In this article, we discuss 5 reliable dividend stocks billionaires are loading up on. If you want to read our detailed analysis of dividend stocks and their performance, go directly to read 10 Reliable Dividend Stocks Billionaires Are Loading Up On.  5. Walmart Inc. (NYSE:WMT) Number of Billionaire Investors: 20 Number of Hedge Fund Holders: 91 […] In this article, we discuss 5 reliable dividend stocks billionaires are loading up on. If you want to read our detailed analysis of dividend stocks and their performance, go directly to read 10 Reliable Dividend Stocks Billionaires Are Loading Up On.  5. Walmart Inc. (NYSE:WMT) Number of Billionaire Investors: 20 Number of Hedge Fund Holders: 91 Walmart Inc. (NYSE:WMT) is an Arkansas-based multinational retail corporation that owns department stores across the US. The company offers a quarterly dividend of $0.57 per share and has a dividend yield of 1.53%, as recorded on June 2. It is among the list of reliable dividend stocks as the company has raised its dividends for 50 years in a row. Some of the most prominent billionaires having investments in the company include Ray Dalio and Cliff Asness. Barclays noted that Walmart Inc. (NYSE:WMT)’s volume has improved in the most recent quarter and also appreciated the company’s discretionary initiatives. In May, the firm lifted its price target on the stock to $162 and maintained an Outperform rating on the shares. Walmart Inc. (NYSE:WMT) was a popular stock among hedge funds in Q1 2023, as 91 funds tracked by Insider Monkey owned stakes in the company, up from 66 a quarter earlier. The collective value of these stakes is over $5.6 billion. Follow Walmart Inc. (NYSE:WMT) Follow Walmart Inc. (NYSE:WMT) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

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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......»»

ABM Industries Incorporated (NYSE:ABM) Q2 2023 Earnings Call Transcript June 6, 2023 ABM Industries Incorporated beats earnings expectations. Reported EPS is $0.9, expectations were $0.86. Operator: Greetings, and welcome to the ABM Industries Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal […] ABM Industries Incorporated (NYSE:ABM) Q2 2023 Earnings Call Transcript June 6, 2023 ABM Industries Incorporated beats earnings expectations. Reported EPS is $0.9, expectations were $0.86. Operator: Greetings, and welcome to the ABM Industries Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Goldberg, Senior Vice President of Investor Relations for ABM Industries. Thank you. You may begin. Paul Goldberg: Good morning, everyone, and welcome to ABM’s Second Quarter 2023 Earnings Call. My name is Paul Goldberg, and I’m the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmirs, our President and Chief Executive Officer; and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our second quarter 2023 financial results. A copy of the release and an accompanying slide presentation can be found on our website abm.com. After Scott and Earl’s prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the words, estimates, expects, and similar expressions are intended to identify these statements and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies our presentation as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers, and the GAAP financial measures is available at the end of the presentation and on the company’s website under the Investor tab. And with that, I would like to now turn the call over to Scott. Scott Salmirs: Thanks, Paul. Good morning, and thank you all for joining us today to discuss our second quarter results. ABM generated solid results in the second quarter, delivering 2.3% organic revenue growth and strong adjusted EBITDA growth. We achieved these results through our consistent focus on cost controls, implementing price escalations, and driving organic growth in our manufacturing and Distribution, Aviation, and Education segments. These factors more than offset the impacts from a still challenging labor market, continued supply chain constraints, lower work orders, and the slow recovery of office occupancy for commercial real estate. Our financial and operational performance speaks to the resilience of our business model, our end market diversification, and most importantly, the talent and dedication of our team. In all, ABM generated second quarter revenue of $2 billion, with an adjusted EBITDA margin of 7.2%, which included the benefit of earnings from the prior period parking project as discussed last quarter. Despite a more challenging macroeconomic environment than we anticipated, we remain on target to achieve our 2023 financial goals. We continue to be focused on driving growth across the company and capturing our share of the many opportunities before us. In fact, for the first six months of 2023, we generated $918 million in new sales, up from $791 million last year. We also continue to invest in our future including our ELEVATE initiatives, which will enhance our operational efficiency and deliver an improved experience for both clients and our team members. I’ll now discuss the demand environment for each of our industry groups. Let’s begin with B&I. Office density rates in the second quarter remained at relatively stable levels at approximately 50% on a blended basis. Although commercial office space remains fairly well occupied Tuesday through Thursday, many employees continue to work remotely on Monday and Friday. This trend is likely to continue as employers accommodate remote and hybrid work. This pattern of office usage limits demand for certain higher-margin work orders like carpet cleaning, freight elevator service, and large gathering cleanups, which are largely driven by office density. As a result of the reduction in office density, we are beginning to see a consolidation of office space in metro markets as clients reduce their footprint when their leases expire. Although we have not yet experienced a resulting contraction and scope of work, we anticipate that further increases in vacancy rates could create additional pressures on our business. However, we feel that we’re very well positioned given our commercial real estate profile, which is heavily concentrated within Class A newer properties. Although Class A buildings are still impacted, it’s to a much lesser degree than Class B and Class C properties. We also believe that as tenants migrate towards higher quality buildings, it will stabilize on our multi-tenant portfolio. Additionally, a sizable portion of our commercial real estate exposure is an engineering, which tends to be more stable as HVAC and electrical systems need to be maintained regardless of occupancy density. Moving to Aviation. Activity in the leisure and business travel markets, including related parking and transportation has essentially returned to pre-pandemic levels. Accordingly, as we go forward, we anticipate our aviation revenue growth will be reflective of the overall travel market growth rate complemented by new business opportunities. In fact, we recently won a multimillion-dollar expansion of passenger transportation services at two major U.K. airports. We also expect continued growth in our ABM Vantage parking solution which enhances revenue for clients and improves the travel experience. Demand in manufacturing and distribution continues to be solid, benefiting not only from expansion within existing logistics and e-commerce clients but also from new business and new end markets. For example, we added over $30 million in new contracts in the semiconductor market in the second quarter alone. We also saw growth with a leading aerospace company. further highlighting our successful efforts to broaden our client base in attractive end markets. We expect revenue growth in our M&D segment to remain on pace for the remainder of the year. In Education, the addition of sizable new clients in the fourth quarter of 2022 and new business wins in this fiscal year has helped drive mid-single-digit organic revenue growth in this segment. We have a strong pipeline of new business opportunities, and I’m confident ABM will continue our positive growth trajectory given our competitive positioning. From a margin perspective, segment margin remains above pre-pandemic levels, and we anticipate that further labor market normalization will support the margin progress we’ve achieved. Moving to Technical Solutions. The demand environment for EV charging infrastructure and microgrids remains positive as our ATS backlog exceeds $440 million. Furthermore, after a slow start to the year, hampered by macroeconomic concerns, market conditions are slowly improving for our Infrastructure Solutions business as evidenced by a significant contract win with a school district in Western Pennsylvania, which includes upgrades for lighting and HVAC as well as multiple building enhancements. Turning to eMobility. As we discussed on our last call, we expect the pace of EV charger installations to accelerate in the second half of the year as we begin to deliver on several new programs, including one for a large automotive dealer network. RavenVolt generated approximately $30 million in second quarter revenue, completing multiple projects, including the installation of power resiliency systems to two major retailers and a multinational consumer goods company. Similar to EV, we expect growth to accelerate in the back half of this year as long-awaited materials begin to arrive. Overall, we continue to be excited about the long-term outlook for ATS and believe we’re at the beginning of what will be a multiyear runway of strong growth. In fact, to support this growth opportunity, we recently announced our plan to construct an electrification center that will establish ABM as the clear leader in electrification infrastructure turnkey solutions. The planned facility in the Atlanta area will house multiple solutions serving the eMobility, power resiliency, and electrification sectors, creating first of it’s kind EV ecosystem hub. Turning to ELEVATE. We made significant headway on our planned initiatives during the second quarter, including the initial successful deployment of our cloud-based ERP system and 15 integrated boundary systems. Our initial implementation focused on our Education segment and the results have been more than encouraging. As we progress forward, future implementations will move through each industry segment on a programmed and managed pace as we leverage our collective learning and experience. In addition, we extended the reach of our workforce productivity and optimization tool, which provides our teams with advanced analytics for productivity levels across their portfolios. This capability has been critical for optimizing labor usage in our commercial real estate markets. We are also approaching the pilot launch of a new mobile application for our frontline team members, a key digital enabler for the ELEVATE program. Lastly, we continue to make progress on our ESG journey. For the first time, ABM has been named to the Diversity Inc. list of noteworthy companies This, among many other distinctions and awards, reflects our culture and our drive to lead away in DEMI. I couldn’t be proud of where our company is heading despite the macroeconomic headwinds and the challenges in commercial real estate. The mixture of our end markets the resiliency of our culture and the extraordinary talent of our teammates will allow us to continue on our accelerated path. Now I’ll turn it over to Earl for the financials. Earl Ellis : Thank you, Scott, and good morning, everyone. For those of you following along with our earnings presentation, please turn to Slide 5. Second quarter revenue increased 4.5% to $2 billion, comprised of organic revenue growth of 2.3% and growth from acquisitions of 2.2%. Moving on to Slide 6. Net income in the second quarter was $51.9 million or $0.78 per diluted share, up 6% and 8%, respectively, as compared to last year. The increase in GAAP net income was driven by higher income from operations, especially in our Aviation segment, and tight expense controls partially offset by higher interest expense, labor costs, and lower volume of higher-margin work orders. Adjusted net income was flat at $60.2 million, adjusted earnings per diluted share was $0.90, up 1% from the prior year period. Adjusted net income and adjusted EPS primarily reflects higher income from operations and effective cost controls offset by higher interest expense. Adjusted EBITDA increased 15% over the prior year to $137 million, and adjusted EBITDA margin was 7.2% versus 6.5% last year. This performance was boosted by the recognition of revenue connected with the previously mentioned Aviation parking project as associated expenses were recorded in prior periods. Excluding the impact from the parking project, adjusted EBITDA was $124.4 million, up 5% over last year, and adjusted EBITDA margin was 6.6%. Now turning to our segment results beginning on Slide 7. B&I revenues declined 0.5% year-over-year to $1 billion. Organic revenue declined 2%, mainly reflecting a lower volume of work orders, including disinfection versus the prior year and expected attrition of certain client contracts from the Able acquisition. Operating profit in B&I decreased slightly to $76.2 million, and operating margin was 7.6%, essentially flat with the prior year. Aviation revenue increased 22% to $227.2 million, marking the eighth consecutive quarter of year-over-year revenue growth. This improvement was driven by the recognition of the previously mentioned parking project revenue as well as increased leisure and business airline traffic, along with related growth in parking activity. Aviation’s operating profit was $23.6 million, including $12.6 million of parking project earnings versus $9.6 million in the prior period. Margin was 10.4% compared to 5.2% last year. Adjusting for the parking project, operating profit was $11 million and margin was 5.1%. Turning to Slide 8. Manufacturing and distribution revenue grew 5% to $373.2 million, reflecting favorable market demand and expansion with clients in the life sciences and semiconductor market. Operating profit decreased 3% to $40.8 million, and operating margin declined 80 basis points to 10.9%. The decreases in operating profit and margin primarily reflects labor cost inflation and changes in mix. Education revenue increased 6% to $216.7 million, benefiting from the addition of new clients in the fourth quarter of fiscal 2022. Education operating profit was $11.8 million, essentially flat versus the prior year period while our margin was down slightly to 5.4%. Technical Solutions revenue grew 15% to $168.4 million, driven by the contribution from RavenVolt. Organic revenue declined 6%, largely due to the timing of large EV charger installation programs, which are weighted to the second half of the year and the delay of some infrastructure solution projects. Backlog in ATS is over $440 million, supporting our expectations for a strong back half of the year. Of note, RavenVolt generated nearly $30 million in revenue in the second quarter, aided by the receipt of delayed materials. ATS’s operating profit was $10.2 million, and margin was 6% compared to operating profit of $10.6 million and margin of 7.2% last year. The decreases in margin and profit were largely driven by changes in service mix and the amortization of intangibles related to the RavenVolt acquisition. Moving on to Slide 9. We ended the second quarter with total debt of $1.5 billion, including $58.6 million in standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.6 times. At the end of Q2, we had available liquidity of $503.2 million, including cash and cash equivalents of $71.2 million. Free cash flow in the second quarter was $16 million, and we expect a solid back half of the year in terms of free cash generation. Interest expense was $21.1 million in the second quarter, up $13 million from the prior year period and up over $1 million sequentially from Q1. The increase was due to significantly higher interest rates as well as a year-over-year increase in total debt. Now let’s move on to our full-year fiscal 2023 outlook, as shown on Slide 10. We now expect GAAP EPS to be in the range of $2.52 to $2.72, up $0.09 from our prior outlook, driven by a benefit from changes in items impacting comparability, primarily related to the fair value of contingent consideration. Our outlook for the adjusted EPS remains unchanged at $3.40 to $3.60. Interest expense is now expected to be around $80 million for the full year, reflecting recent Fed actions and the forward yield curve. This forecast is about $6 million above the high end of the previously estimated range. Our tax rate before discrete items is anticipated to be between 29% and 30%. And as mentioned last quarter, we expect to grow full-year adjusted EBITDA at a mid-single-digit rate. Additionally, we are increasing the low end of the range for adjusted EBITDA margin by 10 basis points. and now expect it to be between 6.5% and 6.8% for the full year. We now expect full-year 2023 free cash flow to be in the range of $240 million to $270 million before the final installment of our CARES Act payment of $66 million, which was made in Q1 and combined integration and elevate cost of approximately $75 million to $80 million. This represents a $30 million decrease from our prior forecast, largely driven by expected working capital needs to support growth in our ATS segment in the second half and higher interest expense. With respect to the cadence of quarterly adjusted EPS, we expect approximately 45% to 50% of full-year adjusted earnings per share to be generated in the first half of the fiscal year. consistent with our prior guidance. We anticipate Q3 adjusted EPS will not be materially different from Q2 2023. With that, let me turn it back to Scott for closing comments. Scott Salmirs: Thanks, Earl. In late 2021, around the time we announced our initial ELEVATE targets, the average U.S. inflation rate for the full year 2021 was 4.7%. The 10-year T-bill was approximately 1.5%, and the unemployment rate has trended down to 4% from the pandemic high of 15%. Today, the 10-year T-bill rate is over 200 basis points higher. Inflation peaked at 9% in 2022 and is currently close to 5%. And the job market for blue-collar labor is as challenging as it has ever been. Despite these headwinds, we’ve delivered on our financial goals, expanded our business and service offerings, and achieved important progress towards our 2025 target. Today, ABM is stronger and better positioned than ever before. Our success reflects our resilient business model, the benefits from our ELEVATE investments, and consistent execution by the ABM team. As we move forward, I’m confident in our ability to build value for our stakeholders as we work tirelessly towards achieving our goals, underpinned by the strength of our core business ABM continues to evolve into a higher-growth, higher-margin facility solution provider. So, with that, let’s take some questions. Q&A Session Follow Abm Industries Inc (NYSE:ABM) Follow Abm Industries Inc (NYSE:ABM) 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 the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question. Sean Eastman: Thanks, for taking my question. So, I just wanted to start on ATS. It sounds like RavenVolt is blowing and going now. It sounds like the EV charging side on pace for a second half ramp. I just wanted to round that out with a discussion on the bundled energy solutions piece and just how customer decision-making is trending in light of the weak macro conditions. Scott Salmirs: Yes. No, that’s a great question, Sean. Look, it’s still slow, probably slower than we’d like, but it’s not a reflection of our market share or sales pipeline or even the viability of the offering. It’s more about the fact that what we’ve seen just across the board, some clients are in pause mode right now, right, the economics get a little bit more challenging in that segment because of interest rates. But we just won — I mentioned in my opening remarks, we won a really nice job in Western Pennsylvania. And the pipeline is strong. So, I think for us, it’s waiting for clients to pull the trigger because it upgrades that they know they need because if you look at the core of it, right, you’re retrofitting a facility that needs retrofitting, right? So, it’s a question of getting the school board together and giving the high sign to pull the trigger. So, we’re as confident as ever. It’s just a little bit more on the delay side, but we’re hoping the back half will be stronger. And that’s a nice thing about ATS because we’re still diversified. And in addition to the bundled energy solutions, as you point out, we have the microgrid solution now where with RavenVolt, our EV is starting to ramp up. And we do have a core electrical and mechanical business on top of that, that we don’t talk about a lot, but that’s also part of the underpinning. So, it’s nice to have diversification in that segment. Sean Eastman : Okay. Thanks for that Scott. And then I guess maybe just to finish it off on ATS. I mean where should the margins be? Obviously, the first half, we’ve had supply chain, we’ve had kind of a project timing, air pocket. I mean, I’m just trying to get an expectation for where we should be run rating when everything is up on planned for ATS. Scott Salmirs: Yes. Historically, when it’s humming, it’s high single digit, right? And there’s no reason that it won’t get back to that. I think it’s like that higher-margin stuff, which is the bundled energy solutions and the microgrids are the ones that just haven’t kicked in yet, right? And even Sean EV, which we said is lower margin. That’s really because we’ve been playing in the dealership market, which is like onesie, twosies, like if you have a large-scale contract with an automaker like BMW, you’re putting two or three in per dealership. It’s not the scale you want, we’re moving more to a fleet orientation where we can go to a facility and put in 100 charges and get the scale. So that’s part of our ramp-up strategy as well. So, I’m confident over time we’ll squarely get back into that high single-digit margin range. Sean Eastman : Okay. Got you. And then one more, just relative to the work order dynamic, I feel like over the past two years, we’ve been anchored from — in terms of like work orders going from pandemic highs down to normalized. But now we’re talking about lighter vacancy rates and maybe that normalized work order level having some downside. How should we think about that, Scott, and whether there’s risk to margins around a step down to below normal work orders. What have we seen historically there? Scott Salmirs : Yes. So, look, I think we’re getting back down to pre-pandemic levels and that’s really a reflection right now of hybrid work. So, here’s the way to think about, maybe this will give you some clarity, right? When you think about work orders, right, it ranges from people calling for the freight elevator because they’re getting furniture deliveries. They’re having a birthday celebration. So, they want two porters to come up because they’re having a pizza party. It’s spotting on staying carpets. So, all those onetime things, and now when people are in the office three days a week instead of five days a week, you get less of those calls on the Mondays and Fridays and we were still stabilized during hybrid at a higher rate than we were pre-pandemic, and we’re really encouraged by that. I think the overlay now that’s brought it down incrementally more is just the state of the economy. People are watching what they’re spending. So, I think that’s a little bit of an overhang. So, if I were to look into the future when we have a recovery, I’m willing to bet that work orders will pop back up again and pop back up again at higher than pre-pandemic levels. So, I think we have this temporary double overhang now. But just to round out the question, I do not think on a percentage basis, we’re going to see much more deterioration. Now, volumetrically maybe because revenues can be compressed a little bit, but that will be on dollars, not margin percentage. I feel like we’re kind of — where we are now is kind of pretty stabilized. Sean Eastman: Okay, thanks. I’ll turn it over. Appreciate it. Operator: Our next question comes from the line of Justin Hauke with Baird. Please proceed with your question. Justin Hauke : Hi, good morning. I wanted to ask just to kind of big picture clarify some of the guidance moving pieces because with the margin moving up a little bit despite the — and the EPS held despite the incremental interest expense. Just the moving pieces on that. What was a little bit better and a little bit weaker? And maybe specifically, the corporate cost control, which it seems like that’s continued to kind of come in a little bit better than expected. So maybe just the outlook for what you’re looking at for corporate for the back half of the year? Earl Ellis : Sure. Absolutely. I’ll take that one. So, when we look at kind of what happened throughout quarter 2, we continue to see some headwinds in the shape of lower work orders, which actually has had a dip in the margin as well as continued pressure in the labor market. So, we’ve continued to see labor inflation, which good news is we’ve been able to offset a large majority of that through price escalations. When we see — looked at the quarter, we also had the flow-through from last year’s parking project, that was able to offset that. And so, when you look at the call up in margins, part of that was actually the flow-through that we actually got from the previously deferred parking. So, what we feel really good about is that in spite of the continued challenges that we’re seeing in margins, we’re still able — so if you actually even back out the flow-through of the parking project from last year, our margins for the quarter were 6.6%. And so, in spite of the continued challenges that we’re actually seeing, we feel really, really pleased that we’re still being able to deliver within the midpoint of our range. Justin Hauke : Okay. And just the corporate expense, maybe like a dollar run rate, what you’re kind of thinking in the back half of the year? Earl Ellis : Yes. So, I would say that when we look at corporate expenses, I would say that the — over the — you expect an average of about $60 million in corporate expenses, excluding kind of like the items impacting comparability. Justin Hauke : Great. And then I guess the second question, just on the parking segment. I mean even backing out the onetime here. Your organic growth rates there have been really strong. And it kind of sounded like in your prepared remarks that maybe you’re expecting that to kind of decelerate when you talked about more market trends. I just want to understand what you mean by that and what you’re thinking about for kind of the growth rate of that segment? What is the market trend for the back half of the year? Scott Salmirs : Sure. I mean look, I think generally speaking, like from an industry standpoint, I think parking revenues are kind of stable now. Like hybrid work is in place. So, it is what it is. The — because like for us, we have our parking business in two kind of key segments, the real estate side, commercial real estate and then on aviation. And I think in both of those segments, we’re pretty stable. So, I think it’s more normalized now. But what we’re excited about is we have our vantage parking offering, which is something that’s really — it’s a new technology, it’s insightful, it works to help give insights to clients on revenue management and so for us, it’s about this new productized offering that’s going to help us accelerate it. So, we’re hoping that in the parking segment, not only do we continue to grow, but hopefully a little bit ahead of the market because of some of the innovative stuff we’re doing. But, I would say walking that back a large measure we’re kind of out stabilization in the parking business as an industry. Justin Hauke : And I apologize. I meant the aviation segment and the adjusted for the parking item, your growth rate there has been in the high single digits. I guess what I was more asking about is, what is your expectation for the deceleration from that? Or why was it so strong in the first half? Is that just kind of the recovery in aviation volumes and now you’re saying those are recovered and they should kind of moderate to more low single digit, or? Scott Salmirs : That’s right. That’s exactly right. Travel has been well, you know, right. Anything around travel and leisure has been so up. So, I think at this point, and I think we did say a little bit in the prepared remarks, we feel like we are back to pre-pandemic levels and maybe even then some. We do think there’s a bunch of people that are catching up, in terms of travel. So, I think you’ll see more of a stabilization but still nice steady growth. Justin Hauke: Great. Okay, thank you very much. Operator: Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question. Faiza Alwy : Yes. Hi, good morning. I just wanted to follow up again on the technical solution side of the business. So, walk us through, you mentioned that you have a project backlog of $440 million, are you expecting that all of that will be recognized as revenue this year? Just walk us through the timing of what’s going on with the project delays? And when do you expect to fulfill those projects? Earl Ellis : Sure, Faiza. No, no. That will all be recognized this year. So typically speaking, ATS in general has always been the back half of the year story. And just to put some color around it, we do a lot of work in school systems. So, think about the fact that in July and August, the schools aren’t occupied, especially K-12. So that’s the time that you go in, and you do a lot of the infrastructure work. So that’s why a lot of this is back half loaded. So, for us, backlog means, again, signed contracts that get initiated. So, a lot of that’s going to happen in Q3 and Q4, really more Q4 than Q3. And that will be the initiation. So, I can’t give you a precise exactly how much of 440 will be in year. But it’s a really strong sign that we have backlog at that level. But it’s — think of it as initiating the projects in Q4 and they ramp through Q1 and even a little bit into Q2. Faiza Alwy : Okay. And then just so I’m clear because the delays are related. Is it more supply oriented? Or is it more demand-oriented. Because it’s — I was under the impression that it was more supply related. But some of your comments today are leading me to believe that maybe it’s more on the demand side, kind of ready to… Scott Salmirs : No, actually sorry [indiscernible]. Faiza, it’s a combination of both. It’s a little bit on demand side on the bundled energy solutions on the microgrids, it’s all about the supply chain. And specifically, batteries and some of the switch gear. Now, we are encouraged because what was happening, and I think you would see this from some of the competitors in our industry. At the beginning of the year, what would happen is something would take 10 weeks and then 10 weeks to get the item, and then maybe a month later, you’d get another order for something and you go to the manufacturer, like, “Oh, no, no, now it’s taking 12 weeks. And then you’d call again, it’s like, now it’s taking 14 weeks. It’s all starting to stabilize now. And that’s the key for us. So, if something pre-pandemic took six weeks and now it’s taking 10. As long as it stays taking 10, you could be planful, you can manage around it and we’re seeing that stabilization. So, the majority of the problem, especially on the RavenVolt side has been supply chain oriented definitely not demand oriented. The pipeline is really, really robust. Faiza Alwy : Okay. Good. Sorry, I’m just a little unclear, that’s why I just want to follow up because — so if it is on the RavenVolt side, that wouldn’t impact your organic revenue. So, explain to me a little bit more in terms of what’s driving the decline in organic revenue? Scott Salmirs : Yes. So, if you — let’s just pull out RavenVolt for a second. So, there’s two core segments there. There is EV and there’s bundled energy solutions. And both of those are more demand side. And for different reasons, EV because we were just winding down a big project with the dealership, and we’re now ramping up a big project with an automotive company. So, you’re seeing that delay to the back half. So that was just timing, but demand timing, not supply chain timing. And the other one is bundled energy solutions, which is what I talked about a few seconds ago, which is really the fact that we have the backlog, we have the orders book, but clients aren’t pulling the trigger because they’re just doing a general pause. But again, we’re starting to see that loosen up a bit. Now that I think the market is thinking that interest rates are starting to stabilize. And if it is what it is, then you start making those decisions. Faiza Alwy : Got it. Thank you, thank you for indulging me on all the detail. And then just maybe if I can follow up on the ELEVATE initiatives. You mentioned a few things. Give us a sense of how you’re thinking about timing there? I know you’ve talked about the end state being maybe a couple of years ago, talk about how you’re thinking about getting to that end state, what are some of the next initiatives that we should expect going forward? Scott Salmirs : Sure. I mean, look, we are on track with ELEVATE. And the big core in terms of infrastructure is our ERP transformation, and that’s a two-year process, because we’re doing it by industry group which just had the successful launch of our education group literally like a month ago, and it’s gone way better than we even expected. Because the ERP implementations are always bumpy and it went really well. And now we’re landing our next industry group, which will happen early next year. So, the infrastructure side is on track and going better than we hope. And then other things are all in progress. We launched hyper targeting for sales growth. You saw in — or heard in the prepared remarks, we had another unbelievable first six months of the year of new sales. So that’s a reflection not only of our sales team in terms of just the culture of our people, but the hyper targeting tool. And we’re now piloting our workforce management which is going to create efficiency in the field. And this month, we’re releasing our ABM Connect, which is our digital application to start connecting us in real time to the people out in the field, which is going to be a real game changer for us. And even that is probably a 12- to 18-month journey if not longer to actually get it deployed across 100,000 people, as you can imagine. But, things are going as planned. So, we’re — hopefully, you can sense the enthusiasm. Faiza Alwy: Great. Thank you so much. Operator: [Operator Instructions] Our next question comes from the line of David Silver with CL King & Associates. Please proceed with your question. David Silver : Yes. Hi, good morning. Thank you. I would like to maybe just drill down a little bit on the RavenVolt performance to date. And I’m wondering if you — maybe if you wouldn’t mind discussing how the performance of the business aligns or how it compares to kind of your initial expectations? And then in particular, I noticed you booked to change to the fair value of contingent consideration. Could you just maybe talk about what drove you to make that adjustment this quarter? Thank you. Scott Salmirs : Sure. I’ll take the first part of it. We’re as encouraged as ever about RavenVolt. I think probably even more so than we did the transaction because, microgrids are so compelling right now. And the backlog is phenomenal, and the team is phenomenal. So, I think if there was any level — I don’t even want to use the word disappointment, it’s just a supply chain and you can’t control that. And it’s the same thing that everyone in our industry is facing. But again, we see light at the end of the tunnel, and we’re hoping for a strong back half of the year. But I’ll let Earl talk to the accounting treatment because that’s in his wheelhouse. So, Earl, you can take it away. Earl Ellis : Sure, Scott. So, on a quarterly basis, we do a mark-to-market valuation on the contingent consideration. And when we look at the outlook, as Scott just mentioned, we’re still very positive on the deal model. However, there’s some timing challenges as we articulate in regards to supply chain timing, which has actually deferred some of the revenue and earnings that would have actually happened in year one into future years. And then just based on the GAAP accounting of that, you actually then discount that back with a high discount rate, which then resulted in this reduction in the liability. So again, I would really chalk it up to timing as opposed to anything different from a value case basis. David Silver : Yes. Thank you. That’s kind of where, what I was wondering about. I appreciate you targeting that. My other question would be kind of more about the office market, the commercial market, which seems to be in the news quite a bit. You certainly addressed it right up front. But I’m just wondering if maybe you could — Scott, if maybe you would share kind of a multiyear outlook, a two- or three-year outlook. In other words, I think what we’re saying is the office market and the motivations and whatnot for the tenants has changed. And for yourself to keep growing in that area, I’m guessing you’re going to have to take share or offer higher — a bundle of higher-value services. So, from your perspective, I mean, what continued, I guess, evolution in your value proposition or in your offering into the commercial market will be necessary for you to kind of deal with the current trends towards lower occupancy rates and remote work or hybrid work arrangements in order to kind of continue to kind of maintain your position and ideally grow, grow your share, grow your profitability in there? Thank you. Scott Salmirs : Sure. Well, listen, there’s certainly going to be pressure in commercial real estate. That’s pretty obvious. For us, so far, as we’ve mentioned, it’s really only been around the work order side because of hybrid and the economy. So, when you drill down into ABMs portfolio in B&I, David, don’t forget that, or you may not have the insight to this, but a third of our revenues in B&I is around engineering and parking. And those are really stabilized depending on office density, because it doesn’t matter how dense the floor is, you still need “engineers” in the basement, working on the mechanical and electrical business, that doesn’t change. And parking, as we said, is stabilized. So, you’re really talking about the janitorial piece that has some of the exposure. But then you look at ABM’s portfolio, and we are way predominantly Class A buildings, newer buildings, bigger buildings, which are the ones that are going to survive the best and if anything, we’ve seen those have positive absorption as compared to the rest of the market because we’re seeing B and C tenants from B and C buildings rather migrating into Class A buildings. So, I think for us, we’re pretty protected. It will be choppy for the next several quarters, there’s no question about it. Leases expire even in A buildings and as they take a little less space, the next tenant has to come in, they’re going to have a year or so to build their space. So, there’ll be some choppiness. But I think, again, we’re so mitigated because of the portfolio that we have. And don’t forget, again, as a whole, we’re diversified. We’ve been investing in end markets like ATS, manufacturing and distribution, which is another hedge for us. And then lastly, David, what I would say is you think about the ELEVATE investments and just hyper targeting just in general for — on the growth side to help us mitigate some of the compression in the real estate market. So, I think we’re doing all the things we can and we actively manage these challenges. We’ve seen some of these downturns before in the segments, look at even the pandemic when schools were closed and airports were closed and B&I accelerated. So now we may be in a period where there is less acceleration in B&I, but as we talked about, aviation is doing great and ATS is doing great. David Silver : Thank you for that. I just have a quick one here, but you touched on ERP and what the history of many other companies has been with their different implementation issues. And I’ve certainly been an observer of a number of them. Just so I know, but in the event that maybe costs rise a little bit above expectations, with the implementation of your ERP system. Would that extra outlay be treated? Would it be capitalized? Or would it be expense? Do you have a sense of that at this point? Scott Salmirs : Yes. We’re right on our target. So, we’re not talking about cost overruns at this point. We feel really good and have really good line of sight into what the expense profile looks like in the next couple of years. So, that’s not in our narrative cost overruns. Operator: Thank you. Ladies and gentlemen, our final question this morning comes from the line of Timothy Mulrooney with William Blair. Please proceed with your question. Tim Mulrooney : Scott, Earl, good morning. Most of my questions have been answered, so I’ll keep this quick. But last quarter, you all gave the headwinds from work orders. I think it was $35 million. And you said you’d expect that, I think, to more normalize. So, you didn’t admit this quarter, is that because there really wasn’t a headwind year-over-year or if there wasn’t, if you can quantify it for us? Scott Salmirs : Yes. We’re talking about maybe $15 million. It hasn’t been much. And again, I do think we’re heading into this more stabilized rate right now. So yes. I think this is — we’re actually given everything that’s happening in the environment and where hybrid is and as I said, where the overall economy is, we were actually pleased that it wasn’t more acute. Earl Ellis : Yes. Because I mean, I think what we talked about last quarter was the anticipated reduction in disinfection related work orders, which that will become a non-story starting in Q3, Q4 as that kind of like precipitates. I think what the potential headwinds that we’ll be seeing potentially in the future are really around just based on what Scott earlier alluded to with regards to the hybrid environment and the potential for reduction in work orders where, again, right now, we’re now at kind of call it free-COVID levels, which are typically about 5% of revenue. Tim Mulrooney : Yes, that’s kind of how I’m thinking about it, or how I interpreted Scott’s comments earlier is like, look, pre-pandemic work order of 4% to 5%. All else equal, you’d expect that to be higher on a go-forward basis. But there’s some macro headwind stuff that’s kind of pulling it back to that 4%, 5%. Is that the right way to think about it? Earl Ellis : That’s exactly right. Scott Salmirs : Exactly right. And again, what I would reiterate is that even during — before the economy started turning in the last few months, even before that, with hybrid, we were still about pre-pandemic level. So, it’s almost like kind of this new kind of cost control that we’re seeing is what pushed us back to pre-pandemic levels. So, we’re optimistic, Tim, that we’re going to get back above that when the economy turns. Tim Mulrooney : Understood. Last one from me, guys. Thank you. Does it make sense to prioritize your capital allocation on debt reduction near term versus M&A and buybacks and other things to help reduce that incremental interest burden? Or are you comfortable at 2.6 times? Thank you. Earl Ellis : Yes. Good question. When we looked at our cash flow, which generally is weighted more in the back half, we do feel like it’s going to provide us with ample flexibility to do both of those things, which would include paying down debt in addition to potentially doing some very small share buybacks. And when I talk about share buybacks, it really would be most likely limited to the anti-dilutive nature of our share-based compensation. But the good news is we feel that with our strong cash flows, we’ll be able to limit our net leverage exposure. Tim Mulrooney: All right. Thank you. Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Salmirs for any final comments. Scott Salmirs : I just want to thank everybody for participating and the interest level, again, very, very much appreciate it. We hope everyone is having a good start to — good start to the summer, and we’re looking forward to coming back to you in Q3 with an update on all things ABM. So, have a great summer, everybody. Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation. 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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......»»

Skillsoft Corp. (NYSE:SKIL) Q1 2024 Earnings Call Transcript June 6, 2023 Skillsoft Corp. misses on earnings expectations. Reported EPS is $-0.21 EPS, expectations were $-0.18. Operator: Greetings and welcome to Skillsoft Corp. First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the […] Skillsoft Corp. (NYSE:SKIL) Q1 2024 Earnings Call Transcript June 6, 2023 Skillsoft Corp. misses on earnings expectations. Reported EPS is $-0.21 EPS, expectations were $-0.18. Operator: Greetings and welcome to Skillsoft Corp. First Quarter 2024 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chad Lyne, Head of Investor Relations. Thank you. You may begin. Chad Lyne: Thank you, operator. Good afternoon and thank you for joining us today for Skillsoft’s earning call to discuss our first quarter financial results for the quarter ended April 30, 2023. Participating on today’s call are Jeff Tarr, Skillsoft’s Chief Executive Officer; and Rich Walker, Skillsoft’s Chief Financial Officer. Today after market close, Skillsoft issued a press release announcing it’s financial results. As a reminder, today’s earnings release is available on Skillsoft’s Investor Relations website. Before I hand the call over to Jeff, I want to remind you that today’s call will contain forward-looking statements about the company’s business outlook and expectations, including statements concerning financial and business trends, our expected future business and financial performance, financial condition, and outlook. These forward-looking statements and all statements that are not historical facts reflect management’s current beliefs and expectations as of today and therefore are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks described in the Safe Harbor discussion found in the company’s SEC filings. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. References on this call to pro-forma results referred to our results that have been prepared and presented to reflect historical periods as Codecademy had merged on February 1, 2022. Unless noted otherwise, all comparisons on this call to prior year results are being made on a pro-forma constant-currency basis which represents first quarter 2024 local currency amounts translated at prior year foreign exchange rates for the comparable period. We also want to note that we have updated our naming convention for our two reportable segments. Our previous Skillsoft Content segment is now called Content & Platform to better reflect our differentiated model of owning and delivering content through our SaaS-based AI-driven learning experience platform. This segment includes Skillsoft Codecademy and our coaching offering. Our previous Global Knowledge segment is now called Instructor-led Training to better reflect our delivery of technical skills training to virtual and in-classroom training. With this naming convention update there has been no change in our disaggregation of revenue or expenses compared to how we’ve reported segment financial performance in the past. A reconciliation of the non-GAAP financial measures included in today’s commentary to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics is included in our earnings press release which has been furnished to the SEC and is also available on our website at www.skillsoft.com. After our prepared remarks, Jeff Tarr and Rich Walker will be available to take questions. With that, it’s my pleasure to turn the call over to Jeff. Jeff Tarr: Thanks, Chad. Good afternoon, and thank you for joining us. We had a strong start to the year building on the momentum that we shared on our fiscal 2023 fourth quarter call. I’m pleased to report that in Q1, we delivered near double-digit bookings growth in our Content & Platform segment, generated record high dollar retention rates, and expanded pro-forma adjusted EBITDA margins while continuing to fund important growth investments in content, platform, and go-to-market. On today’s call, I’ll discuss a number of important market trends and strategic priorities intended to extend our lead in enterprise learning. I’ll also share a few operational highlights that are driving our improved performance before turning the call over to Rich to cover our financial results. I’m excited and encouraged by what I believe are important long-term structural tailwinds. Historically low unemployment has been a constant and businesses remain focused on getting more from their existing employees. Further, the pace of technological change has been relentless exacerbating technical skills gaps. This in turn continues to elevate talent development as a C-suite issue with surveys highlighting reskilling as a top priority for CIOs and their senior teams. This is driving a shift away from a more price-sensitive check-the-box approach to online learning towards customers taking a more strategic enterprise-wide approach to skills development. Now more than ever organizations and leaders are championing skills development for their employees, embracing the strategic imperative of workforce transformation that can be unlocked through the enterprise learning solutions that Skillsoft offers. Our entire business has been built to deliver transformative learning experiences through an end-to-end enterprise-grade solution that ensures reskilling objectives are measurable and outcomes based throughout the learner’s journey. We’ve been evolving our offerings to better serve this growing and more demanding customer segment for some time and we’re encouraged by both the recent wins and the longer-term opportunity we see in front of us. The other big market shift is, of course, the sudden rise of generative AI. While new technologies are often hyperbole, we believe generative AI will profoundly transform jobs and the workforce at an unprecedented pace and scale. Knowledge workers are worried that their jobs will be at-risk from generated AI or from the employee who knows how to use it more effectively. While business leaders are concerned about how their companies will remain relevant and competitive. This is creating a new imperative for reskilling and workforce transformation that is touching nearly every organization and knowledge worker. Given this profound shift, we believe there is a tremendous opportunity for Skillsoft. As we shared on our last earnings call, we have a deep legacy in AI and there have been a pioneer for many years in leveraging its power within our AI-driven Skillsoft Percipio platform. More recently on the content side, our Codecademy team launched an eight-module introduction to ChatGPT. That was our most successful course launch ever. We’ve also seen a more than six-fold increase in completions for our artificial intelligence and machine learning courses. We have a rapidly expanding suite of offerings to help individuals, teams, and leaders develop critical skills for leveraging generative AI across the enterprise. Our training solutions span tech and dev, leadership, and business skills, and compliance with a recognition that generative AI has got more than just the technology that’s contributing to Skillsoft’s unique competitive advantage and interesting enterprise-wide generative AI learning needs. We are also using generative AI to create new ways to work such as our powerful AI coaching simulator which is generating a lot of excitement. It is currently an alpha with more than two dozen large enterprise customers and we’ll move into beta later this month. We are also using generative AI to accelerate the localization of our content and we are uncovering new ways to improve productivity across our organization. Ultimately, we are confident in our opportunity to use generative AI to deliver on our purpose of helping organizations and their people grow together through transformative learning experiences. In summary, we believe powerful market forces are creating new demand for our offerings. Going forward, expect us to continue to focus on three important inter-related growth drivers one, leading and workforce transformation; two, leading in tech and dev skilling; and three, leading and preparing organizations and their people to succeed in a world of generative AI. Turning now to our operational highlights. Since our return to public markets, we’ve assembled the breadth of assets that we believe is unparalleled in the industry. Our go-to-market investments in people, processes and systems are enabling us to better position this comprehensive portfolio into a holistic and integrated solution for large and complex enterprise workforce transformations. The changes in our go-to-market strategy and execution are reflected in our Q1 results. We grew our Content & Platform segment bookings 9% and 3% on an LTM basis. We demonstrate the value of our solutions with existing customers and were more effective at expanding our relationships at renewal. Our team’s ability to articulate and demonstrate the value across our solution suite drove cross-sell and upsell activity that contributed to record high dollar retention rates of 108% and 101% on an LTM basis. Beyond the headline metrics for Content & Platform’s Bookings growth and retention, we also executed well on the customer acquisition front. We earned business with more than 150 new customers in the quarter, including larger six-figure deals with a leading European aerospace and defense contractor, one of the largest U.S.-based last-mile logistics and distribution real estate companies, and a leading provider of retirement and investment products and services. A highlight for the quarter was signing a four-year agreement with Kyndryl, the world’s largest IT infrastructure services provider with nearly 90,000 employees serving thousands of customers in more than 60 countries. Kyndryl has built a purpose-driven organization and a value-centric culture focused on putting the skills and careers of its people at the heart of its business. As the company works to advance its distinct culture and support the professional growth of Kyndryl’s globally, it sought an enterprise partner that could deliver measurable outcomes with an end-to-end learning solution. Skillsoft provides all Kyndryls with the opportunity to continuously develop and grow their skill sets. Skillsoft was able to demonstrate a compelling value proposition for Kyndryl that leveraged all of our capabilities, including our best-of-breed Skillsoft Percipio learning experience platform, our extensive and immersive content portfolio spanning thousands of topics and learning paths, and our full continuum of learning modalities, all supported with extensive program management and learning administration services. It’s a tremendous win for our teams and a testament to our strategy. In summary, I’m pleased with our progress and the results our team generated. Our year is off to a good start. And while we expect there to be areas of variability quarter-to-quarter, we believe we are positioned for what will add up to a solid year. With that, I’ll now turn the call over to our CFO, Rich Walker, to cover our financial results. Rich? Rich Walker: Thanks, Jeff. Welcome, everyone, and thanks for joining today. As Jeff discussed, we delivered a solid first quarter that generally outperformed our objectives. We grew bookings and revenue in our Content & Platform segment, performed in line with our expectations in our ILT segment, expanded adjusted EBITDA on a dollars and margin basis, and generated strong positive free cash flow. In the past several quarters, we have worked to flatten the organization, simplify spans and layers, and promote a culture of ownership and accountability, and we continue to execute with a high degree of focus and urgency. Moving now to our financial results. Unless otherwise noted, the results I discuss will be on a pro forma basis, as if Codecademy had merged on February 1, 2022, and excludes the divested sum total business for all periods. In addition, I will just discuss growth comparisons on a year-over-year constant currency basis unless otherwise noted, which we believe represents a more appropriate comparison of our underlying operating and financial performance. Let’s turn first to bookings. In our Content & Platform segment, bookings were $65 million, reflecting growth of 9% for the quarter and 3% on an LTM basis. The higher performance in this segment was primarily due to stronger upsell and cross-sell activity across our offerings, which was captured in our dollar retention rate of 108% for the in-quarter period and 101% for the LTM period. As a reminder, given the quarterly seasonality in our renewal base, Content & Platform Bookings and DRR are metrics that should be primarily viewed and assessed on an LTM basis. In our ILT segment, bookings were $44 million, down 18%, which we had largely anticipated due to changes in fiscal 2023 in two large partners training subsidy programs. Importantly, we expect to largely lap the impact of these changes in the second half of this year. Given the mix of bookings between our two segments with Q1 typically being the seasonally smallest quarter of our Content & Platform segment, total bookings of $108 million were down 4% due entirely to the ILT segment. Moving to the P&L. Content & Platform revenue was $99 million and up 2%, with growth across all lines of business including sustained double-digit growth from Codecademy. ILT revenue was $37 million and down 14%, contributing to total revenue of $136 million being down 3%. From a mix standpoint, approximately 73% of our total revenue was in our Content & Platform segment. This is up from approximately 66% two years ago, and we expect to continue to increase the mix over time from this segment given its more predictable and recurring subscription revenue basis. Shifting to profitability. Across the organization our teams executed well and demonstrated effective stewardship of our capital and resources. Identifying areas to drive ongoing operating leverage through greater productivity, efficiency and effectiveness. We prudently rationalize spend in some areas to redirect investment capacity towards strategic growth priorities for the business. I believe we struck an appropriate balance between reinvesting savings into the business while also accruing more to the bottom line. Non-GAAP OpEx of $114 million or 84% of revenue, was favorably down 6%. Non-GAAP cost of revenue of $38 million, or 28% of revenue, was up approximately 1%. Non-GAAP content and software development expense of $14 million, or 11% of revenue, was favorably down 21% due primarily to the timing of content development spend and capturing of synergies from the Codecademy acquisition. Non-GAAP sales and marketing expense of $44 million, or 32% of revenue, was up 7% due to investments in our go-to-market transformation to accelerate bookings growth on our Content & Platform segment. Non-GAAP general and administrative expenses of $18 million, or 13% of revenue, was favorably down 26% due primarily to the capturing of synergies from the Codecademy acquisition and other expense reductions. Adjusted EBITDA was $22 million, up 13%. Adjusted EBITDA margin was approximately 16% of revenue, a gain of more than 200 basis points compared to our pro forma results in the first quarter of fiscal 2023. Our GAAP net loss was $44 million in the quarter and adjusted net loss was $30 million. Moving to cash flow and balance sheet highlights. Cash flow from operations was $21 million in the quarter, led by working capital favorability as we had strong cash collections against the seasonally high fourth quarter accounts receivable balance. We invested $4 million in capital expenditures and capitalized internally developed software, resulting in positive free cash flow of $17 million. We ended the first quarter with $178 million of cash and cash equivalents, an increase of approximately $8 million from our fiscal year end in January. During the quarter, we repurchased 4.4 million shares under our $30 million share repurchase program. The outstanding balance on our term loan facility was $601 million and we had $45 million drawn on our $75 million accounts receivable facility. As a reminder, we prepaid $31 million on the term loan last fall following the sale of the sum total business, and we have annual amortization payments of approximately $6 million. From a capital allocation standpoint, we will continue to prioritize organic investments that we believe will accelerate our long-term growth profile and align for our priorities of leading in workforce transformation, leading in tech & dev skilling, and leading in generative AI. We will also continue to evaluate opportunities to further reduce our obligations under the term loan in advance of its maturity in July of 2028, while also assessing further share repurchases under our existing share repurchase authorization. With a good first quarter behind us, we believe we are positioned well for the year ahead. We are reaffirming the full year outlook we provided in April, which calls for total bookings of $610 million to $640 million, revenue of $555 million to $585 million, and adjusted EBITDA of $100 million to $105 million. We look forward to connecting with many of you in the coming days. We appreciate your support as we continue to execute our strategy and seek to drive profitable growth for Skillsoft and value creation for all of our stakeholders. Operator you may now open the call for questions. Q&A Session Follow Skillsoft Public Limited Co Follow Skillsoft Public Limited Co 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 the line of Ken Wong with Oppenheimer. Please proceed with your question. Ken Wong: Great. Thank you for taking my question. I want to just maybe ask quickly on the guidance. It looks like you guys did see a bit of an FX headwind this quarter and as we think about that full year guide, what’s baked into there, and should we view kind of on a constant currency growth basis, that kind of that reiteration is actually a bit of a modest increase? Rich Walker: Yes, I think — Ken, it’s Rich. Our guidance isn’t changed because of the FX environment, so no modification there. And we think when we said guidance, it was reflective of our best outlook for the year. Ken Wong: Okay, fantastic. And then maybe second really solid performance on the retention side. Can you maybe talk about where you saw that uplift from? I think you mentioned maybe a little bit of incremental cross-sell. And as we look ahead, is that a trend that you think is potentially sustainable? Jeff Tarr: So, Ken, thanks. We’re pleased with the dollar retention rate. 108% demonstrates what the company is capable of and is reflective of what we’ve seen for some time in some pockets of the business, some geographies some segments of customers. With that said, it’s a small quarter. It’s our smallest quarter of the year. And so individual small numbers of wins and losses can move that dollar retention rate up or down quite significantly in the first three quarters of the year. So we prefer to look at the LTM growth rate, which also is moving in the right direction at 101% as the metric to watch more closely. Of course, we’re driving each quarter to drive the highest dollar retention rate we can to move that LTM metric up. Ken Wong: Got it. Okay, perfect. Thanks a lot, Jeff. Really appreciate the color, guys. Operator: Our next question comes from the line of Raj Sharma with B. Riley. Please proceed with your question. Raj Sharma: Hi, thank you for taking my questions. I wanted to understand if you could probably please add some color on — more color on Codecademy. How’s that revenue contribution and also in terms of the profitability metric. You had set certain metrics when you acquired them. Do you please give an update on that? Jeff Tarr: Sure. Raj, thanks very much. I’ll start, I’ll let Rich take it from there. But first of all, you need to understand how we’re operating business. We have the Codecademy B2C business, which we operate effectively as a business unit that’s reported inside of content platform. The B2B business has been increasingly integrated into our tech & dev product line, so it becomes increasingly difficult to break out. With that said, we’re pleased with how it’s performing top line. I’ll invite Rich to give best shot at how we see the metrics that require some allocations to do that. And we’re also tracking well on the profitability commitments that we made at the time of the transaction. Rich? Rich Walker: So we did announce Raj when we acquired it, it was probably a $20 million drag on EBITDA at that time. We have now more fully integrated the business. We don’t have a separate reportable segment-level P&L view, but I’m very pleased with the progress we made. Part of the reason we saw 13% year-over-year growth in our consolidated was because of the efforts we made. We expanded margins on a like-for-like comparison about 200 basis points in the quarter. The full year outlook is reflective of Code and its contribution to our results. And the go-forward will be described much like on this call without a lot of detail. Now that we’re lapping the Codecademy and more importantly, integrating it into our operations and our results. Jeff Tarr: Maybe on — is on the top line. The B2B business is growing in the double-digit — at a double-digit rate. The B2C business is growing at a mid to high single-digit rate. And that B2C business, I emphasize, is growing faster than we’re seeing peers growing in the B2C segment. So we believe we’re taking share. Raj Sharma: Right. I know you commented on the synergies on the cost side, and some of those were from the Codecademy side. Is it fair to say that — what would you classify the $20 million drag on EBITDA when you acquired it? Has it been narrowed to half of it or all of it, or is it flat now, counting the synergies you have? Rich Walker: Yes, it’s a tough measurement because you have to make some assumptions on allocations. But I think we’ve made the progress we expected and executed on the integrations. It’s primarily the entire B2B business is integrated into our tech & dev offering. The B2C business has a different autonomy as it operates. But all of those two are supported by a shared services model in HR and legal and finance and accounting, as well as some marketing support to the enterprise business. So I think the drag is not meaningful on the business, and we’re operating it more for the top line growth that Jeff alluded to and pleased with what we’re seeing on the top line. Raj Sharma: Great. Okay, fair enough. I just want to move on to the ILT business, the global knowledge. Can you comment on the revenue cadence and sort of through the year, the expectation for that business as part of your guidance and how that business is doing? Jeff Tarr: Well, first of all, I’ll say we’re tracking as we expected in the first quarter, and we believe that we’ve turned the corner on that business that we have operating it more effectively, that we’re close to lapping some of the issues that we saw in that post COVID environment and are feeling good about the year. Rich, what sort of color are you comfortable giving on the…? Rich Walker: Yes. I think the — on a quarterly kind of the progression of the business, Q4 historically tends to be a seasonally high quarter for ILT bookings. You approach a use it or lose it. Q1 is always from a classroom and consumption where we recognize revenue, generally a smaller impact seasonally. When I widen the aperture and think about the business and how it’s executing and importantly, when we lap in the second half the tough compares to the prior year, there’ll be a more logical compare in the business, but the business is executing to the plan we put in place, and that’s something we’ve enjoyed for about three quarters now, which has been really important. Raj Sharma: Got it. Thank you. And then just congratulations on the free cash flow sort of flowing through down to the bottom line. Yes, that’s all my questions. Thank you. I’ll take it offline. Jeff Tarr: Thanks Raj. Operator: Our next question comes from the line of Robert Simmons with D.A. Davidson. Please proceed with your question. Robert Simmons: Hi. Thanks for taking my questions. I was wondering if you could give us some color on your sales force productivity. Principally looking at the ramp of the newer reps, but then also kind of like where you saw better strength in like maybe weaker than expected. Jeff Tarr: No. We’re seeing good progress on productivity that salespeople who joined us last year. It takes about 12 months to get full productivity. We have assumed improved productivity in our guidance for this year, and we’re seeing that develop as we had expected. Going forward, a big focus on our – with regards to our sales force is to continue to help our sales people engage in a more consultative sales process and to engage at more senior levels in the organizations that we serve. That’s where skills development and workforce transformation is viewed as a strategic imperative. That’s where we’re winning, where we’re winning accounts like Kyndryl and others, and we feel really good about the progress the team is made. Robert Simmons: Got it. And then I was wondering if you could talk about the pricing environment. How is that been going up for you so far this year? Jeff Tarr: First of all, as we’ve talked about, we implemented a company-wide price increase, it takes a while for that to flow through because again, we have bookings, the bookings have returned to revenue. We’re heavily fourth quarter weighted. So every year, we implement price increase, we see there a little of it in the year. With regard to the pricing environment, we see it is quite bifurcated. I alluded to this in my remarks. We see a segment of customers that is highly price sensitive that sees online learning as sort of a check-the-box activity and we see a segment of customers that see online learning and what beyond that what we deliver are transformational learning experiences as highly strategic. The former category of customer, we see as shrinking, both for us and the market overall. The latter category of customers, those that are more strategic, we see as growing, growing market and where we are taking share. So we believe the market is in a transformation of its own. We feel good about how we’re positioned, and we believe over time that’s going to be reflected in a stronger performance. Robert Simmons: Got it. And then the final one from me is could you just talk about where you see in terms of sales cycles? Are those getting longer, getting shorter, kind of stable? And kind of how would you characterize your customer conversations versus three or six months ago? Jeff Tarr: Yes, I think we’re probably building out some commentary on some other calls where others are citing lengthening of sales cycles. Keep in mind, we have most of our business is a renewal business in an upsell business, and we are not seeing a lengthening of cycles there. We are, like others, seeing a lengthening of cycles on new business, but we are less depending on that to hit our numbers and drive growth than others in the industry. Robert Simmons: Got it. Thank you very much. Operator: Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question. Sheldon McMeans: Hi, this is Sheldon on for Raimo. Thanks for taking our questions. I want to start on Codecademy. And how are you seeing the reception of the recently announced enhancements to the suite with Codecademy Plus and the upgrade of Pro features. In terms of kind of the reaction here, is this leading to reduce friction for the enterprise sale? Is it leading to higher land sizes? Any color here? Jeff Tarr: Well, I can’t tell you is – we believe Codecademy is taking share on both consumer and the B2B side. So we feel good about that, early days on the new launch. Where I can also tell you, we’re seeing traction is on our new generative AI offerings, and we expect to continue to invest in that area and believe we’ll continue to deliver results in that area. Sheldon McMeans: Great. And wondering if there’s anything that you could call out in terms of demand across regions or verticals and that’s all from me? Thank you. Jeff Tarr: Look, we see more growth in regions where we’re less penetrated. So growth is stronger, for example, in MDI and some of the Asia Pacific markets. But those are still small parts of our business and do less to drive the total company result. Overall, both our big markets, North America and EMEA, we’re both performing to expectations in the first quarter. You also asked about the verticals, sorry. So in terms of verticals, we see more growth opportunity in areas like – and where we’ve been seeing more results in professional services, in technology, in retail. Those have been some good financial services have been really good verticals for us, seeing good, healthy growth. But what really differentiates where we see growth versus where we see less growth is with customers to see workforce transformation reskilling as a strategic imperative. And where they’re investing in talent, that’s where we see the most opportunity. Sheldon McMeans: Excellent, thank you. Operator: Our next question comes from the line of Tom Singlehurst with Citi. Please proceed with your question. Thomas Singlehurst: Yes. Good evening it’s Tom here from Citi. Forgive me if I missed the beginning of the call, so I apologize if we’re rehashing sort of stuff you’ve already covered, but I’m interested in the comments on generative AI. I mean you talk about some of the content you’ve already created that addresses sort of reskilling these in that area? But I’m just interested whether you could give more flesh on the bone on what your customers are saying about this topic and whether it’s really sort of starting conversations about sort of a broader push for reskilling and upskilling. And then more specifically, is there an opportunity on the cost side as well for you guys in, either course creation and/or sort of sort of learner support and personalization? Thank you very much. Jeff Tarr: So love the question. We are seeing the impact of generative AI on what we teach, how we teach and how we work. And it is coming up in terms of what we teach and how we teach it comes up in almost every customer conversation. When it comes to what we teach, we’ve already announced the Codecademy suite of eight segments course on introduction to generative AI. We have added to our IoT portfolio, and we are launching a first of a series of learner journeys, comprehensive multi-mobile learning – learner journeys on generative AI. Generative AI cuts across all three of our major categories. It impacts leadership and business skills, it impacts tech and debt and it impacts compliance. And you should expect over time that every new course of hours, if it’s in an area where generative AI has an impact, that we’ll be integrating that into the content. So that’s number one. What we teach, it’s changing, and it will continue to evolve given the imperative that generative AI to create workforce transformation and reskilling. Secondly, on how we teach, we are – we’ve long been using AI in our business. We’re seeing generative AI as a huge unlock. I mentioned on the call, we have an AI coach simulator that is an alpha tremendous response from customers that’s in beta with alpha rather with more than two dozen large enterprise customers. And we are within weeks of moving into data. We’re very excited and believe that we are leading the industry in this particular field. In terms of how we work, the third area, generative AI is already having an impact on cost structure. We’re seeing that there are areas in our business where it’s driving cost out, and we expect that to continue. Now I’ll tell you that we’re not – we less focused on dropping that to the bottom line right now more focused on using the resources that generative AI frees up to invest in extending our lead and what we teach and how we teach. We see that as critically important to the future of the business. It is an enterprise-wide top three imperative for our company and expect us to do everything we can to sustain a lead in this area. Thomas Singlehurst: That’s very clear. Thank you very much. Operator: There are no further questions in the queue. I’d like to hand the call back to management for closing remarks. Jeff Tarr: Thank you very much. We’re greatly appreciate you joining us for this call. We’re still early in the year. We feel very good about how the year has started, and we look forward to updating you after our second quarter. 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 Skillsoft Public Limited Co Follow Skillsoft Public Limited Co We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

This article will cover 30 high-paying remote jobs without a degree or experience. These mostly include international remote jobs that pay around $30 per hour. The article also covers the emerging trends, key players, and changing landscape in remote jobs. If you want to skip our detailed analysis, you can head straight to 10 High-Paying […] This article will cover 30 high-paying remote jobs without a degree or experience. These mostly include international remote jobs that pay around $30 per hour. The article also covers the emerging trends, key players, and changing landscape in remote jobs. If you want to skip our detailed analysis, you can head straight to 10 High-Paying Remote Jobs without a Degree or Experience. In an era marked by economic uncertainty, where traditional job markets have experienced significant shifts, the allure of remote work has become increasingly appealing to professionals worldwide. Technological advancements and changing employment dynamics have opened a vast array of opportunities for individuals seeking high-paying remote jobs, irrespective of their prior experience or formal education. Rising Job Optimism Amid Economic Uncertainty According to recent research by Robert Half, many professionals are embracing job optimism despite economic turbulence. The biannual Job Optimism Survey revealed that 46% of respondents in the United States are either actively searching for new roles or planning to do so in the first half of 2023. A desire for career growth, greater fulfillment, and financial rewards drives this surge in job search enthusiasm. The changing career preferences may also be observed today; several factors influence professionals’ inclination to explore new employment opportunities. The research highlights specific demographic groups and occupations more likely to consider a career change. Younger individuals aged 18 to 25 are most willing to transition, while human resources professionals, working parents, and employees with 2-4 years of tenure demonstrate a significant desire for change. Moreover, the research underlines the primary motivators for professionals seeking a new job in the coming months. A higher salary was the top reason, cited by 61% of respondents, followed by better benefits and perks (37%) and the desire for greater flexibility in work arrangements (36%). These factors reflect the evolving priorities and aspirations of the modern workforce. The Remote Work Revolution and the Rise of Prompt Engineers Remote work has experienced exponential growth in recent years, fueled by technological advancements and changing attitudes toward workplace flexibility. The COVID-19 pandemic further accelerated this shift, with organizations worldwide embracing remote work arrangements to ensure business continuity. Remote work has significantly impacted employees’ well-being, as revealed by The Evolving Office eBook based on a survey of 1,000 office workers. One key finding from the eBook is that 56% of employees reported experiencing improvements in their mental health due to remote work. This underscores the positive influence of flexible work arrangements on employees’ overall well-being. Thus, remote work continues to be perceived as overwhelmingly positive.  Moreover, Buffer’s State of Remote Work report found that 98% of respondents expressed a desire to work remotely, at least part of the time, for the remainder of their careers. Furthermore, 91% reported a positive overall experience with remote work, with only 1% having a negative experience. The biggest reason remote work has been this popular is its flexibility, according to 22% of respondents. This includes the freedom to manage their time effectively, choose their desired work location (13%), or even decide where they want to live (19%). Notably, tech-related occupations have witnessed the fastest growth in remote work opportunities, with business, financial, and management occupations also experiencing significant advancements in teleworking options. For example, as artificial intelligence (AI) continues to evolve, a new breed of technology employees has emerged: prompt engineers with high-paying remote jobs without a degree or experience. These professionals play a pivotal role in training large language models (LLMs) like ChatGPT to communicate effectively and accurately. Surprisingly, these roles do not require coding skills or tech background. Instead, prompt engineers harness their linguistic prowess to mould AI systems, emphasizing the importance of human instruction and diverse perspectives in shaping these transformative technologies. Within this rapidly transforming job landscape, many high-paying remote jobs await individuals seeking career growth without requiring extensive experience or formal degrees. Many remote jobs requiring no experience or degree pay as high as $30 per hour. Many of these are specific to tech domain and include jobs like software development. Many jobs in technology other than software development, like digital marketing etc can also be international remote jobs, where companies can outsource from different countries. From contract-based roles offering hourly rates of up to $200 to full-time positions offering salaries as high as $335,000, professionals with diverse backgrounds and skill sets can now capitalize on remote work opportunities.  Companies like Adidas AG (OTC:ADDYY), Alphabet Inc. (NASDAQ:GOOGL), and Upwork Inc (NASDAQ:UPWK) are renowned for enabling remote work opportunities worldwide, often offering attractive salaries to remote employees. Photo by Annie Spratt on Unsplash Methodology A consensus-based approach was adopted to determine the ranking of high-paying remote jobs without a degree or experience. It involved gathering information from online platforms such as Upwork.com, Indeed.com, and Reddit to identify trends and common opinions. Sources like Indeed, Glassdoor and ZipRecruiter were consulted for average base salaries for ranking these jobs in ascending order of high average base salary. It is important to note that the rankings, as well as many jobs, may vary with salaries because of the fact that thousands of remote jobs pay well, and in many cases, salaries can vary for the same job depending on different factors, so the limitations of the list should be considered. Here is a list of the high-paying remote jobs without a degree and experience: 30. Medical Record Transcriptionist Average Base Salary: $50,231 A medical record transcriptionist converts voice-recorded medical reports into written documents, requiring knowledge of medical terminology, strong typing skills, and attention to detail. Due to the non-technical skill requirement of the job, transcription is also one of the high paying jobs for 18 years olds without experience. 29. Video Editor Average Base Salary: $50,425 Video editors generally have the flexibility to work from anywhere, collaborating with clients and teams remotely. This allows them to bring their creative expertise to various projects, including films, commercials, social media content, etc. Upwork Inc (NASDAQ:UPWK) offers many opportunities and jobs for remote video editors on Upwork.com.  28. Search Engine Evaluator Average Base Salary: $50,884 A search engine evaluator analyzes and rates search engine results to enhance quality. They assess search queries and corresponding results for accuracy and relevance. This role improves search engine performance and user experience by following provided guidelines. Telus Corporation (NYSE:TU) and Lionbridge Technologies Inc are some of the top choices for individuals looking for high-paying remote jobs without a degree or experience for this role.  27. Remote Bookkeeper Average Base Salary: $51,068 Bookkeepers handle financial records, transactions, and statements for businesses. With the flexibility of remote work, bookkeepers can conveniently manage accounts, reconcile finances, and provide financial insights from their preferred location. In the US, Taylor White Accounting and Finance and Ledgent Finance & Accounting are renowned firms offering high hourly rates, i.e., $28.10 and $25.62, respectively. Remote work allows bookkeepers to handle accounts and provide financial insights conveniently. 26. Proofreader Average Base Salary: $51,223 A proofreader reviews documents, articles, manuscripts, or other written materials to ensure accuracy, clarity, and consistency. Proofreaders have a keen eye for detail and strong language skills. Many proofreaders work remotely, offering their services to clients worldwide, and utilize digital tools to collaborate and provide feedback efficiently. 25. Online Fitness Trainer Average Base Salary: $52,647 An online fitness trainer delivers personalized fitness coaching remotely through digital platforms. They create customized workout plans, offer nutrition guidance, and motivate and support their clients. This flexible approach allows clients to access fitness training from anywhere. 24. Project Coordinator Average Base Salary: $54,300 A project coordinator supports and coordinates project activities, ensuring their successful execution. They assist with planning, scheduling, and organizing tasks, track progress, facilitate communication, and provide administrative support.  The Massachusetts Bay Transportation Authority, Power Personnel, and Sharp HealthCare are companies where individuals seeking project coordinator roles in the US have shown inclination to work as they offer relatively higher salaries ranging from $36 to $40 per hour. 23. Technical Support Specialist Average Base Salary: $55,121 A technical support professional offers assistance and solutions for technical issues, providing support and troubleshooting services. They possess technical expertise and strong communication skills to promptly address customer concerns and resolve problems. 22. Graphic Designer Average Base Salary: $55,516 A graphic designer uses software and artistic skills to create visually appealing print and digital media designs. They convey messages and ideas through illustrations, logos, and layouts. Graphic designers usually work remotely, collaborating with clients and teams to create impactful visual content. One of the top choices for individuals seeking a job in this role is Adidas AG (OTC:ADDYY), which offers competitive compensation at above-average rates with annual bonuses. Working with Adidas AG (OTC:ADDYY) provides an opportunity to contribute to their social media presence, promote their brand, and connect with a global audience.  21. Social Media Manager Average Base Salary: $56,895 The social media manager develops and implements social media strategies, creates and schedules content, and monitors analytics. They aim to enhance brand visibility and drive traffic. Social media managers must stay updated on industry trends, possess strong communication and creative skills, and understand the latest social media platforms and their advertising tools. They often work in marketing departments or as part of digital marketing agencies. 20. Inside Sales Representative Average Base Salary: $57,224 An inside sales representative engages with prospects remotely or in-office to promote products/services, answer inquiries, and close sales deals. They aim to generate revenue by building relationships, understanding customer needs, and providing effective solutions. 19. Web Designer Average Base Salary: $57,233 Web designer creates visually appealing and user-friendly websites using their creative and technical skills. They utilize design software and coding languages and stay updated with industry trends. Remote work is common in web design, allowing collaboration with clients and teams from anywhere. 18. Email Marketing Specialist Average Base Salary: $57,939 An email marketing specialist develops and executes email campaigns to promote products or services. They create engaging content, manage subscriber lists, and analyze campaign performance. They require strong communication skills, knowledge of email marketing best practices, and proficiency in marketing automation tools. 17. Translator/Interpreter Average Base Salary: $58,400 Translators and interpreters facilitate communication between people speaking different languages. They work in various government, corporations, healthcare, and education settings. They may work remotely or on-site, offering linguistic expertise to bridge language barriers. 16. Customer Service Representative Average Base Salary: $59,380 A customer service representative assists and resolves customer inquiries and issues through various channels. They aim to deliver positive experiences and ensure customer satisfaction. They can work remotely or on-site in retail, telecommunications, banking, or e-commerce industries. 15. Property Claims Adjuster Average Base Salary: $60,996 The property claims adjuster assesses property damage insurance claims, investigating the cause, evaluating the extent of damage, and determining appropriate coverage and settlements. They work for insurance companies, conducting inspections, interviews, and negotiations to ensure fair resolutions. 14. Technical Writer Average Base Salary: $62,022 A technical writer is a professional who creates clear and concise documentation and instructional materials for technical products, processes, or software. They gather information from subject matter experts and translate complex technical concepts into user-friendly content. Technical writers often work remotely, utilizing collaboration tools and communication platforms to research, write, and edit technical documentation. Upwork Inc (NASDAQ:UPWK) offers technical writers unparalleled opportunities. 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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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Chico’s FAS, Inc. (NYSE:CHS) Q1 2023 Earnings Call Transcript June 6, 2023 Chico’s FAS, Inc. beats earnings expectations. Reported EPS is $0.32, expectations were $0.27. Operator: Welcome to the Chico’s FAS First Quarter 2023 Conference Call and Webcast. All participants will be in listen-only mode. Please note this call is being recorded. I would now […] Chico’s FAS, Inc. (NYSE:CHS) Q1 2023 Earnings Call Transcript June 6, 2023 Chico’s FAS, Inc. beats earnings expectations. Reported EPS is $0.32, expectations were $0.27. Operator: Welcome to the Chico’s FAS First Quarter 2023 Conference Call and Webcast. All participants will be in listen-only mode. Please note this call is being recorded. I would now like to turn the call over to the Company’s Head of Investor Relations, Julie MacMedan. Ms. MacMedan, please go ahead. Julie MacMedan: Good morning, and welcome to the Chico’s FAS first quarter 2023 conference call and webcast. For reference, our earnings release can be found on our website at www.chicosfas.com under Press Releases on the Investor Relations page. Today’s comments will include forward-looking statements regarding our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, which speak only as of today’s date. You should not unduly rely on these statements. Important factors that could cause actual results or events to differ materially from those projected or implied by our forward-looking statements are included in today’s earnings release, our SEC filings and the comments made on this call. We disclaim any obligation to update or revise any information discussed on this call, except as may be otherwise required by law. Certain non-GAAP measures may be referenced in today’s call. A GAAP to non-GAAP reconciliation schedule is included in our earnings presentation posted this morning on the Chico’s FAS Investor Relations page. Now, I’ll turn the call over to our CEO and President, Molly Langenstein. Molly Langenstein: Thank you, Julie, and good morning, everyone. We delivered another outstanding quarter of operating income and earnings performance, demonstrating solid execution and underscoring our commitment to our four strategic pillars, of being customer-led, product obsessed, digital first and operationally excellent. First quarter earnings per share exceeded last year and our outlook, driven by gross margin performance and disciplined expense management. For all three brands, full price sales remained healthy. Spend per customer and average unit retail was up year-over-year, and we gained market share. Chico’s, our largest brand, celebrating its 40th anniversary, demonstrated outstanding performance, posting comparable sales growth of 4.9% on top of 52% last year. We believe Chico’s is positioned for continued outsized growth. Soma sales trends continued to improve from prior quarters while White House Black Market sales declined as we quickly sold through fashion inventories due to strong customer demand. Let me cover some highlights for the quarter. We delivered another quarter of meaningful gross margin expansion, which led to strong operating income and bottom line results. Operating income grew to 10% of net sales, improving 160 basis points over last year and diluted EPS increased 14% over last year to $0.32. Our powerful portfolio together delivered total sales of $535 million and a two-year stack comparable sales increase of 40%. Our largest brand, Chico’s, led the way as customers responded to innovation and solution-oriented products, building complete outfits. Soma has had four quarters of sequential year-over-year improvement in comparable sales performance with the first quarter improving 250 basis points over last year’s fourth quarter. Innovation and discipline drove double-digit AUR and profitability growth over last year’s first quarter. Our best-in-class bra and panty offering continued to outperform for last year, indicating the overall long-term power and strength of the brand. White House Black Market comparable sales fell 8% and were up 57% on a two-year stack basis. Customers responded to our newness in fabric, innovation and fashion building complete outfits, quickly selling down our fashion inventory levels during the quarter. We expect to have more inventory in line with demand by early fall, which should drive a back half trend change. Our brands continued to take market share. According to [Circana], during the last 12 months, Chico’s was the fastest-growing apparel brand for customers over 45 with household incomes over $100,000 and White House Black Market gain share in this key market as well. During the same period, Soma gained market share with customers over 35 with household incomes over $100,000. Innovative products, targeted marketing and our impactful loyalty programs, build more customers to our brands. Over the prior 12 months, multichannel customer count and spend per customer were up mid-single digits and total customer count was up, indicating a long-term opportunity for each brand. This same innovation and marketing has meaningfully increased spend per customer across all brands since 2019, demonstrating the quality and health of our customer file, a customer that is focused on fashion and newness rather than pricing and value. We ended the quarter with customer-facing inventory up 1%, well positioned entering the second quarter. We further strengthened our balance sheet, ending the quarter with $131 million in cash after repaying $25 million of debt and returning nearly $20 million to shareholders through share repurchases. Let me give you a brief update on how each of our strategic pillars drove first quarter results. We are customer-led, connecting with our customers and driving long-term growth through three powerful platforms. Our physical stores are community centers, where our stylists and bra experts showcase our product, and they share their knowledge and enthusiasm, driving sales and brand loyalty. Digital is the hub for our product offering and often the first impression of our brands, and our social stylists can expertly connect customers to our brands and drive growth within both channels. For the 12 months ended with the first quarter, customer count grew 2%. Spend per customer was up 7%, and the multichannel customer count grew 6%, demonstrating the overall health of our brands. We also have a significant number of customers within our reactivated files that have not shopped with us for 36 months that are coming back to each of our brands. This means more demand in the pipeline and a very active customer segment for us to engage with. Our loyalty programs, we launched last summer, continued to exceed expectations in customer sentiment and redemption rates. We are product obsessed, focused on delivering elevated best-in-class merchandise to our Chico’s, White House Black Market and Soma customers, offering a continual pipeline of innovation and beautiful solutions that inspire confidence and joy. All of this is delivering more full price selling, lower promotional activity, bigger basket sizes and higher AUR. At all three brands, customers continued to respond to our elevated fashion and solution-oriented products, demonstrating that product enhancements and innovation are moving the brand forward. Customers appreciate higher quality, and they are receptive to paying for value and solutions. At Chico’s, we are attracting new customers and driving revenue increases through newness with fit, comfort and solutions. Customers responded to our product innovation in fashion, including dresses, new proportions in bottoms and tops and our expanded travelers and Zenergy collection. She focused on completing her head to toe looks with Easycare, wrinkle-free climate right fabric. At White House Black Market, customers responded to newness and casual footing, new proportions in bottoms and fluid AV fabrics in both jackets and bottoms, paired with layering tops for our published look. Our customers responded favorably to our fashion offerings. So well, in fact, we sold through much of our fashion inventory during the quarter. We are enhancing our fashion offering with the goal to complete the rebalance by the second half of the year. At Soma, customers responded to our expanded bra and panty assortments including the launch of unlined and stretch lace bras and panties. And our expanded Bodify and Vanishing collections that included a wider range of bra and cup sizes. This newness drove sales in these categories ahead of last year. While sales of sleepwear declined due to lower levels of markdown inventory, we significantly had healthier margins at Soma this year. We are digital-first, leveraging technology to engage and deliver to our customers across channels and brands. For the last 12 months, digital sales represented 41% of total company revenues. Over the trailing 12 months, total customer count was up 2%; Chico’s was up 6%; White House Black Market was up 4%; and Soma was down 3%. The new customers we are attracting to our brands are younger than existing customers by 10 years at Chico’s; two years at White House Black Market; and three years at Soma. Each digital touch point, including our customized digital styling tool, MyCloset and Style Connect and our mobile app, inspires the customer to find solutions and build rewards across brands. We continue to leverage our digital tools to drive customer engagement, enhance our loyalty program and grow multichannel customers, we’ll spend more than 3x the single-channel customer. We continue to enhance areas such as digital marketing, attribution and search, personalization and order management. This will allow us to better serve our customers by customizing product recommendations, enhancing our digital user experience and providing best-in-class customer service. And finally, we are operationally excellent, constantly focusing on diligently managing our inventory, cost sales, supply chain, expenses and real estate, generating healthy cash flow and delivering a strong bottom line. For the quarter, we had outstanding gross margin performance driven by lower freight and higher AURs, and we continually work to drive efficiencies and reduce expenses in our sourcing, logistics and operational areas. Now I’ll turn the call over to PJ to update you on our financial performance. PJ? PJ Guido: Thank you, Molly, and good morning, everyone. We posted another great quarter marked by solid overall topline performance and outstanding gross margin improvement, complemented by active expense management that demonstrates our flexibility to adapt to an uncertain operating environment and sales variability within our brand portfolio. For the quarter, we generated diluted EPS of $0.32 compared to $0.28 last year, a 14% increase over a very strong 2022. Sales of $535 million were down 1% from last year and down 0.6% on a comparable sales basis. For the quarter, digital sales were up low single digits and outpaced stores on very strong traffic. This performance indicates that all three of our brands remain healthy and in demand for both existing and new customers. Starting in late March and continuing through the end of April, we did experience a decline in traffic and sales at our Chico’s and White House Black Market outlet locations that cater to a more price-conscious customer more sensitive to economic conditions. This did have a material impact on sales for the quarter. Traffic at our frontline stores was still strong, but inconsistent and also had an impact for the quarter. However, the strength of our digital platform helped offset lower store sales. This further demonstrates the power of not only having our diversified brand portfolio, but also having two strong channels that complement one another. We continue to see higher AUR across all three brands throughout the quarter, which supported total sales and also offset lower store sales relative to digital. I would call out that we posted a 41% comparable sales increase in last year’s first quarter. So our overall level of sales remains healthy. Looking at the brands, Chico’s with the leading performer for the quarter, posting a 4.9% comparable sales increase. Soma posted a first quarter comparable sales decline of 2.5%, with the brand showing a continued comp sales trend improvement over the last four quarters. White House Black Market comparable sales fell 8% due to selling through fashion inventory faster than planned. Gross margin was 42.1% compared to 40% last year. The 210 basis point increase primarily reflected lower freight costs, higher AUR and corporate expense savings, partially offset by higher raw material and occupancy costs. Gross margin also benefited from a significant improvement at Soma where margin was up substantially over last year, another proof point that Soma is on an upward trend compared to last year. SG&A expenses totaled $172 million or 32.1% of sales compared to 31.6% in the prior year. Year-over-year SG&A dollar spend was essentially flat, resulting in modest deleverage of 50 basis points. We are disciplined and thoughtful in managing expenses and will remain lean while strategically investing in areas like marketing and store payroll to support customer growth, store productivity and long-term topline growth. The current year SG&A rate was well below the low end of our outlook of 32.8%, helping to drive strong double-digit operating income and EPS growth. All three brands contributed to consolidated operating income of $53 million or 10% of sales, which represented 160 basis points of improvement over last year, driven by continued gross margin expansion and expense control. We generated $63 million of EBITDA for the quarter, an 11% increase over last year, indicative of our ability to generate strong cash flow to support our strategic plan and ongoing investment in growth. Now let’s turn to our balance sheet and overall financial strength, which is rock solid. Our cash position, total liquidity and operating cash flow remains strong, providing us with flexibility to manage the business, make investments to further propel our growth and return excess cash to shareholders. During the quarter, we repaid an additional $25 million of debt, reducing our balance by $75 million since the first quarter of last year. This brings our debt-to-EBITDA ratio on a trailing 12-month basis to just 0.2x. In addition, we returned nearly $20 million to shareholders through share buybacks. After all this, we still ended the quarter with $131 million of cash and total liquidity of approximately $364 million, which includes capacity on our multiyear committed credit facility. At quarter end, customer-facing inventories were up 1% generally pacing with sales. Inventories totaled $294 million compared to $326 million last year. The 10% decline primarily reflects a return to normalized supply chain conditions that resulted in significantly lower in-transit inventories. Now let’s shift our focus to real estate. In the first quarter, consistent with our strategy to optimize our portfolio, we closed seven stores and in the quarter with 1,262 boutiques. Closing locations has been highly accretive to our P&L. And due to our strengthened financial position, we’ve been able to negotiate longer-term new and renewed leases with more favorable terms in more desirable locations. We believe our fleet is rightsized and well positioned to deliver incremental growth and profitability going forward. We will continue to actively manage our portfolio to enhance overall store and company profitability. This year, we expect to upgrade approximately 60 Chico’s boutiques, and we may open up to 15 Soma boutiques at the right high-return opportunities develop. We have identified three stores so far and are actively looking for additional locations. Now let me provide our updated outlook for fiscal 2023. On top of our 18% total company sales increased last year, we are planning for low single-digit topline growth for fiscal 2023. We expect digital traffic and sales to remain strong and have incorporated some additional risk in our outlet and frontline store channel based on recent traffic and consistency. Looking at the brand portfolio, we expect continued strength from Chico’s and continued improvement in Soma. However, we expect White House Black Market to be back on track in the second half of the year. White House Black Market sales were so exceptional in fiscal 2022 that we achieved our three-year revenue growth target for that brand in just one year, and we are recalibrating its long-term growth trajectory to meet the growing demand for the brand. We will continue to manage expense and expect cash flow to remain strong as we invest in our long-term growth plan we will also make prudent investments in our business that will drive traffic, conversion, customer growth and revenues across all channels for many years to come. Our planned capital expenditures for fiscal 2023 are still expected to total between $80 million and $90 million, inclusive of cloud-based investment. As our cash flow and EBITDA remain very strong, we expect our financial position to only strengthen from here. In addition to funding strategic investments, cash flow will allow us to navigate any economic shock that may arise over the coming quarters. So for the second quarter, we expect total sales of $545 million to $565 million; gross margin rate to be in 39% to 39.5% range; SG&A rate to be in the 30.5% to 31% range; an effective tax rate of approximately 28% to 29%; and diluted EPS of $0.25 to $0.30 per share. For the full year, which has 53 weeks, we now expect total sales of $2.18 billion to $2.20 billion; gross margin rate to be in the 38.4% to 38.8% range; SG&A rate to be in the 32.6% to 33% range; an effective tax rate of approximately 26%; and diluted EPS of $0.70 to $0.82 per share. Looking ahead, we remain cautiously optimistic on customer demand and our ability to react in this dynamic environment, further supported by a strong balance sheet. We are managing lean inventories and progressing on our key strategic initiatives and investments in digital, technology and stores to deliver both topline and bottom line growth over the long term. We look forward to keeping you posted on our progress. Now I’ll turn the call back over to the operator. Operator? Q&A Session Follow Chico's Fas Inc. (NYSE:CHS) Follow Chico's Fas Inc. (NYSE:CHS) 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 Dana Telsey from the Telsey Group. Please go ahead. Dana Telsey: Hi, good morning, everyone. Nice to see the progress in the Chico’s brand. Can you give any comments or color on the overall state of the consumer by brand? What you’re seeing? How promotional levels are? And exiting the quarter into the second quarter, how are you planning for each brand? And on the inventory side, given the solid reception of fashion White House, what percentage of the assortment do you expect the fashion going forward? And how does that impact the margin? Thank you. Molly Langenstein: Thank you, Dana. Make sure that I got all three of these. I’m going to start with just reiterating that we had an outstanding quarter for all three brands. Full price sales were healthy. Our AUR was up in all three brands, and we gained market share in each one of our brands, proof points that our strategy is working. What we’re seeing in the customer right now is very positive. When you look at the running 12-month basis for the first quarter, our total customer count was up 2%; our spend per customer increased 7%; and our multichannel customer count grew by 6% with their spend being up nearly 7%. And this grew in Chico’s 5% to 6%, White House 5% to 4%. And even though the Soma customer count was down by 3%, we look at this as a positive because what we were less promotional in the brand for the quarter and that last year drove one and done customer that did not stay with the brand. So overall, our customer file is much healthier than it has been in the past. Another data point that I’d like to reference on the customer file when we dug into the spend per customer. When we look at each brand in every segment of customer that’s coming to us over time, we are seeing their spend per customer is growing year-over-year from first quarter ’19 to ’20 to ’21 to ’22 to ’23. So the customer is buying full price and she is less dependent on promotionality and we were less promotional in the quarter, which is why we delivered such strong margins for the quarter. Your second question was about exiting the quarter and our plan in terms of — I think that was inventory. Is that what it was related to, Dana? Dana Telsey: Yes, exactly. Molly Langenstein: Okay. We’re confident in our inventory position. We do not have a — we do not believe we have any liability in our inventories. Our inventory is up 1%. Customer facing are very lean on top of last year’s very lean. We have the appropriate amount of basics in all three brands to be able to manage the continued profitability and health of the three brands. And where we have an opportunity is to continue to add more fashion to the assortment, in particular, into the White Health brand and then more opportunity in sleepwear and Soma. When you break that down, which is your third question about the fashion percent assortment and where that’s going to be as we move forward, our customer in both apparel brands buys complete outfits. So we need the core stability of the basics and the inventory position that we have in basics to fuel the fashion that complements that for her to complete the outfit. That’s where we see opportunity in White House in particular. And we believe that will be corrected and rebalanced by the — starting in the back half of next — of this year. Dana Telsey: Thank you. Operator: The next question comes from Jeff Lick from B. Riley Financial. Please go ahead. Jeff Lick: Hi, guys. Great quarter. I was wondering on gross margin. I know you don’t endorse this statistic, but I’m just looking at your — what I kind of back into your gross margins — your merchandise margins relative to 2019. It looks like give or take, you’re probably 1,000 basis points better than that in Q1 than you were in 2019. I was wondering if you could just kind of speak to as we flow through the rest of the year, the sustainability of that and how you’re thinking about gross margin? PJ Guido: Yes, Jeff, it’s PJ. I’ll take that one. So first off, the gross margin is up on strong fundamentals. And specifically in Q1, we saw over a 200 basis point benefit on higher AUR. And that is our algorithm going forward to ensure that AUR always outpaces average unit cost. And so healthy growth in AUR in Q1. And again, we expect to continue to keep AUR elevated going forward. We also have seen higher raw material costs that have been embedded in gross margin for a while. Now I will say that inbound freight costs, which have come down have more than offset that. And we also expect that relationship to continue for the remainder of the year. So higher raw material costs, offset by lower freight costs. And then the balance is just the expense management so leveraging our cost structure that’s embedded in gross margin. And we generated over 40 basis points of leverage in Q1 on corporate expense. So those are the puts and takes but over the long term, we’re really focused on growing AUR. We’re also focused on store productivity and leveraging occupancy costs, which is also a big reason why our gross margin is up since 2019. Jeff Lick: Just a quick follow-up, if I may, on Soma. Molly, obviously, Soma is the one brand, I think, that probably had the most pandemic noise in it the last few years. So much of kind of the sizzle to the Chico’s story is embedded in Soma. I’m just kind of curious if you kind of give me your thoughts as you look at Soma as to why you’re optimistic in some of the data, if you can maybe elaborate a little more. I know you gave some of that in the script, but maybe just a little more if you can elaborate. Molly Langenstein: Absolutely, Jeff. We are encouraged by the trend at Soma. And we look forward to that continued improvement as we move through the balance of this year. And we do expect the brand to turn positive as we — for the full year. We remain bullish on the long-term opportunities for Soma because this segment of the market is not crowded. And there is a lot of white space for us to be able to go out and capture. And when you look at our performance consistently each quarter, we have gained market share in the core components of bras and panties. So this is, to me, a big indicator of the long-term health of the brand. That is where you get repeat customers, you get the loyalty of consumers into the brand and we have been fueling our pipeline of innovation so that there is constantly newness that we are putting in front of the consumers in this quarter. We had new online bras in stretch lace. We also had expanded band and cup sizes in our Bodify franchise and in our Vanishing collection. So you will continue to see us fuel that innovation pipeline and continue to be on the journey of expanding our bra and panty menu, which is so important to us and growing that customer file and that repeat consumer. The other thing that gives us total confidence, Jeff, is that in a highly promotional environment that exists out there in this segment of the business, we were able to have a very significant gross margin and AUR improvement by being very, very lean on promotion compared to last year. So the overall health and profitability of the brand is in a very good situation for us to be able to pivot to growth. Jeff Lick: Awesome. Thank you very much. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Molly Langenstein for any closing remarks. Molly Langenstein: Thank you. Before I close, I want to note, we’re very pleased to welcome Julie MacMedan to our team as our new Head of Investor Relations. She comes to us with a wealth of IR experience within the retail sector, and we know the analyst and investor community will enjoy engaging with her. We have a great story to tell at Chico’s, and Julie will be instrumental to helping us amplify it. So welcome, Julie. Our team has transformed the company into a customer-led, product obsessed, digital first, operationally excellent organization with three powerful brands that we believe have a clear path for profitable growth. We are confident in our ability to further enhance our operating performance, strengthen our balance sheet and generate meaningful shareholder value over the long term. Thank you for your interest and time. We look forward to speaking with you again during our second quarter conference call. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Follow Chico's Fas Inc. (NYSE:CHS) Follow Chico's Fas Inc. 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Casey’s General Stores, Inc. (NASDAQ:CASY) Q4 2023 Earnings Call Transcript June 7, 2023 Operator: Good morning and thank you for standing by. Welcome to the Fourth Quarter Full-Year 2023 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. […] Casey’s General Stores, Inc. (NASDAQ:CASY) Q4 2023 Earnings Call Transcript June 7, 2023 Operator: Good morning and thank you for standing by. Welcome to the Fourth Quarter Full-Year 2023 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead. Brian Johnson: Good morning and thank you for joining us to discuss the results from our fourth quarter and fiscal year-ended April 30, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores. There are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions as well as other risks, uncertainties and factors which are described in our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey’s disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as the detailed breakdown of the operating expense increase for the fourth quarter can be found at our website at www.caseys.com under the Investor Relations link. With that said, I’d now like to turn the call over to Darren to discuss our fourth and fiscal year results. Darren? Darren Rebelez: Thanks, Brian, and good morning, everyone. We’re looking forward to sharing our results in a moment. So I would like to start by thanking our 43,000 Casey’s team members for their tireless efforts and contribution to a record fiscal year. As I reflect on the three-year strategic plan that we set out in January of 2020, I’m extremely proud of what we’ve been able to accomplish. Casey’s is at the heart of the communities we serve. Our teams give their all, and this shows in the positive guest feedback we receive, the delicious food we make, and the impact we have on our communities. In fiscal year ‘23, Casey’s along with our generous guests and committed supplier partners, enabled over $5 million of donations. These dollars provided meals, school supplies, new playgrounds and equipment, disaster recovery needs, and services helping veterans and their families. I’d like to offer a huge thank you to our team members, our guests, and our non-profit and supplier partners that make this all possible. We are proud to do so much good across so many communities. Speaking of good, in early May, we launched an upgrade to our rewards program that’s bringing more good to our 6.5 million loyal members. The enhanced Casey’s Rewards experience includes a refreshed app design that makes it easier than ever for Casey’s Rewards members to track their points, redeem them for rewards and see how much money they save by shopping with Casey’s Rewards. The program recently celebrated its three-year anniversary and what guests love most about our loyalty program is the waiting and choose to receive their rewards. Whether it’s Casey’s cash to help pay for pizza night, or extra cents off when filling the family vehicle, members have the flexibility to decide what works best for them. We look forward to continuing to grow membership and participation. Now let’s discuss the results of the past fiscal year. Fiscal ’23 was a record year for diluted EPS finishing at $11.91 a share, up 31% increase from the prior year. The company also generated a record $447 million in net income and $952 million in EBITDA, an increase of 19% from the prior year. Inside same-store sales were up 6.5% or 13.6% on a two-year stack basis with strong results in both prepared food and dispense beverage, as well as grocery and general merchandise. With same-store sales up 7.1% and 6.3%, respectively. Margins were virtually flat year-over-year, a tremendous accomplishment as we manage cost increases with our merchandise partners and commodities, while still holding our value proposition for our guests. We saw tremendous results across the board. Pizza slices and alcoholic beverages were very strong. We also had a lot of fun with innovative products like Busch Light, Beer Cheese, Breakfast Pizza that made a positive impact on sales. Fuel gross profit was up 16% with total fuel gallons sold, up 4% and a fuel margin averaging [$0.402] (ph) per gallon over the course of the year. Our fuel team continues to do an excellent job maximizing gross profit dollars by balancing fuel volume and margin. The macro environment was especially favorable for fuel margins with two significant wholesale fuel cost declines during the year. We also had a great year in terms of managing costs. Same-store operating expenses, excluding credit card fees, were up only 2.8%, impacted favorably by a reduction of same-store labor hours of 2.3%. Guest satisfaction scores still improved, which is a testament to our store simplification and store leadership teams. They’ve been effective at freeing up unproductive and more expensive labor hours, which enables our team members to better serve our guests. During fiscal year, we also did a tremendous job with unit growth. We built 34 new stores and acquired 47 more, which demonstrates our ability to grow the business both organically and via M&A. We met our annual and our three-year growth targets despite challenges with permitting, as well as delays in construction materials and equipment due to supply-chain disruptions. We are successfully integrating the 228 new units from fiscal 2022 and are meeting our synergy targets from those new stores. All of this wouldn’t be possible without our store development, real estate, and integration teams working seamlessly to grow our store base. We’re extremely confident in our ability to continue to build and buy new units. We believe consolidation will continue to occur in the industry, while rising financing costs are reducing the number of potential buyers. Our private-label program continues to be popular with our guests and we ended the fiscal year above 9% penetration in the grocery and general merchandise category in both units and gross profit. We currently offer over 300 SKUs of private-label products, which we believe is a tremendous value proposition for our guests. These record-breaking financial results are a strong reminder that our business model is resilient in all parts of the economic cycle and that Casey’s has unique ability to provide value and quality to our guests. I’d now like to call — turn the call over to Steve to discuss the fourth quarter and our outlook for fiscal ‘24. Steve? Steve Bramlage: Thank you, Darren, and good morning. Before I jump into the financials, I’d also like to acknowledge the entire Casey’s team to the excellent financial results for the quarter, the year, and the three-year strategic plan, our significant accomplishments for the entire organization, and it would not have been possible without the hard work and dedication of all of our team members. Total inside sales for the quarter rose 8.4% from the prior year to over $1.1 billion with an average margin of 39.6%. For the quarter, total grocery and general merchandise sales increased by $66 million to $810 million, which is an increase of 8.8%, and total prepared food and dispensed beverage sales rose by $21 million to $314 million, an increase of 7.1%. Same-store grocery and general merchandise sales were up 7.1% and the average margin was 33%, an increase of 50 basis points from the same period a year ago. Sales were particularly strong in our non-alcoholic and alcoholic beverages and we experienced a favorable mix shift in these categories as single-serve grab-and-go items outperformed. Energy drinks sold exceptionally well driving non-alcoholic beverages, up over 13% in the quarter. Ongoing private-label growth also assisted this category. Same-store prepared food and dispensed beverage sales were up 4.9% for the quarter. The average margin for the quarter was 56.8%, down 10 basis points from a year ago. Bakery, as well as hot food performed well in the quarter. Margin was adversely affected by a higher LIFO charge than prior year, which had an impact of roughly 50 basis points. And while we did experience some cost pressure in bakery and proteins, cheese costs were down $0.06 per pound from the prior year $2.20, this had an approximately 20 basis point benefit to margin. During the fourth quarter, same-store fuel gallons sold were flat with a fuel margin of 34.6 cents per gallon, down approximately 1.6 cents per gallon, compared to the same period last year. Fuel margins varied widely in the quarter. For example, we experienced a low-30s cents per gallon in both February and March, but in April, CPGs were closer to 40 cents a gallon. Our flat same-store sales outperformed our relevant OPIS geographic data by over 200 basis points. Retail fuel sales were down $207 million in the fourth quarter, due primarily to an 11% decrease in the average retail price from $3.77 last year to $3.36 a gallon. This was partially offset by a 2.4% increase in total gallons sold to $636 million. Total operating expenses were up 6.3% to $31 million in the fourth quarter, approximately 1.5% of the increase is due to operating 69 more stores than a year ago. Approximately 2% of the increase was related to same-store operations. Finally, approximately 1% of the change is related to an increase in the accrued costs for variable incentive compensation due to strong financial performance. Same-store employee expense was flat as the increase in employee wage rate was offset by a 3.3% reduction in same-store labor hours. The company also benefited from a $2 million reduction in credit card fees, due to lower retail prices of fuel. Depreciation in the quarter was up modestly as we put a large number of stores in service late in the quarter. Net interest expense was $12.8 million in the quarter, and that’s down $2.5 million versus the prior year. This reduction was aided by rising interest rates on our cash balances. And as a reminder, only 15% of our debt is floating-rate. The effective tax rate for the quarter was 22.7%, compared to 17.8% in the prior year. The increase was primarily driven by a one-time benefit in the prior year from adjusting our deferred tax liabilities for a corporate rate drop that was enacted by the State of Nebraska. Net income was down slightly versus the prior year to $56.1 million, a decrease of 6%, and EBITDA for the quarter was $166 million and that’s essentially flat with the prior year. During the quarter, we refinanced our credit facility with an unsecured $1.1 billion facility, that includes an $850 million revolving line of credit, and a $250 million term loan each of which have a five-year maturity. It’s an excellent outcome for us in what was a challenging banking environment during the quarter, and that speaks to the quality of Casey’s as a credit risk and to the strength of our balance sheet. At April 30th, we had $379 million in cash and cash equivalents on-hand and with the recent refinancing, we now have an additional $875 million in undrawn borrowing capacity on existing lines of credit, giving us ample liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until our fiscal 2026. Our leverage ratio as calculated in accordance with our Senior Notes is 1.8 times EBITDA, and we continue to have ample capacity to make good strategic investments as they present themselves. For the quarter, net cash generated by operating activities of $245 million, less purchases of property and equipment of $175 million resulted in the company generating $70 million in free cash flow. We continue to see delays in the delivery of vehicles and construction time to remain elongated thus deferring some of our planned capital spend into fiscal ‘24. At the June meeting, the Board of Directors voted to increase the dividend of $0.43 per share per quarter and that’s a 13% increase, marking the 24th consecutive year that the dividend has been increased. We will continue to remain balanced in our capital allocation going forward focusing on driving EBITDA growth with ROIC accretive investment opportunities in front of us. The company is providing the following fiscal 2024 outlook. Casey’s expects the following performance during fiscal ‘24. We currently expect inside same-store sales to increase 3% to 5%. We expect inside margin improvement to approximately 40% to 41%. The company expects same-store fuel gallons sold to be between negative 1% to positive 1%. Total operating expenses are expected to increase approximately 5% to 7% and that’s inclusive of adding 110 stores in fiscal ’24. As a reminder, this is inclusive of non-recurring operating expense benefits from FY ‘23 regarding a legal settlement. Net interest expense is expected to be approximately $55 million. Depreciation and amortization is expected to be approximately $340 million and the purchase of property and equipment is expected to be approximately $500 million to $550 million. The tax rate is expected to be approximately 24% to 26% for the year. Consistent with our past practice, we’re not guiding to a CPG figures nor are we providing EPS or EBITDA. But for modeling calibration purposes, fuel margin in the mid-30s, along with flat retail prices of fuel, compared to fiscal ‘23 would result in a flat EBITDA year-over-year. Our first quarter to-date experience is as follows: Inside same-store sales are consistent with achieving the midpoint of our fiscal ‘24 guidance; same-store gallons sold are near the low-end of our fiscal ‘24 outlook: fuel CPG margin for May was in the low 40s, however, we’re currently in the low 30s. I would now like to turn the call back over to Darren. Darren Rebelez: Thanks, Steve. I’d like to again say thank you and congratulations to the entire Casey’s team for delivering another record year. The results speak for themselves and are a reflection of the hard work of the team and their dedication to executing our three-year strategic plan. In January of 2020, we laid out a plan to reinvent the guest experience, create capacity through efficiencies, be where the guest is all while investing in our talent. As this plan is now ready for renewal, I’d like to share some of our accomplishments. Our team had to navigate through a global pandemic and the effects therein, including restricted traffic, labor shortages in an inflationary environment. We adapted to the situation and thrived in it as you can see with our results. We reinvented the guest experience in several ways, but we really shined with our Casey’s rewards program. We made a commitment to enhance our brand and drive digital engagement and we did just that with over 6.5 million members through May of 2023. And this helped drive results, as our same-store inside sales were at the high-end of our guidance. We wanted to make sure that we create capacity to invest in the business by capturing efficiencies while we grew. The team worked exceptionally hard to make the stores work harder for us, culminating in reducing same-store labor hours in fiscal ‘23 by over 2% while keeping team members engaged and guests satisfied. As shown in the financial results too is our operating expense CAGR of 12% was lower than our EBITDA CAGR of 14%. We also made a commitment to be where the guest is through accelerated unit growth. We came into the plan with an expectation that we would build more than we bought, but as the M&A environment changed, we were able to remain flexible with our two-pronged approach in over 70% of our new units from fiscal ‘21 to ‘23 or via acquisition. We made a bold commitment to accelerate our growth and we exceeded our own high standard of 345 new units ending the three-year period with 354 new stores. As you can see, our business has performed exceptionally well in a challenging macroeconomic environment. Casey’s has shown tremendous resiliency and we’re positioned especially well to deliver future value to our shareholders through our strategic plan, which is being enhanced with our commitment to technology. This was all made possible by making investments in the talent at Casey’s. Our investment in a standalone M&A team drove record growth, centralized procurement helped keep our shelves stocked at lower costs, despite supply chain challenges, centralized fuel operations allowed us to balance fuel volume and margin and countless other teams within the organization, help make these last three-years some of the most successful in the history of the company. We did all of this and generated cash flow from operations of approximately $2.5 billion, which was considerably higher than our capital expenditures of approximately $1.2 billion. As we reflect on our last strategic plan and our fiscal ’23 and beyond, I’m thrilled in Casey’s ability to succeed in any macro-economic condition. We’re excited to share our next three-year strategic plan on June 27th as we host our Investor Day in New York. We’ll lay out our plans to continue to grow the business and deliver value to our shareholders. Finally, I’d also like to thank Board Directors, Diane Bridgewater and Lynn Horak for their amazing contributions to the company over the last decade plus. Their guidance helped fuel Casey’s growth and success during their tenures. Lynn has been an invaluable resource to me as the Board Chair being a great mentor and advisor, since I came on into summer of 2019. I wish Lynn and Diane, all the best in their retirement from the Casey’s Board in September. We will now take your questions. Q&A Session Follow Caseys General Stores Inc (NASDAQ:CASY) Follow Caseys General Stores Inc (NASDAQ:CASY) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] The first question comes from Karen Short with Credit Suisse. Your line is open. Karen Short: Hi, thanks very much, and congratulations on a good year. I just wanted to — and, you know, also look forward to seeing you in June. I just wanted to parse out on your guidance with respect to in-store margins. Maybe you could parse out a little bit more on the grocery side versus the prepared food side. Obviously prepared food continues to be pressured? And then I guess within the — both of those components, you know, talk a little bit about price increases and/or branded pass-through on grocery? And then what you’re, kind of, thinking through on the actual prepared food commodity cost pressures? And then I have one more quick question. Darren Rebelez: Yes, Karen, this is Darren, and thank you. Yes, I’ll go ahead and start and let Steve fill in some of the detail. Yes, we expect to see a bit of recovery in overall inside margin and we would see that primarily in prepared foods and we think that’s for a couple of reasons. We’re expecting the inflationary pressure that we’ve experienced over the last year and a half to settle down a bit. We’re currently experiencing some favorability on cheese costs as an example, which as you know is a big input to our prepared food and dispensed beverage margin. So that we expect to continue to improve throughout the year. On the grocery and general merch side, we started to see some of that inflation subside. There is still some categories like chips and candy, where we’re experiencing some inflation. But outside of that, there has been some moderation there. And so we’re — we’ll still remain diligent in terms of passing on pricing that’s appropriate. And on the prepared food side, we’ll be a little more cautious on that effort on the commodity side, because we don’t want to whipsaw the guest and we want to make sure we maintain a relative value proposition. Steve, any color to that? Steve Bramlage: Yes. Just Karen for modeling purposes, I think I would advise that you — grocery and GM to Darren’s point probably flattish margin wise year-over-year for all those reasons and the preponderance of the inside improvement will come from prepared food and that’s both on the cheese side we’re about 43% hedged right now for our fiscal ‘24 requirements. And at the current cheese prices, we’re kind of looking at least for the first quarter down about 10% or so year-over-year, so we’ll get some tailwind there. We’ll also be lapping some significant price increases we’ve had this year, for example, donuts inflation this year was 40% in the bakery category and we’ll lap that during the first part of fiscal ‘24. So most of the improvement mechanically is going to be prepared foods. Karen Short: Okay. And then my second question is, obviously you’re managing OpEx growth extremely well. One of your more rural I guess, I’d say comparisons that had significant number of hours to the stores, just from a labor perspective. And I’m wondering how you think about that in terms of where you’re at in terms of being able to actually meet the guests’ needs and whether or not you need to add more labor to the stores, because that seems to be more of a theme even for rural operators. Darren Rebelez: Yes, Karen. I think whether you add labor or take-away labor depends largely on where you’re starting. And for us, we felt like we were always staffing our stores appropriately to meet the guests’ needs and we continue to believe that. But what we were able to identify is that we had some unproductive hours in the stores and we had some labor or activities rather that we were doing in the stores it just didn’t need to occur in the store anymore. We could pull that activity out of the stores and move it upstream where we can do it more efficiently, And so, we’ve been on a concerted effort over the last year to do exactly that. We’ve been able to reduce the number of unproductive hours as we would call it and take those out. And in fact, our overall satisfaction scores as we measure them through a third-party have actually improved, while we’ve done that, because we’ve not only freed up those hours and taken some of that to the bank, but we’ve also given some of those hours back to the store, so they can focus more on the guest experience. So we feel very comfortable with where we’re at now. And again for this next fiscal year, we still have our continuous improvement team in place who are going to continue to pursue finding more opportunities to operate our stores more efficiently. Operator: [Operator Instructions] The next question comes from Anthony Bonadio with Wells Fargo. Your line is open. Anthony Bonadio: Yes, hey. Good morning, guys. So just wanted to ask about the gallon guidance, you’re guiding to a flattish same-store gallon growth, despite what optically looks like a pretty easy compare and you’re lapping what I would assume a some of demand elasticity last year on higher gas prices, plus you’ve got the loyalty program. Can you just talk about your assumptions there and maybe why you’re not more constructive? Darren Rebelez: Well, Anthony. Yes, with the gallon guidance, I mean, there’s a lot going on right now in the world, and you’re right, we are — if you just look at the first quarter last year when gas prices spiked over $5 a gallon, there was a bit of demand destruction there, but then things fell off and got a little bit more normalized, it’s been a little bit choppy. As we go into this year, obviously, there’s a lot of macroeconomic headwinds going on that could have an impact on gallons to the negative. At the same time, we do think that because we’ve outperformed our relevant benchmarks in our geography, we think we have some potential to grow gallons as well, so we’re trying to be appropriately conservative. We’ve given ourselves some room to grow gallons in the guidance and also are being somewhat pragmatic about the fact that if we go into recession and the economy changes that we could see some softness. It’s just a little bit too early to tell. So that’s how we landed on the guidance that we did. Anthony Bonadio: Got it. And then on the 3% to 5% inside same-store sales guidance as we continue to see disinflation and now deflation in some categories, can you just dig in a little more on the underlying components of that growth and specifically how you’re thinking about contributions from price and unit growth within that forecast? Darren Rebelez: Yes, for the inside of the store, we’re expecting to see still good growth on the grocery and general merchandise side, probably a little bit softer on the prepared food and dispensed beverage, simply because of what we’re cycling. So we’ve been up over 13% on a two-year comp. So this would be the third year in a row that we’re cycling really aggressive costs. We’re not expecting a lot on the pricing side from inflation, particularly in prepared foods, we took a lot of price last year to cover commodity costs. And so we’re trying to maintain more of a relevant value proposition for our guests, especially as the economy starts to tighten. On the grocery and general merch side, we’re still going to see some inflationary impact from tobacco and that’s just kind of normal course. And like I said, we are seeing some inflation in some categories, but we’re also seeing that moderate. And in fact, when we look at alcohol and the beer category in particular, we’re expecting that to be a little more price-competitive this summer with some temporary price reductions from the manufacturers. So that could be actually a little bit deflationary. Operator: [Operator Instructions] The next question comes from Ben Bienvenu with Stephens. Your line is now open. Ben Bienvenu: Hey, thanks very much. Good morning, everybody. Darren Rebelez: Good morning. Ben Bienvenu: I wanted to ask first on the unit growth, 110 units that you’re citing for the year. Is that all organic within the inorganic the — augmenting agents to that assumption? And then I guess along those lines, could you talk a little bit about kind of the phasing of the unit growth and the pipeline visibility that you have there? Darren Rebelez: Yes. Ben with the unit growth of 110 units for this year, as we model it out at the beginning of the year, we kind of think that’s an even split between organic and M&A. And now, having said that, a lot can happen in 12 months in the M&A world. So I’ll leave myself a little bit of wiggle room based on potential transactions that could occur, that mix could change. But we feel very confident in the 110 units, regardless of how we do that. And from an organic standpoint, we feel very good about our pipeline and we’ve got the sites identified and it’s just a matter of building them right now. We’re on a better cadence this year, I would say than we were last year. We’re feeling better about the supply chain, the permitting component of that equation is starting to get a little bit more ratable. So — but we feel a little better about the cadence of growth throughout the year on the organic side. On the M&A side, we feel really good about our pipeline and we’re having a lot of good discussions with potential sellers. The timing of those tends to be lumpy as you all know. So it’s hard to pigeonhole those into any type of quarterly cadence. But we definitely feel good about the pipeline on both organic and inorganic, and we’re confident we’ll be able to easily get to that 110 number. Ben Bienvenu: Okay, great. Let me — revisiting operating expense growth, the 5% to 7% range is much better than you guys have delivered over the last several years understanding that there have been a number of external challenges to getting back to this kind of more normalized growth. When you think about the factors that contribute to either the 5% or the 7%, what are the variables that are the swing agents in that guidance range? Darren Rebelez: Yes, Ben, I guess, the first thing I’d tell you is, we have made an organization-wide commitment to controlling operating expenses and being very disciplined about that. And so that is as I said, that’s an organization-wide effort and I think you saw the results of that effort in this past fiscal year. So you can expect that, kind of, effort from us moving forward. Having said that, I think in terms of the components, when we look at our G&A, we’re essentially keeping G&A flat for the year. And so that’s a big step in the right direction. And from a store standpoint, we have our continuous improvement team like I’ve mentioned before that is doing a lot of great work. And so we expect to continue to see a reduction in same-store labor hours this year as we did in the previous year. And on the rest of the equation, we expect to be able to continue to pursue opportunities to leverage our scale and our purchasing power to drive more efficiencies in the business. Steve, anything else you want to add? Steve Bramlage: Just the other piece around employee wage rates, we will — we’re going to continue to obviously pay people competitively and beyond market. And so our average wage rate right now in our stores excluding our managers is a little over $14 or so an hour. We feel like that’s on market broadly across our footprint that we’re certainly going to — we’ll remain very competitive in that space. And to Darren’s point, that’s not a source we’re going to control necessarily around store rate, it’s more of the efficiency side. Darren Rebelez: Yes, Ben. I just add one other thing and we’ve mentioned it before on previous calls. We’ve also made a concerted effort around controlling our turnover and reducing our turnover and we’ve had really good success in that over the year end. This past quarter was no different and in the quarter, we saw a 20% reduction in overtime hours, 20% reduction in training hours. And so we expect to continue to work that turnover down. And as a result of that, we’ll lower some of those training costs and overtime hours as well. Operator: [Operator Instructions] Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Bonnie Herzog: Hi, thank you, good morning. Darren Rebelez: Good morning. Bonnie Herzog: I had a quick follow-up question on fuel gallons, which trended negative in May, you guys called that out. So just hoping for I guess a little more color on what you’re seeing from the consumer in terms of I guess traffic, fill-outs, et cetera? And I guess really what the key drivers of the recent pressured volume growth have been? And how does that compare to the industry and the broader Midwest, are you taking share, for instance? Darren Rebelez: Yes, Bonnie. On gallons, I guess, I would start with the fourth quarter. Our gallons were flat in the quarter by the mid-continent OPIS data that we saw gallons were down about 2.5% for that same three-month period. So from that perspective, I would say that even though we were flat, we’re probably taking share versus some others in our geography. One of the dynamics that we’re seeing that’s impacting gallon volume is the softness in diesel fuel volume and that’s really a result of what we’ve seen happen in the economy over the last few months with softening retail sales, construction starts, kind of, slowing down. And so you’re just seeing less trucks on the road. So we saw a reduction in our diesel volume low-single-digits. And now, that’s only 14% of our fuel mix. But when its down it does have an impact. Now on the gasoline side, we are seeing a bit of an increase. So when you mix all that out, it came out flat in the quarter, but that’s what’s really driving some of the softness right now that we’re seeing. Bonnie Herzog: Okay, that’s helpful color. And then I wanted to ask a little bit on your private-label business. You highlighted that you now have over what 9% of your gross profits in units is private-label, which is great. So congratulations. Just — and then hoping you could maybe frame for us how that is or your position there relative to the industry average? And maybe ultimately what the real opportunity could be? And how you’re thinking about private-label in the context of your guidance this year? And then maybe touch on any key category callouts where the consumer is trading down more. I think you highlighted beverages, but any others? And then in the context of that, I’m just curious to hear from your perspective about the SNAP benefit changes and what impact that may have had on your business or the consumer in your stores? Thanks. Darren Rebelez: Yes. The private brand growth has been phenomenal really, and we’re still very bullish on that. Over the course of the year, we saw about 31% growth actually in the quarter, 31% growth in private-label over last year. And as you mentioned, our unit share is just under 10% and our gross profit dollars share is just over 10%. So we’re really, really feel good about the contribution that’s had and that mix has grown about 100 basis points from the same period last year. So everything’s kind of working in the right direction on private label. The categories is probably been the best, our chips, frankly, in fact, we saw over 80% growth in chips and took about 500 basis points of share in the most recent quarter in our chip category and we’re also seeing a lot of good success in bottle water. But what I would tell you is that, I think the price increases that we’ve taken from the national brands over the past year have really put us spotlight on the value proposition for private brands, has really widened that price delta between the two. And so as consumers get a little more penny pinched, they’re starting to look for those private brands. And so that’s why you saw the mix increase. We expect to add another 40 items into the assortment over the course of the next calendar year and we will continue to grow that business. Steve, I don’t know if you have any break down of private-label contributions. Steve Bramlage: Yes. I mean, listen we consistently obviously, see private label contribution of many multiples of improvement from a margin standpoint. I think we’re running if our category nationally is running in the low-30% private label will be closer to 50% contribution on a lot of those items varies by overall category profitability. But it certainly is a quite accretive category in general for us to continue to push. Operator: [Operator Instructions] The next question comes from Bobby Griffin with Raymond James. Your line is open. Bobby Griffin: Good morning, everybody. Thanks for taking my questions. I guess first guys, it’s more of a high-level question, but over the last couple of years, there’s clearly been a lot of changes that’s happened in the industry, you’ve had a period of rising wholesale prices, a period of big falls in wholesale, COVID, et cetera. I guess, so when you and the team look, is there a fiscal year or a period of operations that you feel is kind of close to what a normal EBITDA of this business should be where we could benchmark or were you guys benchmark the next two or three or four years of EBITDA CAGRs off of? Darren Rebelez: Well, Bobby, that’s a tricky question. I’m not sure what normal looks like anymore, if you put it in the context of the last four years. I don’t know. To a certain extent, I would just fall back on what we’ve done historically and say we’ve grown EBITDA at an 8% to 10% CAGR pretty consistently over a long period of time, and that’s been through a lot of different economic cycles. So if I were going to anchor on anything, I would say, I think that’s a long track record of performance where we’ve been able to stay in that type of range. Really regardless of how the economy is performing. Now quarter-to-quarter or year-to-year, that may fluctuate a bit. But over a longer period of time, I think that’s a pretty safe place to anchor yourself on. And so I don’t see anything on the horizon that will prevent us from continuing to do that. And we’ll talk about this more on our Investor Day, but no, we feel very good about the future and so. I guess that’s the best answer I think I can come up with Bobby, is that what you’re kind of looking for? Bobby Griffin: Yes. I mean that’s fair. Yes, I mean, I agree, it’s very tough to predict normal. It’s just when you kind of — maybe we best look at it on the rolling three years and kind of have that historical performance there, because there has been such big swings in the fuel side of the business. So no, that’s fair. I guess my second question is back to private label. Just the performance there has been pretty impressive, it’s getting to a point now where it’s a meaningful part of the business. Just curious, as we’ve maybe seen some modest breaks and inflation here, how are the national brands now responding? Are you seeing them come back to the table given the success you guys have had in private label and come back with more compelling offerings from a price or a promo basis? Or are they kind of just accepting the shift that’s taking place inside your grocery business? Darren Rebelez: Well, I think first, I think they started to moderate on the price increases that they’re passing on to us. And so I think some of that is a reflection of just inflation overall starting to subside. Some of it is a reflection of the fact that our private brand mix has grown continuously. And we have really good relationships with our major suppliers, and we have great conversations with them about this subject. In some cases, they make some of the private label for us. In other cases, they probably wish we didn’t have it. But yes, I think as we continue to have success with it, we continue to challenge each other to find ways to grow the entire pie. Our goal with private label isn’t to reduce sales of national brands. Our goal in private label is to meet the needs of consumers that are looking for more affordable high-quality options. And so we seek to offer that to those guests. And at the same time, we do a lot of great work with our national brand suppliers to make sure we’re satisfying the needs of those guests as well. And so — yes, we have good discussions. That’s all part of our joint business planning process that we’ve been implementing for the last few years. And as you can see with our inside sales numbers, it’s been pretty successful. Operator: [Operator Instructions] The next question comes from Kelly Bania with BMO Capital Markets. Your line is open. Kelly Bania: Good morning. Thanks for taking our questions. And sorry if I missed this, but I was wondering if you could just comment on traffic versus ticket within the in-store comps? And just any color on units versus inflation and mix within the two in-store categories? Darren Rebelez: Yes, Kelly, if you look at — if you look at the composition of our same-store sales last quarter, we were up 6.5% in inside same-store, about 6% of that was from price and about 0.5% of that was from traffic. And so we feel really good about the fact that we’re generating positive traffic, albeit just a little bit, but it is positive. And we’re also seeing that dynamic play out in the first quarter as well with positive traffic. So as the pricing kind of moderates as we cycle over some of that inflationary pressure, we shifted our focus more towards driving traffic, and we’re starting to see the benefit of that. Kelly Bania: Okay. That’s helpful. And I think there was a comment about an expectation to continue seeing a reduction in same-store labor hours. But I was wondering if you could be more specific in terms of the magnitude of further labor hour reductions that are embedded into your 5% to 7% OpEx growth outlook for this coming fiscal year? Steve Bramlage: Sure, Kelly. Good morning. This is Steve. Our 5% to 7% or plans at the moment for another 1% year-over-year reduction in same-store labor hours. So that be on top of it, it is something that we realized this year. And then obviously, we’d have wage offsetting that, but a 1% same-store labor hour reduction is baked into that 5% to 7% OpEx guidance. Operator: [Operator Instructions] The next question comes from Irene Nattel with RBC Capital Markets. Your line is open. Irene Nattel: Thanks and good morning, gentlemen. Darren Rebelez: Good morning. Irene Nattel: Good morning. Just listening to your commentary, it sounds as though you are sort of marginally more cautious on sort of consumer and spending trends and marginally more bullish on the M&A outlook. So I’m wondering if you could just talk a little bit in both those categories about what you’re seeing in the stores, a little bit more around trade down behavior other than private label and the initiatives that you have underway for providing value. And then on the other side, just on the M&A, what you’re seeing in terms of valuation expectations and, I guess, your volume in the pipeline? Darren Rebelez: Yes. Sure. Irene, I’ll go ahead and start with the consumer. I’ll let Steve talk to M&A. With the consumer, I think we all recognize that the economy started to soften a bit and so we started to see some consumer behavior from a more macro perspective. When you look at our consumer base, I’ll just remind everybody that a couple of things. One, is about three-quarters of our consumers earn over $50,000 a year. And that’s significant in the fact that — of the geography that we operate in the most expensive state we operate in is ranked 20 seconds in terms of cost of living. And seven of the bottom 10 states are in our geography. So $50,000 goes lot further in our geography than in many others around the country. So with that as a backdrop, what we’re seeing from the consumer in our stores is pretty consistent behavior for that group, that three-quarters of the group that are earning $50,000 or more, not any real significant shifts in buying behavior. With the group that’s that other 25%, call it, that’s earning less than $50,000 a year, we are seeing some shifts certainly shifting more towards private label. Reducing some of discretionary purchases, think lottery and some ice cream novelty, that sort of thing. But they’re also shifting those purchases over to more affordable indulgence like candy. We’re also starting to see some behavior where they’re leaning a little more into our freezer section of buying individual meals and that may be in lieu of going to a QSR occasion as well. So we are seeing a bit of that shifting around the store. But again, our traffic has been positive. So we haven’t seen any sort of behavior that would suggest that the consumers not shopping. And this is one of the beauties of our business model. We sell basic needs for people. And so these are things that people have to have. And so they’re going to continue to come. They’re just made behave a little bit differently. But at this point, it’s really been the low-income consumer that’s been most impacted. Steve Bramlage: And Irene, on the M&A side, the pipeline, I think, remains quite robust as we sit here today in terms of the things that we’re looking at, we feel good about that. And just a couple of things that are in that mixing bowl. Listen, there’s a higher cost of financing for sure, associated with anybody who does a deal, and I think that’s generally a good thing for us. I think potentially marginal buyers are sidelined quicker. Certainly, non-strategic buyers have largely been sidelined for many of the potential processes that we’re looking at where there’s no longer a, kind of, a cost of financing advantage and then they just don’t have any synergies to bring to bear. And so I think it’s a smaller pool of potential buyers in general, the operating environment for potential sellers still remains tough. It’s tough sledding for a lot of these small — smaller operators, which is rising costs and the need to reinvest in the business and labor dynamics, et cetera, that remains definitely a tailwind for us and generally I think the industry is still working through valuation expectations. There’s no doubt that sellers want potential sellers. They want to start with all-time high fuel margins and LTM numbers and 0% financing driven historical multiples, and that’s not the world that we’re in. And so you have a little bit of standoff at least initially with that. I think that’s starting to break a little bit, but there’s no doubt there’s still some valuation disconnects at the beginning of a lot of the processes we’re involved with. Irene Nattel: That’s really helpful. Thank you. And then just one other question, please, around cheese pricing. You said that you have 43% of this year’s needs locked in. Can you tell us at what price? And can you also give us an idea of whether sort of that 43% is time-based or sort of prorated across the year? And what are your plans in terms of locking in pricing given where we are today versus where we were three months ago on pricing? Steve Bramlage: Well, we watch the prices every day. So this is a big deal to us, obviously. And so if we feel like we can lock in year-over-year deflation as a general matter, that’s a pretty attractive entry point for us to be able to do that. The 43%, it is across the whole fiscal year. It’s a little bit higher in the first quarter. We’re kind of two-thirds or so locked in the third quarter or in the first quarter, I’m sorry, and then it progressively goes down from there. And again, I think, I said we’re about low-double-digits, 10% to 15% deflationary in the first quarter based on the amount that we’ve locked and it probably would be consistent as you go into the later quarters too, but where this trip ultimately settles is still remains to be seen. And so that number can change. But we’re certainly in a much better spot coming out of the gate on cheese than we were entering fiscal ‘23. Operator: [Operator Instructions] The next question comes from Chuck Cerankosky with Northcoast Research. Your line is open. Chuck Cerankosky: Good morning, everyone. Darren and Steve, can you address shrink in the quarter and the year and whether that’s a component of concern in operating the stores? Darren Rebelez: Yes, Chuck. Shrink is always a concern in our stores and our business. I would say that so far, we have not seen any real shift in shrink versus where we’ve been historically. And I know there’s a lot of talk out in the industry about strength, but we just have not experienced that yet in our stores at this point. Chuck Cerankosky: Okay. That’s great. In the tobacco category, as we look out for fiscal 2024, that continues to shrink in volume. What is that — what effect is that having on the gross profit margin? Darren Rebelez: Well, Chuck, what we’ve experienced is essentially, kind of, flat sales from a dollar perspective and kind of mid-single-digit erosion in unit volume. And so the pricing that we’ve been able to pass on has essentially covered the cost increases plus maybe $0.01 or $0.02 a pack. So from a dollar standpoint, it’s holding steady, but from a margin rate perspective, it does it does put a little bit of pressure on the grocery and general merch category. I don’t know exactly what that impact is, Steve, I don’t know if we actually. Steve Bramlage: We have the math on that. But Chuck, what we’ve also seen overall in the grocery and general merch category is some margin expansion. And so I think that’s — we’ve been able to offset any pressure from tobacco by accelerating our private label and working closer with our supplier partners on more margin-accretive activities that just overcome that drag from tobacco. Operator: [Operator Instructions] The next question comes from John Royall with JPMorgan. Your line is open. John Royall: Hi, good morning. Thanks for taking my question. So can you talk about the recent volatility on the fuel margin side going from the mid-30s in 4Q. And I think Steve said it jumped to the low-40s in May and then snap back to the low-30s. Can you talk about the drivers of that volatility. It doesn’t feel like price has been quite that volatile since the end of April. So any color there would be helpful. Thanks. Darren Rebelez: Yes. It’s just John, that we just had some wholesale cost increases and decreases, and it has been volatile. And then of course, we’re not alone in this, there’s a competitive set. And so we have to stay competitive with others in the market. And sometimes that overall dynamic between cost increases and competitive pricing posture allows us to make more margin in some situations and less margin than others. And so we’ve had — it’s probably been a little bit more extreme month-to-month than we would see historically. I would just point you to the last four months, the three months in our last fiscal quarter and then May. Two of those months were in the low-30s, two of those months are low-40s and so typically, the spread is not that much, but I’d say there’s nothing unusual in the world that’s driving that, just continued competitive activity and wholesale cost fluctuations. John Royall: Okay. That’s helpful. Thanks, Darren. And then I noticed you had a pretty sizable working capital draw in 4Q. Any color around that and any portion of that that might be reversible in 1Q or later on in the year? Steve Bramlage: Yes. John, this is Steve. I think from a working capital perspective relative to where we were in the prior year. So a lot of our working capital change is just going to be driven by the price of fuel. So right, as the wholesale value of fuel goes up and a particular period that’s going to show up, right, as an increase in inventories for us and it’s going to show up as an increase in payables, and then it’s going to go the opposite direction. And so the single biggest impact on our working capital change, both in the prior year 12-month period was a big change in the wholesale cost of fuel, and it was the same this year, it just happened to be going in the other direction. There is nothing substantially different happening in the business. We generally, as we add units, our working capital positive, just based on the timing with which we procure fuel and have to pay for fuel and receive credit card payments. And so adding a bunch of units at the very end of the period this year we’ll have a differentiating impact on working capital if we add units at a different pace in the prior year as well. Operator: [Operator Instructions] The next question comes from Krisztina Katai with Deutsche Bank. Your line is open. Jessica Taylor: Good morning. This is Jessica Taylor on for Krisztina. I just wanted to go back to vendors and pricing and just get your thoughts what you’re seeing competitively for pricing? Are your competitors looking more — doing — taking more pricing actions? And then from the vendor perspective, if you’re seeing any within your negotiations and your joint planning, like any indication that your vendors are looking to drive more units and to price accordingly? Darren Rebelez: Yes, Jessica. From a competitive standpoint, we do see some competitors still continuing to take price. And I would say particularly among the smaller operators that dynamic is not all that different than fuel, where they don’t have a lot of levers to pull, so they’re pulling the price lever to try to offset higher costs across the board. So we are seeing some of that. From a supplier perspective, it really depends on the type of supplier in the industry and the categories that they’re in. I think we’re seeing an interesting mix of some suppliers that still believe they have the ability to pass on more price. And so the — we are seeing a little bit of that. That has certainly moderated from where it was a year ago. We see others, like I mentioned before, in the beer category who are looking to be a little more aggressive this year, and we expect them to be battling over share. And so we’re expecting some price off on that category. So a little bit of a mixed bag from that perspective. Jessica Taylor: And then as a follow-up, I think on the last call, we talked a little bit about pizza a little bit of — I’m just wondering there if you’re seeing any softness in slices or whole pies and how the promotional environment is there. Are you still seeing a lot of promotions from your competitors? Darren Rebelez: In Pizza, we’ve done pretty well. Our slices, the units are — have actually been growing. Whole pies have been a little bit soft from a unit perspective, but we’ve taken pretty significant pricing in that category. But overall, we’re just kind of flat to maybe a little bit negative in that category. So — and that compares pretty favorably to what we see in our pizza competitive set. We are starting to see some more promotional activity from the major pizza competitors as they all try to get some unit velocity back we’re taking a fairly conservative approach on that. We are doing some promotional activity, but we feel like we’re line priced pretty competitively in the base case. So we don’t have to discount too aggressively. We have more of an everyday low-price approach, and that seems to work pretty well for us. Operator: I show no further questions at this time. I would now like to turn the call back to Darren for closing remarks. Darren Rebelez: All right. Thank you, and thanks for taking the time today to join us on the call. I’d also like to thank our team members once again for their contributions and delivering another record year. And we look forward to seeing everybody on Investor Day on June 27. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Follow Caseys General Stores Inc (NASDAQ:CASY) Follow Caseys General Stores Inc (NASDAQ:CASY) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

G-III Apparel Group, Ltd. (NASDAQ:GIII) Q1 2024 Earnings Call Transcript June 6, 2023 G-III Apparel Group, Ltd. beats earnings expectations. Reported EPS is $0.72, expectations were $-0.1. Operator: Good day and thank you for standing by. Welcome to the G-III Apparel Group First Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] Please be advised that […] G-III Apparel Group, Ltd. (NASDAQ:GIII) Q1 2024 Earnings Call Transcript June 6, 2023 G-III Apparel Group, Ltd. beats earnings expectations. Reported EPS is $0.72, expectations were $-0.1. Operator: Good day and thank you for standing by. Welcome to the G-III Apparel Group First Quarter Fiscal 2024 Earnings Conference Call. [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, Neal Nackman, CFO. Please go ahead. Neal Nackman: Good morning and thank you for joining us. Before we begin, I would like to remind participants that certain statements made on today’s call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC. The company undertakes no duty to update any forward-looking statements. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per diluted share and adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb. Morris Goldfarb: Thank you, Neal, and thank you, everyone, for joining us. We had a good start to the year. In the first quarter, our team worked hard to successfully navigate what remains a challenging environment where we exceeded both our top and bottom line guidance. For the first quarter of fiscal 2024, net sales were $607 million, above our guidance by approximately $45 million. Non-GAAP net income per diluted share was $0.13, exceeding the midpoint of our guidance by $0.23. As expected, gross margins were significantly better than last year’s first quarter. We made strong progress rightsizing our inventory position by reducing future buys to account for the product that we’re carrying. We sequentially decreased inventory from last quarter by $80 million and ended with balances up approximately 15% to last year or up 8%, excluding the acquired Karl Lagerfeld inventory. Further, as port congestion and lead times have normalized, we adjusted our warehouse space appropriately. Importantly, we expect this trend to continue throughout the year, driven by freight costs moderating and not needing to anniversary significant logistical costs, primarily incurred in last year’s third quarter. We ended the quarter in a strong financial position with approximately $800 million in cash and availability, including returning $17 million to our shareholders through stock repurchases. Our balance sheet continues to provide us with the flexibility to invest in future growth. Last quarter, we announced two new substantial opportunities, which include the Spring 2024 repositioning and global expansion of Donna Karan and a long-term license for Nautica in North America. We’ve already begun executing against them. Today, we are pleased to announce a new licensing agreement for the Halston brand as the third new initiative. We have entered into a 25-year agreement with Xcel Brands to design and produce all categories of product with the option to buy the brand at the end of the licensing term. As the master licensee for Halston, we have the ability to sublicense additional lifestyle categories that we do not produce, providing another share of licensing income. First deliveries are expected for fall of 2024. Halston is an American heritage brand with a rich legacy of glamorous designs across a range of price points. Currently, the brand is sold through a number of distribution channels, with a focus on top-tier department stores and live streaming. With our best-in-class design and merchandising teams, retail relationship and distribution expertise across stores and digital platforms will make the brand more widely available to consumers across a broad range of touch points. At G-III, we are known for our success with American heritage brands and believe there is tremendous opportunity to grow Halston by leveraging our proven model to unlock its potential. I look forward to sharing updates with you as we make progress on bringing this exciting brand to market. Development for Nautica and Donna Karan is well underway. We’ve spent time studying the archives of these brands to ensure we create lines with authentic brand messages while broadening their appeal. Product development and merchandising are foundational strength of our company and our experienced teams are moving quickly. For Nautica, we’re hard at work bringing the Spring 2024 jeans line to life. Having built highly successful and differentiated jeans businesses for Calvin Klein, Tommy Hilfiger and DKNY, we’re confident in our approach to Nautica jeans. With a strong understanding of the architecture of this category, we’re creating a line that we believe will be successful from the start. With Donna Karan, we’re leveraging the brand’s classic, contemporary, and elevated feel and working to broaden its appeal to a wider consumer base. The collection looks incredible and the initial response from our retailers has been positive. The new Donna Karan, Nautica and Halston opportunities, along with our focus on our strategic priorities will continue to drive growth for the company. Our strategic priorities remain, drive our power brands across categories, further expand our portfolio through ownership of brands and their licensing opportunities, extend our global reach, maximize omnichannel opportunities by leveraging data and continue to scale our private label business. Now let me update you on some of our progress this quarter. Our power brands, DKNY, Karl Lagerfeld, Calvin Klein and Tommy Hilfiger outperformed our expectations. Our results were led by dressier categories, including dresses, sportswear and suit separates. Consumers are responding to our latest product offerings across all of our distribution channels. Our diversified expertise enabled us to pivot quickly to these categories from athleisure, which has declined in demand. We continue to be able to make quick transitions where necessary to deliver the right product at the right time. Owned brands are a key strategic priority for us. This includes a focus on DKNY, Karl Lagerfeld, Donna Karan and Vilebrequin as well as our other owned brands, which continue to perform well and represented an aggregate of $1.3 billion in annual net sales last year. This year, our owned brands are expected to generate approximately $1.5 billion in annual net sales. Our team is focused on these businesses through expansion across categories, distribution channels, geographic regions, digital penetration and new licensing opportunities. These brands have strong resonance and significant potential to grow while generating higher operating margins than the company’s historic averages. Our North American DKNY and Karl Lagerfeld Paris businesses exceeded plan and are off to a good start to the year. DKNY has shifted much of its marketing efforts to a digital-first approach, focusing on both performance and brand awareness campaigns. The brand continues to build relationships with influencers across all key social platforms and participated in the second annual Metaverse Fashion Week in March. Last month, Vogue and the Metropolitan Museum of Art hosted the Annual Met Gala, the largest and most prestigious event in global fashion. The event celebrated the opening of the museum’s new exhibition, Karl Lagerfeld: A Line of Beauty, which revisits Karl’s extraordinary career at Chanel, Fendi, Chloe, and his own Lagerfeld brand to explore his impact on fashion and culture. It’s a great honor for Karl Lagerfeld and we are thrilled that our brand is central to all of the activities. The celebrity-studded Gala was widely watched with spectacular red carpet arrivals. Many celebrities wore Karl Lagerfeld, including Academy Award actors, Michelle Yeoh and Jared Leto, in addition to Amber Valetta, Cara Delevingne and Carla Bruni-Sarkozy. To capitalize on the significant Met Gala press and activities, we focus on our marketing investments on brand-building strategies that connected with customers. We rolled out our largest global marketing campaign for the brand to date, which included dedicated windows at Macy’s and Bloomingdale’s flagship stores in New York City. We also launched capsule collections, events, media partnerships, pop-ups and metaverse engagement. These activities resulted in an impressive 5.1 billion impressions. This is global and created an increased demand for the brand. Our largest retail partners and our own retail sites saw significant spikes in the period around of the Met Gala. The branding halo from the Met, coupled with the strong performance we’ve seen as a result, reinforces the power of having Karl Lagerfeld as part of our portfolio. Additionally, we’re looking forward to the Karl Lagerfeld movie with Jared Leto, who is starting in and co-producing with us. We expect that these investments will increase long-term brand affinity. Extending our global reach is another key priority. In addition to Karl Lagerfeld and DKNY, Vilebrequin continues its positive sales trend and opened 3 new stores this quarter. The brand is known for exciting collaborations that drive newness, excitement and differentiated product. Last week, we officially opened the Vilebrequin La Plage, our first Beach Club in Cannes, signaling the brand’s association and ability to grow all things vacation. Having just returned from the grand opening, I can tell you that it embodies his spirit of the brand. It is clear that there are many more opportunities to broaden the Vilebrequin experience and further solidify our position as a leading luxury resort brand. Our focus on developing sales across multiple distribution channel is yielding good results. In particular, our digital business had strong growth of over 20% and increase that outperformed the industry overall. This is primarily attributed to our focus on building our Amazon business, which was almost triple last year’s first quarter, led by outerwear, dresses and shoes. Our growth with pure-play digital retailers offset traditional digital channels, which as expected, have moderated with customers returning to stores. This diversified mix is serving us well as we continue to invest in expanding our digital distribution channels, including our own sites, retail partner sites and pure plays and ensuring that appropriate product is also available in stores. The replatform of our own DKNY and Karl Lagerfeld Paris e-commerce sites are boosted by a new look and feel, new loyalty programs, enhanced CRM capabilities and upgraded technical operations. These are powerful consumer engagement tools that are resulting in strong increases in traffic as well as strong double-digit increases in sales and increased average order value. We are unlocking data in more effective ways than ever before to acquire new customers, drive incremental conversion and foster a more seamless shopping experience for our brands. This work has resulted in the strong performance of our digital business. We continue to take on initiatives to enhance our operations, which will further improve our profit margins in the future. This includes hiring a consultant to help us optimize our warehousing infrastructure. Lastly, I am pleased to mention that we had a good start to the first – to the new fiscal year. We beat our top and bottom line guidance. We made solid progress aligning our inventory to forward demand, and we signed a new long-term global licensing agreement for Halston. Furthering our focus on developing new opportunities. Based on the strong first quarter, we’re raising our fiscal 2024 outlook. We now expect fiscal 2024 net sales of approximately $3 million – excuse me, $3.29 billion, slightly up to last year and including a full year of the acquired Karl Lagerfeld business. We’re raising our non-GAAP net income per diluted share to be in the range of $2.80 to $2.90 compared to $2.85 in fiscal 2023. In conclusion, I am pleased to mention that our Board has nominated three new directors, Dr. Joyce Brown, Michael Shaffer, and Andrew Yaeger, who will stand for election at our Annual Shareholder Meeting this Thursday. We look forward to having their expertise and valuable perspectives in supporting the future of G-III. I will now pass the call to Neal for a discussion of our first quarter financial results as well as guidance for the second quarter and full year – full fiscal 2024. Neal Nackman: Thank you, Morris. With respect to our results of operations, the comments I’m about to make on a non-GAAP basis. And again, a full reconciliation of our GAAP to non-GAAP results are included in our press release issued this morning. Net sales for the first quarter ended April 30, 2023, decreased approximately 12% to $606 million from $689 million in the same period last year and approximately $45 million above our guidance. Included in our sales for this quarter were $60 million in sales of the acquired Karl Lagerfeld business, which became a wholly-owned subsidiary on May 31, 2022. Accordingly, the results of the Karl Lagerfeld business were included in our results commencing with the last month of the prior year second quarter. Net sales of our Wholesale segment decreased approximately 14% to $587 million from $681 million last year. This segment now includes the acquired Karl Lagerfeld business results. Net sales of our Retail segment was $30 million for the first quarter compared to net sales of $28 million in last year’s first quarter. Our gross margin percentage was 41.2% in the first quarter of fiscal 2023 compared to 35.7% in the previous year’s first quarter. The Wholesale segment gross margin percentage was 39.9% compared to 34.1% in the prior year’s comparable quarter. As we have stated before, the acquired Karl Lagerfeld business operates at a higher gross margin percentage than the rest of our Wholesale segment. Their inclusion in the quarter resulted in an increased wholesale gross margin percentages of approximately 250 basis points. The remainder of the increase in gross margins is a result of a decrease in inflationary pressures in product and transit costs as well as increases in our prices. The gross margin percentage in our Retail Operations segment was 50.9% compared to 49.9% in the prior year’s quarter, also benefiting from a decrease in inflationary pressures in product and transit costs. Non-GAAP SG&A expenses were $226 million or 37.3% of net sales compared to $183 million or 26.6% of net sales in last year’s first quarter. SG&A grew by approximately $43 million, primarily related to the inclusion of the acquired Karl Lagerfeld business in our results for the quarter. In addition, we had an increase in warehousing costs as a result of our higher inventory levels and increases associated with overall inflationary pressures. Non-GAAP net income for the first quarter was $6 million or $0.13 per diluted share compared to $35 million or $0.72 per diluted share in last year’s first quarter. This was significantly above the midpoint of our guidance of a net loss of $0.10 per share. Turning to the balance sheet. We made good progress with respect to our inventory levels, which sequentially decreased by $80 million from last quarter. As compared to last year’s first quarter, inventory levels were up approximately 15%. Approximately half of the inventory increase is attributable to the acquired Karl Lagerfeld business. The remaining increase is related to increases in outerwear that we carried into this year and expect to ship in the fall and holiday season. Just as a reminder, we have tempered our buying this year in all categories to account for our existing inventory levels and expect our levels to be down significantly compared to the prior year at the end of the second quarter and continue to normalize our inventories as we go through the third quarter. We ended the quarter in a net debt position of approximately $250 million compared to $83 million in the prior year. This increase in net debt was impacted by the $170 million in net cash used to complete the Karl Lagerfeld acquisition and $44 million used for stock repurchases. We had cash and availability under our revolving credit agreement of approximately $800 million at the close of the quarter. Post quarter end, we repaid $75 million of the $125 million note outstanding to LVMH. The remaining $50 million of this note will be repaid on December 1st. We expect strong positive cash flows this year that will be enhanced as our inventory levels normalize. We believe that our liquidity and financial position provides us the flexibility to invest in our future growth. As for our guidance, a full – based on our performance in the first quarter, we are raising our guidance. For the full fiscal year 2024, we now expect net sales of approximately $3.29 billion, slightly ahead of last year. On a non-GAAP basis, we expect net income for the full fiscal year 2024 of between $132 million and $137 million or between $2.80 and $2.90 per diluted share. This compares to non-GAAP net income of $139 million or $2.85 per diluted share for fiscal 2023. Full year fiscal 2024 adjusted EBITDA is expected to be between $267 million and $272 million compared to adjusted EBITDA of $266 million in fiscal 2023. For the second quarter of fiscal year 2024, we expect net sales of approximately $595 million compared to $605 million in the same period last year. The prior year second quarter reflected only 1 month of the acquired Karl Lagerfeld business. On a non-GAAP basis, we expect operating results of between a loss of $3 million and net income of $2 million or between a loss of $0.06 per share and net income of $0.04 per diluted share. This compares to non-GAAP net income of $19 million or $0.39 per diluted share in the second quarter of fiscal year 2023. Let me add some context around modeling. As Morris mentioned, we expect gross margin improvement during fiscal year 2024 and anticipate ending the year with gross margins up approximately 350 basis points compared to the fiscal 2023 rate. This is driven by a few factors: First, freight cost have significantly moderated, and we expect this benefit throughout the year. Second, we do not expect to repeat significant one-time logistical costs, primarily incurred in the third quarter of last year. Lastly, the first 5 months of this year will benefit from the inclusion of the acquired Karl Lagerfeld business, which positively impacts our gross margin percentages. The results from the acquired Karl Lagerfeld business were reflected commencing June 1, 2022. We anticipate SG&A will de-lever as we continue to expect elevated warehousing costs associated with higher inventory levels this year as well as continued inflationary pressure on costs. Further, the addition of the Karl Lagerfeld business in the first 5 months of this year will increase the percentage of net sales represented by SG&A expenses. We expect non-GAAP interest expense to be approximately $50 million, and we are estimating a tax rate of 28% during the year. We have not anticipated any potential share repurchases in our guidance. That concludes my comments. I will now turn the call back to Morris for closing remarks. Morris Goldfarb: Thank you, Neal, and thank you all for joining us today. G-III continues to successfully navigate what is – what has remained a challenging operating environment. We’re off to a good start in the new fiscal year. We remain focused on driving our key strategic priorities and continuing to develop new opportunities. We have the financial flexibility to invest in our business and take advantage of appropriate opportunities that may come our way. I’d like to thank our entire organization, our many partners, and all of our stakeholders for their continued support. Operator, we’re now ready to take some questions. Q&A Session Follow G Iii Apparel Group Ltd (NASDAQ:GIII) Follow G Iii Apparel Group Ltd (NASDAQ:GIII) 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 Edward Yruma from Piper Sandler. Your line is open. Edward Yruma: Hey, good morning, guys. Thanks for the time. I guess, first, Morris, on Halston, exciting news. Can you talk a little bit about the white space now that you have a couple of owned brands in that space and licensed brands, kind of how does it fit in relative to DKNY and Karl Lagerfeld? And then as a follow-up, Neal, I know you have lots of excess demurrage costs in the back half of last year, kind of are they already rolling off? And could you just maybe remind us the modeling purposes kind of when they were – when they fell in last year and how we should model appropriately this year? Thank you. Morris Goldfarb: Thanks for your question, Ed. Halston, for us, is a brand that we will have full control of and basically servicing the demands of where the consumer wants to be. We’re developing a collection of a little bit more glamorous than we historically have done product. We’ve staffed it with talent that is premier in our organization. We didn’t have to go outside to find new talent. We have talent that follows basically the beat of G-III, does it well. Sourcing is not a problem, and we’re excited about the opportunity of building a global initiative with Halston. It’s a brand that very much is classified as an owned brand. And as much as we will share some licensing royalty with Xcel. They seem to be great partners, and we’ve got – we’ve got a strong plan for this in the coming years. The white space that your question refers to, in product, I assume you’re asking is more existing in our portfolio than out there in the world. It’s a brand that partners well with Lagerfeld. In a sense, they are contemporaries. One has got European appeal and the other is more of an American heritage brand that we’ve proved out to be quite proficient in developing brands such as Halston. We’re not so concerned about filling white space or we’re a little bit more concerned about filling our own space. And as most of you do know, we’re in a process of exiting both Tommy and Calvin. So this is a shore up to our assets. And as I said before, we’re excited by the opportunity and the great partners that we have. Neal Nackman: Ed, on the logistical costs, we incurred about $40 million in total last year, about – just under $30 million was in the third quarter and about $10 million was in the fourth quarter. And you could pretty much exclude those figures almost entirely as we roll this year. Edward Yruma: Thank you. Morris Goldfarb: Thank you, Ed. Operator: Thank you. [Operator Instructions] We have a question from Will Gaertner from Wells Fargo. Your line is open. Will Gaertner: Hey, good morning, guys. Thanks for taking my question. Neal, maybe you could just talk a little bit about inventory levels that and Morris too, I guess, what you’re seeing at retail partners? Are they still heavy with inventory? Are they beginning to order or receipts coming back? And then secondly, maybe can you speak to the work stoppages in the West Coast ports and how that might impact your business? Thanks. Morris Goldfarb: Thank you for your question, Will. The inventories are a major issue for our customers today. There is a clear focus on managing their inventory differently than they have historically. Turn on product is a focus there, which isn’t natural. If you’re not turning your inventory, you have no need to buy it. Fortunately, for us, we’re on the good side of that. Our inventory is turning well. Our inventory is in demand. We’ve – our fashion and our inventory is in demand. And what we’ve done is adjusted our inventory into the in demand categories that we have. We – we’re in a good position on the performance or athleisure side of our business. We have a fair amount of orders that go forward that support the initiative. The space is not being given up. There is an overabundance of product in the marketplace. We’re adjusting our flows to accommodate that. And the areas that are flourishing at retail are our specialty, suit separates and dresses are areas of demand that we dominate. So it’s not necessarily how the retailer is managing their inventory. It’s how we’re managing fashion and the right product for our retailers to create demand in our classifications. So we don’t see a problem. Our orders support that, reorders support that. But there is a focus on coming in with low inventories by quarter. We have done an amazing job of bringing down our inventory levels to at least what you’re seeing is Q1, which was not a problem quarter for us last year. Our problems came in Q2 and Q3. In spite of the fact that you’re seeing an 8% increase in inventory levels, it’s at a period of time that our inventory levels were not an issue at all. You’ll see major, major decreases in inventory levels for Q2 and Q3, which will enhance our cash, and it will mitigate some of the logistical issues that we had last year. So inventories are very much in control. As far as the West Coast, we’re not incurring any issues, not at all. Nothing forewarn that we have a potential issue. We’re flowing our inventory appropriately. We have inventory in-house to support a good percentage of what we need going forward. So there is no crisis on our horizon. Will Gaertner: Thank you. Morris Goldfarb: Thank you, Will. Operator: Thank you. We have a question from Mauricio Serna Vega from UBS. Your line is open. Mauricio Serna: Great. Good morning. And thanks for taking my question. I just wanted to ask about the Halston brand agreement. So just following on the previous question, what kind of revenue potential do you see in the long-term from this brand? And also, I noticed like in another release, press release was mentioning that there was like an upfront payment in May 2023 for this an advanced payment. Is that like an amount? Could you share the figure for that and how meaningful it is for your guidance this year? And then lastly, on the gross margin, how should we think about the rate of expansion in upcoming quarters compared to what we saw in Q1? Thank you. Morris Goldfarb: Thank you, Mauricio. Addressing the Halston question, I am not free to give you the cost of buying or giving enough payment to Xcel. It’s not my decision to – my own decision to give it to you. It was a minor payment in the scope of G-III. It doesn’t affect us in any way at all. It gives us freedom. It gives us growth. And if I were to put a target on it, I would tell you within 4 years, it’s a $250 million business. It is global. It is in demand. We didn’t just pick the brand without doing our diligence. We have customer support for it globally, quite honestly, I was a little surprised after the fact that it has the global appeal, particularly in Europe. So, we are excited by the opportunity. We have an added feature. We share licensing royalty and licensing income that comes to us when we license categories that we choose not to do or are not able to do for any reason. So, besides our own income, we get licensing income. And it’s long-term at a discounted royalty rate as well as a nominal purchase 25 years from now, should we care to purchase the company. It’s all – it’s not a major event from a financial output story. As far as gross margin, what we have told the Street and what we are experiencing is and you can see it. There is a margin enhancement when you get to ship your own brands without paying a serious royalty on it. The royalties all in that we pay for a product is somewhere between 10% and 12%. And eliminating that and spending our own money on advertising and maybe a little bit of added infrastructure, we still have a significant margin enhancement in our business by shipping our own brands versus licensed brands. Neal Nackman: And Mauricio, just to help you with some of the phasing, we expect pretty strong increases compared to the prior year for the second and third quarter. And then of course, in the fourth quarter, that will probably tail up, but still be ahead of the prior year. Mauricio Serna: Great. Thank you very much. Congratulations on the results. Morris Goldfarb: Thank you, Mauricio. Operator: Thank you. [Operator Instructions] We have a question from Janet Joseph Kloppenburg from JJK Research Associates. Your line is open. Janet Joseph Kloppenburg: Good morning everyone and congratulations on a good quarter. I got on a little bit late, so forgive me if you have answered this. I was wondering with the addition of the Halston brand and the development of DK, and bringing on Nautica, if you now feel that the revenues that will eventually diminish from Tommy and Calvin have been recouped. I just wondered how that outlook looked. And I know Halston will be a license plan, and I wondered about the margin profile about and how it may impact your business next year. Thank you. Morris Goldfarb: So Janet, the prior question, we addressed on Halston, and I will give it to you again. Janet Joseph Kloppenburg: Thank you. I am sorry for the repeat. Morris Goldfarb: No, quite alright, I like telling the story. Halston is a great fit for us. It was not a major cash output, and it’s signed as a global initiative. It’s signed as a discounted royalty rate, and it’s signed as an opportunity to buy the brand at termination of the license which goes out, should we choose to go out. It’s got the kick-out periods, but should we have this brand in 25 years, we buy it or we buy the entire brand for a nominal amount. So, great acquisition for us, it fits into our portfolio. We know how to produce American heritage brands, and we have built-in demand for the brand. And we have built in space as we wind down our Calvin and Tommy licenses. And I believe within 4 years, this is a $0.25 billion business for us with enhanced margins. Janet Joseph Kloppenburg: Thank you. Okay. Could you also talk about the career wear business? It seems to be leading your strength. And if you look for that to continue for the remainder of the year, or if you think there will be some reversion back to casual? Thank you. Morris Goldfarb: Yes. Good question. Career wear is performing very well. We dominate that sector at the wholesale level. Our business is very good. Our margins are good. Our inventories, if I were to cite an area where we have low, low inventories, it would be the career wear side of our business. Demand was high. Sell-throughs were very strong, and we see it continuing as it always has to the future. As far as the athleisure business, that’s not gone away. There was an overabundance of inventory in the marketplace. Everybody during pandemic decided that, that was the area to address. They either expanded their offerings, initiated new collections or bought brands and classifications that they thought they could build. So, all of a sudden from a small business, it became a giant business. So, now it’s correcting itself. It’s an important business. And as the inventory – the old inventory clears out, new offerings are given to the consumer, where we are just fine. We believe that, that business does come back, and it comes back appropriately. The woman is not giving up on athleisure apparel. It’s a way of life. So – and I don’t see that way of life changing at all. And it’s pretty much all demographics, and it’s pretty much every age. So, we have got the two initiatives that you speak about are both incredibly strong in different ways in different timeframes. Thank you, Janet. Thank you for your questions. Janet Joseph Kloppenburg: Thank you. Operator: Thank you. Our next question comes from Paul Kearney with Barclays. Your line is open. Paul Kearney: Hey good morning everyone. Thanks for taking my question. My first question is on kind of the SG&A cadence through the year. I think relative to where we had you and consensus was, 2Q looks a little higher than we were thinking. I am wondering just if there is anything behind why SG&A will be higher in 2Q, or how we should think about it through the year? And then second, as we lap the Karl Lagerfeld acquisition in this coming quarter, can you just give us a sense or just remind us the organic underlying growth of that business and how we should model that going forward? Thank you. Neal Nackman: Yes. So Paul, as far as SG&A, pretty comfortable with the first quarter a little more advertising spend. So, I think maybe the models were a little bit light. But if you look compared to what we are doing in the first quarter for our volumes, nothing too unusual there. Like I have said, we will have challenges for the year in terms of even the core business with respect to warehousing costs and inflationary pressures in general. With respect to the Karl Lagerfeld acquired business, on a comp basis, we see nice double-digit growth in that business. And as Morris said in his prepared remarks, just lots of exciting things happening around that brand that will inure to the benefit in both the current year and the future year for that brand. Paul Kearney: Thank you. Operator: Thank you. [Operator Instructions] We have a question from Noah Zatzkin with KeyBanc Capital Markets. Your line is open. Noah Zatzkin: Hi. Thanks for taking my questions. Now that you’ve got Nautica and Halston signed up, just wondering how you are thinking about additional opportunities moving forward? Would you look for an owned opportunity versus licensed? You are kind of agnostic there? And then second, just hoping you could speak to your level of comfortability with the order book today as it relates to the decision to raise full year guidance. Thanks. Morris Goldfarb: Thanks for your question, Noah. We are consistent. And our first choice is to acquire brands, the features of owning brands are almost self-evident today. The risk of losing a license after you have developed it for the years that we have with Calvin and Tommy have taught us a lesson owning in this case is better than renting. The margin enhancements are incredibly important to us and being able to guide all our people as to where the brand goes, how it’s marketed, and the attributes that we care to impose in an owned brand are different than our ability to have an influence on licensed brands. So, we like – in this case, we like owning better than renting. As far as what are we out there looking for brands, we are. In the last few months, I have traveled the world to have meetings on opportunities that we believe are actionable. None has surfaced to a must buy today, but we do have the availability and bank support and as much as cost of money is a little richer than I would like to pay. If the opportunities are there, we have the ability of buying a major acquisition. So, we have not put that to the side because we have Nautica, Donna Karan and Halston, we are still searching for an important acquisition. Neal Nackman: And then Noah, with respect to the order book that is coming along nicely, obviously this time of the year, we don’t have – we have not shown all of the seasons that we will ship during the year. So, probably about 75% of the year looks like it’s pretty well reflected, and we feel it’s pretty supportive of the – of our forecast. Noah Zatzkin: Thanks a lot. Morris Goldfarb: Thank you, Noah. And our last question? Operator: Yes. Our last question comes – and one moment. Our last question comes from Dana Telsey from Telsey Advisory Group. Your line is open. Dana Telsey: Hi. Good morning everyone. As you think about Karl Lagerfeld and the significant press that you have had over the past quarter, what – was there any additional contribution to revenues or margins that you saw as a result of it? And for the balance of the year, is there any additional uptick that we should be expecting from the Karl Lagerfeld brand as you move forward? And then, Morris, just your view on the wholesale channel right now, what you are seeing in terms of promotions and what the setup looks like for fall and for holiday would be helpful. Thank you. Morris Goldfarb: Thanks for your question, Dana. We – as it relates to Karl, we have a spike in business. Margins were good going in. We have positioned the brand in an area where it just can’t get too deep into the customers’ wallet. It’s an affordable brand. It is not top tier luxury, yet we are – there is pricing power left in that brand. We have got great demand. I was amazed when I was giving a number yesterday that there were 5.1 billion eyeballs on the brand during the Met Gala. So, it’s clearly a brand building that you don’t get the immediate – I can’t tell you that we had an immediate impact that was as glorious as 5.1 billion eyeballs. But clearly, there are eyeballs that are now paying attention to it. So, the future is bright. The present business is very good. The future is better than the business today, although other business is at the top tier of what we are doing at G-III, both internationally as well as domestically. So, we are excited by the ownership of the brand. There is so much more to come, whether it’s retail, whether it’s wholesale distribution, whether it’s licensing and licensing and classifications that were unexpected. So, the calls and the curiosity of where to take this brand are just mind-boggling. So, we are more than thrilled to own it all. And as far as wholesale, wholesale is going through its difficult periods. There is a hate to do this and everybody says the same thing. Weather has had its impact for Q1. It was unseasonably cold. So, spring inventory didn’t move nearly at the rate that we all expected it to. I am expecting markdowns to be – I am not going to say aggressive, but there is a need to mark down product to make room for appropriate seasoned goods and the retailers are recognizing that. I don’t think you are going to see a crazy amount of markdown product. I think everybody for the last six months has been focused on inventory corrections. So, nobody is really top, top heavy on inventory. So, I think we are all okay and it takes a little time to course correct with all that’s going on in the world in the last couple of years. And I think we are on that path. Dana Telsey: Thank you. Morris Goldfarb: Thank you, Dana and thank you all and speak to you soon. Have a good day. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Follow G Iii Apparel Group Ltd (NASDAQ:GIII) Follow G Iii Apparel Group Ltd (NASDAQ:GIII) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Couchbase, Inc. (NASDAQ:BASE) Q1 2024 Earnings Call Transcript June 6, 2023 Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.27, expectations were $-0.32. Operator: Greetings, and welcome to the Couchbase First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal […] Couchbase, Inc. (NASDAQ:BASE) Q1 2024 Earnings Call Transcript June 6, 2023 Couchbase, Inc. beats earnings expectations. Reported EPS is $-0.27, expectations were $-0.32. Operator: Greetings, and welcome to the Couchbase First Quarter Fiscal 2024 Earnings 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 call is being recorded. It is now my pleasure to introduce your host, Edward Parker, Head of Investor Relations. Thank you, Mr. Parker, you may begin. Edward Parker: Good afternoon, and welcome to Couchbase’s first quarter 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me are Couchbase’s Chair, President and CEO, Matt Cain; and CFO, Greg Henry. Today’s call will contain forward-looking statements which include statements concerning financial and business trends and strategies, market size and expected future business and financial performance and financial condition, and our guidance for future periods. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release and our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as how we define these metrics and other metrics, is included in our earnings press releases which are available on our Investor Relations website. With that, let me turn the call over to Matt. Matt Cain: Thank you, Edward. And good afternoon, everyone. On today’s call, Greg and I will provide details on our first quarter results, as well as our second quarter and full-year fiscal 2024 guidance. I’ll start off with a few highlights of our Q1 financial results. Couchbase delivered a strong quarter beating our guidance across all metrics. I’m pleased with the team’s execution on our strategy to deliver topline momentum, while outperforming on profitability all against a difficult economic environment. Total annual recurring revenue or ARR was $172.2 million, up 23% year-over-year. Revenue in Q1 was $41 million, up 18% year-over-year. Our non-GAAP gross margin remains best-in-class at 86.4%. Non-GAAP operating loss was $12.9 million and non-GAAP operating margin was 5 percentage points above the midpoint of our implied guidance range, demonstrating our continued operating expense discipline and focus on driving leverage in our model. I’m proud of how the business is performing despite the macro environment. And I believe we are more strategically aligned than ever before. Indeed, while there are external factors outside of our control, we continue to focus on what we can control. Innovating and investing for an exciting future, while placing increased rigor on our expense discipline. Recall that last quarter, we laid out our key priorities for fiscal 2024. Focus on top line growth, increase the mix of Capella, drive further sales and marketing efficiency and accelerate the pace of leverage in our model. I’ll comment on Capella and our go-to-market progress and Greg will provide more details on the impact they’re having on our growth and leverage results. Starting with Capella. Our R&D team is rapidly innovating to enhance our offering, reduce barriers to adoption and deliver even more value for customers. Last week, we announced our newest release of Capella, which will be accessible by the popular developer platform Netlify and features a New Visual Studio Code extension. This release makes it easier for developers and development teams to build modern applications on Capella. We also extended Capella’s enterprise features and deployability, including new time series data capabilities to support a broader set of use cases. Looking forward, we will continue to focus our product innovation towards making Capella more accessible for customers and on improving the developer experience, all while delivering the enterprise-grade capabilities that have been the core of our DNA. In addition to Capella innovation, we continue to invest in initiatives that drive developer adoption and more efficiently drive growth. These are enabling users to discover the power of Couchbase sooner and are accelerating product-led growth for both new and existing customers. As a result of our efforts, we’re enjoying higher engagement and visibility at more developer meet-ups and conferences, increased content consumption on a revamped developer website and valuable feedback from some of our most strategic customers at developer workshops. Customers are selecting Capella for their long-term cloud modernization strategies due to its performance, speed, scalability and flexibility advantages. Capella’s best-in-class TCO and unique value proposition are especially important differentiators for cost-conscious customers during times like this. On the go-to-market side, we continue to create further sales and marketing efficiency by driving ongoing operational improvements and investing in our partner ecosystem. Last month, we announced the availability of Capella on Microsoft Azure marketplace further simplifying the process for customers to adopt Capella and deploy applications on their cloud of choice. We are excited about the opportunity for our Azure partnership to accelerate the adoption of Capella and bring the power of Couchbase to more organizations. Also on the partnership front, we are building on the momentum of our recently enhanced ISV partner program in conjunction with our expanded relationship with AWS through the launch of our ISV Starter Factory. This program supports ISVs with additional tools and resources to build and modernize their applications with Capella on AWS, reducing complexity and making it easier for organizations to modernize and migrate their applications. We remain closely aligned with AWS and are excited to participate in an increasing number of go-to-market activities with them. These include joint asset creation, developer engagement and AWS summits around the world. We will continue to evolve and broaden our partner ecosystem in order to help organizations accelerate their application development journey and grow our reach in the market. Now turning to wins from the quarter. I am pleased with the breadth of our customer activity across a broad range of industries, including technology, e-commerce, healthcare and travel. Starting with Capella, we’re seeing increasing engagement and uptake of our as a service offering. During the quarter, we crossed a key milestone with the number of Capella customers now in the triple-digits growing dramatically year-over-year. Some exciting new wins included a fast-growing pet health and wellness company, a NextGen real estate technology company and a revenue cycle management software company. We also continue to see existing customers migrating to Capella. A Fortune 500 energy customer that leverages Couchbase for its main field application decided to migrate a meaningful portion of its estate to Capella. This six-figure deal was one of our largest Capella deals in the quarter demonstrating how our large enterprise customers can leverage the full capabilities of Couchbase while enjoying the greater flexibility, efficiency in TCO inherent to our on-demand offering. A Capella expansion during the quarter came from public and is really based online media company, which uses Couchbase to power its indexing and query for its search engine. As public continues to scale its business, it’s expanding its investment in Capella, because they see compelling cost efficiencies compared to competitor solutions. On the enterprise front, we want to spotlight LinkedIn, who serves over 1.4 million profiles per second at its peak. They recently published an article outlining how their existing open source platform could no longer address the loads on their storage infrastructure, which was doubling every year. LinkedIn selection of Couchbase as a centralized storage tier cash resulted in more than a 60% reduction in tail latencies and trim the cost to serve by over 10% annually. Now turning to some thoughts on the near-term environment. As I have said before, there are things we can control and things we cannot control. We were prepared for both heading into Q1 and the quarter played out largely as we expected. One variable we, of course, cannot control is the macro environment. As we discussed last quarter and as you’ve been hearing from many of our technology peers, the uncertainty and volatility continues to present headwinds for IT spending. We’re seeing longer deal cycles, extra layers of scrutiny and approval and customers electing to buy in smaller increments. These trends persisted through the end of the quarter and I am extremely pleased with our ability to navigate these headwinds. At the same time, we feel good about what we can control which includes driving operational efficiency while preparing for the future by building our field capacity and pipeline. We’re committed to improving our profitability and if necessary have the right levers to find further leverage in our model and react accordingly. That said, demand indicators remain strong and we continue to see a healthy pipeline of deals and interest in our cloud database platform. The big secular trends of digital transformation, acceleration of the cloud and innovation at the edge are still in our favor. I’d be remiss if I didn’t mention the topic dominating everyone’s minds. Let me spend a moment touching on how the fast-moving wave of AI-driven applications will power if not accelerate the secular tailwinds that offer specific opportunities aligned with our strengths. At Couchbase, we’re exploring a wide range of initiatives both internally and externally to leverage AI to increase efficiencies across various aspects of our business. Some examples of this include research, generating tests and test data for code, exploring how generative AI can drive developer productivity and adoption of Capella and making our platform more operationally efficient. And while the benefits for Couchbase specifically in the industry more broadly are real and exciting, we believe the implications for our business and mission are more profound and increasing productivity and efficiency alone. Consider the following: the processing of unstructured data in real-time is becoming a necessity; modern applications require predictive insights and real-time decision-making for personalization; and the models are moving closer to the data for improved control and faster time to processing; this series of events collides when enterprises, who are building AI-driven insights into their next-generation applications leverage AI to run private models. It’s at this point, where enterprise will require the combination of a high-performance operational database with analytical functionality making this an exciting opportunity for Couchbase. Much of the promise of generative AI is only recently being understood. But these core concepts will be familiar to many of you, who have been following Couchbase, because they are all foundational elements of how we are architected. Clearly, there is more to do to capitalize on this opportunity, but you’ve often heard me say that Couchbase has been built for this moment and I think that’s as true today as it’s ever been. In closing, we had a solid start to the year and the secular drivers behind our business remained strong. We’re making progress on our initiatives, our committed to focusing on what we can control and are nimble in navigating areas we cannot control. Before handing the call over to Greg, I want to emphasize one of our core values that I’ve repeated many times. At Couchbase, we attack hard problems driven by customer outcomes. With that, I’ll hand the call over to Greg to walk you through our results in more detail. Greg? Greg Henry: Thanks, Matt. And thanks everyone for joining us. We had another strong quarter as we beat guidance across all key metrics. Despite the elevated level of deal scrutiny that Matt talked about, we are pleased with our execution, our dedication to delivering value to our customers and our ability to navigate the environment, while driving healthy outperformance in our operating loss guidance. I’ll now walk you through our first quarter in more detail before providing our guidance for the second quarter and full-year. Total annual recurring revenue or ARR was $172.2 million at the end of the first quarter, representing 23% growth year-over-year. Revenue for the first quarter was $41 million, an increase of 18% year-over-year. Subscription revenue for the first quarter was $38.5 million, an increase of 21% year-over-year. Professional services revenue for the first quarter was $2.5 million, a decline of 15% year-over-year, consistent with our expectations following outsized strength in professional services in fiscal 2023. We continue to expect the contribution as a percentage of revenue in fiscal 2024 to be slightly below recent levels. Our ARR per customer performance in the first quarter was $254,000, up from $242,000 in the fourth quarter and indicative of the growing wallet share we have with large customers. As a reminder, as Capella continues to grow in revenue contribution, we expect ARR per customer growth could moderate or decline in future quarters. Our dollar-based net retention rate continues to exceed 115%, driven by strong renewal and upsell activity across our base of larger enterprise customers. We exited the quarter with 679 customers, an increase of four net new customers from the fourth quarter. Our gross customer addition count was consistent with levels we saw in Q1 over the past two years, but we did see some challenges with a handful of smaller mid-market customers, who are being impacted by the macroeconomic environment, including some who are no longer in business. That said, we’re encouraged by the strength of our new logo pipeline and remain confident in our ability to reliably expand logos as evidenced by our consistent ARR growth and our strong retention metrics against a more challenging spending environment. In discussing the remainder of the income statement, please note that unless otherwise stated all references to our expenses, results of operations and share count were on a non-GAAP basis. In Q1, our gross margin remained strong at 86.4%. This compares to a gross margin of 87.3% a year ago and 86.3% last quarter. As a reminder, as Capella mix increases, we expect gross margin will decline over time. Turning to expenses. We continue to invest to capture the generational opportunity we see in front of us, but our focus on improving the efficiency of our growth. We are pleased with our execution on this front as our expense discipline and early benefits from cost savings initiatives resulted in outperforming our operating loss outlook. Our sales and marketing expenses for Q1 were $29.2 million or 71% of revenue, compared to $24.8 million or 71% of revenue a year ago. Q1 included costs associated with our annual sales kickoff event, which was held in-person this year, compared to last year’s virtual format. Research and development expenses for Q1 were $12.5 million or 31% of revenue, compared to $12.5 million or 36% of revenue a year ago. We continue to thoughtfully invest in our as-a-service offering, as well as an additional features to bolster our platform. General and administrative expenses for Q1 were $6.7 million was 16% of total revenue, compared to $6.5 million from 19% of revenue a year ago. Non-GAAP operating loss for Q1 was $12.9 million or negative 32% operating margin, 5 percentage points higher than the midpoint of our guidance, compared to an operating loss of $13.4 million or negative 38% operating margin a year ago. Non-GAAP net loss attributable to common stockholders for Q1 was $12.3 million from negative $0.27 per share. Turning to the balance sheet and cash flow statement. We ended Q1 with $163.6 million in cash, cash equivalents and short-term investments. We remain well capitalized to execute against our long-term growth strategy. Our remaining performance obligations or RPO totaled $165.6 million at the end of Q1, a decrease of 2% year-over-year. We expect to recognize approximately 68% or $112.1 million of total RPO as revenue over the next 12 months, which represents 11% year-over-year growth. As we have noted, our total RPO performance has been impacted by a year-over-year contraction in billings terms as some customers are electing shorter-term contracts due to the macro uncertainty and because our sales plans no longer incentivize multiyear contracts as aggressively. Operating cash flow for Q1 was negative $7.2 million and free cash flow was negative $8.5 million or negative 21% free cash flow margin. We are pleased with the progress we have made in our free cash flow profile. We remain committed to driving further improvements. Now, I will provide guidance for Q2 and the full-year fiscal 2024. As Matt discussed, we continue to see solid momentum and our pipeline remains strong. Furthermore, we anticipate that our investments in our product capabilities, partner ecosystem and go-to-market motion will complement our momentum in fiscal 2024. That said, we are mindful of the macro headwinds and continue to carefully monitor their impact on our business, including bookings, pipeline conversion, retention expansion rates, deal sizes, sales cycles, logo acquisition and sales productivity. As such, our outlook maintains an elevated degree of conservatism across all these metrics to account for the uncertainty as well as the lack of visibility into how the macro may impact consumption trends for our emerging as-a-service offering. With these factors in mind, for the second quarter of fiscal 2024, we expect total revenue in the range of $41.2 million to $41.8 million or a year-over-year growth of 4% at the midpoint. We anticipate ARR in the range of $176 million to $179 million, which represents 22% growth year-over-year at the midpoint. We expect a non-GAAP operating loss in the range of negative $10.9 million to negative $10.1 million. For the full year of fiscal 2024, we are raising our ARR outlook while maintaining our revenue guidance and decreasing our operating loss. We expect total revenue in the range of $171.7 million to $174.7 million or a year-over-year growth of 12% at the midpoint. As a reminder, we’ve historically seen variability with respect to the implementation timing of certain enterprise deals which impacts our revenue visibility along with new or migrated Capella customers. We therefore continue to view ARR as a better indicator than revenue of the strength of our business. We expect ARR in the range of $191.5 million to $195.5 million or 18% growth at the midpoint. And finally, we expect a non-GAAP operating loss in the range of negative $43 million to negative $39 million. With that, Matt and I are happy to take your questions. Operator? Q&A Session Follow Couchbase Inc. Follow Couchbase Inc. 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 be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from Sanjit Singh with Morgan Stanley. Please proceed with your question. Sanjit Singh: Thank you for taking the questions. And congrats on a nice start to the year net new ARR growth. I wanted to start my first question with guidance and just sort of look at that 22% ARR growth that you did this quarter. I think on a net ARR basis was even a little bit better than that. If I look at sort of the back half of the year in terms of what’s implies, it implies I think flattish or actually down year-over-year net new ARR growth? And so just in terms of the expectations coming into this year than what you saw in Q1, just wanted to get a sense of — are you seeing the year sort of come in as you expect it or it mean the underlying assumptions are largely holding or did you see incremental deterioration versus what you’ve guided to approximately 90 days ago? Matt Cain: Hey. Sanjit. This is Matt. I’ll provide some opening commentary and then hand it over to Greg. Look, as we stepped into the year, I think we were particularly careful on articulating our perspective of things that we can control versus things that we can’t. And as we mentioned in the remarks that played out largely as we expected in Q1. We continue to be excited about the progress we’re making operationally everything from Capella to go to market. At the same time, we’re cognizant of the fact that the macroeconomic situation persists and we want to be responsible with that as we think about the rest of the year. So I would say as — at a very high level, things are progressing as we anticipated and Q1 was a nice start to enable us to have the year that we know is possible. There are some specifics around the number which Greg can give some perspective on. Greg Henry: Yes, Sanjit, thanks. Look, again, we feel very good about Q1 and the overall look. We have relatively good visibility, particularly into Q2 some deals obviously have closed now and we see the renewals expansion. Some of the consumption trending for Q2. The pipeline remains healthy. And so for the full-year, we’re pleased that we raised the guidance by the beat in Q1 and we see that — we still want to maintain an elevated level of conservatism. And as we’ve always stated, we established guidance to at a minimum deliver that if not try to overachieve as we go through the year. So that’s how we sort of maintain the posture. But as Matt said, we’re pleased and we think things are off to good start. Sanjit Singh: That’s helpful color. And then the LinkedIn comment was certainly a nice feather in the cap type win, any sort of context you could give us where they Couchbase, sort of, customary for before they start to replace their — that core application that was driving all those users. What sort of the evolution to get them to where they are today? Matt Cain: Yes, Sanjit, that was an existing customer who has been enjoying the value proposition of Couchbase for multiple applications aligned with their next-generation application modernization strategy. And then further leaning into the capabilities that are offered with the managed service totally aligned with the value proposition that we’ve been articulating. And as you can imagine, we’re having conversations with most if not all of our existing customers on the eventuality of taking advantage for Capella for their entire estate or a subset of it. Sanjit Singh: Very exciting. Thanks, Matt. I appreciate the color. Operator: Thank you. And our next question is from Rob Oliver with Baird. Please proceed with your question. Rob Oliver: Great. Hey, thanks, guys. Good afternoon. Matt, I had one for you. And then Greg, I had a follow-up for you as well. So, Matt, first off, the — I wanted to dive a little bit deeper into that oil and gas when that you guys had, which was a Capella conversion obviously an industry that you guys have done really well in and just wondering what some of the template — what some of the decision points were for that customer along the way. And if you can help us understand like what got them over the hump on the move to Capella. And if this sort of lighthouse went on Capella that could become a template for others within that industry. And then I had a quick follow-up. Matt Cain: Sure. So look, this has been a customer for us for some time. And one of the capabilities that they’ve been taking advantage of is our mobile capability, in addition to our core enterprise feature set. We’ve continued to grow the account over several years and have been having discussions with them about moving into Capella. I think ultimately, Rob, it became the compelling event for them where they were able to not only offload the database management and save money but also optimize internal resources. And there is almost an insatiable demand in our enterprise customers to modernize and build new applications but they often run into challenges and having the people and resources to do that. Capella helps with that very thing. This is a blueprint that we’re using with many other customers and we’re very carefully engaging with them on the right time for them to move again either their entire state or others. But look, the fact that we’ve architected the solution to be the full power of Couchbase with the additional value proposition of better TCO, better internal productivity as you can imagine that value proposition is resonating quite a bit with current environment and the foreseeable future with the application dynamics that I mentioned. Rob Oliver: Great. That’s helpful. Thank you very much. And then Greg, just one for you, just contemplating the full year guide. You called out some of that I think it was kind of low to mid-range customer churn that happened through the quarter. Just thinking about the full-year guide, can you just help us get comfortable with how that might progress throughout the year? Are we through most of that, as you guys kind of scrubbed that portion of the customer base, what — how did you — where did you land in the end? Thank you. Greg Henry: Yes. Hey, Rob. Appreciate the question. Yes, I think that’s the case. I think we see the churn on the customers is anomalous this quarter. Like I said, like we said in the prepared remarks, the gross acquisitions were consistent with historical Q1. The losses we had were driven by a handful of smaller challenge customers and several of them are going out of business. We had no competitive losses. And the other thing I would say about the logos is the average loss logo was the second lowest we’ve seen in the last three years. So while you see the count, a lot of times that we share with you the dollar is also matter and we actually had a reasonable dollar of new logo. So in terms of how it’s going to play out for the year, it’s going to — it’s not going to materially impact the year per se, and it’s already contemplated in the guide. So I think we’re comfortable where that landed. Rob Oliver: Okay. Super helpful color. Thanks, guys. Appreciate it. Greg Henry: Thank you. Operator: Thank you. And our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question. Unidentified Analyst: Hi. This is [Anita] (ph) for Matt Hedberg. Thanks for taking my question here. It’s good to see the improved leverage in the model. Can you remind us how you’re thinking about the path to breakeven profitability and what are the drivers to get there? Matt Cain: Yeah, Thanks for the question. Yeah, again we’re pleased that we were able to continue to demonstrate leverage in the model and inefficiencies. And as we stated before, it’s our other discussions that we are committed to continuing to do that. We haven’t given a long-term range outlook in terms of cash breakeven or profitability. And when we do our Investor Day, we plan on doing that but we certainly are committed to continuing to do that. And hopefully, we saw that we delivered a beat in the quarter. The flow-through of one of the $1.5 million for the full year, but we also in that $1 million flow-through. We also took another $1 million of FX headwind against expenses as well. So we’re feeling operationally pretty good about the leverage and efficiency that will continue to gain and we’re just going to keep marching towards profitability here. Unidentified Analyst: Got it. And then one more from me. Now that Capella is available across all three hyperscalers, can you talk more about the traction you’re seeing there? And is there a way to quantify the new business you’re seeing coming from the three marketplaces? What is the more traditional go-to-market channel? Thanks. Matt Cain: As it pertains to the hyperscalers, a big part of our value proposition is allowing our customers to run applications anywhere from cloud edge and that consists of their own datacenters, inclusive of instances where they have deployments in any one of the big hyperscalers. And oftentimes, our customers have a multi-cloud approach where they’re not totally dependent on a single hyperscaler, but combine that with Couchbase with the ability to do hybrid deployments and run applications all the way out to the edge inclusive of mobile devices, which is a big part of our differentiator. So we were excited to round out the portfolio with the addition of Azure, which has been part of our plan roadmap. And then as we indicated with commentary specific to AWS, we’re now able to go after go-to-market partnerships and programs with the other providers, where we have solutions in market quite frankly to allow customers total freedom of choice and movement in between the cloud solution. So it’s a big part of our value proposition. We thought about the market that way for some time even before we had Capella end market. And so I think it’s an extension of how we think about supporting our customers and being the e-cloud database for modern applications. It’s hard breakdown on numbers, that’s not something we provide. Greg, I don’t know if you have any more. Greg Henry: Yes. I mean, as Matt stated, we were working with all the hyperscalers both on Capella and through their marketplaces. So we continue to see good traction all around but we haven’t given specifics on by vendor. Unidentified Analyst: Got it. Thank you. Greg Henry: Thank you. Operator: Thank you. And our next question is from Kash Rangan with Goldman Sachs. Please proceed with your question. Kash Rangan: Hello, thank you very much. Nice quarter. I just wanted to understand the consumption patterns you’re seeing with Capella. Not sure if we quantified how it is contributing to revenue budget. Since you’ve been added for a couple of years, you probably have enough cohort analysis to conclude some pattern. So curious how much more visibility you’re getting into the consumption model granted that consumption model itself relative to subscription. It’s not that visible. But as you study the cohorts, what are your conclusions? And one of the things that you’re doing from a contracting standpoint to ensure that you have some level of visibility as Capella contracts continue to ramp. Thank you so much. Matt Cain: Hey, Kash. Thanks for the question. Yeah, we are starting to get obviously some insights into the Capella consumption trends given that we’ve been at it for, like you said, a year and a half or so now. And look overall, we can see is once customers begin their journey on Capella, they tend to consume at a very healthy rate and a lot of them consume at a rate faster than they had originally anticipated. We’re seeing some of our customers that are having to buy at least once or sometimes multiple times before they get to their first anniversary from a consumption. And look, we have monitoring, obviously very closely of the consumption trends by customer. We can see it all real time, so we know whether customers are under consuming and we can go help them get up and running faster. We can see where they’re over-consuming. We can obviously spend time and make sure they’re over-consuming for the right reasons and they’re not going to get surprised. So we are seeing healthy trends there. And I think the theory is starting to play out although, we share the metric yet. But we do believe that net retention rate will probably be greater in our Capella customer cohorts than it is for the non-Capella customer cohorts. Kash Rangan: And that should also result in a structural lift of the growth rate that the company as Capella becomes a larger part of the business obviously. And if that’s the case, if you agree with that, how are you scaling your expenses alongside the increase in consumption so that you can still achieve the proper targets that you probably have somewhere in the not too long-term? Thank you so much. And that’s it from me. Matt Cain: Yes. Look, we’re — as we’ve talked about even starting late last year and through current, we are focused on profitability rule 40 efficiency. So we are absolutely monitoring the topline and the pace at which it’s growing and we’re moderating the expenses to go with it, so that we can continue to gain that leverage and efficiency as we go. So we will be monitoring it closely. Obviously, we’ve talked for a while now that we’ve really shifted all of our focus and resources really around Capella from a development perspective. So we are all in on Capella there and we’re going to try to continue to go as fast as we can. But again keeping in mind that we are focused on leverage and efficiency at the same time. Operator: Thank you. And our next question is from Raimo Lenschow with Barclays. Please proceed with your question. Raimo Lenschow: Thank you. Congrats from me as well. The quick question on Capella. Do you see any patterns in terms of use cases that are emerging in terms of some clients kind of particularly focusing on certain areas? And what do you see there in terms of like test development and test development on Capella versus kind of production workloads? And then I have a follow-up for Greg. Thank you. Matt Cain: Raimo, a dynamic that I would bring attention to is kind of two sides of the spectrum as we think about new Capella customers to Couchbase. And on the one end, you have new logos or customers that are brand new to Couchbase in general and are signing up with Capella as their entree to the way to get access to the database. On the other side, you have some of our largest customers that are evaluating the eventual migration of existing applications into the managed service. And I think the dynamics of how a customer adopts it varies pretty significantly from some of the smallest deals that we see a new logo acquisition we just want to get people started and enjoy the growth that we’re seeing in Capella. And on the other side, where people — our largest customers are going to be pretty specific and probably run it through more robust testing and proof of concept before they eventually move into Capella. And I would say, as we’re driving the transformation to cloud-first, that’s probably a more important dynamic than any specific vertical or use case. We’re quite frankly — we’re very fortunate that our platform services everything from financial services to NextGen Healthcare and gaming and everything in between. So I wouldn’t say that Capella consumption model is changing the quote unquote vertical dynamic more so the how our customers thinking about getting into the managed offering. And again, depending on which side of the spectrum, it can be a different on ramp and we’re setup operationally to support both. Raimo Lenschow: Makes sense. Thank you. And then Greg, one follow-up. After the New Year started, has there been any changes in terms of how are you selling in terms of incentive structure to get maybe more Capella in the big’s — like how do you handling that transition and does that create headwinds for you that we should be aware of? Thank you. Greg Henry: Yes. Hey, Raimo. Yes, I think if I was going to comment sort of at a high level in terms of like sales compensation this year, we clearly made more shift to focus on Capella, that’s what we’re trying to drive. So there is a more incentive on Capella this year than there even was last year. We’re still focused on obviously growing the business and new business. But clearly, Capella is the focus and where we’re looking for the sales team to be motivated to go sell. Raimo Lenschow: Okay. Perfect. Thank you. Greg Henry: Thank you. Operator: Thank you. And our next question is from Howard Ma with Guggenheim Securities. Please proceed with your question. Howard Ma: Thank you. And thanks for sharing the triple-digit Capella customer set. Can you reconcile that number with the limited number of net new customer adds? I think it implies that if you triple-digit — if you take 100 and imply that at least 15% of your existing server customers are now Capella customers. But can you comment on the pace of growth of these Capella customers since Capella has been available? And so I guess that’s one part that the pace of growth. And then looking ahead, should we expect a meaningful acceleration in net new Capella customers or will — for like foreseeable future for the next year or so, will most of that Capella contribution come from the existing customer base. Matt Cain: Yeah. Hey, Howard. Thanks for the question. Yes, so very pleased to reach that mark and you’re right if you take the least triple-digit you’d get 15% of our customer set. So we align there. And I would just say that, as a reminder, we can have customers that have both Capella and non-Capella. And in some cases — a lot of cases now, there is both. So we still see very healthy Capella customer acquisition. So we’re seeing that for sure. I think the other thing to consider is, when you see the Capella customer count grow, it can grow through migration of existing customers as well. It doesn’t have to all the new acquisitions. So again, healthy on the Capella side. In fact, look, for Capella migrations, we did 2 times the migrations in Q1 this year versus Q1 last year. So we feel good about migrating customers over and we also feel good about the pace of the add that we’re delivering as well. Greg Henry: Howard, if I could hop on. I think the net number in Q1 is a combination of Capella and enterprise and it was really sort of two different stories there. So we have very high expectations for Capella and that’s playing out largely as we expected. To be frank, this is an area of the business that we’ve been pretty transparent that we know we can do better and Capella will be the biggest driver of that. And so we continue to expect that as we move forward with the business. To your question on percentage of customers, if I go back to that dynamic of big existing customers that are migrating versus net new logos, I think we’re going to see a higher number of customers on the new logos faster as we get new logos that start with Capella. But the dollar contribution is going to be more correlated with the timing at which our large customers decide to move into Capella. What you can’t see reflected in the numbers or the conversations that we’re having with those large customers. And I believe that it is an eventuality. At the same time, we don’t want to try to push our customers before they are ready and they have resources lined up and determine that it’s the right compelling event for them. And so it’s really important for us as these customers are making two, three, five to 10-year decisions that we work alongside of them, particularly in current economic times and we’re more focused on the mid to long-term prospects of the business. Then artificially trying to get quickly over some threshold of percentage of economics. So I’d say those are dynamics that we’re very aware of and managing and we’ll share more of that as we go forward. Howard Ma: Okay. Great. Thanks for adding that color, Matt, to what Greg was explaining. And Greg, just a quick follow-up. To be clear on guidance, I think last quarter you said that you’re baking in a heightened level of conservatism into guidance relative to what you’re actually seeing. Can you just clarify if that’s still the case? Thank you. Greg Henry: Yes, Howard. It’s quite similar to be perfectly honest. Obviously, we’ve just got one quarter under our belt and we’ve seen the results from Q1. So I think in the prepared remarks, we say we’re continuing to have an elevated level of conservatism as we go through the year because we’re very cognizant of what’s happening out in the world today and we want to be in a position where, as I stated earlier, we can at a minimum meet the guidance if not beat it as we go forward. So I think things are continuing as we had stated a quarter ago. Operator: Thank you. And our next question is from Rudy Kessinger with [Technical Difficulty] Rudy Kessinger: Great. Thanks for taking my questions. Greg, I wanted to start with you and double-click on the customer churn commentary. I think you said it was — on a dollar basis, you said it was I think the second-lowest in the last few years. Could you just clarify what comments you had thrown in there? And then just any other further color you could share with these smaller enterprises where their mid-market customers, any verticals and specific any regional banks to call out that churn. I know you said some that went out of business. Just any more color you can give on the customer churn? Greg Henry: Yes. No problem, Rudy. So first of all, there were no regional banks part of this. And what I stated before was, if I looked at the average loss — dollar loss per customer, it was the second lowest we’ve seen in three years. So they were very small on the SMB side of things, customers. And as I said they were many that were quite honestly challenged with what’s going on in the macro today that either put them out of business or we’re on a path to go out of business. And so that was the churn piece, but the dollar component of it was relatively low, which is why I was referencing that while we share that count with you that doesn’t always tell you the whole picture and the dollar — the net dollar new logo for the quarter was actually pretty reasonable. But the count was impacted by those churns. Rudy Kessinger: Okay, that’s helpful. And then Matt, you mentioned I’d say in this call you’ve and then you’ve mentioned it in our past conversations potentially holding our Investor Day at some point in the future. Investors that I speak with are certainly looking for some kind of target date on operating breakeven or free cash flow breakeven that they can hang their hat on. And I certainly understand there might be some hesitancy to give some kind of intermediate long-term targets when you’re in an — operating in volatile macro as we are today. But just have you put any more thought to that? And when could we expect an Investor Day or getting some of those longer-term targets profitability? Greg Henry: Yes. Hey, Rudy. It’s Greg. I’ll take this one. Look, yes, we absolutely are still considering doing an Investor Day later this year. To your point on the macro, we want to really see where this is going to go but we fully intend when we do the Investor Day that we will lay out Capella metrics, a long-term model path to profitability. We obviously trying to share some of that as we go which is why we disclosed today about hitting the triple digits on the Capella customer account. And hopefully, we’re seeing that the path to profitability has begun in terms of our ability to start getting leverage in the model and generating some efficiency and letting that flow through to the bottom line. So all is good. And we, like I said, we still plan on doing an Investor Day. And as soon as we land on a date, we certainly will let you know. Operator: Thank you. And our next question is from Taz Koujalgi with Wedbush Securities. Please proceed with your question. Taz Koujalgi: Hey, guys. Thanks for taking my question. I have a question on the impact, when a customer moves from on-prem to Capella, you’ve mentioned that you’ve seen a lot of success from customers moving from on-prem to Capella. Can you I guess help us understand would the uptick in customer spend is, I’m assuming Capella is obviously the higher price point. But when a customer goes from an on-prem offering to Capella that’s a like-for-like capacity or like-for-like, I guess usage. What is the kind of uptake you see in customer spend? Greg Henry: Yes. Hey, Taz. It’s Greg. Appreciate the question. Yes, I think how we stated it before is — if a customer was spending a dollar on self-managed Couchbase enterprise and they move to Capella, they would go to like $1.50 to $2 depending on which flavor of Capella they chose. So that’s sort of the uplift and that’s assuming again like-for-like no additional volume or consumption just pure moving over. Taz Koujalgi: Got it. Very helpful. And just one follow-up. Your revenue — any comment on linearity for revenue, because your revenue looks like it was better than usual seasonality. Usually, I believe Q1 revenues are down versus Q4 this quarter we saw that improve. I think your Q1 revenues were better than your subscription revenues in Q1. This quarter were better than last quarter. Any comment on linearity? Was it a more front and lower quarter? How does the linearity play out versus other quarters? Greg Henry: Yes. Look, we would expect subscription revenue will continue to grow over time. I think there is obviously timing involved with that in particular around the non-Capella piece and the way the accounting is for when you start the subscription term with the accounting rules. So some of that can drive some of the timing difference. But nonetheless, we expect it to continue to grow. Again, we feel very good about the performance in Q1 and that we’re maintaining the guidance for the full-year. So I think it really has to do a lot of it with the timing of the start dates and that’s why we’ve talked about in the past about ARR being the measure we think is more important, because it can cut through some of that noise, but you will see some — again, some timing differences around revenue recognition based on how those rules work. Taz Koujalgi: Got it. Just one last one, if I may. Services revenue is a little bit lighter this quarter, I think, down year-over-year. What are we expecting for the rest of the year? Should that uptake or is there a reason why they were a little bit light to this quarter? Greg Henry: Yes, it’s a good question. We had tried to share with people that last year was an outperformance on service. We had a healthy backlog and a higher than normal customer demand to deliver services. So we had a outperformance last year and that this year would be a down year just, because we can’t — we’re not going to repeat that. And that the mix of services on our business was around 8% last year and we’d expect it to be even maybe potentially a little bit below normal, which is around 6%. So maybe 5% for the year is the way you should think about it, but you should still continue to expect to see that be a headwind for us the rest of the year. Taz Koujalgi: Got it. Thank you very much. Greg Henry: Thanks, Taz. Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to CEO and Chairman, Matt Cain for closing comments. Matt Cain: Thanks, operator. To recap, we had a strong quarter and start to the year. We remain excited about our opportunity with Capella, due to some very big trends in our favor like digital transformation, acceleration of the cloud, innovation at the edge and AI. We’re cognizant of the macro environment and are sharply focused on execution during times like this, while also building for what we believe will be a very exciting future. Thank you all for joining us and we look forward to speaking with you next quarter. Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Follow Couchbase Inc. Follow Couchbase Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

IDT Corporation (NYSE:IDT) Q3 2023 Earnings Call Transcript June 5, 2023 Operator: Good evening, and welcome to the IDT Corporation’s Third Quarter Fiscal Year 2023 Earnings Call. In today’s presentation, IDT’s management will discuss IDT’s financial and operational results for the 3-month period ended April 30, 2023. During remarks by IDT’s Chief Executive Officer, Shmuel […] IDT Corporation (NYSE:IDT) Q3 2023 Earnings Call Transcript June 5, 2023 Operator: Good evening, and welcome to the IDT Corporation’s Third Quarter Fiscal Year 2023 Earnings Call. In today’s presentation, IDT’s management will discuss IDT’s financial and operational results for the 3-month period ended April 30, 2023. During remarks by IDT’s Chief Executive Officer, Shmuel Jonas, all participants will be in a listen-only mode. [Operator Instructions]. After Mr. Jonas’ remarks, Marcelo Fischer, IDT’s Chief Financial Officer, will join Mr. Jonas for Q&A. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or in the Q&A session, IDT’s management may make reference to non-GAAP measures, including adjusted EBITDA, non-GAAP net income and non-GAAP earnings or loss per share. A schedule provided in the IDT earnings release reconciles adjusted EBITDA, non-GAAP net income and non-GAAP earnings or loss per share to the nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website. The earnings release has also been filed on the Form 8-K with the SEC. I will now turn the conference over to Mr. Jonas. Shmuel Jonas: Thank you very much, operator. Welcome to IDT’s earnings conference call. After my remarks, Marcelo Fischer, IDT’s Chief Financial Officer, will join me, and we’ll be available to answer questions. My brief remarks today focus on the third quarter of our fiscal year 2023, the 3 months ended April 30. For a more detailed discussion of our financial and operational results, please read our earnings release filed earlier today and our Form 10-Q that we expect to file with the Securities and Exchange Commission on Friday. For the third quarter of our 2023 fiscal year, IDT generated year-over-year increases in gross profit, adjusted EBITDA and EPS, highlighted by the continued expansion of our 3 high-growth, high-margin businesses and by the relatively resilient cash flow from our Traditional Communications segment even as revenue from this segment continued to decline. NRS added new POS terminals and payment processing accounts at a record pace this quarter and achieved solid year-over-year increases in all 3 of its recurring revenue verticals as well as in recurring revenue per terminal. Advertising revenue decreased sequentially due to seasonal reductions in demand and the advertising industry’s pullback, particularly in the digital out-of-home segment. Behind the scenes, we’re enhancing our advertising platform and diversifying our network partnerships to pursue new opportunities, both within and outside of the digital out-of-home market. This foundational work should pay off when advertising demand rebounds. Given our success in accelerating the pace of new payment processing account sign-ups, increasing merchant services ARPU and bringing new premium features to our platform, we expect that NRS will continue to perform extremely well. At net2phone, we increased subscription revenue by 20% year-over-year while approaching cash flow breakeven. In the coming weeks, we expect to launch exciting new offerings and features that will help to build our momentum, including net2phone AI, which includes powerful analytical tools powered by artificial intelligence technology. At BOSS Money remittance, volume increased by 38% year-over-year, driving a 29% revenue increase. I’m especially pleased by the robust growth of BOSS Money’s retail channel over the past few quarters. Throughout the rest of the BOSS ecosystem, the synergies between retail and direct-to-consumer drive better economics than we could achieve with a single approach. We believe that the same will be true for the money remitted. For that reason, we continue to focus on retail channel expansion as we invest to achieve scale and long-term profitability. With our diverse mix of businesses backed by a solid balance sheet and with no debt, IDT is positioned to continue delivering solid results across a wide variety of economic conditions, while returning value to our stockholders. Before we move on to the Q&A, I want to thank our employees for their great work and thank our stockholders for putting their faith and their capital with us. Now Marcelo and I will be happy to take your questions. Q&A Session Follow Idt Corp (NYSE:IDT) Follow Idt Corp (NYSE:IDT) 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 [Alex Rohrer] (ph). Unidentified Analyst: Can you hear me? Shmuel Jonas: Yes, we can. Unidentified Analyst: So just quickly this morning, the NRS Insights report showed 25,000 terminals currently, which implies a really strong month of May, so like 1,000 net adds at the month of May. Just wondering, was there anything particular occurring in the month of May that would have led to unusual strength? Marcelo Fischer: Alex, it’s Marcelo. So you’re right. You’re reading things carefully. It’s mostly because of rounding. May have been our best month ever for adding POSs into the network. But it’s mostly rounding. We added more like 630 new POSs on a net basis. And because of rounding, it makes it looks like it’s 1,000. But it was our largest increase ever at the moment. Unidentified Analyst: Understood. And just shifting gears to mobile top-up. Cuba, I think at this point, we’ve been dealing with this for a long time. But what’s driving the continued declines in the business? And is there some point at which you would expect the business to resume growing year-on-year? Shmuel Jonas: Yes. There’s a bunch of factors that have driven it. I mean one is we really focus on profitable growth, and we’re not just in it to have volume and some players that really come into the market and disrupt it, really not looking for profitability, maybe even they’re losing money. And we’ve decided to sort of take, I’ll call it, a wait-and-see approach and to see if they can afford to continue to subsidize the market. At the same time, our direct-to-consumer channel and our retail channel have been relatively stable. So it’s much more of a situation in the wholesale side of the business than it is in those two, but we have a bunch of new enhancements coming out both in retail and in direct-to-consumer that we expect to help increase growth as well as some new marketing campaigns. And our new Zendit platform, we hope, will help with the deterioration that we’ve seen in wholesale. Operator: The next question is from David Polansky. David Polansky: David Polansky from Immersion Investments. I want to start, big picture, talking about NRS and poking kind of around how big this thing can get. I mean we’ve been sitting on sort of a unit TAM figure for NRS at about 200,000 retail locations. And just looking at market share data for a lot of your states, so I think New York and California, I think you have roughly a 25% market share. And I think New Jersey, I mean, correct me if I’m wrong, but I think it’s somewhere in the 30% to 40% range. So is there a reason to think that we can’t get to like a 25% share figure nationwide, which would put you somewhere in sort of the 50,000 unit range? Shmuel Jonas: Well, I mean I’d say 2 things. Just from walking around, I don’t feel like we have 25% or 30% market share yet, but I hope to be there one day. That’s in the New York, New Jersey area where I walk around more frequently. But again, the 200,000 number is really a very hard number to put our finger on it. I mean, again, more and more, we sell into stores that I wouldn’t have thought would have been typical for NRS locations, whether or not it’s beauty or dollar stores or general services, so auto parts stores, et cetera. And so I think like the TAM is a little bit of a moving target. So I don’t know if that’s really our gating factors, what percentage of that number we’ll get. I think we have to continue to provide great service and great new products, and we’ll continue to grow and continue to expand our sales channels. And again, we are doing that aggressively. You can see a little bit of that in the SG&A. And we expect to see the number of units increasing quite substantially over the next couple of months and, hopefully, long past that. But I think you’ll start to see that May number ramp up. David Polansky: Great. You mentioned, I mean, you’re seeing increasing success in areas outside of your core C-store bodega channel. I mean how material is that at this point? Are you willing to discuss like is that like 10% of the 1,500 to 1,600 that you’re doing? I mean is it really material at this point? Shmuel Jonas: I don’t know the exact number. I would say that it’s greater than 10%, but I don’t know the exact. I didn’t come here prepared to know from the sales, which is more recently, how many of them are outside of our traditional stores. So I don’t want to give you an answer definitively. David Polansky: Okay. And then apologies for the mundane question, Marcelo or Shmuel, could you help us understand sort of the seasonality in the NRS business? Like, will Q3 EBITDA margin always be lower than Q2? Is Q4 going to be like Q1 and Q2? I mean can you just sort of, I guess, directionally help us out or do you think that this quarter was sort of an aberration in terms of the last couple of quarters? Shmuel Jonas: I mean I think two things happened. I mean one is we had a relatively weak advertising quarter. And advertising is our highest margin contributor at NRS, so that definitely hurt this quarter in particular. Yes, I do think that there is some seasonality to the numbers. It’s not dramatic, but there is some. And again, sometimes we sell more accounts then come online. So I think this particular quarter, we had a very strong quarter in terms of merchant processing sales, but a lot of that actual volume probably doesn’t come on until this quarter. So I think you’ll see a much better number next quarter. And again, our sales are increasing, so that will continue to be better and better. David Polansky: Great. And I have to ask on the capital markets side. It seems like things have calmed down a little bit, at least year-to-date. Is there anything we can be expecting in the near term on sort of net2phone or NRS monetization? Or is that sort of a wait and see? Shmuel Jonas: For the time being, it’s a wait and see. I mean, again, we’re continuing to make those businesses significantly more mature than they were, and hopefully, at the right time, great value will be achieved. Operator: The next question is from [Brian Warner] (ph). Unidentified Analyst: A private investor. Actually, David pretty much asked one of my questions, and that was really around the total available market. I’m wondering, just as an aside on that question, do you view the restaurant area as a potentially large area, and I’m wondering what progress and what you might call out as any areas that are particularly enticing in terms of what sort of the size of the market and where you think you can get good economics? And then just final question, NRS, you seem to be reporting monthly sales that are certainly low to mid-single digits better than the industry, which is recurring with a lot of frequency. I’m wondering what you think that is from and if that sort of become a selling point for you guys or if you think it’s more of an anomalous thing. Shmuel Jonas: I would say I think two or three things. I mean, first on the restaurant industry POS world, I’ll call it, I mean we do not have any intentions of trying to become a toast or something like it. Like, that is not our goal at NRS. We do have a goal of serving small restaurants that wouldn’t be maybe the best fit for a solution like toast as well as to serve convenient stores that sort of have restaurants in the back of their locations. Again, it’s not something you see if you’re in the New York, New Jersey area very often. But if you start getting, I’ll call it, Virginia and beyond, you’ll start to see a lot of stores that have a restaurant component to it. And we definitely do intend to continue to serve that market better and better. We’re in the process of making a small acquisition that hopefully will help us with that. As far as your question regarding sort of sales at our stores being better than in the market generally, listen, I don’t know enough about same-store sales everywhere else to know exactly how they compare, but it does seem to me like what you said is correct just based on what I hear on the radio. And what I would say is that, I mean, listen, I think our stores are very resilient. And some of that, as you know, from help they get from us. But other factors of it is the fact that like we’ve always felt that when people stop going to a grocery store and getting their orders delivered to their house, that’s the customer that, that grocery store really loses most of the time. Maybe they come in there, one out of every three times they would have gone. But they end up needing small stores like the ones that we serve even more often because now they’re depending on them for items that they didn’t beforehand. So I think that, that has something to do with it. Marcelo also has some thoughts on [Indiscernible] at NRS. Marcelo Fischer: Yes. I mean, obviously, we also look at the national data and compare them to NRS data. And we also kind of scratch our heads somehow a little bit. And I think we speculate that also our customers, they are going into this independent retail store to buy a lot more of what their needs are, okay, basic needs type of goods. And therefore, they’ll do the more recurring transactions part of the strategy. So maybe that’s also what’s triggering why the growth is a little higher. Operator: The next question is from Adam Wilk. Adam Wilk: This is Adam Wilk with Greystone Capital. Can you hear me? Shmuel Jonas: We can hear you well. Adam Wilk: I just had a few or maybe a couple of questions wrapped up into one for net2phone, really strong results there once again. And I’m just wondering, I know there was a good amount of focus on this at the annual meeting, and I’m sure not much has changed. But I just wanted to touch on maybe the sources of operating leverage that you’re seeing, if anything has changed year-to-date, I’ll say. And then maybe you can talk a little bit about Bridgepointe. Is there a channel partner, correct, and then maybe kind of what you’re seeing in line with additional opportunities there in terms of channel partners and maybe the ability to drive more margin or leverage moving forward? And then maybe one quick follow-up, but we can start with those. Shmuel Jonas: Okay. I mean I don’t think that much has changed since the annual meeting in terms of our focus that we described for net2phone then quite thoroughly. Again, I think that the team at net2phone has really executed very well, and they’ve really made the cash flow generation a very big part of what they focus on. At the same time, they’ve really taken the bull by the horn and focusing on areas that we see massive growth coming down the line, whether or not that’s AI that everyone is talking about or CCaaS products. Even CCaaS for small customers have those kinds of needs as well, and we have a product coming out specifically for them. We try to take some of the learnings that we’ve seen sort of also in other parts of the business. So NRS, like we’ve been very good at selling into stores with a very low price, easy offering to take it to the store and then upselling them into higher plans and other services and funding, et cetera, et cetera, that we provide. And we’re really trying to now do that same type of a sale at net2phone as well where we come in there, being a relatively low-cost provider for their UCaaS services but then adding on all of these much higher tier, I’ll call, products, again, whether or not it’s CCaaS or call intelligence or et cetera, et cetera. I would say the only thing that’s changed is maybe more of a focus on growing the base with more revenue rather than just growing the number of customers. Now in terms of answering your question about our channel partners, we are a channel-based business in net2phone as opposed to an NRS where we have really a very diverse strategy of direct channel as well as through IDT salespeople. And net2phone, with the exception of Canada, it’s really a channel of business. And that’s not changing. But when it comes to adding revenue on to the customers, some of that does become a direct sale from net2phone, depending on whether or not the channel partner feels, I’ll say, sufficiently trained in being able to sell it. So some of our newer products really require a different type of a sale than some of our channel partners traditionally have done. I mean UCaaS and CCaaS are not necessarily sold by the same people, if that would be a way to explain it easily. Marcelo Fischer: Yes. Adam, I think to the operational leverage, when we decided to postpone the net2phone about 1 year ago, and we mentioned at the time that the focus was going to be turnaround and demonstrate that net2phone can be a growing and profitable company. So this past year, there was tremendous focus by the net2phone team on making the yield efficiencies, on trying to show that we’re going to be able to get the company to be cash flow positive. And that we think we will start the new year being cash flow positive, even covering all the CapEx expenses that they incur. And now that we have achieved that or going to achieve that, the focus, as Shmuel mentioned, is going to be more growth towards bringing to market new products. CCaaS to play a bigger role as time goes by. It will help to guide ARPUs slightly higher. It’s kind of a bigger part of the mix. So I think that’s going to be the focus for this coming year, the things right now, working on the budget for this coming year. And I think that will continue to be now a growing company but also a cash flow generator in the next year. Adam Wilk: Okay. Yes, that’s really helpful. And I appreciate the comments on cash flow, which is interesting just given the growth runway on reinvestment potential, I think, that sits in front of you. One quick question, just from your combined answers, is the U.S. for you guys, who are kind of less on the enterprise side, is that more of a channel market for you? Or is that more direct as you kind of increase your efforts there? Marcelo Fischer: Yes. I mean the U.S. has been almost, until recently, a channel business. We have very little direct sales. Most recently, we started a new group to sell directly to larger enterprises. We just started about a few months ago. We’re probably going to be adding more resources into that group as we go into this coming year. And that group has already got in about 1 client with about 4,000 seats. So going forward, we’re going to have a direct group for trying to onboard larger enterprises. Adam Wilk: Okay. Great. And then just in terms of Mexico, this may be jumping the gun, but there’s a lot of talk about near-shoring opportunities or re-shoring opportunities. And I think there’s a lot of bullish commentary just regarding the growth of that country in general in terms of the economy. And I’m curious as that takes place, does that sort of increase the opportunity set for you guys there? Or has anything changed on that front for that specific geography? Is there anything to sort of share at this point? Shmuel Jonas: It’s interesting. I mean Marcelo is sort of smiling as you were asking that question because we were talking about it this morning. And again, I do think that that’s going to be a big area of growth. It has been already. But I think it will continue to be even bigger. The near shoring definitely helps net2phone, there’s no question about it, particularly when it’s done in Mexico. Although we are looking to extend other, I’ll call them, nearshore markets. Operator: We have a follow-up coming from . Unidentified Analyst: Just a quick question, you guys seem to have pulled the rabbit out of hat. So a lot of times with Traditional Communications and despite the obviously significant revenue headwinds, the EBITDA has held up remarkably well for what is generally viewed as a rapidly shrinking ice cube. And I’m just wondering if there’s any reason to think that you can continue to milk that business for quite a few years or if you think maybe, over the next couple of years, if there’s anything to sort of watch out for that could sort of be a clip in your cash flow there? And a follow-up question, if you want to be generous with a thought. I’m wondering where you think net2phone or, for that matter, a well-run UCaaS company at maturity, and you can define it or not, what sort of EBITDA margin do you think that business is? Is it 20%? Or is it something significantly different than that, in your mind? Just curious about the thought you might share. Shmuel Jonas: Again, we have a model on the net2phone business that showed something a little better than that over time. I mean we’re not getting there next year. That’s for sure. But again, it will be better than that. As far as our traditional business, listen, we have to continue to make painful cuts to sustain the cash flow from that business. And that’s never fun. And at the same time, we need to continue to develop features that keep our customers willing to pay for our services when, oftentimes, they can get it free somewhere else. And that’s a struggle that we deal with every day. You’ve seen the reality in the numbers. So we do our best to continue going as long as we can. . Marcelo Fischer: But we do expect as we look ahead for our long-distance voice revenues to continue to decline most likely at the current pace. We don’t see any turnaround in that trend. Actually, we’re trying as hard as we can to manage the cost structure, to try to alleviate the impact to the bottom line. But that becomes harder and harder as time goes by. So I do expect, right, that the gross profit, the EBITDA for long-distance voice to continue to decline at the same rate and maybe at an accelerated rate as time goes by. And we hope to be able to offset some of that decline with the stronger performance by IDT digital payments with our mobile top-up offerings and other digital offerings. Operator: [Operator Instructions]. As there are no more questions, this concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect. 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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......»»

JOANN Inc. (NASDAQ:JOAN) Q1 2024 Earnings Call Transcript June 5, 2023 JOANN Inc. misses on earnings expectations. Reported EPS is $-0.93 EPS, expectations were $-0.66. Operator: Good day, and welcome to the JOANN’s First Quarter Fiscal 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will […] JOANN Inc. (NASDAQ:JOAN) Q1 2024 Earnings Call Transcript June 5, 2023 JOANN Inc. misses on earnings expectations. Reported EPS is $-0.93 EPS, expectations were $-0.66. Operator: Good day, and welcome to the JOANN’s First Quarter Fiscal 2024 Earnings Conference Call. All participants will be in a 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 Jason Wood, Vice President Strategy and Corporate Responsibility. Please go ahead. Jason Wood: Thank you and good afternoon. I’d like to remind everyone that the comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company’s actual results to differ materially from management’s current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances. Please review the cautionary statements and risk factors contained in the company’s earnings press release and the recent filings with the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company’s earnings press release, which was filed today with the SEC and posted to our Investor Relations section JOANN’s website at investors.joann.com. On the call today from JOANN are the co-leaders of the Interim Office of the CEO, Chris DiTullio, Executive Vice President And Chief Customer Officer; and Scott Sekella, Executive Vice President and Chief Financial Officer. During the question-and-answer portion of the call, we will also be joined by Rob Will, Executive Vice President And Chief Merchant for JOANN. I will now turn the call over to Chris for his prepared comments. Chris DiTullio: Thank you, Jason. Good afternoon, and welcome to JOANN’s first quarter fiscal 2024 earnings call. I want to start today by acknowledging the recent retirement of Wade Miquelon as JOANN’s President and Chief Executive Officer. Wade spent seven years at JOANN serving as CFO before becoming President and Chief Executive Officer in 2019. During his time as CEO, Wade helped JOANN navigate periods of growth and challenge, including our initial public offering and our response to the COVID-19 pandemic. On behalf of JOANN, I would like to thank Wade for his leadership during this time here and wish him the best as he moves on to his next chapter. Our Board of Directors has commenced a search to find a permanent replacement and that effort is well underway. While that search is ongoing, Scott Sekella, our Chief Financial Officer and I have been appointed to lead the interim office of Chief Executive Officer. In our role leading this office, we remain focused on delivering value for our shareholders. To do this, our focus in fiscal year 2024 is to deliver significant cash flow improvement and strengthen our top line by emphasizing the fundamentals that have made JOANN the nation’s category leader in fabric and sewing and a strong competitor in the arts and crafts space. This approach represents a back to basics mindset in which we are strengthening our focus on winning in our core sewing and crafting categories [indiscernible] high-quality in-store and online experience with emphasis on driving operational excellence and efficiency. To support this approach, we are leaning in on delivering innovative assortments with a strategic mix of owned, national and partner brands. A significant piece of this strategy is a continued investment in our owned brands. By building our portfolio of owned brands, we can customize our product assortment using a customer first lens, improve margins through direct sourcing and value engineering, all while exercising greater control over product quality and supply chain efficiency. Our investment over the past few years in owned brands such as Place & Time, Big Twist, Top Notch and Pop! is already delivering value. Owned brand sales, which represent nearly half of our total outperformed the total company sales in the first quarter by nearly 500 basis points, with gross margin impact between 400 basis points to 600 basis points higher than the balance of our products. Owned brand penetration also increased 2% in the first quarter and we expect this trend to build in the back half of fiscal year 2024. As we move forward, we believe our continued investment in owned brands combined with strategic national brand partnerships will enhance our innovative assortment of products and strengthen our position in both our core selling and craft categories. As we look next at how we provide a differentiated in-store experience, we are focused on developing creative approaches to driving store productivity. This involves the holistic look at our stores to identify opportunities where a new or relocated location makes sense or where store refresh can help improve brand and customer experience, including better utilizing space for our core selling and craft categories. That said, we recognize that physical space is only one part of a great in-store experience. As a result, we continue to look for ways to make it easier for our team members to deliver great service and truly be friendly clever allies to everyone who shops in our stores. This includes looking at ways to optimize our store labor hours to the key selling periods, delivering training support and simplifying the execution of our visual merchandising tactics so that our team members are ready and available to engage with our customers and drive sales. Recognizing that the way people shop our assortments also continues to evolve, our broader strategic priorities in fiscal 2024 also include working to make the JOANN brand ubiquitous through seamless and engaging digital touch points and compelling omni-channel offerings. We are committed to reducing friction across all customer touch points which includes working to optimize customer fulfillment by leveraging our network of stores and distribution centers more efficiently to maximize our e-commerce fill rates and accelerate delivery time to customer. Additionally, our customer continues to love our buy online and pick up in store or curbside options as we enable the Shop Your Way service model. Our customer is responding and is evidenced by increasing engagement and shopping through our mobile app, which has over 15 million downloads and provides a fully omni-channel effectively. Underlying this strategic focus is our continued effort to operate as effetely and efficiently as possible. This starts with our focus, simplify and grow initiative. Launched in the back half of fiscal year 2023, this initiative is a critical tool as we look to reduce costs and drive cash flow improvements. When combined with other ongoing operational efficiency efforts, such as our continued emphasis on and utilization of a data driven decision making infrastructure, focused simplifying growth is an important driver of our ability to build for the future by reinvesting in our core strengths and growth strategies. Our focus, simplify and grow initiative targets, as a reminder, approximately $200 million of annualized cost savings in three general buckets, including approximately $100 million in supply chain costs, $60 million in our cost of goods sold and another $40 in SG&A costs. Initially, we had planned for the identification of these cost savings to be completed by early fiscal year 2025. While Scott will speak to the specifics in greater detail, we have begun capturing significant supply chain cost savings through decreased domestic and international freight and through our vendor negotiations have clawed back some inflationary increases in our cost of goods with more to come. Additionally, our investment in owned brands continues to help reduce product costs as well. Through this work and our ongoing efforts to reduce SG&A expenses, we now have full line of sight to the $200 million total and are leaving no stone unturned as we look for further cost reductions. As anticipated, these cost savings have supported significant improvement of $89 million in year-over-year free cash flow improvement in the first quarter of fiscal 2024 and will help move our adjusted EBITDA back towards historical levels in fiscal year 2025. We believe that by delivering on these foundational strategic priorities, creating a differentiated in-store experience making the JOANN brand ubiquitous across customer channels and continuing to drive operational efficiency and effeteness. JOANN will be well positioned to create value in the near term and reinvest in the things that will drive long term growth. Before getting into more detail about our first quarter performance, I do want to take a moment to recognize our team members. I could not be prouder the dedicated professionals who work across all aspects of our company. The team members in our stores, distribution centers, omni fulfillment center and across our corporate offices truly are our greatest asset. As we move forward through fiscal year 2024 implementing our strategic priorities will require our more than 20,000 team members to display a passion, commitment and flexibility they are known for as we work to inspire creativity in our customers and ourselves and help everyone find their happy place with JOANN. With this approach as a foundation, I will now provide some highlights from our first quarter fiscal year 2024 performance. For the first quarter, we delivered net sales of $478.1 million, decline of 4% compared to the same period last year. Gross margin on a GAAP basis was 52.1%, an increase of 380 basis points compared to the first quarter of fiscal 2023. Top line sales started strong in the quarter in February and early March. However, like many other retailers we saw a decrease as we moved into and through April. This deceleration coincided with the decline in consumer confidence driven by continuing inflationary pressures, rising interest rates and the accompanying concerns over potential recession. We will obviously continue to monitor consumer sentiment and the pressure it is putting on the discretionary portion of the economy and we will strategically adjust as necessary. That said, we remain optimistic. We will be able to deliver on our full year outlook, which Scott will walk through in a few minutes, due to healthy customer engagement in our core sewing and craft categories and our strategic focus on baseline cost reductions. Our merchandise category performance across the quarter was mixed. On the positive side, our core sewing and craft businesses performed well during the first quarter. We are seeing strength in our textiles related sewing and craft businesses, along with the supplies that support those activities. This is critically important as it illustrates the effectiveness of our strategic focus on winning in our core categories and demonstrates that our core customer is also reengaged in the space. It was also supported by the launch of DITTO in the first quarter. DITTO, to remind everyone, is our 50-50 joint venture with SINGER, Viking, PFAFF. This innovative product which brings the pattern business into the digital age is in its early stages of rollout at both JOANN and Singer, Viking gallery locations and is gaining attention with sewing enthusiasts across the country. On the merchandise headwind side, we do continue to see craft technology as our primary challenge to positive comparable sales. While our data indicates we’re outperforming the industry, sales pressure from craft technology was significant in the quarter, accounting for a decline in comparable sales of 150 basis points. We expect this headwind to continue as we move deeper into fiscal year 2024. Additionally, we have also made strategic pullbacks in higher risk seasonal categories and while currently a headwind to the top line is supporting higher overall gross margin and company profitability. We also continue to see strength in our e-commerce business. In terms of performance in the first quarter, our year-over-year change in e-commerce sales outpaced walk-in sales and the company overall, declining at a more moderate rate of 1% compared to last year. Overall, e-commerce sales accounted for 11.8% of revenue in the first quarter, a 30 basis point increase in the penetration rate over the same period last year. Much like the overall business, we saw positive sales growth in our core sewing and craft categories across the quarter, while craft technology, a business that is highly penetrated online was our primary headwind accounting for 390 basis point decline in comparable e-commerce sales. With all of this in mind, we recognize there is work to be done. While we can’t control macroeconomic uncertainty, we will remain focused on driving value for our shareholders. Through executing on the strategic priorities I’ve outlined today, including the execution of our focus, simplify and grow initiative, along with our first quarter performance gives us clear line of sight to not only delivering significant full year-over-year cash flow improvement, but also to hitting our fiscal year 2024 outlook. With the great capabilities, commitment and passion of our team members, I’m confident we can build on our first quarter results and position JOANN for long term success moving forward. With that, I will turn it over to our CFO, Scott Sekella to give a more detailed rundown of our first quarter financial results and a forward look at fiscal 2024 before we wrap up with answer your questions. Scott Sekella: Thank you, Chris. As Chris discussed in his remarks, our strategic priorities in fiscal year 2024 remains centered on winning in our core sewing and craft categories, providing a great customer experience in our stores and online and continuing to find new ways to operate as efficiently as possible. By emphasizing these fundamentals, which help make JOANN the nation’s category leader in sewing, we believe that over the course of fiscal 2024, we will be able to meaningfully improve cash flow, strengthen our top line, and begin expanding adjusted EBITDA towards more historical levels. With that in mind, today I’ll provide a deeper recap of our first quarter results and provide details about our full year outlook for fiscal 2024. In the first quarter, net sales totaled $478.1 million, a decline of 4% compared to last year with total comparable sales also decreasing by 4%. Through the quarter, sales were strong in February and March but decelerated in April. While this coincided with declining consumer confidence, we remain optimistic about our fiscal 2024 sales outlook due to healthy customer engagement in our core sewing and crafting businesses, our increased emphasis on our strategic priorities which Chris discussed and the ability to optimize our promotional cadence to meet customer demand in the face of an uncertain macroeconomic environment. On a GAAP basis, our gross profit in the first quarter was $249 million, an increase of 3.4% from the first quarter of last year. This year-over-year increase was driven largely by continuing improvement in import freight cost which had a 500 basis point positive impact on our gross margin. We recognized $3.9 million of excess import freight costs during the first quarter. This figure reflects a $25 million decrease to the same period last year as we continue to benefit from the improving conditions in the spot market. On a cash basis, in Q1 we realized $21.7 million of cash benefit from lower ocean freight rates. This was one of the drivers of our $89 million year-over-year free cash flow improvement in the quarter. On a year-over-year basis, for the full fiscal year 2024, we anticipate excess import freight costs, which are treated as an add back for non-GAAP measures to be approximately $90 million less than last year and fully cycle out by the end of the second quarter. Our gross margin on a GAAP basis was 52.1% in the first quarter, an increase of 380 basis points from the first quarter of last year. This continued the trend of sequential improvement in our year-over-year GAAP basis gross margin comparisons. As described a moment ago, we continue to benefit from cycling the extremely high ocean freight costs that we faced last year. The year-over-year 380 basis point improvement was driven by the 500 basis point increase from continuing improvement in ocean freight costs and a 40 basis point increase from improved clearance activity. These increases were partially offset by a 100 basis point decline in our merchandising margin, a 40 basis point decline due to the timing and cycling of capitalized domestic freight costs, partially offset by improved carrier rates and a 20 basis points of higher shrink, primarily in our stores, which has sequentially improved from the previous quarter. To provide additional color on our first quarter merchandising margin, the decline of 100 basis points compared to the same period last year can be attributed to the continued lapping of some of the inflationary cost increases we experienced during the prior year. Our average unit costs were up 5.1% compared to the prior year period. We do expect our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle these inflationary increases and begin to reap the benefits of the reduction and cost of goods sold negotiated with our vendors as part of the focus, simplify and grow initiative. Average unit retail increased 2.7% relative to the same period last year. Turning to expenses. Our first quarter fiscal 2024 SG&A expenses increased by 1.5% from the first quarter of last year. This increase was driven by incremental costs related to incentive and stock based compensation as well as inflationary pressures on labor, particularly at our store locations and other costs. With that being said, we were pleased with our ability to manage SG&A expenses despite these pressures through actions such as the strategic management of labor hours in our stores and our continued optimization of advertising spend as we shift to more digital channels as well as lower medical benefit costs. We continue to assess for opportunities to optimize our SG&A expenses as part of our focus, simplify and growth cost reduction initiative, and I will give more color on that shortly. Our net loss in the first quarter was $54.2 million compared to a net loss of $35.1 million in the same period last year. Adjusted EBITDA in the first quarter was $3.5 million compared to $18.6 million in the first quarter of last year. Moving on to our balance sheet. Our cash and cash equivalents were $19.7 million at the end of the first quarter. As of April 29, 2023, we had $61.3 million of availability on our revolving credit facility, which is tied to a lower borrowing base due to our inventory optimization efforts, including cycling higher excess import freight costs and our actions to strategically lower inventory receipts. Our face value of debt net of cash at the end of the fourth quarter was $1.033 billion. This reflects an increase of $109.4 million from the same period last year and a leverage ratio of 4.8 times as measured by net debt and finance lease obligations relative to credit facility adjusted EBITDA on a trailing 12 month basis. Our inventory at the end of the first quarter was down 13% compared to the same period last year. This decline was driven by a $32.3 million year-over-year reduction in capitalized excess import freight costs, as well as our plan to strategically lower inventory receipts. This approach allowed us to de risk in the right areas, primarily our seasonal categories so that we can lean in on receipts to support our emphasis on winning in our core sewing and crafting businesses. Fueled in part by the strategic inventory receipt reduction, we continue to maintain a low clearance inventory of less than 5% of total. Our inventory position remains clean leading us well positioned to capitalize in the evolving demand environment as we leverage test, read and react capabilities. In conjunction with all this work, we remain laser focused on meaningful cash improvement in fiscal year 2024. We have initiated multiple actions to support this focus and these efforts have supported a significant $89 million year-over-year improvement in our first quarter free cash flow. This includes our focus, simplify and growth cost reduction initiative, which, as Chris mentioned, targets $200 million of annual cost reductions in three broad categories across all areas of our business, including approximately $100 million of supply chain costs, approximately $60 million of product costs and another approximately $40 million of SG&A. Since launching this effort late in fiscal year 2023, we have worked diligently to identify cost reductions in all three buckets. We can safely say that we have identified the full targeted $200 million of annual cost reductions and we are now focusing on implementing and executing these initiatives. This implementation includes taking proactive steps to solidify and as possible, build on the significant positive impact of reduced ocean freight costs. We are finalizing new agreements with our ocean freight vendors that include favorable contract rate, putting us in a strong position to continue to benefit from these savings and potentially over deliver our $100 million supply chain cost target. Additionally, we continue to identify product cost savings. Many of our RFPs are still in process, but we are confident about our ability to claw the inflationary increases we saw last year. In terms of SG&A, we are identifying ways to more efficiently deploy our resources to support value creation and drive top line activity. This includes optimizing store labor through four wall work simplifications, optimizing our labor mix and reducing administrative hours. As well as driving greater efficiency in our information technology spend. As we take this approach, we are staying grounded in our strategic priority of delivering a differentiated in-store experience by looking at identifying efficiency gains that not only lower costs, but make it easier for our in-store team members to deliver the quality service our customers expect. While we have already identified the targeted $200 million of annual cost reductions and are now implementing these initiatives. As Chris said, we are leaving no stone unturned as we look for additional potential savings. With these identified cost reductions, a significant first quarter year-over-year improvement in free cash flow and the operational results we saw in the first quarter, we believe we have a clear line of sight to delivering on our full fiscal year 2024 outlook. In terms of our top line performance, we anticipate that net sales relative to fiscal year 2023 will be down between 1% and 4%. This range is inclusive of a 53rd fiscal week in fiscal year 2024, which is worth approximately 2%. We believe the healthy customer engagement we are seeing in our core sewing and craft categories will aid in providing a buffer to our top line in light of the challenging and uncertain macroeconomic environment our customers continue to face. As we previously mentioned, driving meaningful cash improvement is one of our key focuses for fiscal year 2024. In the first quarter, we delivered a significant year-over-year improvement in free cash flow, and we anticipate additional improvement as we move through the full fiscal year. We are projecting that over the full fiscal year 2024, we will see a year-over-year improvement in free cash flow between $150 million $170 million. The significant drivers of this forecasted improvement include the continued implementation of our focus, simplify and growth cost reduction initiative, as well as working capital and capital expenditure optimization actions. For fiscal year 2024 we are projecting capital expenditures net of landlord contributions between $40 million $45 million. While the cash benefit of focus, simplify and grow initiative will be felt heavily in fiscal year 2024, the mostly annualized P&L benefit will be realized until fiscal year 2025 due to the time it takes for inventory and related costs to cycle through our balance sheet. With that being said, we do anticipate adjusted EBITDA between $85 million $95 million. Note that, fiscal 2024 includes a headwind from reinstituting our incentive compensation program which is partially offset by the benefit of the 53rd fiscal week. In conclusion, we remain focused on delivering value for our shareholders. As we move through fiscal year 2024, we are focused on delivering significant cash flow improvements and strengthening our top line by emphasizing the fundamentals that have made JOANN the nation’s category leader in fabric and sewing with one of the largest assortments of arts and crafts products. While still facing an uncertain macroeconomic environment, we are executing on a series of strategic priorities that will help us deliver that value. Based on the factors we have discussed today, including the significant year-over-year improvement in our free cash flow, the continued implementation of our focus, simplify and grow cost reduction initiative and our operational performance in the first quarter, we believe we have a clear line of sight to delivering on our full fiscal year 2024 outlook. With that, we’d be happy to take your questions. Operator? Operator: Thank you. We will now begin the question-and- session. [Operator Instructions] [ Technical Difficulty] I believe David’s line is muted. I still can’t hear him. Can I move on to the next question. Q&A Session Follow Joann Inc. Follow Joann Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Chris DiTullio: Yes. Please. Operator: Our next question comes from [indiscernible] with Guggenheim. Please go ahead. Unidentified Participant: Good afternoon. This is [Ray Marin] (ph) on for Steve Forbes. I wanted to focus on the 2 million reactivated customers during 2022. Curious if you can discuss any incremental learnings from this cohort year-to-date? What strategies are in place to keep this consumer engaged for the remainder of the year? Chris DiTullio: Hi. This is Chris. I can take that answer. We’re seeing really good engagement across our known customer database, including those reactivated last year, but also those that have been year-over-year. That — our known customer database is the strongest portion of the response we’re seeing right now. Transactions, sales and customer counts are up across the board within our various known customer database segments. Unidentified Participant: Great. And for my follow-up, I wanted to touch on the DITTO launch. Can you provide some additional color on the feedback you are getting from your dealer network and customers? We understand this is early in the stages, but perhaps you can discuss how this initiative is performing versus internal expectations? Are new customers engaging with DITTO as much as your core customer? Any additional color would be helpful. Thank you. Robert Will: Hi. This is Rob. I want to be careful a little bit as this is a joint venture with Singer, but I’m happy to report that in the early days, we’ve now launched DITTO in just over 300 of our JOANN stores, including 180 Viking galleries that are lease owned within our stores by Singer. We have been very happy with the results so far on the customer engagement. We’re seeing really great results with downloads of individual patterns as well as the subscription service, and we’re averaging about 4.5 to 4.8 stars on our reviews of the DITTO across both sites. The dealer network is starting to pick up. We have about 100 dealers that have picked up DITTO as well. But again, that’s just launched in stores about 1.5 months ago. Unidentified Participant: Great. Thank you. Operator: Our next question comes from Peter Keith with Piper Sandler. Peter Keith: Hi. Thanks. Good afternoon everyone. I appreciate you guys putting out some context for guidance. So I was going to ask a question around that. I guess just thinking about the rest of the year, it looks like the sort of implied same-store sales is kind of [indiscernible] maybe a little bit worse than Q1. But at least in our model to get to the midpoint of the EBITDA guidance, you really need to start seeing that EBITDA margin run kind of even year-on-year or even up year-on-year. So I was hoping if you could just kind of shape that dynamic for us as the year progresses. And help us understand the key drivers of the improvement. I think it’s going to be freight in the merchandise margin, but I want to make sure we’re catching everything. Scott Sekella: Hi, Peter, it’s Scott. Yes, I think it’s coming from a number of places. One, a little bit on the top line is where we saw sequential improvement in Q1, and we’re confident that it’s going to continue there, potentially be a little bit better as we go forward. But on top of that, to your point, freight is going to continue to be a tailwind. I do think merchandising margin is going to get a little bit better as the year goes. But then the real big pieces that I’m excited about is on the SG&A side that as we touched on with the focus, simplify and grow initiative, that’s where in the back half, we’re really going to start to see some of the SG&A savings as we implement these ideas. And it’s also the biggest area in the last 90 days from when we talked to you before that we’ve gotten the most traction on some of those initiatives. So really excited with what that’s going to deliver to — deliver our full year adjusted EBITDA outlook. Peter Keith: Okay. Thank you. And then just looking at that dynamic of cost inflation versus I guess — I think you said a little over 2% in average unit retail, 2.7% to be specific. So your costs have been up about 5%, but you’ve only taken up the prices by about 2.7%. And I guess your point is, as the year progresses the cost will kind of smooth out and that will no longer be a headwind? Scott Sekella: Yes. So keep in mind, when the costs first started increasing with our vendor base, we took the price up. So you saw the average unit retail increase first last year. Now we’re cycling through those increases. We sell the product now, the higher cost that we started absorbing last year. But as the year goes, this is going to get sequentially better as we start lapping that. So our average unit cost increases will be a lot less in the back half than what we just saw in Q1. Peter Keith: Okay. Great. And then maybe just lastly on that. So at what point does your AUR, in effect, sort of smooth out from the inflationary pressures during the year? Scott Sekella: I think you’re going to continue to see it smooth out through the balance of the year. So there’s — there haven’t been really any new AUR sort of price increases. It’s a little bit of just mix movement. So you’ll start to see it smooth out for the balance of the year. Peter Keith: Okay. Very good. Thank you very much. Operator: Our next question comes from Laura Champine with Loop Capital. Please go ahead. Laura Champine: Thank for taking my question. If we look at the guide for comp to be down this year or sales to be down this year, are the factor is more macro? Is it category related? Is it competition? Like at this stage, kind of three years into the decline, so what’s driving that this year? Chris DiTullio: Hi, Laura, it’s Chris. We’re really seeing that the craft tech component of our business is the primary headwind right now. I think we talked about that in the last quarter as well. And so, that’s going to continue to be a headwind. It was 150 basis points in the first quarter. We believe it will be upwards of 100 basis points for the balance of the year. So that’s one factor. And then we are seeing great strength, improving strength in our core sewing and craft categories. So that’s really driving us to lean in there, which are the categories that we know the best and have the best history in. So that’s really what we’re seeing in the market competitively. Really pretty rational environment, I would say, but really driving to our core customer and our core sewing and craft businesses. Laura Champine: Got it. So to summarize, it doesn’t seem as if there’s a deterioration in the macro. And I think that’s — is that fair to say given the sequential improvement that you called out? Chris DiTullio: Yes, I would say that’s right. Laura Champine: Got it. Thank you. Operator: Our next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead. Cristina Fernandez: Hi. Good afternoon. So I wanted to follow up on Laura’s question. I mean, you mentioned that the core categories are strong, and it seems like they were positive and then the negative 150 basis points from consumer tech. So there’s still a gap. Is that just a seasonal being down? Or I guess what else are you seeing? Like what else is the bigger source of the headwind on the reported comp? Chris DiTullio: Yes. The seasonal business, we strategically pulled back our purchases there because that is inventory that has the most risk historically to margin and sell-through. So we did strategically pull back. That is a current headwind, but we believe it’s one that won’t be as significant later in this fiscal year. The good news is, with those receipt reductions that we’ve made in seasonal, we now have the ability to be — play more offense in terms of those core sewing and craft categories that are working well for us. Cristina Fernandez: That makes sense. And then a second question is on the — with the consumer seemingly being more value-oriented, how are you thinking about pricing for your goods? Do you feel competitive? And is there opportunity to lower prices as the year goes on? Robert Will: Sure. It’s Rob. I’ll take that one. So as we had mentioned, we’re continuing to see success across our owned or private brands. And that is part of the work that we’ve been doing on COGS with our focus, simplify and grow initiative as well. So we are seeing the cost of those products coming down, which will allow us to price some of that in as much of the assortment is focused on the good and better side of what we bring to market in those core categories. Chris DiTullio: The one other thing I would just add in is, bear in mind that our average unit retail is roughly $5 as well. So we really do believe that we provide a very competitive option in the retail environment for customers regardless of the income tier or where they stand within the economy. Scott Sekella: Cristina, it’s Scott. I would just add, we’ve set up some processes here internally to really be able to read and react how the consumer’s behaving and so that we can meet them where they’re looking for at the right price point. So we’re trying to stay very nimble in this environment to be able to read and react. Cristina Fernandez: Thanks. And then last question is, I appreciate the financial guidance for this year. Any comment on where you expect to end the year as far as your debt balance? And if the interest rate — or the interest expense assumption of $100 million that you gave on the last call, still a good number for this year? Scott Sekella: Yes. From an interest expense standpoint, that’s right around where we are. We kind of still think interest rates are going to tick up and that takes that into account and then maybe start to hopefully come back a little later in the year. In terms of net debt, not really giving any guidance, but I don’t really see a meaningful change this year as we work to really improve our year-over-year cash flow and then really start to get positive cash flow in the out years. Cristina Fernandez: Thanks again. Best of luck this quarter. Operator: This concludes our question-and- session, and the conference is also now concluded. Thank you for attending today’s presentation. You may all now disconnect. Follow Joann Inc. Follow Joann Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Vera Bradley, Inc. (NASDAQ:VRA) Q1 2024 Earnings Call Transcript June 7, 2023 Vera Bradley, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.2. Operator: Please standby. Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call for Fiscal 2024. At this time, all participants […] Vera Bradley, Inc. (NASDAQ:VRA) Q1 2024 Earnings Call Transcript June 7, 2023 Vera Bradley, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.2. Operator: Please standby. Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Vera Bradley First Quarter Conference Call for Fiscal 2024. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today’s conference call is being recorded. I would now like to turn the call over to Mark Dely, Vera Bradley’s Chief Administrative Officer. Please go ahead. Mark Dely: Good morning and welcome everyone. We’d like to thank you for joining us for today’s call. Some of the statements made during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today’s press release and the company’s most recent Form 10-K filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today’s call. I would now like to turn the call over to Vera Bradley’s CEO, Jackie Ardrey. Jackie? Jacqueline Ardrey: Thank you, Mark. Good morning and thank you for joining us on today’s call. Today, I’m joined by both John Enwright, our departing CFO and Michael Schwindle, our newly appointed CFO. Before we begin, I want to express my sincere thanks to John for his nine years of service to Vera Bradley and his many contributions to our company and we wish him all the best in the future. And we welcome Michael Schwindle to our team who joined the company on May 8th. He is a retail industry veteran with over 30 years of experience, including more than 15 years in CFO roles, delivering strong results through profit improvement and by providing innovative solutions. For the three years prior to joining our company, he served as CFO for accessory and jewelry retailer Claire’s. Previously he held CFO roles at specialty retailers Fleet Farm, Payless Shoe Source, Perry and David, and Musician’s Friend as well as other key financial roles at Home Depot and Limited Brands. You’ll hear from both John and Michael later in today’s call. Now let me turn to the quarter. We are very pleased that meaningful gross margin expansion and diligent expense control led to a significant year-over-year improvement in bottom line performance for the first quarter. On the revenue side, Vera Bradley factory stores experienced challenging traffic trends in March and April that led to weaker than expected performance for the quarter. This was partially offset however by several positive highlights in other areas of our business. First, we delivered our first positive quarterly revenue performance in five quarters at Pura Vida, primarily driven by non-comparable retail store sales. We also saw improved year-over-year sales trends in both our Pura Vida wholesale and ecommerce channels. Second, we delivered strong Vera Bradley ecommerce performance and solid Vera Bradley full line store revenues. Vera Bradley indirect revenues declined as expected due to a non-recurring key account order that took place in last year’s first quarter, but the underlying business remains healthy. We are building a collaborative team with the mindset of generating long-term revenue increases, expanding gross margin, and ensuring strong financial discipline and cost control, which we expect will drive long-term profitable growth. The team is working hard and taking strategic proactive steps to steadily grow Pura Vida’s revenues and to reverse the trends in Vera Bradley’s factory channel through the expansion of successfully tested targeted marketing programs designed to drive traffic and average order size. At Pura Vida, we have a solid organizational structure in place with newly promoted General Manager, Sujay Shah leading the team with heightened discipline and focus on day-to-day execution and driving business results. Sujay was Pura Vida’s former VP of Finance and is leading the team to return the ecommerce business to growth through utilization of the newly launched comprehensive customer data platform, diversification of the marketing program, improving site navigation, and focusing on customer retention. On the product front, our custom bracelet program and new friendship packs are a big focus and are working and we will continue to pursue high profile collaborations like Sanrio, Harper Charms and Crumbl Cookies that are always fan favorites. The hard work on project restoration began in the first quarter, which is focused on four key pillars of the business for each brand, consumer, brand, product, and channel to drive the long term profitable growth we expect. To support project restoration and lay the foundation for our success, we made additional corporate changes and announced incremental cost reductions including the elimination of approximately 25 corporate positions as part of an overall plan to further right size the expense structure of the company. Of course, Michael Schwindel’s track record of driving profitable growth along with his passion for retail and operational excellence will be instrumental as the company executes project restoration. We also made several organizational changes in the marketing, ecommerce, product design, and product development areas that flattened and streamlined the organizational structure to improve execution, make faster decisions, and provide support for the four pillars of project restoration. These most recent organizational changes and non-payroll expense reductions are expected to produce annualized savings of approximately $12 million on top of our fiscal 2023 cost reductions. Let me give you a bit more detail on project restorations four key pillars and some of the initiatives we currently have underway. At Vera Bradley for the consumer we will focus on restoring brand relevancy, targeting casual and feminine 35 to 54-year-old women who value both fashion and function. For the brand, we will strategically market our distinctive and unique position as a feminine fashionable brand that connects with consumers on a deep emotional level. For product, we will refocus on core categories and items we are best at by innovating and expanding within our core products like travel and back to campus. We will elevate our colorful feminine heritage, keeping it distinctive but more trend relevant through updated print and design. We will also innovate into strategic adjacent lifestyle item introductions that make sense for our customers. As part of this, travel and travel accessories perform strongly across all channels in the first quarter and the travel category will continue to be a key focus of our go forward assortment. Additionally, our performance fabrics are trending well across all channels with a core customer being younger with a higher household income, this remains a big opportunity for us. Patterns will always be our signature, but coordinating solids continue to be a key opportunity for us as well. We will expand our solid collection this fall, including our foray back into a small collection of leather goods. Finally, product collaborations are still an important part of our brand expression. Our Winnie the Pooh capsule was a huge success. Our first Hello Kitty collaboration was just launched this month and our NFL collection will be launched in August, just in time for football season. And then finally for channel, we will accelerate our digital first focus and online presence, build a balanced footprint that more clearly differentiates full line from factory stores, and target and or strengthen relationships with strategically aligned wholesale partners. As part of this, our recent site rebranding and navigation changes have been successful in reducing bounce rate and driving conversion and sales. So turning to Pura Vida, for the consumer we will sharpen our focus on the carefree 18 to 24 year old girl who both those younger and older aspire to be. For the brand, we will re-center our brand ethos on living life to the fullest with marketing authentically, sharing real moments, places and faces. Our Live Free campaign launched this month will accentuate travel, adventure, friendship, and freedom, and will create engagement and excitement in our customer base for the entire summer. For product, we will focus on delivering unique, fun, playful designs that are affordable and accessible with a dominant emphasis on bracelets and jewelry as well as other strategic adjacent categories. Some great examples of this are our new summer collection and our Harper Charms collection, which are both resonating with our customers. And then finally for channel, we will have a strong focus on restoring ecommerce growth, which I just talked about and growth of wholesale by pursuing larger, more strategic partnerships and expanding larger existing accounts and refining our existing store model. Now let me turn the call over to John to review the financial results. John. John Enwright: Thanks, Jackie and good morning. Let me go over a few highlights for the first quarter. The numbers I will discuss today are all non-GAAP and exclude the charges outlined in today’s release. For a complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP numbers, please reference today’s press release. Consolidated net revenues totaled 94.4 million compared to 98.5 million in the prior year first quarter. The consolidated net loss totaled 2.6 million or $0.09 per diluted share compared to 6 million or $0.18 per diluted share last year. Vera Bradley direct segment revenues totaled to 58.9 million, a 4.4% decrease from 61.6 million in the prior year. Comparable sales declined 3.3%, primarily due to weakness in the factory channel Jackie noted earlier. Vera Bradley indirect segment revenues totaled 15.4 million, a 9.4% decrease from 17 million last year. Prior year revenues reflected a large one-time key account order that was not repeated this year. Pura Vida segment revenues totaled 20.1 million, a 1.2% increase over 19.8 million in the prior year first quarter, primarily driven by non-comparable retail store sales. First quarter gross margin totaled 51.7 million or 54.8% of net revenues compared to 52.5 million or 53.3% of net revenues in the prior year. The current year gross margin rate was favorably impacted by lower year-over-year inbound and outbound freight expense, and the sell through of previously reserved inventory partially offset by an increase in promotional activity. SG&A expenses totaled 55.6 million or 58.9% of net revenues compared to 59.4 million or 60.3% of net revenues in the prior year. Current year expenses were lower than the prior year, primarily due to cost reduction initiatives and the reduction in variable related expenses related to lower sales volumes. The company’s first quarter consolidated offering loss totaled 3.5 million or 3.7% of net revenues compared to 6.7 million or 6.8% of net revenues in the prior year. Now let’s turn to the balance sheet. Quarter end cash and cash equivalents totaled 25.3 million compared to 46.6 million at fiscal year-end with no borrowings on our 75 million credit facility at quarter end. Total quarter end inventory was 142.7 million compared to 161.8 million at the end of the first quarter last year. During the quarter, we purchased 128,100 shares at an average price of $5.71 per share for an aggregate amount of approximately $732,000. $27 million remains under the $50 million repurchase authorization that expires in December 2024. Now let me turn the call over to Michael to talk about the company’s fiscal 2024 outlook. Michael Schwindle: Thanks, John and good morning everyone. Based on the first quarter performance, as both Jackie and John have discussed as well as our initiatives underway and the macro environment trends and expectations, we are revising our guidance for this fiscal year. As a result, all of our forward looking guidance or as a reminder, rather, all of our forward looking guidance is on a non-GAAP basis. Fiscal 2024 our updated guidance is as follows. We expect total revenues of $490 million to $510 million. As a reminder revenues totaled 500 million in fiscal 2023, and we expect both Vera Bradley and Pura Vida revenues to be approximately flat on a year-over-year basis. We also expect gross margin rates of between 52.8% and 53.8%, which compares to 51.4% for last year. Our fiscal 2024 gross margin rate is expected to be favorably impacted by lower year-over-year freight expenses, cost reduction initiatives, and the sell through of previously reserved inventory, which will be partially offset by an increase in promotional activity. Our SG&A expenses are expected to be between 237 million and 247 million compared to 245.3 million last year. The expected year-over-year decline in SG&A expense is being driven by company-wide cost reduction initiatives partially offset by restoring incentive compensation to more normalized levels and incremental marketing investment intended to accelerate customer file growth. This results in anticipated consolidated operating income of 24 million to 28 million compared to 12.3 million last year and diluted EPS of $0.57 to $0.67 based on diluted weighted average shares outstanding of 30.7 million and an effective tax rate of approximately 28%. Our diluted EPS totaled $0.24 last year. We also expect net capital spending of approximately $5 million compared to $8.2 million last year, which reflects investments associated with new Vera Bradley factory stores, as well as technology and logistics enhancements. And as a result our free cash flow is anticipated to be between $35 million and $40 million compared to a cash usage of 21.7 million in fiscal 2023. So with that operator, we’d like to open up the call to questions. Q&A Session Follow Vera Bradley Inc. (NASDAQ:VRA) Follow Vera Bradley Inc. (NASDAQ:VRA) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions]. And our first question today comes from Joe Gomes with Noble Capital. Joe Gomes: Good morning and thanks for taking my questions. Michael Schwindle: Hey Joe. Jacqueline Ardrey: Good morning Joe. John Enwright: Good morning. Joe Gomes: So I wanted to start off, you talked about some lower traffic levels at Vera Bradley, I think in March and April. Maybe you could give us a little more color or detail as to what was behind that? Jacqueline Ardrey: Sure, Joe. So, first I want to say that the traffic challenges were limited really to the factory channel and they were primarily in March. I think where we are seeing some other retailers report similar slowdowns and what we’ve done in the quarter is really look at some marketing programs to drive more traffic to those factory stores. And that’s part of the reinvestment that we’re going to make for the rest of the year as really we had some successful test results from some of those programs to help increase in targeted markets. And we’re going to continue to deploy those programs. So — but again, it was really just limited to the factory channel. Our, full line traffic was strong throughout the quarter. John Enwright: And Joe, all I would add on to that, and I think Jackie did a good job, is to say that to the point was March was really kind of the toughest month in the quarter and we saw it rebound a little. It’s still down in April, but we saw it rebound in April better than March, and then in May we’ve seen kind of that continued progression, so. Joe Gomes: Okay. And, I don’t know, maybe if you talked about this before or not, maybe you can give us a little bit size as to what that non-recurring account order last year was, just so we can kind of get a better idea of the year-over-year X that performance? John Enwright: Yeah, so indirect would’ve been down about 2%, excluding that one-time sale last year for the key account order. So it was a little bit over $1 million. Joe Gomes: Okay, great. And then one more if I may and I’ll pass it along, Michael, congrats on joining the team. You’ve been there now a little over a month, early days, kind of maybe give us your first impressions and what are you kind of laying out as what your initial short-term goals would be here? Thank you. Michael Schwindle: Oh hey, thank you, Joe. Appreciate the question. Hey, with my days and days of experience as Jackie and others have heard me say, so this is a tremendous brand. It’s got a great solid foundation here, great customer base, great brand recognition that gives a tremendous foundation from which to build upon. And so I — Jackie and I’ve talked a lot about that, I’m very excited about that. Obviously initially there’s a lot to learn here around all the different channels of the business as well as with the Pura Vida brand. And so, I’m a bit vertical on the learning curve as you might imagine, as I’m trying to digest and under understand all of that. In the meantime, I’ve already been engaged pretty deeply in a lot of the cost initiatives that Jackie referred to earlier, making sure that we’ve got good controls around that and making sure we have good visibility to delivering those initiatives as well as gathering additional understanding of the different areas of the business. I think one of the advantages I have been around lots of different retail organizations. I’ve had a lot of different operational experiences over my 35 years, and that makes it a little bit faster kind of running start for me to jump into different areas of operations and other things to kind of have a solid foundation at the onset and then look for the opportunities in the business. Joe Gomes: Great. Thanks for that. I look forward to working with you going into the future. Thanks for taking the questions again. Michael Schwindle: I do as well. Thank you. Jacqueline Ardrey: Thanks, Joe. John Enwright: Thanks Joe. Operator: [Operator Instructions]. And our next question will come from Eric Beder with SCC Research. Eric Beder: Good morning. Congratulations on the quarter. John Enwright: Thanks, Eric. Jacqueline Ardrey: Thanks Eric. Eric Beder: Okay. How should we be — I know that you have this new management team join, it’s a little bit tough in the near term to really change the product mix and flows. Obviously you’ve done a great job in controlling what you can control on the expense side. Now when should we be thinking that we’ll see like what you Jackie or team envision the stores to fully be, is that back half of this year or is that really into next year? Jacqueline Ardrey: Yeah, that’s a great question, Eric and as you said, it’s tough to change a product trajectory quickly. But I think the team has done a great job of really getting in and dissecting what’s working and what’s not working, especially as it relates to our future customer target. So we have — one of the things we learned that I talked about today is just the balance of solids and prints in our assortment and looking at the fabrics that we currently offer, who they attract in terms of a customer level and a price point level. So you’ll definitely see some product mix changes at the back half of the year and then it will steadily increase as we get closer to the middle of next year. Eric Beder: Okay, that makes sense. How should we be thinking about stores, I mean, obviously the Pura Vida store openings that happened last year helped, historically been closing full price stores, opening outlets, what should we be thinking about this year and I guess longer term? Jacqueline Ardrey: Yeah, it’s another great question, Eric, and I have to say that we are deep in that work that’s part of the channel pillar of our project restoration for both brands. Our Pura Vida stores are working pretty well so it — but it is really about right now pausing to be sure that we can deliver the right strategic plan for the business. So that’s the only reason that we haven’t continued opening Pura Vida stores. But I think you’ll hear more from us by the end of the year about our plans for stores. But, it’s just really important that, again, right now we’re focusing on the health of the overall portfolio and making sure that we’re making the right strategic decisions for store openings for both brands. Eric Beder: Sure. And last question for you, what should we be thinking about and how, in terms of inventory flows obviously Q1, you brought the inventories down significantly, is there opportunities to continue that throughout the rest of the year? Thank you. Michael Schwindle: Hey, Eric this is Michael, I’ll jump in on that and Jackie can add some more color. As you noted, we have seen some pretty good reductions on a year-over-year basis. It’s roughly flat with the end of the year. We do expect to continue to see a downward trajectory in our overall inventory through the end of the year or something in the probably down 10 ish, maybe a little bit more than 10 ish percent by the time we get to the end of the year. Jacqueline Ardrey: And just a little color on that, we’ve been — the company has been engaged in an exercise around SKU reduction. It’s called the SOAR project and that has really contributed to kind of cutting off the tail of some of our unproductive inventory. And that’s really contributing to some of the declines that you’ve seen. We’re continuing that work and really I think you’ll see the continued evidence as Michael mentioned within the rest of the year of those reductions. Eric Beder: Great. Good luck for the rest of the year. Thank you. John Enwright: Thanks, Eric. Michael Schwindle: Thank you Eric. Operator: Thank you. That does conclude the question-and-answer session and I’ll turn the conference back over to Jackie Ardrey for closing remarks. Jacqueline Ardrey: Thank you. In closing, we’re committed to returning both of our brands to healthy top and bottom line growth and generating strong cash flow through project restoration, which I believe will deliver value to our shareholders over the long-term. This year by focusing on stabilizing sales, expanding gross margin, and controlling expenses, we believe we can at a minimum nearly double year-over-year operating income and more than double EPS. We have an exciting future ahead. Thank you for joining us today and we look forward to sharing our progress with you on our second quarter call on August 30th. Operator: Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day. Follow Vera Bradley Inc. (NASDAQ:VRA) Follow Vera Bradley Inc. (NASDAQ:VRA) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»