Amplitude, Inc.

Amplitude's third quarter 2023 earnings conference call. I'm Yao-Sian Chiu, Vice President of Investor Relations. Joining me are Spencer Skates, CEO and co-founder of Amplitude, and Chris Harms, the company's Chief Financial Officer. During today's call, management will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full year 2023, the expected performance of our products, our expected quarterly and long-term growth, investments, and our overall future prospects. These forward-looking statements are based on current information, assumptions, and expectations and are subject to risks and uncertainties, some of which are beyond our control and could cause actual results to differ materially from those described in these statements. Further information on the risks that could cause actual results to differ is included in our filings with the Securities and Exchange Commission. Your caution not to place undue reliance on these forward-looking statements, and we assume no obligation to update these after today's call, except as required by law. Certain financial measures used in today's call are expressed on a non-GAAP basis. We use these non-GAAP financial measures internally to facilitate analysis of our financial business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be used in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website With that, I'll hand the call over to Spencer.

Thanks, Yao, and good afternoon, everyone. Welcome to our third quarter earnings call, and thank you for taking the time to join us. For today's Q3 2023 call, I'm going to cover three main topics. First, our Q3 financial results alongside a macro and execution update. Second, observations on our evolving market opportunity and category. And third, an update on platform developments and some customer stories. Let's start with a summary of the third quarter. We closed the third quarter with $70.6 million in revenue, up 15% year over year. Annual recurring revenue was $273 million, up $5 million from the end of the second quarter. We were profitable on a non-GAAP basis and generated another 7.5 million of positive free cashflow this quarter. We now have almost 2,500 customers. To put these numbers in context, I'll provide an update on how we're executing on the state of the macro and on how we see our category evolving. On execution, our new ARR was more broad-based this quarter. We welcomed a number of organizations of all sizes to Amplitude, compared to Q2, which was marked by a couple large expansion deals. Total churn, while still high, was lower than the previous quarter. We also drove an incredible company-wide effort to launch our Plus plan. I'll talk more about it shortly, but the Plus plan gives a self-service options for startups, small businesses, and first-time enterprise prospects. Given it's a product-led growth motion, it also allows us to incrementally redirect our sales efforts towards larger enterprise prospects and customers. The new leaders we brought into the company continue to raise the bar across the board, from discipline and rigorous inspection to elevating customer relationships. We are also beginning to think bigger. We've been able to grow deal scope and deal sizes significantly with some customers this quarter as we start to sell more strategically across different buyers. The macro environment remains challenging on a number of fronts. Our customers continue to recalibrate their own growth expectations under new demand and interest rate environments. We continue to battle the same ongoing themes of optimization and macro-driven churn as customer budget pressures remain stubbornly persistent. This will take time to work through. On the digital analytics category, it remains in its early days and we continue to see evidence that our approach is the right one. Adobe, Google, and many others have built great businesses on the back of a web traffic and marketing-centric view of the world. Billions of dollars are currently being spent by companies on legacy software, data scientists, and complex implementations to try to understand the digital customer experience. This approach breaks down for today's realities. Customer data is now more fragmented than ever across multiple data sources and touchpoints. Growing global regulation and an increased focus on privacy means a heightened importance on first-party data. Legacy approaches and point solutions only provide a snapshot when it comes to trying to understand your customer. Amplitude tells you what your customers do and how they behave across the entire customer journey. Market awareness continues to grow alongside increasing customer sophistication. Our platform for breadth resonates with users across multiple departments, product, data, engineering, marketing, and more. As customers understand the criticality of product data, we also see increasing signs of previously siloed pools of spend coming together across marketing, product, and data budgets. We see increasing opportunities for us to grow wallet share and expand our addressable markets. One notable sports gaming customer expansion from the quarter really brings these dynamics to life. Amplitude had been the solution of choice for their leading digital products since 2016. Product teams were historically given their own choice of toolkits. That agility came with the trade-offs of sprawling costs and unsuccessful implementation. Recognizing the need for a more complete view of the customer journey, their VP of marketing and MarTech recently took over additional responsibilities for product analytics. Over the course of our relationship, we've worked with them to execute on their vision for one provider across their entire digital product portfolio. This quarter, they went wall to wall with Amplitude. Amplitude Analytics, CDP, and Experiment are displacing several fragmented marketing and point solutions across their products. We're helping them personalize customer experiences, embrace rapid testing, and drive insights to action with one singular platform. We think we can help many more of our customers execute on that vision. With that backdrop, let's recap product development. It was an excellent quarter for innovation. We are growing our platform. I'm very excited to announce that session replay is coming to Amplitude early next year. Session replay is a great entry point for companies who are earlier on their analytics journey. It provides video-like replays that give a more accurate picture of how digital products are being used through actions like clicks, cursor movements, and scrolling. When combined with analytics, teams can quickly identify the issues users are having, understand why they're having them, and recommend improvements. With a visual comparison of the before and after, teams will be able to see if a problem like low engagement is resulting from user, design, or performance issues and how widespread specific issues are. Session replay removes the guesswork behind behavior and improves the user experience across the board. As I mentioned earlier, we launched our PLUS plan in mid-October. PLUS solves an issue we've been hearing for years, namely that pricing for analytics is challenging. It can be expensive to go from free to paid plans. And if those plans are priced by events, smaller companies either overpay or ration what they track, which undermines the whole purpose of analytics. That is where Plus comes in. The plan offers the best of amplitude analytics, CDP, and experiment starting at just $49 per month. And it's the first digital analytics platform to be launched in a self-service package. With this launch, we are growing distribution and can now serve the low end of the market more efficiently. Early traction is encouraging with multiple five-figure signups in the first few weeks since launch. As it relates to AI, I'll provide a brief update on our recent launch and what we're seeing in the market. Data governance is like physical health. Companies should be proactive about data and cleanup and taxonomy. And we should exercise and eat vegetables every day as well, but few people end up doing it in practice. That is where Amplitude can help. Amplitude's AI data assistant is a friendly, individualized, personal trainer for anyone who wants to get their product data in better shape. In less than three months since launch, our AI data assistant has been a huge hit with hundreds of our customers already using it to improve their governance practices. What would normally take weeks and months of effort is being broken down into bite-sized chunks that can be tackled in minutes and hours. Organizations that use data assistance see a big uptick in data governance scores and more than a 30% average lift engagement. Cleaner data leads to more impactful insights, happier users, and better business outcomes. On to customers. We want to stand out customers in the generative AI space. Amplitude is the platform of choice for some of the biggest, brightest, and best names in generative AI, helping them guide their businesses in ways that our competitors cannot match. Midjourney is a pioneer in AI image generation, revolutionizing art and imagination in the same way ChatGPT has transformed the written word. They developed and productized text-to-image generation and are the AI success story in image generation. They are evolving rapidly with their product surface area growing from web to mobile to multi-surface. With a small but incredibly sophisticated technical team, Amplitude was the right solution to give them leverage on time, resources, and effort. They're engaged with our entire platform from day one across analytics, experiment, and CDP. Amplitude will enable Midjourney to understand free-to-paid conversions, correlate demographics to user patterns, and A-B test changes on their users' experiences. Another win I'm really excited about is Character AI, a neural language model chatbot service. Character AI empowers users to easily create and interact with a variety of characters that feel alive with contextual conversations and human-like responses. They're one of the fastest growing AI companies. They've adopted Amplitude for both analytics and experiment and viewed Amplitude as the best long-term partner given their needs to rapidly scale their product. This is just the start. Amplitude has always been able to capitalize on waves of technological innovation. We remained well positioned to benefit from the ongoing swell of AI product and company formation. With a proliferation of digital products and experiences, the need for Amplitude only grows. We had some other incredible wins this quarter. We welcome Playrix and Q3. As one of the top three mobile gaming companies in the world, their games are played by 120 million people every month. Previously, they relied on a smaller mobile analytics vendor, which was too outdated for the current needs and couldn't provide them with the right level of flexibility. Playrix is moving to a multi-product strategy. Multiple teams, including product and marketing, needed to simplify the usage of their internal platform to shorten time to insights. Through a highly competitive process, Amplitude stood out as a winner based on both our ease of use and on our unmatched ability to deliver a unified view of their users across different games. We also won another large global sports organization this quarter. Over time, the organization had lost trust in the data provided by their large legacy MarTech provider. Users across data, analytics, marketing, and advertising desperately needed stronger support and more open integrations. With a seamless combination of Amplitude's analytics and CDP, this customer will be able to recommend the best video and articles to their user base and drive engagement. With a blueprint of their user behavior, they can improve their mobile app experience to maximize sponsor revenues and retention. Through this period of change, we are delivering on profitable growth while balancing thoughtful investment. We are growing alongside our customers and extending our platform. I'm confident the challenges we are enduring in the short term will set us up to be a stronger company in the longer term. With that, thank you for your interest in Amplitude. I'd now like to turn it over to Chris to walk through the financial results.

Thanks, Spencer. And thanks to everyone joining us today. I'm proud of our recent performance. We beat the midpoint of all guided metrics, as well as achieved our commitment of being free cash flow positive for two consecutive quarters. Inclusive, we beat the top end of the range of the revenue guide, and we are raising our Q4 revenue guidance from what was implied in our August guidance. I'm energized by what lies ahead of us. We are well positioned for an increasing portion of customer wallet share. This will become increasingly evident as the role of product increases in importance across different buyers, as legacy approaches break down, and as siloed pools of spend continue to come together. Our operational execution is improving. Our medium-term visibility has improved from earlier in the year as it relates to both new ARR forecast predictability and ARR churn risk. We're improving capital allocation. Our PLUS plan will better serve the lower end of the market, while our people-led sales efforts will increasingly focus on accounts with higher potential of long-term value. Now, on to our third quarter results. As a reminder, all financial results that I will be discussing, with the exception of revenue and balance sheet figures, are non-GAAP. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found in our earnings press release and supplemental financials on our IR website. Third quarter revenue was $70.6 million, a 15% year-over-year. Total ARR Exiting Q3 increased to $273 million, an increase of 12% year-over-year and $5 million sequentially. Here's more detail on key elements of ARR. We again saw sequential growth in customer count and ARR across both our million-dollar-plus and our $100,000-plus ARR base. New ARR was fairly evenly split between land and expand. In direct contrast to the large expansion-driven performance in the prior quarter, this was more broad-based. Churn remains elevated and slightly lower in absolute dollar terms than Q2 and in line with our expectations. Themes here have been consistent. First theme, as companies come up for renewals, they're often resetting and optimizing for new expected levels of growth. The substantive portion of these legacy multi-year contracts are expected to be reset by the end of Q2 2024. The second theme, cost pressures persist, particularly with smaller customers. Competitive losses remain rare as these smaller customers are choosing to not use a solution from any provider to preserve cash. End period NRR dropped to 99%. As stated, land and expand were fairly evenly splinted in Q3, meaning new ARR from expand was lower than the prior quarter. Churn, while down from the prior quarter, remained sizable. A combination of the two factors resulted in the end-period NRR dropping below 100%. NRR on a trailing 12-month basis declined sequentially to 105%. Gross dollar retention this quarter was in the mid-80s. As a reminder, amplitude includes both ARR reductions from fully churned and lost customers and ARR reductions from partially churned and retained customers in our GDR metric. Gross margin was 78.7% of 4 percentage points year over year, mainly reflecting the improvements made in our unit hosting costs, and the margin impact of restructuring our services team in the second quarter, both of which we have covered previously. Total operating expenses were $53 million, down sequentially and growing 4% year on year. Here, we remain measured around our pace of hiring following the restructuring completed in the second quarter. Operating profit was a positive $2.8 million, or 4% of revenue. a 12 percentage point improvement on a year-over-year basis. Net income per share was 5 cents, based on 128.1 million of fully diluted shares, compared to a loss of 3 cents with 112.0 million shares a year ago. Free cash flow was positive 7.5 million, or 11% of revenue. Free cash flow saw a benefit this quarter from higher collections, and timing of certain payments. Now on to our outlook. For the fourth quarter, we are raising the revenue outlook that was implied in our August guide with a Q4 revenue guide between 71.3 and 71.9 million, representing an annual growth rate of 10% at the midpoint. We expect non-GAAP operating income between positive 1.3 and 1.9 million. two cents and three cents, assuming shares outstanding of approximately $129.8 million as measured on a fully diluted basis. For the full year, we expect revenue to be between $276.2 and $276.8 million, an annual growth rate of 16%. We expect non-GAAP operating loss between $4.5 and $3.9 million. And we expect non-GAAP net income per share to be between $0.05 and $0.06, assuming shares outstanding of approximately $127.8 million as measured on a fully diluted basis. As it relates to 2024, we will provide more detailed guidance on our fourth quarter earnings call in February. However, I do want to provide some additional context for your modeling purposes. We have expressed a zero-add net ARR expectation for the fourth quarter of 2023 in our prior earnings calls. Coupled with a net ARR add of $18 million year-to-date through September 30th, this implies a year-over-year growth rate of ARR for the year that is below 10%. There is a high correlation between the current year ARR growth rate and the subsequent year revenue growth rate within our revenue models. We expect new ARR to be relatively balanced between land and expand over the coming quarters. Accordingly, given the magnitude of churn that we have been conveying, we expect in-period NRR to be below 100%. As stated earlier, as companies come up on renewables, they are often resetting and optimizing for new expected levels of growth. The substantive portion of these legacy multi-year contracts should be reset by the end of Q2 2024. Taking this into account, ARR reacceleration should become mechanically easier in the back half of 2024. In summary, Q3 shows our ability to adapt quickly to the new environment. We're delivering on free cash flow. We're investing appropriately against opportunities that we expect will drive long-term value And above all, we're committed to improving execution. With that, I'll open for Q&A. Over to you, Yao.