AvePoint, Inc.

Good afternoon and welcome to the AvePoint's fourth quarter and full year 2021 earnings call. For opening remarks and introductions, I will now turn the call over to Mark Griffin, Investing Relations. Please go ahead.

Thank you. Good afternoon and welcome to AvePoint's fourth quarter and year-end 2021 earnings call. Today we'll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is Dr. T.J. Jung, Chief Executive Officer, and Jim Cassie, Chief Financial Officer. TJ will begin with a brief review of the business results for the fourth quarter and full year ended December 31st, 2021. Jim will then review the financial highlights for the fourth quarter, followed by the company's outlook for the first quarter and full year 2022. We will then open up the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our press release for a more complete description. All materials in the webcast is the sole property and copyright of AvePoint with all rights reserved. Please note that this presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures prepared in accordance with the U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to the financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended December 31, 2021 press release may obtain a copy by visiting the investor relations section of the company's website. With that, let me turn the call over to TJ.

Thank you, Mark, and thank you to everyone joining us on the call today. I'm very pleased to report that AvePoint's fourth quarter performance was a strong finish to what was a monumental year for the company. It is a profound privilege to see the trust our customers, partners, and shareholders place on us, and it's a great honor to see how hard and committed AvePoint's employees are in earning and holding that trust. When we became a public company in July, I committed to fulfill our mission to enable organizations to collaborate with confidence at scale. For our fourth quarter, we delivered SaaS revenue of $24.3 million, up 52% from the same period 2020, and grew total ARR 34% year-over-year to $159.2 million. Our growth reflects the expanding need to secure collaboration data, sustain connections between people, and ensure business continuity. In 2021, the world continued to adapt to hybrid work. We helped customers become digitally resilient and build the right foundation for innovation by introducing industry-leading solutions and evolving existing ones. By providing better insights and controls, security teams, IT operators, and business leaders can make better decisions. I'm proud of our commitment to security for ourselves, our customers, and our partners. We received authorization to operate under FedRAMP as well as security certifications for ISO and SOC 2 Type 2 compliance. Our support extends to collaboration on Microsoft, Google, and Salesforce Clouds. Our fiscal year 2021 results were strong across our key operating metrics as we delivered on growth while remaining free cash flow positive. Revenue grew 27% over last year to $191.9 million, with SaaS revenue of $85.6 million, up 64% for the year. These strong results were driven by a go-to-market strategy that is well balanced for solid new logo acquisitions, a growing partner ecosystem, and the ongoing expansion of existing customers. This demonstrates the resilience of our value proposition the strength of our SaaS platform, and the character of our team and core values. One of the tailwinds advancing our go-to-market efforts has been our expanding partner network. AppPoint has strong roots working with global enterprise organizations, and in 2021, we introduced our global partner program designed to deepen our relationships with existing partners and amplify our recruitment efforts. We have been a destructor in our approach to this market. Our ability to enable our partners with capabilities in our cloud-native platform is helping them serve their small and medium-sized business clients amid secular trends of digital transformation. That means our enterprise-grade technology, the same that Fortune 500 businesses use, is now available to help SMBs collaborate with confidence. Very few B2B SaaS companies achieve this versatility and our early success gives us the confidence for sustained growth in the next five years and beyond. I want to spend a few minutes discussing how partners are accelerating our business in a few ways. As we announced recently, AppPoint ended the year with over 2,800 total partners, including managed service providers, or MSPs, value-added resellers, system integrators, cloud consultants, DevOps partners, and distributors. The vast majority of our partners have an MSP business primarily focused on the SMB market. Serving MSPs is a highly efficient way to expand our high-margin SaaS revenue while shifting much of the sales, marketing, and customer service touchpoints to our partners. As of year end, this portion of our channel business was transacting the equivalent of 9.4 million ARR, up 126% from last year. The growth we're seeing now is possible because of our continued commitment to supporting partners wherever they are and however they prefer to transact. In Q4, for example, thanks to our technology integration with ApexSight, a technology provider for distributors and vendors to create a white-label cloud marketplace, we're able to quickly onboard a key distributor in the Nordics. By working with this new distributor, we are able to reach an additional 80% MSPs managing hundreds of thousands of cloud users. This is an incredible force multiplier for us. One of their MSP partners in Sweden was able to onboard 13 unique clients onto our multi-tenant data protection services within just two months. The simple streamlined onboarding experience for MSPs that our integration provides is helping drive sustained demand for our cloud solutions. We're excited to help partners scale and achieve extraordinary growth for their small, medium, and enterprise business customers. Another lever for growth is our ability to enable a co-sale motion. In these situations, the partner has an established relationship with the end client, and the partner may choose to purchase our SaaS solutions directly from us and not a distributor. This flexibility empowers the partner to wrap our software in their services and expands our presence in the market. For example, a partner in Australia is going to market with a health check service. powered by our Confidence Platform Insights. The partner identifies potential security concerns related to information oversharing, external users, and sensitive data. These insights create an opportunity for recurring revenue services through ongoing action and remediation. In Canada, we are able to help a large global client in the service sector supporting their 54,000 users across multiple geographies with our local partner, SII. Now they're able to satisfy data protection and data sovereignty requirements with our SaaS backup. Furthermore, I want to add that many of our partners such as Converge and C3 have multiple lines of business and support Outpoint through both managed services and co-sell agreements, depending on their clients. Our reach into this market segment continues to grow as we onboard more MSPs and their clients onto our cloud services. Collectively, our approach to scale through partners is paying dividends. Half of our new logos today come from partner source opportunities. In today's highly disrupted geopolitical climate, AppPoint is viewed as the trusted platform provider to our enterprise customers and partners. With AppPoint's true global presence across all their premium B2B software markets in North America, Western Europe, NZ, Singapore, Korea, and Japan, We expect our strong channel growth momentum to continue, if not accelerate, going forward. To support larger global organizations, our direct sales team continues to drive our enterprise business. In 2021, we significantly increased our enterprise sales capacity. Our direct sales team is designed to quickly respond to evolving market trends. to help customers solve complex business problems. In Germany, for example, a large manufacturing customer was concerned with records and information management. With rising cloud storage costs, they need a better way to keep their collaboration platform optimized with a proactive data disposition and retention program. Our SaaS solutions are being deployed to automate classification and lifecycle policies. As a result, they can look forward to improved transparency, accountability, and compliance, plus reduce cloud storage costs. In North America, we were able to help a life insurance company satisfy ransomware protection and data retention requirements for their 24,000 users. The ability to recover data in the event of a ransomware attack was a must-have requirement. The IT and storage teams also needed a better way to work together to ensure archive content is properly disposed. We were able to satisfy both set of requirements through our unified SaaS platform. These stories demonstrate our strength in our enterprise market segment. The number of our customers with over 100,000 in ARR increased to 335 in Q4, up 36% year over year. We also saw success with our existing customer base as they continue their cloud transformation and look to gain more value from their own cloud investments. In Q4, for example, we helped an international financial institution consolidate cloud vendors onto Microsoft 365 and are continuing to help them transition their on-prem infrastructure to the cloud. We reached another milestone in Q4 as the number of users managed by our SaaS platform continue to grow. As of December 31st, 2021, we managed 9.4 million users, up 34% from 7 million a year ago. Now I would like to provide a few technology highlights. Last year, we strengthened our confidence platform, resulting in additional solution depth and breadth. We introduced M3C5 license management in our control suite with a new product called Sense and expanded our resilience suite with Google Workspace backup offering. In Q4, our November release shipped more capabilities to make SaaS operations and data management easier and more efficient across our platform suites. Our control suite now features improved budget management and even presents global or delegated admins with recommendations on how to better manage license costs. This maximizes the ROI on our customer SaaS portfolios. We also overhauled and improved our elements platform for MSPs, which supports multi-tenant management to help them streamline customer management and do more with less. Another key highlight was the release of our support for Teams private channels. This support is critical for highly regulated customers. A US defense contractor would not have been able to release private channels to their 50,000 users without our solution. Our solution provides a compliant access request process that secures and governs access to Microsoft Teams and now private channels. Information security and management challenges remain top of mind no matter where organizations are in their transition to the cloud. While some organizations are already dealing with the aftershock of the rapid shift to cloud over the last couple years, some are still transitioning or are choosing to live in a hybrid world. We are well positioned to support our customers and partners no matter where their data resides, as now customers can extend their information management processes to legacy, on-prem content, without the burden of self-hosted infrastructure and applications. We're very proud of these enhancements and excited by the reception by our customers and industry experts. AppPoint was recognized as a leader for cloud backup as the only vendor to receive a differentiated rating for Microsoft 365, Google Workspace, and Salesforce backup capabilities in the Forrester's New Wave SaaS Application Data Protection Report in Q4. Through our November release, we also laid a lot of groundwork for two very exciting releases in January and March that we'll speak to in a couple months in our first quarter update. And finally, before Jim goes over the numbers, I want to touch on the share repurchase announcement we made in our earnings release. Our board of directors have authorized a three-year repurchase program that will return up to $150 million to shareholders. 2021 was an outstanding and transformative year for the company as we saw record revenue growth and became a publicly traded company. Our financial positioning is strong. We're investing and scaling our business through channel, accelerating new product offerings while maintaining positive free cash flow to continue building the foundation for sustained growth in 2022 and beyond. With that, I'll turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ, and good afternoon, everyone. As I review our fourth quarter results today, please note that I'll be referring to non-GAAP metrics unless otherwise noted. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is also available on our website. Before I discuss our fourth quarter results, I want to highlight a change in the timing of revenue recognition we made relating to our term license contracts. This change resulted in the deferral of an additional $4.4 million of revenue that is reflected in our fourth quarter results. We determined that for our term license contracts, we should adjust the percentage of revenue recognized upfront attributable to the license and shift more of the contract value to PCS, which is recognized over the term of the contract. Although this change impacts the timing of revenue recognition, it has no impact on our annualized recurring revenue. We expect to recognize the majority of this additional deferred revenue over the next eight quarters. Additionally, the adjustment to the allocation of contract values will affect the amount of term license revenue we will recognize upfront in 2022 and beyond. Total revenues for the fourth quarter ended December 31st, 2021 were 53.8 million, up 17% year over year. Within total revenue, SAS revenue came in at $24.3 million, up 52% year-over-year and constituting 45% of total revenue. Term license revenue came in at $13.7 million, a decline of 13% year-over-year due to the change in the timing of revenue recognition on our term license contracts. Excluding this change, term license revenue would have been $18.1 million or up 15% year over year, and our total revenues for the fourth quarter would have been $58.2 million and up 26% year over year. As of the quarter end, we had total ARR of $159.2 million, which grew 34% from a year ago. Our core ARR ended the year at $149.8 million. Both our core ARR and our SMB ARR had quarterly growth records on an absolute dollar basis, with core ARR growing 31% year-over-year and our SMB ARR growing 126% year-over-year. As customers continue their cloud transformation and expand their SaaS operations, our average core ARR per account continues to grow as well. At quarter end, the average core ARR per count was approximately $37.8,000, which represents an increase of 15% year over year. This growth was driven by 335 customers with ARR of over $100,000, up 36% from the prior year period. For the quarter and year, our core dollar-based net retention rate was 110%. an improvement of three percentage points since last year and in line with last quarter. It is important to point out we do expect slight fluctuations from quarter to quarter in this metric. Overall, we're pleased with the year-over-year improvement, and we anticipate continued improvement moving forward. We recently created dedicated farmer versus hunter roles across our sales organization to increase focus on existing customer upsell. This further sharpens our existing customer revenue ownership and accountability across our sales and customer success organizations. Now let's review the income statement in a little more detail. Gross profit in the quarter was $39.6 million, representing a gross margin of 73.5% compared to 77.6% in the year-ago period. This margin decline is the result of two primary factors. The first is the negative margin impact from the change in revenue recognition I just spoke of. And the second is the increase in services revenue, our lowest margin business. Going forward, we are continuing to drive our sales efforts toward our fastest growing revenue stream, our SaaS solutions. At the same time, we expect service revenue as a percentage of overall revenue to decline by transitioning more services revenue to our channel partners. resulting in overall margin improvement. Sales and marketing expenses were $24.2 million, or 45% of revenue, compared to 35% of revenue a year ago. This represents an increase of $8.3 million year over year, or 52%. This was driven by an increase in headcount and personnel-related expenses as we expanded our sales and customer success organizations, as well as additional marketing spend as we invested in both our direct sales and channel strategies. We have grown our sales and marketing headcount by nearly 30% year over year, with hires evenly distributed across our sales functions as well as marketing and customer success functions. This increase in headcount has resulted in a $4.6 million increase in total compensation, primarily driven by salary and benefits. Programmatic spend in marketing is up $2.8 million year over year, primarily driven by brand awareness efforts and marketing events. R&D expense was 3.3 million, or 6% of revenue, compared to 7% in the year-ago period. Our headcount for the quarter was up approximately 40% year-over-year, but our expense in the quarter remained flat. This was due to the timing of bonus accruals and an increase in the allocation of research and development expenses to cost of services to support our increased project implementations of our technologies in the quarter. These projects are critical for us as they help fuel innovation and provide customer insights in real time to our development team. To remain competitive, we run a program which allows us to rotate R&D personnel to participate in implementation projects. The cost associated with R&D's participation in these projects is included in cost of revenues. This practice ensures we remain connected to the market environment. This also creates a feedback mechanism to drive differentiated product offerings for our priority markets. It highlights promising ways to reposition our business through new platforms and disruptive product breakthroughs. G&A expense was 10.3 million, or 19% of revenue, compared to 21% in the year-ago period. The increase in G&A expense largely reflects an increase in people and infrastructure related expenses associated with our public company readiness and ramp up efforts, including headcount increases of approximately 25%. On an absolute dollar basis, we expect that the rate of expense growth will decrease in the future periods. Non-GAAP operating income was $1.4 million, or 2.5% of revenue, compared to $6.7 million in the year-ago period. Turning to the balance sheet and cash flow, we ended the quarter with $271 million in cash and short-term investments. We generated strong cash flows in the quarter. Cash flows from operations were $9.5 million in the quarter, while free cash flow, which includes CapEx, was $8.5 million. Despite the significant investments in the business throughout the year, we saw 5.5 million of cash flows from operations on the year with 3.1 million in free cash flow. I would now like to turn to our outlook for the first quarter and the full year 2022. Our current outlook for the first quarter operating profit reflects revenue seasonality as well as an additional first quarter operating expenses primarily relating to accelerating our marketing investments. For the first quarter, we expect total revenue of 48 million to 49 million and a non-GAAP operating loss of 6 million to 6.5 million. For the full year, we expect total revenues of 236 million to 242 million. We expect our non-GAAP profitability to be in the range of a loss of 3.5 million to income of 1 million. and we expect year-end ARR to be in the range of $212 million to $216 million. We continue to see strong demand for our existing products and are excited about the release of new products and the strong reception of our global partner program. We've spent much of the last year executing our growth strategy and building on our strong financial position. With uncertainties from geopolitical concerns and the evolving pandemic, to rising inflation and the overall macro environment, our strong balance sheet and our ability to generate positive cash flows positions us well to capitalize on our strategic vision and also take advantage of additional opportunities as they become available. One of those opportunities is the recently announced authorization from our board of directors to repurchase up to $150 million of AppPoint shares over the next three years. We are confident in our ability to continue to generate strong levels of growth and increasing profitability in the years to come. With that, we'll open up the call for questions. Operator?

Thank you, and at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we poll for questions. And our first question comes from the line of Kirk Midturn with Evercore ISI. Please proceed with your question.

Yes, thanks. Thanks very much. Jim, maybe just to start off with, when I look at the guidance for calendar 22 from a revenue perspective, any way you could just quantify what the rev rec change is on that? I mean, if I look at your ARR guidance, it looks still very strong, but obviously the revenue guidance is a little bit below what you guys were thinking earlier. Is that just solely due to the Rev Rec changes?

Yeah, that's the biggest factor, Kirk, and thanks for the question. That's definitely the biggest factor affecting revenue going forward. And like you said, it obviously doesn't affect ARR. We're feeling really good about that moving forward. This is just obviously the timing of revenue.

That's helpful. And then, TJ, just for you, you mentioned some of the go-to-market changes. enhancements you've been putting in place. Can you just talk about what you're seeing in your pipeline right now in terms of both net new customer growth and expansion? How do you feel about sort of the net retention ratio being able to continue to push higher from here?

Yeah, that's a great question, Kirk. So on the net new side, we are actually going very strong. So the new AR is 50-50 from new customers and then from existing customers. That's AR growth. And from the pipeline, we continue to see on plan, very strong for the year and high predictability. On the NRR, we have already indicated that we're working aggressively towards that 120%, and we're still marching towards that. Some of the things that Jim shared earlier around this whole specialization across sales, farmer versus hunter for the first time, for example, we actually have farmers upsell quotas. So that sharpens the alignment between our sales organization and customer success organization, taking account ownership to result in better retention on our side. And on the new logo side, as I shared also, we're actually very proud of the fact that half of the new logos today are sourced by our partners and partners. You remember our global partner program was launched just in July of last year, 2021. So all of those indicate continuous strong momentum. This is why from the forecast perspective, you see that we continue to believe very strongly in our AR growth. And while the revenue side may have a slight ding due to the revenue recognition, but the overall growth and acceleration of the business continues.

That's great. Thanks, guys.

Thank you. Thanks, Kirk.

Our next question comes from the line of Jason Adder with William Blair. Please proceed with your question.

Yeah, thanks. Hey, guys. Has anything changed, TJ, in terms of the expectations that you've had around mix between term license and SAS?

So, yeah, I can go first. So, actually, the SAS mix has gone up. This is also where we're seeing the positive shift a lot more SaaS mix. For example, in North America, our SaaS growth went up 55%. So yeah, the SaaS mix is going up. The term mix is going down. And with the revenue recognition, it's impacted revenue, as Jim predicted, stated. But for overall, the momentum of the business continued to be very strong.

Great. So is it fair to say then that Most of the kind of differential on the revenue guide is due to the rev rec, but there also could be some impact from just overall faster than expected mix shift to routable?

Absolutely. Jason, I think you hit it right on the head. I think it's predominantly we're seeing the rev rec impact, but there's also this shift. And as you know, the more SaaS we're doing, we're growing faster on the SaaS piece and then the ARR is intact, but it's obviously having a little slower revenue recognition relating to SAS as opposed to term. So we're seeing that a little bit more in our forecast for 22 than we would have prior.

Great. And then just to follow up for you, Jim, I'm wondering if, I guess philosophically, would you say the company is taking a more conservative tack on guidance, let's say where you work, I know you weren't in place there as the CFO, but can you just talk us through kind of philosophically how you guys are thinking about just setting the bar and setting guidance? And then just as an aside, are you factoring any macro uncertainty into your forecast, especially in your European business, given what's happening over there?

Yeah, so great question. You know, I think in terms of the macro, we have tried to consider some of that in the overall plan that we have and guidance we've put forward. Obviously, there's uncertainties in a lot of factors right now, something we're continuing to monitor. You know, fortunately, we don't really have any business in Russia, so we're not impacted at all, you know, by any of the sanctions put in place. And our legal team is managing that very tightly. I think we have $20,000 of ARR related to that region. So we're not directly impacted. But as you said, there's obviously the indirect impact on our European business. And we've tried to factor in a little bit for that. And so I would say that we've taken that into account. And philosophically, I think we want to be as accurate as we can. We want to be as predictable as we can. And so we're trying to to have that kind of cadence and that kind of rigor around some of the numbers that we're providing, both externally and, frankly, internally. We're putting in a lot more rigor around the operations of the business to make sure that we're doing that. So I think philosophically that's our strategy and our plan, and it goes both externally as well as internally.

Thanks a lot. Good luck, guys.

Thank you.

And our next question comes from the line of Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. Thank you for taking the question. I've got a couple here. Maybe just to start with TJ, you know, you mentioned, you know, security and backup as, you know, one of the drivers. And I guess overall, what are you seeing on your end from the transformation environment with regard to front office versus back office? And then is security, you know, playing a material role in, you know, particularly with the proliferation of ransomware in terms of a driver of your business, maybe just to kind of like take a step back post-pandemic acceleration of transformation and any observations you might have on the overall environment from your side would be helpful.

Yeah, Brian, that's a great question. We definitely see a significant uptick on the security concerns The amount of ransomware attacks that our partners are relating to us is increasing on a fast clip. This is why we also released our ransomware detection features in our backup product. In fact, our resiliency suite that includes backup, compliance, and record product is actually now about 50% of our total business. That's growing very, very quickly. while the fidelity and control side of it are each about 25%. Previously, last year, we were at one-third, one-third, one-third situation. So there is a massive increase in security concerns, be able to do proper SaaS backups so that customers can do in-time and also in-user, business-user-driven restores. This is also why Forrester put us at the top position essentially vendor in the SaaS application backup given our advanced use cases and users restore capabilities and speed to recovery. So yeah, that's very, very important new phenomenon.

Got it. That's helpful. And then maybe just switch to sales and marketing. Nice color on the sales and marketing headcount growth. And I think you noted it was relatively balanced across sales and marketing. Maybe for Jim, what's embedded in your expectations for fiscal 22? Do you expect to grow, I guess, quota bearing reps at the same rate? And would that change at all given FedRAMP authorization and your, you know, any efforts to focus on the federal space?

Yeah, so we won't expect to see the same rate of growth in next year. We're actually anticipating... you know, probably somewhere around 20 to 25% headcount growth, which is far less than what we incurred this year. So we're still growing, but not nearly at the same pace. And that's a combination of factors, right? We have a lot of ramped up reps at this point that are producing quota and giving us that quota capacity we need. We also, as TJ had mentioned, to really embrace the channel partner strategy. which obviously we start to leverage some of our already, you know, the investments we've previously made in sales and marketing, including people. So we won't see some of those same investments that we've made this past year, but obviously we're still growing the group.

Got it. That's helpful. Thank you very much. Thank you.

Our next question comes from the line of Brett Noblat with Cantor Fitzgerald. Please proceed with your question.

Hi, guys.

Can you hear me all right?

Yeah. Yes.

Perfect. Thanks so much for taking my question. I guess just also on the guide, what would the guide have been without the rev rec change in TLS? You know, would that, you know, I guess can you just quantify the revenue headwind for the full year? Is it closer to, you know, 10, 15 million?

Yeah, so when we look at it, obviously there's lots of factors that go into that, but in our kind of internal kind of budgeting and guidance, it's roughly around $10 million of potential net impact. So that's kind of what we've factored in. So that's how you should probably think about it for your purpose.

Perfect. And then maybe just one on the cloud user base. I thought that was a really strong number. I guess what's kind of baked into your assumptions for the full year? Do you think that, you know, $2 million a year is, you know, kind of the going rate?

Do you think you can accelerate that?

Right now, our business plan projects continue to be the rate of the business. So ARs is forecasted at the midpoint 34%. So we continue to forecast the user rate to grow at that.

obviously at the same time we are layering new product um so we are looking to uh increase our pool um so yeah so but our our business plan forecast is that 30 percent increase perfect that's helpful maybe just just one more um i think maybe over the last three months or so you guys launched three new products confide ransomware detection um and and trust i guess which one of those products are you kind of most excited for as a contributor to growth over the medium term?

We're excited for all of them. They actually come together very nicely. So, for example, in trust, we even have a reference customer quote in the release. It's used by large organizations to do actually virtual tenant management. So that's delegation management. And, of course, ransomware detection goes into the security side of it. So customers, when they detect specific signatures of a ransomware attack, can be alerted early and be able to point to the right recovery points to recover very, very quickly. And we support Microsoft 365 now. And then the roadmap includes Google in the second half of the year. And then last, Confide is an extension to an industry use case of a secure data collaboration area within Microsoft 365 where all the data resides in the tenants, the customer's own tenancy, and even IT super users don't have access to that data. So 100% controlled by the business users to do internal, external collaboration with workflows to manage a deal and manage a project. So we're actually excited about all three product releases. They go well hand-in-hand with our confidence platform around business user, business data, security, and governance story.

Awesome. Thanks, TJ. Appreciate it. Thank you. Thanks, Brent.

And our next question comes from the line of Naho Chokshi with Northland Capital Markets. Please proceed with your question.

Yeah, thank you. Nice ARR result there. What were the drivers of the acceleration of ARR growth of 34%?

And also, how was linearity in the quarter as well? Yeah, so, you know, great question.

So, in terms of growth, we saw, if you look at the, I think we broke it out in the prepared remarks, but, you know, it was really driven partly by our SMB sector, right, in terms of that growth has really tremendously grown. We're up 126% there. So that was a big driver. And then even our core ARR was up 31%. So also another big driver of the overall ARR growth. So, you know, we saw good growth around the world, particularly in Europe and Asia. We saw significant growth in ARR. So again, we're seeing it kind of kind of all over, no one particular driver. We're seeing, as TJ mentioned, more recently we're seeing kind of a shift to, you know, some more concerns around security, and that seems to be a driver and adding to our ARR as well. So I think it's kind of across the world, but clearly our SMB focus now is definitely having an effect, and we're seeing lots of growth there, and we expect to continue to see that into 22 as well.

Great. And just to be clear, core ARR in the September quarter, how much was that up, your reviewer?

The core ARR was up 31%, and the SMB was up 126.

Yeah, that was for the December quarter, but what about for the September quarter? The September quarter? Mm-hmm. Hang on one sec. It's all the same.

Yeah, you know what, let me get back to you on that one because that, I don't have those numbers right in front of me, but let me, I can respond back to you on that one.

Okay, all right. Got a couple other questions. Sure. What was the actual percent that's being shifted from product to PCS for the term-based licenses?

Great question. So, we are going from an average, what used to be it was 75% upfront, which would mean 25% was deferred to the PCS. And going forward, that average will go from 75 down to 60% upfront. So we're going to shift, you know, another 15 points going to PCS. And then depending on the length of the contract, some of those will even be greater and could be as low as 50% and just under 50% of upfront. So we will kind of shift to almost as much as 50% shifted to PCS. So much, you know, a pretty big significant change from where we've been. But I think, again, It actually helps eliminate some of the lumpiness we currently have in the revenue based on the term and kind of spreads it a little bit and smooths it out. And I think in the long term, it'll be good for us.

Great. And then bold move on the $150 million repurchase program. Definitely applaud that. It's very awesome. What's your expectations on the pace of utilization of that?

So it's a great question because we're in the early discussions of that. You know, obviously we've got to do a couple of things to make sure and get the mechanics done to have it in place. You know, right now we're trying to stay flexible on that and not, we haven't committed to a specific rollout plan yet, but we're going to be working on that here over the next week or so to kind of, you know, figure out a strategy that lays it out in exact timeframes. But right now we're just remaining flexible. and expect to have a little bit more concrete over the next couple weeks.

Great. Thank you.

Thank you. And, Nihal, I just want to add that with that program, we are still doing other investments in the business, both organic and inorganic growth. You have seen that our business continue to generate cash, so we're a cash flow positive business. So even with this program to do stock buyback, if not to, we continue to go aggressively on the other investments to grow the business.

Right, right. I believe that on the prior conference call, you had talked about initial sort of M&A being sub $50 million, getting your feet wet, so you should have plenty of cash left to do that, right?

That's correct. Exactly.

Yep, right.

These are clearly not mutually exclusive by any stream. Yep.

And our next question comes from the line of Derek Woodward Cowan. Please proceed with your question.

Oh, great. Thanks. Hey guys, it's Andrew on for Derek. I wanted to ask DJ on, on, on sales productivity. Did that improve versus last quarter and what drove that and, and out of the reps you've hired in, in the second half of 21, these should be, fully ramped by second half of 22, I would think. So could that help you accelerate in the back half?

Great question. So since our call out on the productivity ramp-up lags in our last earnings call, management have dived deep into this to replicate best practices. For example, we see the best productivity and shortened ramp-up time came from our channel-centric business in Western Europe, specifically in our Dock and Nordic regions. The logic is pretty simple. When new reps work with existing partners, deals discovery and deal motion are all much faster than direct sales focus reps, who in comparison had to start everything from scratch, thereby having a longer ramp up time, especially when they work remotely. So we now are aggressively applying the same best practices across our North America sales teams, which historically has been very much directly focused to incentivize also partner co-sell motions as we mentioned in the prepared speech earlier with comp neutrality commission plans. So all these things go hand in hand to drive much faster growth and also lower our overall cost. In the mid-market segment, we are also passing a lot of the service opportunities to our partners. So this will also go into what Jim stated as a part of our effort to reduce the percentage of service business in our revenue. So overall, the revenue mix, you will see continue to be much healthier, more profitable, therefore, you know, with continued strong growth on the ARR side.

Right. And then for Jim, Kirk asked earlier about the net rev retention, but And I get that you're moving towards 120%, but any other color on what you're embedding for this year in guidance and how would you rank order the drivers of that improvement if there's any?

Yeah, we're not providing any guidance on NRR right now. But I would say that probably our biggest driver for that is the hunter-farmer kind of specialization that TJ referred to a little bit ago. because I think that gives us the focus we didn't have over the past couple years of really focusing on that group and really making them aware of predominantly cross-sell opportunities in selling them additional products. And so I think that gives us the greatest opportunity to improve on the NRR. The other thing that we've seen is both this year and what we're expecting to continue to see is our overall gross retention rates have been improving nicely. And so, again, that should have a real positive impact moving forward.

Great. Thanks, guys.

Thank you.

And we have reached the end of the question and answer session. I'll now turn the call back over to TJ Zhang for closing remarks.

Great. Well, thank you, everyone, for the good questions, and we look forward to more discussion one-on-one. I just want to cap off the call with The business momentum is very strong. The adjustments are what we stated. So it's a conscious effort on the management team here to reflect what the market is telling us. Given the current macro conditions, the market is looking for SaaS software companies that are not only high growth but also profitable. So we took that feedback to heart. Going forward, we're actually taking stock-based comps comes as a part of our budgeting process and we are looking to endeavor to reach profitability. Not only are we continue to be cash flow positive, cash generating, but we are committed to reach profitability in the medium term here so that we're both high growth and a profitable SaaS software company. So that's our stated goal. And you know, we, we listened to our investors, we listened to our partners and customers, and we are very confident on achieving that and continue to build this very highly resilient, robust global business. So with that, thank you very much, and hope everyone have a great rest of the week.

And this concludes today's conference, and you may disconnect your lines at this time.