improved two points to 25%. To put these results into perspective, we achieved a 59% year-over-year growth rate in the first quarter and the second largest quarter in ChargePoint’s history. We did that while the EV installed base in North America and Europe are still in single-digits, and the EV market is only at the beginning of a decade’s long growth cycle. We also achieved this growth in the midst of a challenging macroeconomic environment. Diversification across verticals and geographies continues to contribute resilience to our business. So while we saw less growth in North American Commercial and Residential than we would have liked due to what we believe is a delay in discretionary purchases we continued to see overall growth and margin improvement. Rex will address guidance for the second quarter. But just to give you a sense of the magnitude of the long-term opportunity ahead of us, the midpoint of that guidance would make Q2 the largest quarter in ChargePoint’s history. You’ll also hear Rex talk about non-GAAP adjusted EBITDA. To give some context, we use non-GAAP adjusted EBITDA as a key measure of the health of our business as we drive towards profitability and as we disclosed in our proxy statement filed last week. This metric is one of the two components of our annual management bonus programs. Beneath the top-line results, we’re continually improving our operations and investing for future scale. We have consistently improved gross margins while recovering from supply chain issues making meaningful changes to the cost of our products and optimizing our operations. Also as we scale, we are carefully managing our operating expenses while making the necessary investments in our support operations and internal business systems. We are committed to delivering dependable infrastructure to our customers. So drivers can find it, use it and depend on it everywhere. Turning back to Q1, we saw two areas of particularly strong growth, Europe and fleet. For the first time in our history, Europe delivered over 20% of ChargePoint’s quarterly revenue. Meanwhile, Q1’s fleet billings more than doubled year-over-year despite supply limitations on vehicles entering the segment relative to demand, and as a percentage of billings, fleet increased from Q4. We’re encouraged to see continued resilience in these growth areas. Beyond the financials, we continued to focus on our products. We offer industry-leading hardware and software for nearly every fueling vertical. Our solutions help our customers deliver the kind of EV driver experience that will continue to accelerate EV adoption across North America and Europe. In brief, better charging infrastructure delivers a better driver experience, which drives more value across the entire EV ecosystem. The positive feedback loop for growth that benefits ChargePoint, our partners and EV drivers in the environment. We are betting on the continued changeover from fossil fuels to electric drive regardless of OEM or vertical. And as a result, we believe we are an index for the electrification of mobility. Before handing off to Rex, let me update you on a few key statistics to give you a little more color on our continued growth. On the network side, we give drivers and ecosystem partners access to approximately 745,000 EV ports in North America and Europe. 243,000 of these are active ports under management on the ChargePoint network up from 225,000 ports last quarter and we recently passed a milestone of over 500,000 roaming ports. These roaming ports are critical to delivering a world-class ecosystem to ChargePoint’s drivers site host customers and strategic partners such as OEMs and fuel card providers. Approximately 21,000 of the 243,000 ports on the ChargePoint network are DC fast-charging up from approximately 19,000 at the end of Q4 and approximately one-third of our overall ports are located in Europe. We count 76% of the 2022 Fortune 50 and 56% of the 2022 Fortune 500 as our customers. This reflects excellent penetration given our land and expand strategy, the stickiness of our solutions, and our strong rebuy rates. From an environmental perspective as of the end of the quarter, we estimate that our network now has fueled approximately 6.3 billion electric miles avoiding approximately 252 million cumulative gallons of gasoline and over 1.25 million metric tons of greenhouse gas emissions. So when you put all that together, it shows that despite the current economic environment, ChargePoint growth continues. We made significant progress against our long-term road map ensuring that ChargePoint scales ahead of this remarkable market opportunity. We’re running a highly differentiated business that is not CapEx intensive. And as you’ll hear from Rex, we’re heading into the black while we turn the world green in the early innings of the EV transition Rex, over to you for financials. Rex Jackson: Thanks, Pasquale. As a reminder, please see our earnings release where we reconcile our non-GAAP results to GAAP and recall that we continue to report revenue along three lines. Network charging systems, subscriptions, and other, network to charging systems is our connected hardware. Subscriptions include our cloud services connecting that hardware, assure warranties, and our ChargePoint-as-a-service offering where we bundle hardware, software and warranty coverage into recurring subscriptions, other consists of professional services and certain non-material revenue items. As Pasquale indicated, we had a solid Q1 with revenue of $130 million, up 59% year-on-year and above the midpoint of our previously announced guidance range of $122 million to $132 million, down seasonally as expected from Q4, Q1 was notably the company’s second largest quarter ever and a good start for the year when compared to Q1 contributions over the past two years. Network charging systems at $98 million was 76% of Q1 revenue, down from $122 million and 80% in Q4, due to typical seasonality. Q1 revenue from network charging systems grew 65% year-on-year. Subscription revenue at $26 million was 20% of total revenue, up 49% year-on-year, up sequentially, and again above the $100 million annual run rate we referenced in our last call. Our deferred revenue which is future recurring subscription revenue from existing customer commitments and payments continues to grow, finishing the quarter at $205 million up from $199 million at the end of Q4. We’re especially encouraged to see this continued growth in our recurring revenues in the very early days of what we believe is a decade’s long EV adoption curve. Other revenue at $5 million and 4% of total revenue increased 20% year-on-year. Turning to verticals, first quarter billings percentages were commercial 63%, fleet 24%, residential 11%, and other 2% reflecting a particularly strong performance in fleet. Commercial grew 44% year-on-year, while fleet was up 129%. Residential grew at 13% year-on-year, and maintained its generally consistent billings percentage. From a geographic perspective, Q1 revenue from North America was 79% and Europe was 21%. As Pasquale mentioned, Europe continues to outpace North America on a percentage basis of 70% year-on-year. Turning to gross margin, non-GAAP, for Q1 was 25% up sequentially from Q4 is 23% and up eight points from 17% in Q1 of last year. This improvement is primarily a combination of diminishing supply chain and logistics expense pressures, significant operational improvements and better scale. We continue our considerable investment in our driver and host support infrastructure because we believe support and reliability, our critical differentiators for both drivers and our customers. We expect continued improvement in non-GAAP gross margin this year. Non-GAAP operating expenses for Q1 were $85 million a year-on-year increase of 2% and a sequential increase of 6% primarily reflecting payroll taxes as well as annual compensation increases effective April 1st. As we look out to the rest of 2023, we will manage expenses carefully and expect to deliver improvements in operating leverage. As you may recall in calendar 2020 and 2021, our OpEx which reflects significant forward investments in our business, was at approximately 100% of our revenue. In 2022, we took that down to 53% in Q4 and 69% for the year. In Q1, we were at 66% given revenue seasonality, but again expect continued improvements this year, particularly in the second half. Given this trajectory, I’d also like to expand on Pasquale’s comments regarding non-GAAP adjusted EBITDA. We added this metric and the associated reconciliation today in our press release with the goal of better illustrating our path to profitability. To calculate adjusted EBITDA, we take our non-GAAP net income loss and add back interest, taxes and depreciation. The depreciation component is low. Thanks to our business model. Using this metric, Q1 non-GAAP adjusted EBITDA was a loss of $49 million a year-on-year improvement of 27%. We look to cut this loss further by approximately two-thirds by Q4 of this year. Looking at cash, we finished the quarter with $314 million, down from $400 million last quarter. As in prior quarters, the primary driver of our negative cash flow is operating loss. In Q1, we also managed to break free on a number of supply chain issues and move our inventory solidly from raw materials and WIP or work in progress, to finished goods meaningfully increasing our inventory level, which helped us avoid leaving business on the table as we have been forced to do in recent quarters. This build helped us in Q1 and sets us up well for Q2 and for Q3. Inventory will vary as we look forward, but we expect it will grow with the business. We used our ATM very likely in Q1, adding $18 million in cash through the program. We will evaluate use of the ATM on a quarter-by-quarter basis and also continued to assess non-dilutive liquidity options. To close on a couple of other key figures, stock-based compensation in Q1 was $24 million consistent with the past three quarters. Our annual compensation cycle includes equity. So we expect our annual step-up and stock-based compensation in Q2 to be approximately $8 million and to be fairly constant for the ensuing three quarters. We had approximately 353 million shares outstanding as of April 30, 2023. Turning to guidance for the second quarter of fiscal 2024, we expect revenue to be $148 million to $158 million, up 41% year-on-year at the midpoint. We are committed to being adjusted EBITDA positive in Q4 of calendar 2024 and remain committed to being cash flow positive by Venezuela. In summary, we’ve achieved the growth we expected to achieve despite significant headwinds. We continue our march to profitability even while we invest in operational excellence at scale. Our differentiated business model is not CapEx intensive and our adjusted EBITDA metric, which we consider to be a strong indicator of the overall health of our business gives us confidence in our trajectory. With that I’ll turn the call back to the operator for questions. Q&A Session Follow Chargepoint Holdings Inc. (NASDAQ:CHPT) Follow Chargepoint Holdings Inc. (NASDAQ:CHPT) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] We’ll take our first question from Gabe Daoud with Cowen. Gabe Daoud: Hey, thanks guys, I appreciate all the prepared remarks, maybe Pasquale. I just wanted to hit on the comment earlier in your prepared remarks just about some of the commercial and residential, we missed that you guys noted, just curious if you could give a bit more color on how that may be snaps back as we progressed through the rest of this year and maybe what’s kind of embedded in your own internal forecast. Pasquale Romano: So, hi, Gabe. It’s a very simple answer. Actually, the beauty of this market is the utilization pressure sits there because EVs keep — we keep converting the installed base from fossil fuel to electric vehicle. Businesses right now, all businesses, commercial businesses that have a discretionary need for charging for their employees or their customers can adjust timing to deal with the macroeconomic uncertainty. So the need doesn’t go away, but the optionality to delay addressing that need in some of our commercial customers exists. What I’ll point you to though is something that we’ve commented on in previous earnings calls as we went through the pandemic. The mix in our business by vertical shifted pretty meaningfully during the pandemic because we went into an abrupt work from home situation and other areas of the business because we’ve been broadly placed across verticals and geos, other places in the business picked up the slack. So we didn’t have to deal with the massive discontinuity financially. You’re seeing that I think play out here again. So we still I think turned in very aggressive growth on a quarter-to-quarter basis, Q1 this year to Q1 last year. It’s a healthy percentage step-up in the geo-diversity especially given that Europe is now 20% of the business and performing strong and fleet up 200% year-over-year similar Q1 to Q1. It’s just evidence that as the macroeconomic water balloon exerts its pressure on the different verticals that we’re diverse enough to take up the slack. So we’re not in a position where we think the demand has gone away and that it’s perished, we’ll get it back as the macroeconomic situation clears up, hope that answered it. Gabe Daoud: Yeah, that’s great color. Thanks, Pasquale. Maybe as a follow-up just and — maybe I’ll ask just about the mix shift or just the billings and the price momentum that you reported in fleet in particular. Could you maybe just give us a bit more color on where exactly are you seeing that strong growth and strong demand within fleet? Is it last mile logistics? Is it I guess on the light-duty vehicle side just given how we’re still vehicle constrained on medium and heavy duty? But just curious I guess is what can you say on fleet, what’s really driving the momentum there and then is it also more fleet momentum in Europe versus the US? Or is it fairly similar? Thanks guys. Pasquale Romano: It’s easier to go backwards with your follow-up question. It’s pretty balanced between Europe and North America fleets. As I said in my prepared remarks, it’s vehicle limited right now, if OEMs were producing vehicles in quantities to match demand, you’d see faster penetration and conversion from fossil fuel to electric. It’s actually well aligned with a softer macro in that everyone’s looking for cost savings obviously and these are meaningful — these vehicles are meaningful components of the cost structures of the businesses that they serve and what that’s done is it’s slanted as I’ve mentioned by the way consistently in previous calls, it’s slanted to land, but not much expand within a customer. And so that’s, I think, just a good indicator for things to come in the future. When that starts to uncoil, it’s complicated, given that there is a bit of a dependency there on vehicle OEMs producing things at scale. One of the bright spots that I mentioned before regarding fleet is transit because that’s the most mature segment. And so we continue to see that segment do quite well, but there has been no general shift in mix between the quarters, that’s worth — that’s materially worth reporting. Gabe Daoud: Okay. Okay, great. That’s helpful. Thanks, guys. I’ll take the rest offline. Operator: We’ll take our next question from Colin Rusch with Oppenheimer. Colin Rusch: Thanks so much guys. Can you talk a little bit about the dynamics in the US commercial market? Can you give us a bit more detail on what’s happening with commercial property owners as they work through cost of capital changes, rental rates and looking at upgrading amenities? With the sales cycle, it looks like conversations you’re having with folks around when and kind of volume of deployments? Pasquale Romano: Colin, the conversation is not any different now than it’s been in the past. The commercial conversations tend to be a mixed bag of are you dealing with the tenant? Are you dealing with the property manager? Are you dealing with the landlord? Are you dealing with all of the above in combination? So it really is situational. And that hasn’t changed. You are seeing property developers and property managers take a more keen interest right now in charging as an amenity more broadly in their portfolio versus in hotspots driven more by tenant — kind of tenant activities. But I think, in general, because the dominant situation there is return to office and as you’ve seen in many statistics that have been reported, we are not — we’re moving to — we’re moving back to a larger component of in-office. But we certainly haven’t snapped back all the way. So that’s probably the biggest component in commercial shift is if people aren’t driving to the office, so workplace charging component will continue to basically move down proportionately to effectively the utilization in the parking lot at office buildings. It doesn’t mean that there isn’t charging going in. It just goes in proportional to the number of days folks are in the office. We will also remind you is it’s not — if you go in three days or if you go in five, it generates the same amount of utilization pressure in the parking lot on these three days if they are synchronized. So there’s a lot of puts and takes there. And I think as this continues — and it gets confused by a lot of other things that are going on in the macro as well, it gets — the complexity goes up. So we’ve got good visibility into it and we’re managing it closely. Colin Rusch: Excellent. That’s super helpful. I’ve got two other things. Just looking for an update there and then maybe a little bit disparate, some of the permitting streamlining efforts that are going on at state level and even at a national level, if you could just give us a sense of anything that you’re tracking very closely there that could be meaningful for the business and then also the potential to consolidate some of these not — these non-fully networked chargers, whether it’s in the US or Europe and how that opportunity is changing for you guys near-term? Pasquale Romano: It is easier to take that one backwards. If you look at consolidation of non-network chargers, there’s a lot of programs, a lot of, I mean, not that our revenue is primarily subsidy dependent, but almost all I can think of anyway subsidy programs have a requirement for the charger to be managed connected to some port of network and meet some set of requirements either at the most basic level for reporting, but usually includes some energy management to give some benefits to the grid. So what you should think about there is a lot of the unmanaged chargers that are out there, will likely get replaced with managed chargers because if they don’t have the necessary communication and processing gear, it’s easier to just tear them out, most of the work by the way is in laying the electrical infrastructure leading up to the chargers. So that’s a very cost-effective swap out. That’s not something that we see as significant yet as a replacement cycle, only because the market is scaling so quickly, the growth sort of swamps it, but I would expect that those things would change out over time. With respect to permitting, I just want to point you to a couple of things in the prepared remarks. If you look at the total ports on our network in terms of activated and under management and that means they’ve not only gone through full installation, but they’ve also gone through software activation. That means the customers decided how they want to use it all that sort of stuff. And we went from 225,000 ports in Q4, to 243,000 ports and you can read the remarks, but that was spread pretty uniformly between DC and AC. What’s interesting in that is the pipeline is already built into our numbers because that is not representative of the ports we sold last quarter. That’s representative of the ports that we sold at some previous months or set of months that have gone through the construction and installation process and the activation process which is not an instantaneous thing in time. So this — you’re seeing in the port growth rate the shadow of the permitting delays print through. Now, for the big stuff, right, the big corridor fast-charging programs, a lot of the big fleet transit programs. Yeah, we see permitting delays continue to be a challenge for our customers. But again that has been a challenge for our customers, for a while, we absolutely would applaud to any change in permit streamlining or utility interconnect streamlining because it will certainly help accelerate, it will accelerate some of the customers’ ability to add the necessary infrastructure. So headline delays are built into our numbers, built into our guide, they’re built into our numbers. They’re built into everything that you’re hearing from us. If we can make it go faster, it’s upside. Operator: [Operator Instructions] We’ll take our next question from James West with Evercore ISI. James West: Hey, good afternoon guys. Hey, Pat. Thanks, Rex. Wanted to ask about the announcement out of Tesla and Ford, a couple days ago, their alignment, the opening of the sort of the supercharger network and what your thoughts were around that? I mean is it a nothingburger? Or is it something to be expected? Is it showing us that there’s two superchargers out there? What’s the — what’s your take on that? Rex Jackson: So I could have bet if one of you would have asked that question. So the shortest way I think to crystallize it in your mind is that, Tesla has been an outsized player, right now they are still sitting around 70%-ish market share in the United States in terms of vehicles in the installed base and that’s Supercharger network has been around since the beginning of the time that we’re in revenue and if it weren’t for Tesla’s on the road, our customers would have no reason to buy a ChargePoint charger because the dominant car there, up to now, and they’re generating effectively the utilization pressure in the parking lots that are causing across vertical, across all our verticals, customers who want to buy our products and services. So the net-net is the Supercharger network whatever effect it’s having is built into our numbers, okay? Now with that said, our fast chargers, in particular, because on the AC chargers side, Tesla ships with an AC adapter since the beginning of time, it’s easy, it doesn’t impair anything. So that’s a — there’s literally no impact there. On the AC side, I mean on the DC side, our chargers have modular cables and modular holsters. So the ability for us to address if the need arises, the ability in particular use cases to add a direct Tesla cable versus using an adapter like people use today, is possible we’re now spending time obviously thinking about innovative ways to not have to increase what is very expensive element and extra cable on a charger to be able to get around some of those problems. So stay tuned, we’ll be pretty innovative there but I wouldn’t — I don’t read it as a bad thing for us long-term at all. James West: Got it. Okay, thanks. Operator: We’ll take our next question from Morgan Reid with Bank of America. Morgan Reid: Hi, everyone. Thanks for taking my question and nicely done on the growth drivers in fleet in Europe. Just curious if you can maybe elaborate on how we should think about that strength through the rest of the year. Just wanting to understand how those two segments, in particular, are expected to scale through the year here after some nice growth here in the first quarter. Pasquale Romano: I would expect fleet to continue to be strong, these are customers that are electrifying for hard business reasons. There is no discretion in electrification. It’s competitive in the long-term for fleets, for most fleets and then in the long-term, drops our cost structure and there’s a long learning curve and optimization cycle. So they need to start today to not have it be an impediment to their business in the long-term. So we expect that segment regardless of the macroeconomic environment to be very strong on a go-forward basis. Europe is ahead of the US currently in EV adoption. We expect it to continue to be strong. There is a more consistent policy mandate across all of Europe supporting the transition from electric drive to — from fossil fuels to electric drive, now correspondingly in the long-term, we don’t see any major difference between the US and Europe. Remember OEMs have to operate internationally and supply chains and cost structures will shift favorably to EVs over the not-too-distant future. So I think it’s an inevitable conclusion that in both markets, you’ll see a conversion rate but currently, Europe is for all the reasons I mentioned going to continue to be I think very strong for the company. So we would expect that we would see strong growth from that sub-vertical or sub-geo I should say. Morgan Reid: Great. Thank you. And then also, can you just talk about how we should think about the OpEx discipline through the year? And you all talked about kind of scaling operating leverage towards a positive inflection later this year. Just curious if you can kind of help quantify the moving pieces there as you look to continue scaling the topline again still a very disciplined OpEx line. Pasquale Romano: Yeah. So the short answer is we have a number in Q1 and we’d like to stay close to that number for each of the rest of — the next three quarters of this year, obviously there’ll be some variations last year, we were very consistent going out of the gates and staying close to it. So I think we’re going to try to operate within a pretty tight range. Morgan Reid: Great. I’ll take the rest offline. Thanks. Pasquale Romano: Thank you. Rex Jackson: Thanks, Morgan. Operator: We’ll take our next question from Matt Summerville with D.A. Davidson. Matt Summerville: Thanks. First, just a question on gross margins up 200 bps sequentially, how should we expect that to kind of play out as we move through the year? Should we expect a similar kind of step function improvement quarter-on-quarter something a bit more conservative to that? And what are the main levers to gross margin improvement as we sit here for the balance of your fiscal ’24? Pasquale Romano: Yeah. So I think, as we said, we expect continued improvements. I don’t think anyone here would say that ’25 is a place that we should be parking our electric vehicle for these to go up, whether it goes up a point or two or whatever, quarter-on-quarter, we might be seeing, is very mix-dependent, but I’m confident that we’re going to head towards the numbers we’ve discussed before, towards the end of the year, I don’t want to peg it to a number, but it’s going to be better in Q4 than it is today. So expect it to continue to decline this year. Matt Summerville: And then with respect to the comment you made Rex towards any of your compared remarks. Are you thinking cut the EBITDA loss by roughly two-thirds between now and the fourth quarter, so say going from $49 million to say $16 million or thereabouts? Is the entirety of that bridge just scale from the revenue growth you’re expecting? Or are there actual cost and expense cuts that are contemplated in there? Thank you. Pasquale Romano: It’s actually all of the above. Clearly, grow the revenue line, which we would hope to do, consistent with what we’ve done in prior years because you start in Q1 and you end up in Q4, Q4 is a lot better than Q1. So clearly that helps. We expect gross margin to improve during the year that definitely helps a lot. And then if we are disciplined on OpEx and keep that in flattish territory, you can make the math work pretty quickly. Operator: We’ll take our next question from Mark Delaney with Goldman Sachs. Mark Delaney: Yes, good afternoon, and thanks very much for taking my question. I was hoping to better understand some of the supply chain dynamics, I guess in terms of the P&L impact and stick to the gross margin theme first. You guys have been talking about how much of a headwind to gross margin, supply chain, I think at one point, it was something like 900 basis points of a headwind, where does that stand as of this most recent quarter in terms of the impact. And then more broadly supply chain, if you could speak around, how you see that progressing? And do you think supply chain hold you back in terms of hitting your shipment target for the balance of the year? Thanks. Pasquale Romano: Yeah, thanks for the question, Mark. So to start, the PPV/supply chain impact that we’ve been talking about, it’s probably closer to five and six points per quarter. There is logistics charges. We can take it up another quarter two and then we have had a couple of write-offs that we did last year that impacted us. So I just want to frame that the percentage points there, it’s really closer to five or six that are specifically, supply chain, no question that has gotten much, much better from a supply perspective. So we really snapped through this quarter and I was glad to see. I think I actually said in prior calls jeez I’d love to build some inventory, right, because we’ve had to lead business on the table in prior quarters and backlog out of whack. So we’re back to a nice rhythm now. I think from a build perspective there, as you can imagine, there are some prior deals that we had to cut that gets supplied that’s now sitting in inventory. So you won’t see a 100% of the supply chain impact disappear overnight. We obviously have to work that through existing inventory and sell that through, but I would say from an operational perspective, logistics are pretty much back to normal, which is a real-time thing. However you don’t. And then the supply chain thing also back to a really good place. So once we work through any existing inventory that had those higher prices previously will be hitting our stride. So but I think it’s fair to say that we are well past the worst of it. Mark Delaney: Thank you. Operator: Our next question comes from Stephen Gengaro with Stifel. Stephen Gengaro: Good afternoon, gentlemen. One thing for me, I wanted to get your read on NEVI funding, kind of where we stand and what your thought processes on timing, but also, do you have insights into kind of where your customers are in the process as far as trying to secure funding? Pasquale Romano: Sure, Stephen. So just to give you some hard facts around NEVI, there are exactly four states where applications on NEVI proposals are due back within shortly, in general, a little over half the United States has programs that are effectively live where we’re working applications and comments that I’ve made in the past have not changed and that we work across the board with our customer base where the customers are aligned well positionally with position requirements, their location requirements within the NEVI program as well as having the right amenity structure, giving a driver something to do that they would want to do, while they are on a road trip. So combining those two things, we are orchestrating responses to the NEVI program, and sometimes by the way, we’re in multiple applications as the technology provider with different sets of folks from our customer base, that’s generally how we approach it. So think of us as trying to put together this set of optimal sites to meet the state’s requirements by looking into our customer base or potential customer base and trying to orchestrate that. Stephen Gengaro: Okay, great, that’s helpful. So would you expect like an inflection point when the funds are flowing? Or do you think it will be a kind of a more smooth, smooth, just kind of realization of those revenues over time? Pasquale Romano: Yeah, so Stephen, this is what I referred to as an all whoosh no bang industry. If you think about what I just said there, right? It’s all whoosh and no bang. So the timing of all of this stuff, while you will see NEVI starting as we get into 2024 to start to build momentum, right? It’s going to build — it’s going to build along — there’s not going to be a sharp discontinuity where you suddenly going to go vertical on something like that just is this market just doesn’t let you state programs and how state programs are implemented, just doesn’t let you state programs and how state programs are implemented. Just doesn’t let you look at the VW Appendix D programs that contributed to our revenue and it contributed to it in a smoothly increasing way over that program and we would expect NEVI bigger in magnitude to have a similar impact. So I wouldn’t expect some discontinuity out there in the future. The sun and the moon and the stars could align and that could happen just not consistent with history. Operator: We’ll take our next question from Bill Peterson with JPMorgan. Bill Peterson: Yeah, hi, good afternoon and nice to see the gross margin improvement. Just like to clarify in terms of the guidance for this current quarter, it sounds like what you’re saying in some of the trends you saw in the first quarter, are to continue, but just want to make sure still continued relative strength in Europe and fleet, still some I guess discretionary slowdown in commercial and residential. Is that the right way to think about it? Or are there some other areas that are starting to unlock or I guess when does the commercial and residential start to unlock? Is it — I mean we’re kind of past the debt ceiling. What are people, I guess, waiting on at this point from your vantage point? Rex Jackson: Yes, Bill, thanks for the question. First of all, in looking forward to Q2, we did not put parameters around that. But to your point, residential is a function of the sale of cars, right? So keep an eye on how fast EVs move from OEMs into the hands of consumers and that’s a hard one to gauge, but it does look like the OEMs are catching up on their ability to deliver which is great. Commercial is tied to mostly the back to work, although there’s a lot of new construction and other areas where it’s just an imperative because this isn’t a nice to have anymore. This is infrastructure you’ve got to put in. So as the commercial sector — it’s happier and less constrained. Obviously, I think that will be down back to the benefit of our business. Thank goodness in both — in the commercial sector for our existing customers because they keep coming back. So they are a very, very nice underpinning for our existing revenue and what we’re looking at in Q2. And then fleets, you didn’t mention fleet, but fleets, a little harder to predict because it’s — it’s funny on the front end, it tends to be smaller than you would expect. And then on the middle and the back end, it’s bigger than you would expect in terms of per customer. So that could be a little [indiscernible] but Q2 is just a blend of the stuff that we see. I don’t know that it’s going to be meaningfully or wildly inconsistent with the stuff we’ve seen in Q1. Bill Peterson: Yes. Okay. Thanks. That’s a good leading to my second question. So you’ve given some good parameters that you do expect some gross margin, I guess, expansion kind of keep OpEx for any flattish. So that’s really good to back into the two-thirds improvement on the fourth quarter. But I guess, holistically, if we think about third-party forecast, IHS has nearly 60% EV growth in the US this year. I think it has above 60% EV growth in Europe for the calendar year. Your current quarter kind of 40%, 41% year-on-year growth, but is there any reason to think in the back half of the year that at least your network systems, charging systems growth wouldn’t be in that kind of range? Rex Jackson: Well, I wouldn’t put that, frankly, I haven’t thought about it and exactly that those percentage terms. I do think that — the one comment I made in my prepared remarks, to look at the shape of the year and our ability and then saying we think we can cut the adjusted EBITDA loss by approximately two-thirds. It tells you we’re thinking we’re going to have a pretty bad second half, right? So I wouldn’t express in percentage terms, but I would say we’re obviously looking forward to a very strong second half, which is frankly what we’ve done in the last two years in a row. Operator: We’ll take our next question from Alex Potter with Piper Sandler. Alexander Potter: Perfect. Thanks. I had a question, I guess, on customer satisfaction, uptime reliability. I know you’ve done a big focus for the company, those metrics maybe in the past weren’t where you would want them to be. Just interested in knowing maybe what inning you’re in, in terms of addressing that, both, I guess, qualitatively, but also to the extent possible to translate that into P&L impact growth would also be useful and interesting. Thanks. Pasquale Romano: A lot of angles on the answer to that question. First of all, I can’t speak for other charging manufacturers, but we’re very proud of the reliability of our systems and the uptime. We’ve had a variety of different packages for parts and labor warranty programs since the beginning of the company. We’ve encouraged customers to purchase those programs. We have a very high attach rate of those programs, as we’ve commented on that before. All our chargers are connected to our network effectively. So we have good visibility as to general uptime on the network and whether the chargers are in a catastrophic state of failure or not. There are a few mechanical failures we cannot spot, but we have drivers that have a nice little mobile app in their pocket and boy, will they tell us when something is broken. They’re a good canary in a coal mine from a network hygiene perspective. And with that said, we are doubling down now even harder on network hygiene. We are — because of inventory relief, we now can turn around spare parts very, very, very quickly, next business day in most cases. That was not true during the pandemic. There was some delay there because obviously, we were impacted and we had no — we were hand-to-mouth on inventory. So I think that hurt the entire industry in terms of repair cycle delay, that has subsided now. We have completely revamped our support operations across the board, driver support, station-owner support, especially in fleet. We have a lot of new programs in fleet for parts and labor warranty, training of self-maintainers, forward stocking of spares, et cetera. So we think we’re actually in quite good shape with respect to our ability to handle that. We’re not going to get over confident. We’re going to continue to watch it closely. And it is, as you’ve seen in my prepared remarks, multiple times now, it is a big rotation. There was a question earlier that Rex took with respect to operating expense and operating expense focus areas and any focus area changes. And what we’ve consistently said over the last several earnings calls, is that we have lived inside what is a flattish envelope for operating expense, but we are not living inside a flattish operating expense with respect to our efforts on reliability, support operations, et cetera. So we are moving emphasis because we believe that, that is the biggest differentiator you can have right now. Is — it has to be reliable, and we’ve commented also previously the construction of our products are not only from a hardware perspective, looked at from a software point of view inward. So they’re designed for all the features that we think are great, but they’re also designed to be repaired at an incredibly rapid rate and also to be able to support forward stocking of spare parts so that there can be effectively a minimum number of subcomponents we build all our charging infrastructure out of, so it can be very easy to support the repair cycle that will need to support to meet the uptime requirements of most of our customers. So huge investment on our side. Absolutely huge. Operator: Our next question comes from Shreyas Patil with Wolfe Research. Shreyas Patil: Hey, thanks so much for taking my question. You guys have talked about how there is more diversity amongst your verticals as it relates to your revenue. Is there anything to consider in that from a margin perspective? I think in the past, you’ve talked about the workplace charger business being the strongest, fleet was a little weaker due to higher DC fast charging mix. Just curious how we should think about that. Rex Jackson: Yes. So it’s actually more product-specific as opposed to vertical specific but — so single-family home is single-family home, right? And that has a margin. We’ve talked about that. It tends to be healthy, but not as strong as some of the AC products that we put into our commercial and fleet operations. Strongest margins are long-standing AC products, which we’ve recently upgraded to higher power and made some other improvements. But — so where AC goes, you get a better margin and that can be commercial or fleet. And then obviously, we put a lot of effort behind a very robust DC portfolio, which is everything from model that fit in certain applications to what we call our Express Plus, which is modular architecture and the margins on those are getting — are good and getting better. We actually had really good progress because the brand new products and you’ve launched at a lower number than you ultimately expect to do. So I wouldn’t say it’s by vertical, it’s by product because all of our products — our products go into both of the major verticals, commercial and fleet. So I hope that helps you. But it’s — so think of it more from a product perspective. Operator: We’ll take our next question from Brett Castelli with Morningstar. Brett Castelli: Yeah, hi, thank you. Just following up actually on that previous question. Rex, you mentioned the rollout of the new CP6000, I think, on the AC side. Can you just kind of talk about sort of the mix between that new product and the more legacy product that you’re seeing today? And then also, can you touch on any margin differences between the new product versus the legacy? Thank you. Pasquale Romano: I’ll talk about the space that is carved out for itself, so to speak, and Rex can address the margin question in particular. We brought out the 6k not to replace the 4k series. We brought it out as a high-end product. It has a lot of things that obviously roll down over time into lower-cost products, but it’s the flagship currently and it also, for applications, where it’s needed, can provide more power per port and that is not necessary in most medium-duration parking scenarios. So it is not applicable necessarily to every single vertical, although it may have other features that make it applicable to other verticals because it has features across the board that are superior to the 4k product. Without getting into too much detail on the mix because it’s so vertical specific, what I will say is the fleet segment, if it goes with an AC more in a light commercial situation is typically using the 6k or are more lightweight products for light commercial, it is not typically using the 4k product, although we do have some fleet scenarios that use that. So the uptick in fleet, in particular, there’s some correlation there. And the 6k is the primary product we use in Europe. So from the commentary that I made — the primary AC product, I should say, that we use in Europe. So the comments that I made regard to fleet and Europe strength and the corresponding strength in the 6k, those one pulls the other, right? The fleet and the Europe business are more 6k dependent than they are 4k dependent. Rex, I’ll let you take the margin question. Rex Jackson: Yes. So from a margin perspective, the 6k, as Pat said, it’s premium product, higher performance, better features, obviously, we’re evolving the product portfolio in a positive way. It actually has similar margins in North America to the 4k. It’s not all the way there yet but it’s nice to be able to build a next-gen product and to preserve margin on that in the process. And then what’s helping us in Europe, as you may recall, we on the AC side, because of local requirements, et cetera, we’ve had to leverage third-party hardware, and now we don’t have to do that anymore because the 6k is a product that is legal and certifiable and works in both North America and Europe. So that’s been a nice improvement from a margin perspective for us in Europe. Operator: Our next question comes from Itay Michaeli with Citi. Itay Michaeli: Great. Thanks. Good afternoon. Just two quick ones for me. First, I was hoping you could maybe comment roughly on what you’re seeing on utilization of your charges, particularly among commercial customers. And I know not every customer is looking to maximize utilization per se, but curious what you’re seeing there? And second, for Rex, just in terms of the inventory build in Q1, maybe how should we think about working capital at a high level the rest of the year? Pasquale Romano: Two very different questions. I’ll take the first, Rex, you take the second. In terms of utilization, our sales team obviously is — sees utilization data as to our customers. It’s a standard reporting feature in our network. And the utilization has to be measured in the context of the hours of operation at the site. I’ll give you — so it’s hard to comment on utilization in the network as a whole and have that be meaningful because in any subvertical, the utilization is measured differently because it’s measured during hours. And the easiest example to give you is a stadium. We have a lot of stadium customers. The stadium is only active when there’s an event at that stadium. Measured on a utilization basis over a 24-hour, on a 365-day year basis, stadiums have horrible utilization unless there’s an event and then they’re 100% booked. So it all goes down to how you measure it. And utilization is very, very strong across the board. And if you want to see the best proxy for that, look at comments that we’ve made in the past about the rebuy rates. The rebuy rate tends to be the majority of the revenue within a quarter because as Rex mentioned in an answer to one of his questions, the initial buy is smaller than you think it should be and the follow-on buys are bigger than you expect them to be. And that’s because the customers start out with some experimentation, especially in the commercial segment where it’s more discretionary. And then they see the utilization and let that drive the expansion. So because the rebuy rate is so strong, it’s the best proxy you guys can use for, is the utilization on the network? Is it strong and is it growing? Rex Jackson: Yes, and very quickly on the inventory working capital question. No question in Q1, our inventory popped up almost $50 million. In truth, that’s actually a blessing not a curse because we went from a lot of long lead time items and a lot of stuff in raw materials to being able to kick things up and get some bills and we have low obsolescence risk on these products. So getting through that and having a blend to inventory of good finished goods that we can move and therefore, we have pretty back-end loaded quarters like most companies. And so knowing that you can ship, what you need to ship at the end of the quarter to meet demand is a really good thing. So I think the inventory will come down meaningfully on a percentage basis relative to revenue. If you look at like the size of the company, the question is bigger than it needed to be in Q1, but those the reasons because we’re coming out of the supply chain issue. And then working capital generally, we bring in inventory down relative to that, that will help as the company grows. And so I actually think that, that part of the picture will definitely improve later this year. Operator: We’ll take our next question from Joseph Osha with Guggenheim Partners. Joseph Osha: Hi, thanks. I just have one question. We talked a little bit about NEVI earlier. I’m wondering, given the timetable and the ambition of the CARB Advanced Clean Fleets rule, what your thoughts are about how that might begin to layer into your business? Thanks. Pasquale Romano: I mean you saw the strength in the fleet business. And so also the fleet business is one of — is interesting. California obviously usually leads the way in the United States with respect to innovation and policy and incentives. But because it’s just good for business to electrify your fleet from a cost structure perspective, we’re seeing a fleet business that’s pretty pervasive across Europe and the United States and not necessarily hotspoted just in California. And like any program, and this is very in line with the comments on NEVI, it doesn’t hit you all at once, it tends to build. So it will contribute. It will contribute over time because it will drive vehicle electrification but again, I don’t expect it to drive, it just can’t move. And remember, you need the vehicles to be able to have demand for the charging infrastructure and that’s the biggest variable there. You can have the incentive structure there, but it doesn’t necessarily mean that the vehicles are going to follow in perfect order. Operator: Thank you, everyone. This concludes today’s presentation. We appreciate your participation, and you may now disconnect. Follow Chargepoint Holdings Inc. (NASDAQ:CHPT) Follow Chargepoint Holdings Inc. (NASDAQ:CHPT) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

In this article, we discuss 10 stocks that billionaires love. If you want to see more stocks in this selection, check out Billionaires Are Crazy About These 5 Stocks.  Investors seem to have ignored all the panic around debt ceiling and are instead salivating over the possibility that the Federal Reserve might stop increasing interest […] In this article, we discuss 10 stocks that billionaires love. If you want to see more stocks in this selection, check out Billionaires Are Crazy About These 5 Stocks.  Investors seem to have ignored all the panic around debt ceiling and are instead salivating over the possibility that the Federal Reserve might stop increasing interest rates. If the US government successfully raises the debt ceiling and avoids default, the stock market could continue its positive trajectory for a while longer. On May 3, the Federal Reserve increased interest rates for the 10th consecutive time. However, the Fed indicated that these hikes may have reached their conclusion, partly due to concerns within the banking system. According to Jerome Powell, the Chairman of the Federal Reserve, a reduction in bank lending would impede an economy that the central bank was already trying to regulate as part of a larger effort to control and alleviate high inflation. Despite lingering worries about a potential recession in the later part of 2023, which have persisted for around 10 to 11 months, there is currently a sense of investor optimism. This is driven by satisfactory earnings in the first quarter and the possibility of the Federal Reserve temporarily halting interest rate hikes, which sets the stage for a strong market in June. The U.S. economy is also showcasing remarkable strength, as indicated by key factors like GDP and employment. According to the U.S. Bureau of Labor Statistics, there was a rise of 339,000 in total nonfarm payroll employment in May. However, the unemployment rate also increased by 0.3 percentage points to reach 3.7%. The sectors that experienced job gains included professional and business services, government, health care, construction, transportation and warehousing, and social assistance. Furthermore, the recent solid performance of financial, industrial, and material sectors disproves the notion of an impending economic slowdown, as these cyclical stocks normally drop in value before an economic downturn. Don’t Miss: 10 Chinese Stocks Billionaires Are Loading Up On Morningstar’s valuations suggest that investors can benefit from a portfolio that combines both value and growth investments, while reducing exposure to core investments. Both the value and growth categories are considered undervalued, although the growth category has become relatively less undervalued compared to the start of the year due to its strong performance so far. On the other hand, the core category is less appealing in comparison to the overall market average as it is closer to fair value. In terms of market capitalization, the valuations of large-cap stocks have slightly surpassed the market average due to their strong performance in the first quarter. On the other hand, mid-cap stocks are slightly below the overall market average in terms of valuations. However, small-cap stocks are notably undervalued, as they are currently trading at a significant 33% discount, as per Morningstar’s report.  Amid the stock market swings, billionaire investors exhibit a strong affinity towards lucrative investment opportunities in the realm of high-quality stocks. As per Insider Monkey’s data, some of the top stocks favored by billionaires during Q1 2023 included Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META).  Our Methodology  Insider Monkey tracks billionaire-owned stocks and in this article, we selected the top 10 stocks that attracted the highest number of billionaire investors during the first quarter of 2023. We have also mentioned the overall hedge fund sentiment towards each stock as of Q1 2023.  Image by Sergei Tokmakov Terms.Law from Pixabay Billionaires Are Crazy About These Stocks 10. Uber Technologies, Inc. (NYSE:UBER) Number of Hedge Fund Holders: 144 Number of Billionaire Investors: 21 Uber Technologies, Inc. (NYSE:UBER), an American company focused on mobility technology, is a highly sought-after stock among billionaires. In Q1 2023, Uber Technologies, Inc. (NYSE:UBER)’s revenue of $8.8 billion climbed 27.5% year-over-year, beating Wall Street estimates by $90 million. Year-over-year, gross bookings experienced a growth of 19%, and the Mobility and Delivery adjusted EBITDA margins achieved their highest quarterly levels to date. The number of monthly active platform consumers increased by 13%, reaching a total of 130 million. This growth was primarily fueled by an ongoing enhancement in consumer engagement with Uber’s Mobility services. According to Insider Monkey’s first quarter database, Uber Technologies, Inc. (NYSE:UBER) was part of 144 hedge fund portfolios, compared to 135 funds in the prior quarter. Billionaire David Tepper’s Appaloosa Management held a $190.2 million stake in Uber Technologies, Inc. (NYSE:UBER) during Q1 2023.  In addition to Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META), billionaires are loading up on Uber Technologies, Inc. (NYSE:UBER) shares.  RiverPark Large Growth Fund made the following comment about Uber Technologies, Inc. (NYSE:UBER) in its Q1 2023 investor letter: “Uber Technologies, Inc. (NYSE:UBER): Uber was a top contributor in the quarter following better-than-expected 4Q results and 1Q guidance. Gross Bookings grew 19% year over year to $31 billion, driven by 31% Mobility Gross Bookings growth and 6% Delivery Growth Bookings growth. 4Q Adjusted EBITDA of $665 million, up $579 million year over year, significantly beating management’s $600-$630 million guidance. Management guided to continuing growth in 1Q for Gross Bookings (20%- 24% growth) and Adjusted EBITDA (of $660-$700 million). UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now solidly profitable with the potential for substantial margin expansion and free cash flow generation to come. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its 131 million users (by comparison, Amazon Prime has 200 million members) and penetrate new markets of on-demand services, such as package and grocery delivery, travel, truck brokerage (the company had $1.5 billion in Freight revenue for 4Q22), and worker staffing for shift work. Given its $4 billion of unrestricted cash and $5 billion of investments, the company today has an enterprise value of $70 billion, indicating that UBER trades at 1.6x next year’s estimated revenue.” 9. NVIDIA Corporation (NASDAQ:NVDA) Number of Hedge Fund Holders: 132 Number of Billionaire Investors: 22 NVIDIA Corporation (NASDAQ:NVDA) is a technology company specializing in graphics processing units, computing, semiconductors, and artificial intelligence. Riding the wave of investor enthusiasm around artificial intelligence, NVIDIA Corporation (NASDAQ:NVDA) continues to experience a remarkable surge in its stock price, which could potentially push its valuation beyond $1 trillion if these gains persist. On May 24, NVIDIA Corporation (NASDAQ:NVDA) reported a Q1 Non-GAAP EPS of $1.09 and a revenue of $7.19 billion, outperforming Wall Street estimates by $0.17 and $670 million, respectively. In fiscal year 2024’s first quarter, NVIDIA distributed $99 million to its shareholders in the form of cash dividends. The company has announced that its upcoming quarterly cash dividend of $0.04 per share will be paid on June 30, to all shareholders recorded on June 8. According to Insider Monkey’s first quarter database, 132 hedge funds were bullish on NVIDIA Corporation (NASDAQ:NVDA), up from 106 funds in the prior quarter. Billionaire Rajiv Jain’s GQG Partners is a prominent stakeholder of the company, with a position worth $2.3 billion. Additionally, Insider Monkey’s records suggest that NVIDIA Corporation (NASDAQ:NVDA) was part of 22 billionaire portfolios at the end of March 2023. Alger Spectra Fund made the following comment about NVIDIA Corporation (NASDAQ:NVDA) in its Q1 2023 investor letter: “NVIDIA Corporation (NASDAQ:NVDA) is a leading supplier of graphics processing units (GPUs) for a variety of end markets, such as gaming, PCs, data centers, virtual reality and high-performance computing. The company is leading in most secular growth categories in computing, and especially artificial intelligence and super-computing parallel processing techniques for solving complex computational problems. Simply put. Nvidia’s computational power is a critical enabler of Al and therefore critical to Al adoption, in our view. As such, we believe Nvidia is a long-term high unit volume growth opportunity. During the period, NVIDIA reported fiscal fourth-quarter results that met expectations, as the company navigated. through an inventory correction associated with the broad macroeconomic slowdown. Moreover, management gave fiscal year earnings guidance that was better than analyst estimates. noting strong year-over-year growth in gaming and data centers. Management’s constructive assessment of 2023 prospects. coupled with the rapid rollout and adoption of generative Al offerings, led to positive share price performance.” 8. Visa Inc. (NYSE:V) Number of Hedge Fund Holders: 173 Number of Billionaire Investors: 24 Visa Inc. (NYSE:V) was part of 24 billionaire portfolios at the end of Q1 2023. In the second fiscal quarter, the non-GAAP earnings per share of Visa Inc. (NYSE:V) reached $2.09, surpassing the average estimate of analysts at $1.99. Additionally, the net revenue for the quarter amounted to $7.99 billion, compared to the consensus estimate of $7.79 billion. The company’s results for the fiscal Q2 exceeded expectations in terms of both revenue and earnings, exhibiting growth compared to the same period in the previous year. This positive outcome can be attributed to robust cross-border volume. On May 1, Barclays analyst Ramsey El-Assal raised the firm’s price target on Visa Inc. (NYSE:V) to $272 from $270 and reiterated an Overweight rating on the shares. According to Insider Monkey’s first quarter database, 173 hedge funds were bullish on Visa Inc. (NYSE:V), compared to 177 funds in the earlier quarter. Billionaire Chris Hohn’s TCI Fund Management is the largest stakeholder of the company, with 19.3 million shares worth $4.3 billion.  Polen Global Growth Strategy made the following comment about Visa Inc. (NYSE:V) in its Q1 2023 investor letter: “We trimmed Mastercard and Visa Inc. (NYSE:V) to equal weights of the Portfolio. Mastercard and Visa operate as a duopoly in a large and growing market. Over the last 50 years, global personal consumer expenditures (PCE) has grown 7-9% annualized. We expect 4-5% long-term PCE growth going forward. Additionally, the shift from cash to credit continues unabated, with a total credit penetration of only approximately 50% globally.3 This shift provides Visa and Mastercard with another ~4-6% of growth. When combined with PCE, this gives both companies high-single-digit to low-double[1]digit revenue growth opportunities. This growth estimate is before accounting for growth amplifiers like the acceleration of e[1]commerce, the shift from offline to online, and additional services. Both companies enjoy extremely strong network effects that provide strong competitive advantages. We have trimmed Visa and Mastercard because their combined weight grew to over 12% of the Global Growth Portfolio because of their recent performance and to fund our increase in Amazon’s position size. We added to both positions when their prices were depressed due to cross-border transactions deteriorating materially from the pandemic. Cross-border volumes came roaring back when travel corridors reopened, and although we are several quarters removed from the cross-border nadir, Visa still grew volumes >30% in 1Q23. Total cross-border volumes are now 132% of 2019 levels. At 4.5% each, both companies remain high conviction positions for Global Growth.” 7. Alibaba Group Holding Limited (NYSE:BABA) Number of Hedge Fund Holders: 128 Number of Billionaire Investors: 25 Alibaba Group Holding Limited (NYSE:BABA) is a highly favored stock among billionaires, with 25 billionaires holding the company’s stock in the first quarter of 2023. On May 18, Alibaba Group Holding Limited (NYSE:BABA) reported a Q4 non-GAAP EPADS of $1.56, beating market estimates by $0.21. The revenue of $30.32 billion topped Wall Street consensus by $410 million.  After Alibaba Group Holding Limited (NYSE:BABA) reported its March quarter results and expressed positive expectations for user and order growth in the June quarter, BofA analyst Joyce Ju reaffirmed a Buy rating on the stock on May 19. However, the analyst lowered the firm’s price target on the shares from $144 to $132. During the earnings call, Alibaba Group Holding Limited (NYSE:BABA) also revealed plans for a full spinoff of its Cloud unit, IPOs of Cainiao and Freshippo, and external financing for international e-commerce within the next 6 to 18 months.  According to Insider Monkey’s first quarter database, 128 hedge funds were long Alibaba Group Holding Limited (NYSE:BABA), compared to 113 funds in the prior quarter. Billionaire Lei Zhang’s Hillhouse Capital Management is a prominent stakeholder of the company, with 3.7 million shares worth $386.7 million.  L1 Long Short Fund made the following comment about Alibaba Group Holding Limited (NYSE:BABA) in its Q1 2023 investor letter: “Alibaba Group Holding Limited (NYSE:BABA) (Long +16%) shares performed strongly based on favorable sentiment surrounding China’s re-opening and indications from Chinese authorities that the prolonged restructuring process of Alibaba/Ant Financial was finally drawing to a close. The company remains a high-quality business with leading positions in both eCommerce and Public Cloud. We exited our position in January at around US$116 per share with the shares having rallied more than 90% since their early November lows and our China re-opening catalyst having played out. We subsequently re-entered the position in March with the shares having pulled back and with the company announcing a new organizational and governance structure. Alibaba has announced plans to split into six major business groups – Cloud Intelligence, Taobao Tmall, Local Services, Global Digital, Cainiao Smart Logistics and Digital Media and Entertainment Group. Each of these groups will be managed independently (separate CEO and board) and have the flexibility to raise external capital and potentially pursue separate IPOs. We believe this announcement is a strong catalyst to unlock the inherent sum-of-the-parts valuation discount in the company.” 6. UnitedHealth Group Incorporated (NYSE:UNH) Number of Hedge Fund Holders: 116 Number of Billionaire Investors: 25 UnitedHealth Group Incorporated (NYSE:UNH) operates as a diversified health care company in the United States. In the first quarter of 2023, 25 billionaires held stakes in UnitedHealth Group Incorporated (NYSE:UNH). On April 14, the company reported a Q1 non-GAAP EPS of $6.26 and a revenue of $91.9 billion, outperforming Wall Street estimates by $0.18 and $2.12 billion, respectively.  On May 25, Piper Sandler analyst Jessica Tassan initiated coverage of UnitedHealth Group Incorporated (NYSE:UNH) with an Overweight rating and a $580 price target. Piper Sandler believes that the Optum businesses within UnitedHealth Group Incorporated (NYSE:UNH) will play a crucial role in delivering consistent and exceptional earnings per share growth over the next ten years. The firm asserted that Optum will be the driving force shaping UnitedHealth’s trajectory in the coming decade, serving as an increasingly important entry point to the broader enterprise. According to Insider Monkey’s first quarter database, 116 hedge funds were bullish on UnitedHealth Group Incorporated (NYSE:UNH), compared to 110 funds in the earlier quarter. Billionaire Rajiv Jain’s GQG Partners is the biggest stakeholder of the company.  Like Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Meta Platforms, Inc. (NASDAQ:META), UnitedHealth Group Incorporated (NYSE:UNH) is on the radar of billionaire investors.  Alger Spectra Fund made the following comment about UnitedHealth Group Incorporated (NYSE:UNH) in its Q1 2023 investor letter: “UnitedHealth Group Incorporated (NYSE:UNH) is an integrated healthcare benefits company uniquely positioned to address rising healthcare costs for its customers, due to its vertical integration, size, and scale. The Optum health benefits services unit, which accounts for approximately 45% of the company’s operating earnings, in our view, has the potential to grow even further as customers look for ways to manage rising healthcare costs. During the period, shares detracted from performance due to several factors: 1) many 2022 healthcare winners with shorter duration profiles and persistent earnings profiles, such as UnitedHealth Group. underperformed in the first quarter of 2023, 2) uncertainty surrounding Medicare Advantage reimbursement levels from the Federal government in 2023, which will be determined later in the year, and 3) increased regulatory scrutiny in the form of potential Medicare Advantage audits across the industry. While these concerns have impacted UnitedHealth in the near-term, we believe company fundamentals remain intact given its large scale business model, competitive advantages, and medium to long- term growth prospects.”     Click to continue reading and see Billionaires Are Crazy About These 5 Stocks.    Suggested articles: 15 Best Healthcare Stocks To Buy Now 20 Poorest Countries in Europe 16 Best Retirement Communities in Florida Near the Beach   Disclosure: None. Billionaires Are Crazy About These 10 Stocks is originally published on Insider Monkey......»»

Elon Musk cofounded OpenAI with Sam Altman and others in 2015 but has criticized the company and its partnership with Microsoft since leaving in 2018. OpenAI CEO Sam Altman and Elon Musk have a long history.Getty Elon Musk helped found OpenAI, but he has frequently criticized the company in recent years. In March, OpenAI CEO Sam Altman called some of the billionaire's assertions "not true." Here's a history of Musk's relationship with OpenAI and its CEO. Musk and Altman cofounded OpenAI, the creator of ChatGPT, in 2015, alongside other Silicon Valley figures, including Peter Thiel, LinkedIn cofounder Reid Hoffman, and Y Combinator cofounder Jessica Livingston.OpenAI CEO Sam Altman and Elon Musk have a long history.GettyThe group aimed to create a nonprofit focused on developing artificial intelligence "in the way that is most likely to benefit humanity as a whole," according to a statement on OpenAI's website from December 11, 2015.Source: InsiderAt the time, Musk said that AI was the "biggest existential threat" to humanity.Elon Musk is CEO of Twitter.Carina Johansen/Getty Images"It's hard to fathom how much human-level AI could benefit society, and it's equally hard to imagine how much it could damage society if built or used incorrectly," a statement announcing the founding of Open AI reads.Source: BBC, OpenAIMusk stepped down from OpenAI's board of directors in 2018.Gilbert Carrasquillo/GC Images"As Tesla continues to become more focused on AI, this will eliminate a potential future conflict for Elon," OpenAI said in a blog post at the time, adding that Musk would continue to provide guidance and donations.Source: InsiderIn March, it was reported that Sam Altman and other OpenAI cofounders had rejected Musk's proposal to run the company in 2018.JASON REDMOND/AFP via Getty ImagesSemafor reported that Musk wanted to run the company on his own in an attempt to beat Google. But when his offer to run the company was rejected, he pulled his funding and left OpenAI's board, the news outlet reported.Source: Semafor, InsiderIn 2019, Musk shared some insight on his decision to leave, saying one of the reasons was that he "didn't agree" with where OpenAI was headed.Elon Musk.Susan Walsh/AP"I had to focus on solving a painfully large number of engineering & manufacturing problems at Tesla (especially) & SpaceX," he tweeted. "Also, Tesla was competing for some of same people as OpenAI & I didn't agree with some of what OpenAI team wanted to do. Add that all up & it was just better to part ways on good terms."Source: InsiderMusk has taken shots at OpenAI on several occasions since leaving.Frederic Brown/Getty ImagesTwo years after his departure, Musk said, "OpenAI should be more open" in response to an MIT Technology Review article reporting that there was a culture of secrecy there, despite OpenAI frequently proclaiming a commitment to transparency.Musk also added that his "confidence in Dario for safety is not high," referring to Dario Amodei, who led OpenAI's strategy at the time.Source: Insider In December 2022, days after OpenAI released ChatGPT, Musk said the company had prior access to the database of Twitter — now owned by Musk — to train the AI chatbot and that he was putting that on hold.Getty Images"Need to understand more about governance structure & revenue plans going forward. OpenAI was started as open-source & non-profit. Neither are still true," he said.Source: TwitterMusk was reportedly furious about ChatGPT's success, Semafor reported in March.When asked about the future of AI and work, Elon Musk says he has to have a “deliberate suspension of disbelief in order to remain motivated.”Bill Pugliano/Getty ImagesIn November, the chatbot took off and garnered millions of users for its ability to do everything from write essays to craft basic code.Source: Semafor, InsiderIn February, Musk doubled down, saying OpenAI as it exists today is "not what I intended at all."Michael Kovac/Getty Images for Vanity Fair"OpenAI was created as an open source (which is why I named it "Open" AI), non-profit company to serve as a counterweight to Google, but now it has become a closed source, maximum-profit company effectively controlled by Microsoft. Not what I intended at all," he said in a tweet.Source: TwitterMusk repeated this assertion a month later.NurPhotos/Getty Images"I'm still confused as to how a non-profit to which I donated ~$100M somehow became a $30B market cap for-profit. If this is legal, why doesn't everyone do it?" he tweeted.Source: TwitterAltman recently addressed some of Musk's gripes about OpenAI.Brian Ach/Getty Images for TechCrunch"To say a positive thing about Elon, I think he really does care about a good future with AGI," Altman said on a recent episode of the "On With Kara Swisher" podcast, referring to artificial general intelligence."I mean, he's a jerk, whatever else you want to say about him — he has a style that is not a style that I'd want to have for myself," Altman told Swisher. "But I think he does really care, and he is feeling very stressed about what the future's going to look like for humanity." In response to Musk's claim that OpenAI has turned into "a closed source, maximum-profit company effectively controlled by Microsoft," Altman said on the podcast, "Most of that is not true, and I think Elon knows that."Source: "On With Kara Swisher", InsiderAltman also referred to Musk as one of his heroes despite the fact Musk is "obviously attacking" OpenAI on Twitter.Drew Angerer/GettyIn a March episode of Lex Fridman's podcast, Altman said, "Elon is obviously attacking us some on Twitter right now on a few different vectors."Nonetheless, he called Musk one of his heroes, adding, "I believe he is, understandably so, really stressed about AGI safety."Source: Lex Fridman Podcast, InsiderAltman says he's learned some "super valuable" lessons from Musk.Drew Angerer/Getty ImagesIn a May talk at University College London, Altman was asked what he's learned from various mentors, according to Fortune. He answered by speaking about Musk."Certainly learning from Elon about what is just, like, possible to do and that you don't need to accept that, like, hard R&D and hard technology is not something you ignore, that's been super valuable," he said.Musk was one of more than 1,000 people who signed an open letter calling for a six-month pause on training advanced AI systems.Dimitrios Kambouris/Getty ImagesThe letter, which also received signatures from several AI experts, cites concerns of AI's potential risks to humanity."Powerful AI systems should be developed only once we are confident that their effects will be positive and their risks will be manageable," the letter says.Source: Future of Life Institute, InsiderMusk has since unfollowed Altman on Twitter; separately, Altman later poked fun at Musk's claim to be a "free speech absolutist."Kevin Dietsch/Getty ImagesTwitter recently took aim at posts linking to rival Substack, forbidding users from retweeting or replying to tweets containing such links, before reversing course. In response to a tweet about the situation, Altman tweeted, "Free speech absolutism on STEROIDS."Musk has called himself a "free speech absolutist" before and said it's one of the reasons he bought Twitter.Source: Big Tech Alert on Twitter, Twitter, InsiderRead the original article on Business Insider.....»»

The semiconductors space has been prospering in the glow of AI-boom, chip-manufacturing independence by major economies and falling interest rates. Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life, from cars, electronic gadgets to planes and weapons. The demand will continue to trend higher given the increased digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail, among others. However, supply crisis for chips has been prevalent.Chips ETFs like VanEck Semiconductor ETF SMH, iShares Semiconductor ETF SOXX, Invesco PHLX Semiconductor ETF SOXQ and Invesco Dynamic Semiconductors ETF PSI gained added 29.4%, 26.4%, 26.3% and 18.2% this year against a 9.8% gain in the S&P 500 (as of May 18, 2023). The rally could prolong ahead. We’ll tell you why.CHIPS Bill in U.S., EU & BritainThe CHIPS-Plus bill, dubbed the Chips and Science Act, in the United States launched last year was a plus. The bill would provide $54 billion in grants for semiconductor manufacturing and research, tens of billions to support regional technology hubs and a tax credit covering 25% of investments in semiconductor manufacturing through 2026.The European Chips Act launched this year too looks to help the bloc secure its semiconductor supplies, ensure independence and compete with the United States and Asia on tech. The 27 members of EU reached a 43-billion-euro-deal on the legislation and said the new rules would aim to double the EU’s global market share in semiconductors from 10% to 20% by 2030.Most recently, Britain launched a $1.2 billion semiconductor plan after U.S. and EU binge on chips. The investment will form part of a 20-year strategy on semiconductors — which has faced lengthy delays — outlining the U.K.’s plan to secure its chip supplies. The government will initially invest up to £200 million from 2023 to 2025 before expanding its commitments to up to £1 billion in the next decade, per a CNBC article.Emerging Technologies; the AI-BoomThe rapid adoption of cutting-edge technology like cloud, Internet of Things, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, 5G and other advanced information technologies, as well as the solar power industry, should continue to fuel growth.The latest uptake in the use of Artificial Intelligence should also contribute to the semiconductor space. Investors should note that the biggest semiconductor company Nvidia has added immense market cap this year on AI-boom. Nvidia’s super-upbeat Q1 result and the guidance should act as a cornerstone for the entire semiconductor industry in the near term.Cooling Inflation and Rate Hike MomentumPer Gartner, the global economy slowed down in the second half of 2022 due to high inflation, rising interest rates, higher energy costs and continued COVID-19 lockdowns in China. This impacted many global supply chains.Consumers also began to reduce spending, with PC and smartphone demand suffering, and then enterprises starting to reduce spending in anticipation of a global recession, all of which impacted overall semiconductor growth.       However, the inflation started to cool in 2023 and the Fed started to lower the magnitude of rate hike. Geopolitical tensions and regional banking crisis also helped lower rates. This scenario is a plus for high-growth technology companies like semiconductors.  Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.Get it free >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Invesco Dynamic Semiconductors ETF (PSI): ETF Research Reports VanEck Semiconductor ETF (SMH): ETF Research Reports iShares Semiconductor ETF (SOXX): ETF Research Reports Invesco PHLX Semiconductor ETF (SOXQ): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment Research.....»»

After a monumental jump this year, should you tap Nvidia's rally riding the wave of AI market frenzy at the current stage? This year, Nvidia Corp. NVDA has seen a rally that has catapulted its market value by approximately $400 billion. Its shares are up 109% this year versus the Nasdaq’s 32% gains. A lion's share of this gain is attributable to the current stock market hype around artificial intelligence (AI), with Nvidia's chips acting as the key tailwind, as quoted on a Bloomberg article.If this was not enough, shares rose further 24.6% after hours on May 24 after Nvidia reported estimate-beating Q1 earnings results as well as guidance. The post-earnings rally increased Nvidia’s stock market value by about $200 billion to over $950 billion, making Nvidia as Wall Street's fifth-most valuable company.It is now time to determine if the super-rally will persist or if the bubble is set to burst. After all, “we learned from 2000-2003, companies that are going to change the world still have valuation limits," said Miller Tabak’s Maley, as quoted on Bloomberg.Let’s delve a little deeper.The Stake in Nvidia's SurgeInvestors, lured by the successes of AI ventures such as OpenAI’s ChatGPT, are seeking exposure to this rapidly growing sector, with Nvidia's semiconductors being a popular choice. The firm's stock has outperformed all others in both the S&P 500 and Nasdaq 100 indexes (before the Q1 earnings release), despite then-challenging conditions in its core personal computing and data center markets.Estimate-Beating Q1 ResultsQuarterly earnings of $1.09 per share, beating the Zacks Consensus Estimate of $0.92 per share. Revenues of $7.19 billion breezed past the Zacks Consensus Estimate by 10.50%. The chipmaker forecast strong estimate-beating revenue growth and said it was boosting output of its AI chips to meet burgeoning demand.Q1 Data Center Revenue Shows PromiseNvidia's data center business, a leading provider of AI accelerator chips, has been rebounding. The data center revenue for Nvidia was $4.28 billion in Q1, up 14% year over year (way higher than the market expectation of a 4% rise) and up 18% sequentially.Upbeat Guidance Proving the AI ImpactWith such monumental share price rise, the challenge was to demonstrate that this AI-induced demand is producing enough revenue to validate the stock's gains. The company won here also and expects revenues of $11 billion in Q2, plus or minus 2%, compared with the analysts' estimate of $7.2 billion. That would equate to the highest quarterly total revenue for the company.What Does the Current Valuation Say?Nvidia is overvalued in every respect. Going by valuation metrics, the Price-to-Sales ratio of NVDA is 28X versus the industry average of 7.6X. The price-to-book ratio of NVDA is 34.1X versus 5.2X. The P/E (ttm) of NVDA is 122.6X versus the industry-average of 29.7X. The forward P/E of NVDA is 60X versus the industry score of 34.8X. NVDA is heading toward its peak of 68 times expected earnings in 2021, according to Refinitiv data, as quoted on Reuters. If we just focus on AI, the Computers - IT Services industry valuation is even cheaper at around 20.40X.A Further 10% Rally Possible?Considering NVDA’s peak P/E touched in 2021 as the limit (per the Refinitiv data), a further 13% rally is possible. It is a momentum stock. The stock has a Zacks Rank #3 (Hold).Are Nvidia-Heavy ETFs Better Bets?Investors intending to ride NVDA’s AI-growth story but still wary of the high valuation may take the ETF route. This is because ETFs helps investors to mitigate one stock’s average performance with the other stocks’ stellar performances.Below we highlight a few ETFs with heavy exposure to Nvidia for investors seeking to bet on the stock with much lower risk.VanEck Semiconductor ETF SMH – about 15% Exposure to NVDAAXS Esoterica NextG Economy ETF WUGI – about 14% focus on NVDASimplify Volt RoboCar Disruption and Tech ETF VCAR – about 10% focus on NVDA Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.Get it free >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report NVIDIA Corporation (NVDA): Free Stock Analysis Report VanEck Semiconductor ETF (SMH): ETF Research Reports AXS Esoterica NextG Economy ETF (WUGI): ETF Research Reports Simplify Volt Robocar Disruption and Tech ETF (VCAR): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment Research.....»»

Zoom Video Communications, Inc. (NASDAQ:ZM) Q1 2024 Earnings Call Transcript May 22, 2023 Zoom Video Communications, Inc. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $0.99. Kelcey McKinley: Hello, everyone, and welcome to Zoom’s Q1 FY ’24 Earnings Release Webinar. As a reminder, today’s webinar is being recorded. And now, I will […] Zoom Video Communications, Inc. (NASDAQ:ZM) Q1 2024 Earnings Call Transcript May 22, 2023 Zoom Video Communications, Inc. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $0.99. Kelcey McKinley: Hello, everyone, and welcome to Zoom’s Q1 FY ’24 Earnings Release Webinar. As a reminder, today’s webinar is being recorded. And now, I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you. Tom McCallum: Thank you, Kelcey. Hello, everyone, and welcome to Zoom’s earnings video webinar for the first quarter of fiscal year 2024. I’m joined today by Zoom’s Founder and CEO, Eric Yuan, and Zoom’s CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also, on this page you’ll be able to find a copy of today’s prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first — for second quarter and full fiscal year 2024; our expectations regarding financial and business trends; impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations; and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today’s webinar. And with that, let me turn the discussion over to Eric. Eric Yuan: Hey. Thank you, Tom. Thank you, everyone for joining us today. As we continue to execute on the strategic focuses, which I shared with you our last quarter, we are very grateful for the support, feedback and trust that we have received from our customers and investors. Last month, we closed our acquisition of Workvivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social intranet and employee app into one central hub, forming the heart of a company’s digital ecosystem. Incorporating Workvivo’s feature-rich technology into our all-in-one collaboration solution will allow us to offer Zoom customers, a unified platform that keeps knowledge workers and frontline employees informed, engaged, and connected throughout the workday, regardless of in-person, remote, or hybrid work style. According to Enterprise Apps Today, communicative employers have mobile workers who are 5 times more productive and feel 3 times less burned out. The Workvivo team is working very hard to capitalize on this opportunity and is 100% aligned with our culture of delivering happiness to customers and employees. We are so excited to join forces with Workvivo and help our customers raise the bar for employee communication and engagement. Last quarter, we reiterated our strong positioning in AI, and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made considerable progress towards that vision. We outlined our approach to AI is to drive forward solutions that are federated, empowering and responsible. Federated means flexible and customizable to businesses’ unique scenarios and nomenclature. Empowering refers to building solutions that improve individual and team productivity as well as enhance the customer experience. And responsible means customer control of their data with an emphasis on privacy, security, trust and safety. At Enterprise Connect, we unveiled ZoomIQ’s new set of in-beta features leveraging generative AI to support Chat and Email compose, and meeting summary. We are also building new features to summarize long chat threads, catch up tardy meeting participants on what they missed, and brainstorm in Whiteboard. Last week, we announced our strategic investment in Anthropic, an AI safety and research company working to build reliable, interpretable, and steerable AI systems. Our partnership with Anthropic further bolsters our federated approach to AI by allowing Anthropic’s AI assistant, Claude, to be integrated across Zoom’s entire platform. We plan to begin by layering Claude into our Contact Center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in-beta Zoom Workforce Engagement Management. With Claude guiding agents toward trustworthy resolutions and powering self-service for end-users, companies will be able to take customer relationships to the next level. Now moving on to some of our customer wins. I would like to thank Major League Baseball. MLB has long used the power of the broader Zoom Platform to strengthen its connection to fans and teams. And this quarter, we expanded our relationship by launching a first-of-its-kind partnership that leverages Zoom Contact Center to enhance real-time replay reviews and deliver increased transparency to baseball fans. By introducing Zoom technologies into operations on and off the field, MLB strives to create an engaging and unique experience for its fans and teams. I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom Phone seats as well as Zoom Contact Center to their Zoom Meetings deployment. We brought responsiveness, reliability and regulatory compliance to this large expansion and Virginia Tech leverage Zoom’s unified communications platform to build a next-gen solution integrated across meetings, phone and contact center, to serve the entire university community. I would also like to thank Vensure Employer Services, which has grown its workforce significantly the past few years through hiring and M&A. In Q1, Vensure expanded their existing footprint with us by adding approximately 10,000 Zoom Phone Seats and 800 Zoom Contact Center seats, as well as our AI-powered Zoom Virtual Agent and Zoom IQ for sales. It is so exciting to see customers leverage our natively integrated Phone plus Contact Center solutions and invest in our next generation AI-enabled products across their businesses. Finally, I want to thank My Plan Manager, Australia’s leading services provider for the National Disability Insurance Program. MPM chose Zoom Contact Center for its attractive total cost of ownership, the deep integration with salesforce, and the vision and future roadmap for customer experience. And our journey did not end with Contact Center. Appreciating the value of the platform, they also decided to standardize on Zoom One. We are so happy to partner with MPM to help them deliver a world-class customer and employee experience to their clients and disability service providers. Again, thank you so much MLB, Virginia Tech, Vensure Services, MPM, and all of our customers worldwide. And with that, I’ll pass it over to Kelly. Thank you. Kelly Steckelberg: Thank you, Eric and hello, everyone. We are pleased that we beat our top-line and profitability guidance in Q1. Here are a few milestones: first, our non-GAAP gross margin of 80.5% exceeded our long term target; second, after adjusting for the three fewer days in the quarter, our Online revenue was slightly up sequentially; and last, the moment you have all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter. In Q1, total revenue came in at $1.105 billion, up 3% year-over-year and 5% in constant currency. This result was approximately $20 million above the high end of our guidance. Our Enterprise business grew 13% year-over-year and represented 57% of total revenue, up from 52% a year ago. As I mentioned in the quarterly milestones, our Online business improved meaningfully in the quarter as it benefited from many initiatives including the price increase and buy flow optimization. In addition, we saw Online average monthly churn decrease to 3.1%, from 3.6% in Q1 of FY ‘23, and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected. The number of Enterprise customers grew 9% year-over-year to approximately 215,900. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q1 came in at 112%. We saw 23% year-over-year growth in the up-market as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 24% in Q1 of FY ‘23, and span diverse industries such as healthcare, education, government, and more. As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our Americas revenue grew 8% year-over-year, while EMEA and APAC declined by 8% and 5%, respectively. The decline in EMEA was primarily attributable to the outsized impact of the headcount reduction due to local regulations prolonging the process, the Russia-Ukraine war, and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar. Moving on to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities, restructuring expenses, and all associated tax effects. Non-GAAP gross margin in Q1 was 80.5%, an improvement from 78.6% in Q1 of last year and 79.8% last quarter. We are pleased that we have achieved our long term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co-located data centers. For FY ‘24, we still expect non-GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies. Research and development expense grew by 25% year-over-year to approximately $106 million. As a percentage of total revenue, R&D expense increased to 9.6% from 7.9% in Q1 of last year, reflecting our investments in expanding our product portfolio including Zoom Contact Center, AI, and more. Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing expense grew by 4% year-over-year to $278 million. This represented approximately 25.2% of total revenue, up from 24.9% in Q1 of last year. G&A expense declined by 10% to $84 million or approximately 7.6% of total revenue, down from 8.6% in Q1 of last year, as we focused on achieving greater back office efficiencies and savings. Non-GAAP operating income expanded to $422 million, exceeding the high end of our guidance of $379 million. This translates to a 38.2% non-GAAP operating margin, an improvement from 37.2% in Q1 of last year. Non-GAAP diluted earnings per share in Q1 was $1.16, on approximately 304 million non-GAAP diluted weighted average shares outstanding. This result was $0.18 above the high end of our guidance and 13% higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 3% year-over-year from $1.3 billion. This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.5 billion, up 16% year-over-year from $3 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 63% in Q1 of FY ‘23 and 56% in Q4 of FY ‘23. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent Enterprise deals arising from uncertainty in the macro environment. We expect Q2 deferred revenue to be down 2% to 4% year-over-year, which takes into account the recent trend of shorter durations on Enterprise deals and our renewal seasonality, which peaks in Q1 and declines throughout the year. We ended the quarter with approximately $5.6 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $418 million, as compared to $526 million in Q1 of last year. Free cash flow was $397 million, as compared to $501 million in Q1 of last year. Our operating cash flow and free cash flow margins were 37.9% and 35.9%, respectively. Due to a net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY ‘24. We now expect free cash flow to be in the range of $1.14 billion to $1.19 billion. In FY ‘24 and going forward, we expect our smallest cash tax payments to occur in Q1, and the largest to occur in Q2. Now, turning to guidance. For Q2, we expect revenue to be in the range of $1.11 billion to $1.115 billion, which at the midpoint would represent approximately 1% year-over-year growth, or 2% in constant currency. We expect non-GAAP operating income to be in the range of $405 million to $410 million. Our outlook for non-GAAP earnings per share is $1.04 to $1.06 based on approximately 307 million shares outstanding. As our Online business is stabilizing, we wanted to give you all some additional one-time color on how we see it playing out in the coming quarters. We expect our Online revenues to be approximately $480 million in Q2 and be relatively flat thereafter in FY ‘24. We are pleased to raise our top-line and profitability outlook for the full year of FY ‘24. We now expect revenues to be in the range of $4.465 billion to $4.485 billion, which at the midpoint represents approximately 2% year-over-year growth, or 3% in constant currency. We expect our non-GAAP operating income to be in the range of $1.63 billion to $1.65 billion, representing a non-GAAP operating margin of approximately 37%. Our tax rate is expected to approximate the U.S. federal and both state blended rate. Our outlook for non-GAAP earnings per share is $4.25 to $4.31, based on approximately 308 million shares outstanding. As we look to reignite growth and maintain strong profitability, we are committed to doing so in the right way. We are pleased to have recently issued our second ESG report, which includes additional data regarding our greenhouse gas emissions inventory, and recommits Zoom to achieving 100% renewable energy for our direct operations by 2030. Our core value of care is as important as ever. It’s embedded in how our product fosters emissions reductions, while supporting inclusiveness. It is also evident in our corporate and employee giving. You heard it from Eric. We are innovating extremely quickly to bring our customers the immense benefits of generative AI and empower modern collaboration. We are trusted and loved by our amazing and diverse set of customers. And we are fortunate to be one of the most recognized brands in the world. In Q1, we made some very tough decisions related to team size, structure and incentives that have understandably caused distraction in the short term, but at the same time exemplify our commitment to long-term growth and profitability. With a focus on the future, we have refreshed our mission and vision: One platform delivering limitless human connection. Thank you to the entire Zoom team, our customers, our community, and our investors. With that, Kelcey, please queue up our first question. A – Kelcey McKinley: Thank you so much, Kelly. As Kelly mentioned, we will now move into the Q&A session. [Operator Instructions] And our first question will come from Goldman Sachs’ Kash Rangan. Kash, go ahead and come on video for us and unmute if you would, please. All right. Well, hearing no response. We’ll go ahead and move on to Meta Marshall with Morgan Stanley. Q&A Session Follow Zoom Video Communications Inc. (NASDAQ:ZM) Follow Zoom Video Communications Inc. (NASDAQ:ZM) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Meta Marshall: All right. I think I got mine to work. Perfect. Appreciate it. I noted that you were taking down kind of — or not taking down, but giving back some of the gross margin upside that you saw in the quarter and noted that, that was for some of your AI investments. Eric, I guess I’m just wondering, how you’re judging kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development that’s going on versus investments that you want to make? Thanks. Eric Yuan: Yes. Good question. I think it looks like everyone seem to have just woken up to AI. Actually, we have been busy on AI front for a few years, if you look at the past several – two of the largest acquisitions, right, Solvvy and Kites, right, all of the AI-based. Internally, we also have AI team as well because we understand the importance of AI in particular during recently by the generative AI momentum. I think, first of all, we do have our own AI team. We have our own internally developed AI models as well. We also will take up a very open approach. Essentially, we announced our federated approach to AI. We announced the collaboration with the Open AI, Enterprise Connect. We also doubled on our partnership with Anthropic recently as well and down the road maybe some open source AI models available, we are also going to embrace that. Again, we look at everything from end user perspective, right? First of all, we have a team really dedicated on AI. And also, when we sit down with the customers, some customers say, yes, really like Anthropic model. Yes, why not. We doubled on that partnership, we know we can leverage their API as well, right? So we are taking a federated approach which is to put a customer centric, right? That’s why we are very, very excited about this AI momentum can truly improve our product experience. Meta Marshall: All right. Thanks. Eric Yuan: Thank you. Kelcey McKinley: And moving on to Michael Funk with Bank of America. Michael Funk: Yes. Hi. Thank you, guys. Another question for you, Eric, if I could. Some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate SKU? And then how do you monetize AI within your platform? Eric Yuan: It’s a good question. I would say the answer is about both. You take our Zoom IQ for sales, for example, right? It’s extremely important, right? When you send all the salespeople back at the home or work remotely, how to help them to improve their productivity. That’s the reason why we announced the Zoom IQ for sales and even way before the generative AI momentum, right? And internally developed large language models really help us, right? We can monetize that AI empowered Zoom IQ for sales product. At the same time, you look at our feature-rich collaboration portfolio, like a meeting summary, the e-mail and compose a chat message and Zoom Contact Center and Virtual Agent and also recently in beta, right, Workforce Management Solution as well, all of them will be empowered based on AI, the platform, right? So on the one hand, we leverage AI to look at almost every features we have to empower those features and also elevate the customer — the product experience. At the same time, a lot of monetization opportunities, right? Zoom IQ for sales is just one example, right, as a real more opportunity for us. Again, we think AI does bring tremendous opportunity for us because we focus on communication, I think Workvivo, for example, right, we just acquired them in the employee communication and engagement [Indiscernible], how to leverage AI to improve that product experience that is another example. Again, full of opportunities here at Zoom with AI. Michael Funk: Great. Thank you, Eric. Eric Yuan: Thank you. Kelcey McKinley: All right. So let’s go to Kash again with Goldman Sachs. Kash, I think you’re out there driving, so he’s going to stay off video. Kasthuri Rangan: Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I’m not a bot, I’m a human. I just will turn on that video very quickly on. So Eric, I’m curious to get your take. So I want you to, if you don’t mind, drill a little bit deeper to generative AI and while a lot of software companies are announcing partnerships with LLMs based on the content and data that they uniquely process, we’re also at a point where many companies are identifying very unique workflows and productivity scenarios that differentiate them going forward, right? So in that regard, just so there’s a scenario everybody in UCaaS will ultimately have a generative AI strategy. So when you start to have these LLMs work with your core products and given the vast user base and behaviors that you’ve contained in your knowledge base, how do you think Zoom is uniquely qualified to get productivity scenarios that are very unique to Zoom? Sorry for using the same word again, that could be more enduring as a source of competitive advantage because the first chapter of UCaaS was all about providing the core capability of the technology, which you did an amazing job of but I’m curious, the next leg of productivity growth and how you can take this company forward? Thanks so much. Eric Yuan: Yes. Good questions. We have a great integration with the Tesla cars, right? If you use drive a Tesla, just one click and join the call. Even if you can’t come over the video, the audio will be always on anyway. So back to your AI question, I think, first of all, if you look at the generative AI, two things is very important, right? So first of all, if you do not start years back, just given what’s going on in AI industry, AI world, you say, oh my god, a lot of things. However, we already started investing in AI, a few years back. We should understand that. The reason why our Zoom IQ for sales was developed based on our own internally developed large language models. Having said that, there are two things really important. One is just the model, right? Open AI has modeled Anthropic and Facebook as well, Google and those companies. But most important thing is, how to leverage these modules to fine-tune based on your proprietary data, right? That is extremely important. When it comes to collaboration, communication, right? Take a Zoom Employee, for example. We have so many meetings, right, and talk about every day, like our Sales team use the Zoom call with the customers. We accumulate a lot of, let’s say, internal meeting data. How to fine tune the model with this data. It’s very important, right? Not only just for the AI model itself because it will evolve for sure and also we’re also going to embrace. At the same time, how to leverage our proprietary data to fine-tune these AI models towards our industry, that’s very important. Look at — take a meeting, for example, right? I think that this is probably we have way more data than anybody else, right, given all the past many years’ experience, how to fine tune that model with those data. And I think this is our unique — will help us to deliver unique experience to customers. If any other company, you may have, let’s say, you have a greater AI model, however, how to fine-tune it. It’s a lot of effort, right? That’s the reason why we think that’s something unique for us to truly empower AI to deliver a differentiated experience to our customers. Kasthuri Rangan: Thank you so much Eric. Eric Yuan: Thank you. Appreciate it. Kelcey McKinley: So sorry, please continue. Okay. We’ll move on to Tom Blakey with KeyBanc. Thomas Blakey: Hi, everyone. Thanks for taking my question. Kelly and Eric, good to see you guys. There are some – a large competitor of yours has been the news lately with Microsoft possibly needing to create a separate SKU for their teams — Team’s product in terms of debundling that product. I know how important the collaboration component is to Zoom’s vision of becoming the communications operating system for large enterprises and just noting with Kelly’s updated color in terms of Online with that — with the Online business stabilizing, which is great. The implied guide for the enterprise business is for pretty good decel into the second half. So just wondering, how Zoom is thinking about, if at all, the potential impact or opportunity there just to get an understanding of the importance of the collaboration component to your product? Thank you. Kelly Steckelberg: As we noted, we talked about earlier in the quarter, I don’t think that the adjustment that you’re seeing is necessarily related to competition and more due to as we expected, some distraction internally due to the reorganization, but we feel great about the structure of our sales organization now with Graham, especially as our Chief Sales Officer; and Wendy leading the online team and that we’ve made the hard decisions to get them focused and ready now to execute for the rest of the year. And we’re just looking forward to seeing that come to light over the next couple of quarters. Thomas Blakey: Okay. Thank you. Kelcey McKinley: Our next question will come from Parker Lane with Stifel. Parker Lane: Yeah, guys. Thanks for taking the questions. Kelly, I was hoping you could give us a better understanding of just how — to what degree contract duration is actually compressed during the quarter? How much that will be an impact as we progress through the year? Is that more of a factor in any particular product set or was it pretty much across the board? Kelly Steckelberg: Yeah. It was pretty uniformly across our direct segment of the business, especially [Technical Difficulty] thing to be thoughtful about every decision, which is every buying decision, I should say, which is not new. It’s just taking — giving themselves time to make sure that they are getting the product deployed, and we expect it to be not long term in nature. But in order to reflect that, we updated our guidance based on, as we talked about deferred revenue as well for the coming quarter. Parker Lane: Got it. Appreciate the color. Thank you. Kelcey McKinley: We will now hear from Peter Levine with Evercore. Kelly Steckelberg: Hi, Peter. Peter Levine: Thank you for taking my question. Maybe, Eric, one for you is when you think about the use case of AI and you think across like phone, video, contact center, where do you envision seeing the most kind of uplift in terms of client adoption of AI? Just curious to know where you’re seeing that today. Eric Yuan: I think on many fronts, right, like take Anthropic investing, for example, right? For sure, we are going to lever that not only for the entire portfolio, but we are going to start from a contact center, the virtual agent and the contracts and the related features. We also look at our core meeting platform, right, in meeting summary. It is extremely important, right? And it’s also we have our team chat solution and also how to lever that to compose a chat. Remember, last year, we also have email candidate as well. How do we leverage the generative AI to understand the context, right, and kind of bring all the information relative to you and help you also generate the message, right? When you send an e-mail back to customers or prospects, right, either China message or e-mail, right? We can lever to generate is, right? I think a lot of areas, even like you like say, maybe you might be later to the meeting, right? 10 minutes later, you joined the meeting. You really want to stand in what had happened, right? Can you get a quick summary over the positive minutes. Yeah. You just also have to generate AI as well. You also can get that as well. It’s kind of almost a lot of key use cases, right? I think will be empowered by those AI capabilities. That’s why we are looking at almost every area, right, how to leverage generate to improve that experience. We take an Open AI, for example. This is a great company and also a lot of companies are leveraging their AI, not only bigger companies, small companies, we also announced the collaboration with them at Enterprise Connect, right? So that’s why, as I said earlier, three things, right? You understand the large lung model, how to fine tune that with your own data and also revisit almost every feature you have — are there any ways to empower those features? Are there any ways to monetize. That’s why we take a holistic approach and also we like our federated approach to AI. By the way, internally, we do have AI team. It should understand the large language models. It’s not something other companies just have work for AI. Peter Levine: Thank you. Eric Yuan: Thank you. Kelcey McKinley: I’m moving on to Rishi Jaluria with RBC. Rishi Jaluria: All right. Wonderful. Thank you so much for taking my questions. Eric, I want to stay on the AI train for a little bit. You’ve obviously talked about some great use cases and feels like there’s a big opportunity. I want to ask about maybe the potential to start to verticalize some of the AI solutions because it feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real-time signals, for example? And I’m sure that’s one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize? And is that something that can make maybe direct monetization a little bit more easy because the value prop is very straight out of the box? Thank you. Eric Yuan: That’s a great question. By the way, I download the Open AI mobile iOS app, I should ask open ChatGPT to answer to another question. But anyway, you are so right on. When it comes vertical, I would say, the opportunity. There are two things. One is a departmental level, another one is a vertical industry, right? You look at our Zoom IQ for Sales specifically targeted sales use case or sales department, right? Contact Center is for supported part. You’re so right, down the road HR department in marketing, almost every department, they all use Zoom, right? How to leverage AI to build a differentiated solution, right? That is the opportunity. That’s one opportunity. Another opportunity really about the vertical industry. Take health care, for example. Zoom by far is number one on telemedicine, right? How to leverage that, right? And with those proprietary data, right, and also working together with the customers, right, and fine tune this AI model, right? This is one example. Another example is a lot of law firms are also using Zoom as well, right? And how to lever the AI to truly empower those use cases is also another opportunity. I think as I said earlier, AI truly brings tremendous opportunity to us. So we got to leverage that. The good news, we’re already heavily invested in this area for a few years. Rishi Jaluria: Awesome. Thank you so much. Eric Yuan: Thank you. Kelcey McKinley: And our next question comes from Catharine Trebnick with Rosenblatt Securities. Catharine Trebnick: I got it. Thank you. All right. In the last two years, a lot of changes has happened. First, everybody worked from home and now people are going back to the office. So has that actually changed any of your opportunities when you’re looking at marketing, your products. I was thinking in terms of Zoom Room and then some of the areas where you want everybody to be equal in your Zoom Room viewing. So has that changed anything? Have you seen anything different from that? Eric Yuan: Good questions. Good news is a question not about AI anymore. So you’re so right. I think that during the COVID, right, as a lot of consumer use cases, right? Almost every family, you have with company account like a Zoom account, right? After the COVID, I think if you look at the usage, right, consumer-centric usage, I think, less and less. But however, to support a hybrid work, enterprise customers, they are going to leverage the video content more and more, not only just to support remote work. When you try to support hybrid work, how to reserve a desk, all those basic features, right? How to make sure when you join the meeting from the comp room, right, remote people, they can’t see you, right? Not only just big square, right? So everyone who are sitting in the comp room, equally, we have a square as well as Zoom Square, right? So those kind of experiences extremely important, right? A lot of features are built upon enabling hybrid work, right? Even Workvivo is not example, right? During the hybrid work, right? Quite often, you can chat, you use the e-mail or use the phone call, meetings. But sometimes also want to announce a very exciting news and record a video how to distribute those to employees and sometimes even to customers, that’s the reason why we acquired Workvivo as well. I think hybrid work is going to stay. That’s the reason why a lot of new use cases, right? How to double down on that. Take [Indiscernible], for example, we have the smart gallery view feature, right? Customers like that. However, in some cases, customers are still down to work. I have a huge conference room, how do you support that? That’s the reason why we are working on supporting three cameras, right? That’s another way to embrace hybrid work. I think the hybrid work does bring another kind of huge opportunity to us, especially it’s hard to convince everyone back to office five days a week. Even for us, even if I talked with many CEOs. Everyone wanted, right, sometimes you want these employees more. But however, this is kind of to let employees work anywhere, it sort of become a fashion. It’s hard to force employees back in the home. That’s why you have to embrace hybrid work. That’s the reason why Zoom can play a much bigger role to support the hybrid work. Catharine Trebnick: All right. Thank you. Eric Yuan: Thank you. Kelcey McKinley: And William Blair’s Matt Stotler has the next question. Matthew Stotler: Yeah. Thank you for taking the question. Maybe just one on the contact center side. So you obviously continue to innovate on the product front for contact center. But last time, we got a deep update. There was still some honing that was needed on the go-to-market front. We’ll just get an update on what you’re seeing on that front, overall adoption of the Contact Center product suite? And then what you think are the keys to driving further adoption going forward? Eric Yuan: Kelly, do you want to take it? Kelly Steckelberg: Yeah. So our contact center leader is Scott Brown. He is a great addition to our team. And we are focusing from a go-to-market perspective now in the same way that we took Zoom Phone. We are hiring. We have some on board already, but we were hiring additional contact center specialists, who will act as an overlay team and be there to support the account executives to go in, as it’s more of a technical sale and give them the opportunity to eventually over time, all become versed in how to sell Contact Center. So we’re in the process of that today. And as I said, we’ve approved more reps. So we’re excited about making the investment there. Matthew Stotler: Got it. Kelly Steckelberg: Thank you. Kelcey McKinley: Moving on to William Power with Baird. William Power: Great. Thanks. Yeah. I want to ask a question on Online. It’s great to see that segment play stabilizing. Maybe kind of two parts tied to that. Any early color with respect to the price increases and what you’re seeing out of that? And as you look forward for the guidance for online, maybe just some broader framework for how you’re thinking about both churn and top of funnel what gives you the confidence on both those fronts that this really is going to stabilize here? Kelly Steckelberg: Yeah. So we’ve seen a very positive reaction to the price increase. The — when we came into the year and we were modeling it, we’ve actually seen better-than-expected retention rates in response to that. So that’s been really great. As well as — when he’s done a lot of work around the online buy flow, which has also seen a very positive response. And then we’ve talked about it in the past, but there’s a whole road map of other initiatives that are being worked on and continues to be added, including things like additional payment currencies, additional payment types and additional offerings. So those are all the top-of-the-funnel items you’re referring to. And then they’ve also done a lot of work to the flow when people — the cancellation flow when people come through, which is also contributing to the improved retention rates, and we feel great about them. Now they’ve been, it was 3.1% in Q3, 3.4% in Q4 and now 3.1% again or maybe — yeah, 3.4% and we were born now back to 3.1% again in Q1. And as we said, we expect Q2 and Q4 to be seasonally higher quarters due to the holidays in those periods and the flexibility we give our customers to come and go as they need the product. So the churn we’re very pleased with, and we’ve seen the behavior expect exactly as we expected it coming back down in Q1. So that gives us confidence that it’s going to be within that range for the foreseeable future. Eric Yuan: By the way, just quickly to add on what the Kelly said, right? So as we add more and more new services also can help us more upsell opportunities even for online segment. take the Zoom Schedule, for example, we announced that new service, right? And some customers already paid for other services like [indiscernible] right? Customers, yeah, I’d like it to go with Zoom, deploy something similar, right? It’s a part of the package, right? I think a lot of upsell opportunities for us to target the Online segment as well. Kelcey McKinley: Thanks, William. And moving on to Siti Panigrahi with Mizuho. Sitikantha Panigrahi: Thanks for taking my question. Eric, when you — I just want to dig into this Workvivo acquisition. Do you see that more of a long-term opportunity or do you see that something that we can think of, this is some sort of technology that you can cross-sell into their base in near term? And what sort of — is there some particular vertical or in a segment where you can see more traction there? Could you give some little bit elaborate in terms of revenue opportunity from that? Eric Yuan: Yes. Good question. So first of all, if you look at our collaboration platform, right? We really want to offer a unified communication and collaboration platform. Customers I can leave it in the room platform, right? I think today is one of the problems we are facing customer also mention for us as well, right? Quite often, we send all kind of message either to e-mail, it’s really hard to find, not scalable or you send message to chat, bar all those public channels, right? Customers also wanted to essentially like see a video message, right? I want to share to the entire employee base and a maybe a department of news, right? All those kind of accounting, right? Are there any other better ways to share and engage these employee, right? I think that’s the reason why we think Workvivo can play a bigger role right to put on those kind of use cases, right? It’s not only for the short term, is a key missing element of our entire product portfolio, but also in the long run, also is will help us a lot because of the AI, right, because how do you make sure you have more data, right, and really collaborating communication-related data, right? It’s Workvivo for sure. Every day we use engaged with our employees, we are — what we platform, you will generate lots of data, right? All those are very, I would say, is relevant and meaningful, right? How to lever the AI, right? That’s why in the long run, certainly it can help us more. Sitikantha Panigrahi: Great. Thank you. Eric Yuan: Thank you. Kelcey McKinley: Next question will come from George Iwanyc with Oppenheimer. George Iwanyc: Thank you for taking my question. Kelly, maybe building on the stabilization you’ve seen on the online side. Can you give us a sense of what your expectations are from an expansion rate on the enterprise side as you look out over the next couple of quarters? Kelly Steckelberg: Yeah. We don’t guide specifically around the expansion rate. But as a reminder, it is a trailing 12-month metric. So given that it’s at 112% and you can look at where the enterprise growth rate is that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect gold online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that. George Iwanyc: Thank you. Kelcey McKinley: Wolfe Research’s’ Alex Zukin will have the next question. Alex Zukin: Hey, guys. Can you hear me, okay. Kelcey McKinley: Hi, Alex. Alex Zukin: So I guess I’ll try kind of a two-parter. One is just a simple how do you plan to monetize generative AI functionality in the product rather than making it making it a part of the overall experience? And the second is from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-20s last year in the first half to just over 5% of the second quarter guidance implied. That’s a much larger rate of diesel than I think we all contemplated or thought. So how do we — like is it an upsell? Is it cross-sell? Is it new products that are launching? Is it later revenue recognition? Like what is it that’s driven that rate of decel? And how do you reaccelerate obviously, but how do you get back to a double-digit growth rate in that regard because it seems like that’s where a lot of the valuation oomph is coming from for the stock? Eric Yuan: So Kelly, I’ll address the first one, you take the second one. I think in terms of how to monetize generative AI. I think first of all, take Zoom IQ for Sales for example, that’s a new service to target for the sales deportment. That AI technology is based on generative AI, right, so we can monetize. And also seeing some features, even before the general AI popularity, we have a live transmission feature, right? And also, that’s not a free feature. It is a paid feature, right, behind the paywall, right? And also a lot of good features, right, take the Zoom meeting summary, for example, for enterprise — and the customers, if you deploy Zoom One, deploys why do we have those features, right? For to customers, see three, all those SMB customers, they did not deploy Zoom One. They may not get to those features, right? That’s the reason — another reason for us to monetize. I think there’s multiple ways to monetize, yes. Kelly Steckelberg: And then in terms of the enterprise outlook, as I mentioned earlier, we expected the distraction in Q1 as there was impact to the sales or not only from the reduction, but also reorganization. And we feel really good about the structure of the sales organization now. And we’ve also, as I mentioned, we are prioritizing where we want to continue to invest and just recently committed to adding more reps in the contact center team for example. We hired a leader in Europe, which we haven’t had before. So really excited to have Frederic join us. And all of these put us — to bring us to be very well positioned to execute for the rest of the year. And now we’re looking to the sales team to do exactly that. And they — we talked about we have an amazing platform that’s there for them to sell, and we’re all rallying behind them to support them to see them execute. Alex Zukin: Perfect. Thank you, guys. Eric Yuan: Thank you. Kelcey McKinley: And moving on to Michael Turrin with Wells Fargo. Michael Turrin: Hey, there. Thanks. Good to see everyone. Kelly, on the billings deferred revenue side, you came in a little bit ahead of what you were guiding for a few percentage points from last quarter despite some duration impact. So I’m wondering, if there’s any way you can help us quantify those duration impacts either on Q1 or the Q2 guide? And anything else you can provide just to help us think through seasonality as you’ve now passed the heavier renewal period, but mentioned maybe some sales transition impacts still out there. Just help us think through just what’s contemplated in the guide from a few different levels. Thank you. Kelly Steckelberg: Yeah. So I think on the billing duration impact. As I said earlier, we don’t expect this to be a long-term impact. We think it’s just indicative of some of the uncertainty that’s in the macro environment today. And just watching and being thoughtful about the impact that it’s having on deferred and then you also heard it in terms of RPO. But we’ve seen this impact before, and we’ve also seen customers come back then. And I think especially as we continue moving towards more bundles, Zoom One, Contact Centers and Zoom Phone, those are all products that customers are going to commit to for the longer term. So I think as you continue to see more and more of those in our pipeline and being sold by the enterprise team, that, that duration impact will start to expand again. And then in terms of the balance between enterprise and online, we’re thrilled that enterprise has stabilized a little bit earlier than we expected. Given the days in the month — the days of the quarter, that’s why we gave a more view because it’s a little bit tricky when you look at it for the rest of the year. And the guidance contemplates all the things that we already talked about in terms of the pipeline and all the initiatives the online team is working on. And then, of course, the restabilization, if you will, of our direct sales work at the same time. Michael Turrin: Thank you. Kelcey McKinley: And Ryan MacWilliams with Barclays has the next question. Ryan MacWilliams: Great. Appreciate it, guys. And congrats on Zoom Phone reaching 10% of sales. So just thinking back a few years, pretty amazing that this metric only came after reaching 5 million phone sales, so quite the run. Look, I love all that questions so far, but I guess I’ll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to the Online segment versus the Enterprise segment? And have you seen any changes at renewal on the enterprise side, maybe from an enterprise logo like churn standpoint? Thanks. Kelly Steckelberg: No. So our enterprise renewals, as you know, Q1 is our highest seasonal quarter and the renewals were exactly in the range of where we expected them to be for the quarter, so that was really great to see. And then in terms of Online, where we’ve seen strength that we’ve already talked about, I think it’s increasing the top of the funnel. We’ve also continued to see strength in annual plans, which is great. And this is due to the — just as a reminder, when we did the price increase, we didn’t increase the price for the annual plan. So it just shows customers committing to the amazing value that they see in Zoom and the discounts that they get for committing to the long term, but of course, that’s amazing for us because the lifetime value of those annual customers is so much greater. Ryan MacWilliams: Thanks for the color. Thank you. Kelcey McKinley: Patrick Walravens with JMP Securities has the next question. I’m not sure he’s out there, Patrick, do you want to come off mute and start your video for us? All right. Hearing no response… Patrick Walravens: I’ll come off mute. I’m going to turn off the video and you can see why? Eric, can you talk to us a little bit about sort of the [Technical Difficulty] and what part of that is appealing to investors? Kelcey McKinley: Patrick, so sorry, your audio is cutting out for us. Will you try one more time? And unfortunately, we might have to skip you if it doesn’t improve, but try again, please. Patrick Walravens: Eric, can you just talk a little bit more about Anthropic and what they believe come with it? Eric Yuan: Sure. Kelly Steckelberg: I heard Anthropic. Eric Yuan: Yeah. I think Anthropic is a great partner, and this is a great team. And when we look at the AI landscape, I think why not double down on that partnership, right? And given our federal AI approach, right, internally we discussed that happened to be in the middle of using another round of financing, right? That’s why how to solidify our partnership, right? Again, they are a great team, greater technology. And I think this is no brainer for us, we invest in them to further solidify the partnership. And yeah, so that’s pretty much because look at our contact center, right, we will further empower our contact center offering, right, and also download applied to an entire product portfolio. Again, this is very important to our federated approach to AI, and that’s the reason why you invested in them. Kelcey McKinley: Thanks, Patrick. We’ll go ahead and move on to Matthew Niknam with Deutsche Bank. Matthew Niknam: Hey. Thanks for taking the question. Just two quick ones on cash flow maybe for Kelly. First, accounts receivable the last two years, it’s been about a drag of $80 million this quarter, much better, only about $29 million, wondering what changed there in terms of cash collections? And then secondly, in terms of this legal settlement, if you can just quantify and let us know maybe when we should anticipate that? Thanks. Kelly Steckelberg: Yeah. In terms of the settlement, Matthew, we — it’s not clear exactly when that will be completed in terms of the payment. That’s why we said for the full year, we’re updating it could be in Q2, it could also be in Q3. That’s why we just wanted to give you visibility into that. And then, in terms of your first point about collections. I think part of that, honestly, is just the continued improvement that we’re seeing in our team around collections and our ongoing DSOs and also, as we’ve seen online, when there’s more online, especially annual, that is the online is mostly paid via credit card. So that is an improvement in terms of our DSOs usually as that’s growing because the DSOs on online are about three days. Does that help? Matthew Niknam: And the legal settlement, if you could just quantify how much that is? Kelly Steckelberg: It’s exactly the amount of the difference between our previous guidance. Let me say it this way, there was no other change to our cash flow outlook other than the anticipated potential net legal settlement. Matthew Niknam: All right. Thank you. Kelly Steckelberg: Yeah. Kelcey McKinley: Shebly Seyrafi with FBN Securities has the next question. Shebly Seyrafi: Yeah. Thank you very much. So you’re implicitly guiding for your enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. It was only double-digits in the past. So I know you have a lot of changes this year with the sales force, et cetera. After this year, or do you target double-digit growth in enterprise or is it like an upper single-digit growth rate? And also related, the Online business is stabilizing for the next few quarters, it looks like Q4, that means zero growth versus negative growth. Is it a growth business afterwards as well? So I’m just looking after this year is online a growth business is enterprise low double-digits or upper single-digit growth rate business. Kelly Steckelberg: All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both online and the direct business. So that’s innovation. It’s expanding our platform. It’s focusing on investing in the go-to-market teams in terms of what we’ve talked about earlier, like the contact center, adding a leader to Europe, really focusing on marketing in the right way. And we haven’t obviously given FY ’25 guidance, but the goal is, and we’ve talked about before, starting to see reacceleration of growth as we exit FY ’24 and having that continue into FY ’25. And we’re so early in the year of FY ’24, but lining up everything to anticipate reacceleration as we exit the year. Shebly Seyrafi: And the enterprise? Kelly Steckelberg: Across — potentially… Shebly Seyrafi: I’m just saying the enterprise is it upper single digits or low double-digit growth rate, the way you’re targeting it, not guiding, just targeting? Kelly Steckelberg: Yeah, I’m not going to get that specific, especially this early. We’ll be prepared more great to talk about that later this year. Shebly Seyrafi: Okay. Thank you. Kelcey McKinley: And we’ll move on to Karl Keirstead with UBS. Karl Keirstead: Okay. Great. Hey, Kelly. Just to follow on that conversation about driving for acceleration next year. And earlier on, you talked about innovation being a huge priority, that seems to me like there’s the potential to shift a little bit the growth margin trade-off as you invest to drive growth. next year. I’m wondering if you’re intending to signal that high 30s, 40% margins, everybody on the call should consider sort of a peak. And then if I could ask a clarification, did Workvivo impact at all your guidance for this year? Thank you. Kelly Steckelberg: Yes. Thank you, Karl. So as a quick reminder, our long-term target operating margin is lower, much lower than where we are operating today. And that is, as we’ve said in the past, to give us the opportunity as we see opportunities for investment to do so. We are really focused on doing everything we can to drive top line growth and continue to take market share. In the period of time where we’ve had slower growth, we’ve been focused on balancing that with profitability. But as we see opportunities, we absolutely could bring our margins down. So yes, I think we’re at probably the peak of where our margins are. But again, we’re always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, given they’re amazing, and we’re really excited about bringing them into the family, but they’re having really, I would say, minimal impact on both the top line and the bottom line today. Karl Keirstead: Okay. Thank you. Kelly Steckelberg: Yes. Kelcey McKinley: We have time for one additional question, which will come from Sterling Auty with Moffett Nathanson. Sterling Auty: Great. Thanks, guys. Hopefully, my connection holds up. Just wondering back on the enterprise. Given the online $40 million a quarter stabilization. It implies the enterprises revenue is well below Street consensus. Did we analysts just have the mix model [Technical Difficulty] wrong or was the disruption or something having a bigger impact on the line — on the enterprise business for the rest of the year? Kelly Steckelberg: I think there’s two things. I think first of all, we’ve seen online stabilize much more quickly than we anticipated or than we had been indicating to all of you. So I think the overall mix for the year is probably shaving up to be a little bit different than you anticipated and even a that we anticipated at the beginning of the year. And then we’re doing — as I said, we’re doing everything we can to focus on supporting our direct sales organization. The distraction in was not de minimis, right? It was — as I said, it was across not only the reduction but also a reorganization and some changes to incentives and comp plans. And so we’re very happy that that’s all behind us now, and we’re all looking forward to do everything we can to support them and regain momentum there. Sterling Auty: Sounds good. Thank you. Kelly Steckelberg: Yeah. Kelcey McKinley: And again, this does conclude our question-and-answer session. So I’ll pass it back to you, Eric, for any closing or additional remarks. Eric Yuan: Well, thank you all for your time. Really appreciate all your support, and thank you, as you all in our next meeting. I appreciate it. Cheers. Kelly Steckelberg: Bye everyone. Kelcey McKinley: Sorry, Kelly. And again, this does conclude today’s earnings release. We thank you all for your participation. So go enjoy your summer, and we will see you next quarter. Follow Zoom Video Communications Inc. (NASDAQ:ZM) Follow Zoom Video Communications Inc. (NASDAQ:ZM) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Fred Alger Management, an investment management company, released its “Alger Spectra Fund” first quarter 2023 investor letter. A copy of the same can be downloaded here. In the first quarter, Class A shares of the fund underperformed the Russell 3000 Growth Index and returned 7.98% (with sales charges) compared to the Index return of 13.85%. Consumer […] Fred Alger Management, an investment management company, released its “Alger Spectra Fund” first quarter 2023 investor letter. A copy of the same can be downloaded here. In the first quarter, Class A shares of the fund underperformed the Russell 3000 Growth Index and returned 7.98% (with sales charges) compared to the Index return of 13.85%. Consumer Discretionary and Industrials were the leading contributors to the fund’s relative performance in the quarter, while Information technology and Health care sectors detracted. In addition, you can check the top 5 holdings of the fund to know its best picks in 2023. Alger Spectra Fund highlighted stocks like NVIDIA Corporation (NASDAQ:NVDA) in the first quarter 2023 investor letter. Headquartered in Santa Clara, California, NVIDIA Corporation (NASDAQ:NVDA) provides computer graphics processors, chipsets, and related multimedia software. On May 22, 2023, NVIDIA Corporation (NASDAQ:NVDA) stock closed at $311.76 per share. One-month return of NVIDIA Corporation (NASDAQ:NVDA) was 18.81%, and its shares gained 92.99% of their value over the last 52 weeks. NVIDIA Corporation (NASDAQ:NVDA) has a market capitalization of $771.023 billion. Alger Spectra Fund made the following comment about NVIDIA Corporation (NASDAQ:NVDA) in its Q1 2023 investor letter: “NVIDIA Corporation (NASDAQ:NVDA) is a leading supplier of graphics processing units (GPUs) for a variety of end markets, such as gaming, PCs, data centers, virtual reality and high-performance computing. The company is leading in most secular growth categories in computing, and especially artificial intelligence and super-computing parallel processing techniques for solving complex computational problems. Simply put. Nvidia’s computational power is a critical enabler of Al and therefore critical to Al adoption, in our view. As such, we believe Nvidia is a long-term high unit volume growth opportunity. During the period, NVIDIA reported fiscal fourth-quarter results that met expectations, as the company navigated. through an inventory correction associated with the broad macroeconomic slowdown. Moreover, management gave fiscal year earnings guidance that was better than analyst estimates. noting strong year-over-year growth in gaming and data centers. Management’s constructive assessment of 2023 prospects. coupled with the rapid rollout and adoption of generative Al offerings, led to positive share price performance.” Photo by Christian Wiediger on Unsplash NVIDIA Corporation (NASDAQ:NVDA) is in 17th position on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 106 hedge fund portfolios held NVIDIA Corporation (NASDAQ:NVDA) at the end of the fourth quarter which was 89 in the previous quarter. We discussed NVIDIA Corporation (NASDAQ:NVDA) in another article and shared top stocks in billionaire Ken Griffin’s 2023 portfolio. In addition, please check out our hedge fund investor letters Q1 2023 page for more investor letters from hedge funds and other leading investors.   Suggested Articles: 12 Trusted Bitcoin Investment Sites Top 20 Most Expensive Cars of All Time Top 20 Most Popular Consumer Electronics Brands Disclosure: None. This article is originally published at Insider Monkey......»»