AvePoint, Inc.

Good afternoon and welcome to the AbbVoid, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, You may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I'd now like to turn the conference over to Mark Griffin. Please go ahead.

Thank you. Good afternoon and welcome to AvePoint's second quarter 2022 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 the Chief Executive Officer, Dr. TJ Jung, and Jim Cassie, Chief Financial Officer. TJ will begin with a brief review of the business results for the second quarter ended June 30th, 2022. Jim will then review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year of 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 material 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 and as substitutes for or superior to the financial measures prepared in accordance with the U.S. GAAP. For listeners who do not have a copy of the quarter-ended June 30th press release, you may obtain one 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. In our last call, I closed by reinforcing how important it is to grow while being prudent with expenditures in the highly dynamic market we're in turn. Today, amidst the challenging and uncertain macroeconomic environment, I'm pleased to share AppPoint continue to show its proven ability to do just that. Our total revenue for the quarter was $55.7 million at the upper end of our guidance and would have exceeded our guidance range if not for the strong FX headwind we faced in the quarter. This was driven by strong SaaS revenue of $27.6 million, up 34% from the same period 2021. We grew total ARR 28% year-over-year to $178.2 million. Technology plays an important role for organizations across every sector. Every customer I speak with believes there's a real opportunity to overcome today's challenges with technology that secures digital collaboration data, sustains connection between people, and ensures business resiliency. We transform data and collaboration so users can be more productive with the latest cloud services and drive efficiency in delivery and management of those services for infrastructure and operations leaders. We do this through the Outpoint Confidence Platform. which helps organizations using cloud services, including Microsoft 365, Google, Salesforce, and more than a half dozen additional cloud collaboration platforms move faster, become more agile, reduce costs, and improve productivity. With Gartner predicting spending on public cloud services to grow more than 20% in 2022, the AvePoint confidence platform and our purpose-built industry solutions are well positioned to enable organizations to collaborate with confidence in the modern workplace. Organizations in every industry continue to choose our resilience suite to ensure business continuity and compliance with data retention and other regulatory guidelines. With that point, a global leader in recruiting services can confidently accelerate adoption of its Salesforce environment by complying with GDPR and reducing the threat of downtime, which can cost the organization 5 million euros per day. Federal agencies like National Endowment for the Humanities have strict retention policies to address regulations such as the Freedom of Information Act. They can quickly and confidently recover years old Microsoft 365 files necessary to its work with AppPoint. We continue our work with Asian Development Bank to protect its 15 terabytes of data to mitigate risks from ransomware attacks, ensure business continuity, maintain the public's trust, and protect its reputation. Our Fidelity Suite preserves data integrity as organizations transform from one system to the next, capturing data for compliance or integrating SaaS applications to streamline the way users work. With AppPoint, the IRS migrated multiple workloads from legacy systems to Microsoft 365 to modernize its collaboration environment. AppPoint also worked with one of the world's most recognizable food producers, with more than 20 production facilities across the US, Canada, and Bahamas to migrate Microsoft 365 following the acquisition that adhere to all GDPR regulations and privacy laws, all while ensuring business continuity during the transformation. Our control suite provides differentiated value to infrastructure and operations leaders, delivering central services at scale. As a result, organizations can better maximize their digital transformation investments with greater control over their budgets, licenses, users, and workspaces. We're accelerating adoption of a digital workplace program by automating service delivery for a Fortune 250 company specializing in engineering solutions with more than 336 manufacturing locations in 50 countries. We're also helping a large multinational manufacturing company based in Germany manage its growing SaaS operations and increased Microsoft 365 adoption for its 6,500 employee workforce spread across 40 sites. During the quarter, we reinforced our commitment to help businesses continue to mitigate risks, protect business-critical applications, and drive productivity with added support for protecting Microsoft Azure workloads, which capture more than 20% of all public cloud spend. We also added four of our existing solutions on Microsoft AppSource an online cloud marketplace providing tailored line of business solutions. This creates a more seamless experience for businesses, shortens their purchasing cycle, and helps them combat evolving workplace trends and challenges quicker. We also continue to garner industry recognition for our innovation. This quarter, we were named a leader in online backup software by G2 and a representative vendor in the 2022 Gartner Market Guide for Backup as a Service. Our work powering digital transformation led to our recognition as a finalist for the 2022 Microsoft Partner of the Year Awards in the education and government categories, chosen from more than 3,900 nominations across 100 countries. Our purpose-built platform powering inspiring and transformative learning experiences won the 2022 EdTech Breakthrough Award, one of the world's most prestigious awards programs recognizing outstanding educational products. At the end of June, we completed our acquisition of United Kingdom-based Combined Knowledge, a leader in the development and delivery of collaboration education and support. We're confident this move will enable us not only to bring a robust end-to-end experience to our customers to accelerate the adoption of their investments in digital transformation, but also advance our SaaS modern learning product line's domain expertise around corporate learning and higher education. we continue to see a powerful snowball effect from our growing channel business, launched just over one year ago, which provides small and mid-sized businesses with the same enterprise-grade technology available to Fortune 500 businesses. Our channel ecosystem expansion is continuing in line with our geographic and market segment expansion. Our MSP business, primarily focused on the SMB market, continues this robust year-over-year triple-digit CIS growth amidst an environment of tremendous consolidation. We're finding that as larger MSPs already invested with AppPoint acquire smaller MSPs, we continue to be chosen as a partner of choice for scale, efficiency, and security. We continue to meet the needs of our evolving channel ecosystem with the AppPoint certification program as of end of the quarter has resulted in 1,100 certifications and more than 3,000 hours of training completed. This means more partner engineers, pre-sales teams, and product specialists have been trained in our industry-leading technology to best use it to design customer solutions that enable them to source more business and exceed competitors. 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. We work with a 10-year customer of ours, a Fortune 100 financial service organization known for serving the unique needs of nonprofits, institutions, and educators across the United States. to create a secure collaboration service in its new Microsoft 365 deployment. The number of our customers with over 100,000 in ARR increased to 383 in Q2, up 34% year over year. Before Jim goes over the numbers, I want to touch on the share repurchase activity. Through June 30th, 2022, we have repurchased approximately $10 million in shares since announcing our share repurchase plan. In summary, we continue to execute on our mission to enable organizations to collaborate with confidence in the modern workplace amidst uncertain macroeconomic times. With that, I'll turn over to Jim to discuss our financial results in more detail.

Thank you, TJ, and good afternoon, everyone. As I review our second 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 available on our website. Total revenues for the second quarter ended June 30, 2022, were $55.7 million, up 23% year-over-year, and up 31% in constant currency. Within total revenue, SAS revenue came in at $27.6 million, up 34% year-over-year, and up 43% in constant currency. SAS revenue constituted 50% of total revenue compared to 45% of total revenue last year. Term license revenue came in at $14 million, up 26% year-over-year, or 33% in constant currency, and constituted 25% of total revenue compared to 24% of total revenue last year. As a reminder, more than 50% of our revenue comes from international operations which do business in currencies other than the U.S. dollar, predominantly Japanese yen, euro, and the British pound. During the quarter, we experienced a strong foreign exchange headwind due to the strength of the dollar, which affected revenue by approximately 3 percent. This headwind is primarily against our revenue and ARR metrics and not our profitability metrics due to the global nature of our operations. As of the quarter end, we had total ARR of $178.2 million, representing growth of 28% from a year ago and 29% adjusting for FX impacts. Our core ARR ended the quarter at $166.6 million, up 26% 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 account was approximately $39,500, which represented an increase of 10% year over year. This growth was driven by 383 customers with ARR of over $100,000, up 34% from the prior year period. Our core ARR dollar-based net retention rate for the quarter was 106, or 107, adjusted for FX impacts. Now let's review the income statement in more detail. Gross profit in the quarter was $41 million, representing a gross margin of 73.6% compared to 74.8% in the year-ago period. The slight margin decline is the result of our business mix and the impact of FX. Going forward, we are continuing to drive our sales efforts towards 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 of these services to our channel partners, resulting in overall margin improvement. Sales and marketing expenses were $23.8 million, or 43% of revenue, compared to 42% of revenue a year ago. This represents an increase of $4.6 million year over year. 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 media and event strategies. We have grown our sales and marketing headcount by 8% year over year. The increase in headcount has resulted in a $2.2 million increase in total compensation, primarily driven by salary and benefits. Programmatic spend in marketing is up $1.8 million year over year. primarily driven by brand awareness efforts and marketing events. R&D expense was 6.9 million or 12% of revenue compared to 8% or 3.8 million in a year-ago period, a year-over-year increase of 3.1 million or 81%. Our headcount was up 54% compared to last year as we continue to invest in the development of innovative technologies that help our customers stay competitive amidst evolving workplace trends and digital transformation. G&A expense was $11 million or 20% of revenue compared to 16% or $7.3 million in the year-ago period. This represents an increase of $3.7 million year-over-year. The increase in G&A expense largely reflects an increase in people and infrastructure-related expenses associated with being a public company in the current year versus being a private company a year ago, including an approximate 18% increase in our headcount. Non-GAAP operating loss was $1.3 million compared to an operating income of $3.3 million in the year-ago period. Turning to the balance sheet and cash flow, we ended the quarter with $246.6 million in cash and short-term investments. Cash used in operations was approximately $475,000 in the quarter, while free cash flow, which includes CapEx, was a negative $1.7 million. Our use of cash in the quarter was in line with our expectations. In Q2, we continued to purchase shares under our stock buyback program, and through June 30th, 2022, we have repurchased approximately 1.9 million shares at an aggregate purchase price of approximately $10 million. I would now like to turn to our outlook for the third quarter and the full year 2022. We are confident in the long-term durability and predictability of our growth. At the same time, we want to be cautious given the recent macro headwinds we saw in the last couple weeks of the quarter. Our revised guidance assumes these trends will continue for the remainder of the year. Since March 31st, 2022, we have seen an incremental strengthening of the U.S. dollar, resulting in foreign exchange headwind in fiscal 22. We now expect the total FX impact to be approximately $4.8 million on our ARR and approximately $5 million on our revenue. For the third quarter, total revenue is expected to be in the range of $62 million to $64 million, or approximately 17% year-over-year growth 23% adjusted for constant currency. Non-GAAP operating income is expected to be in the range of $1 million to $2 million. And for the full year 2022, total revenue is expected to be in the range of 230 million to 234 million, or approximately 21% year-over-year growth, 26% adjusted for constant currency. Non-GAAP operating income is expected to be in the range of a loss of $3.5 million to income of $1 million. ARR is expected to be in the range of $202 million to $206 million, or approximately 28% year-over-year growth, 31% adjusted for FX impact. In summary, I am proud of our team for another strong quarter. We continue to see strong demand for our solutions as we remain focused on delivering value to organizations who continue to put their trust in us. With that, we'll open up the call for questions. Operator?

We will now begin the question and answer session. To ask a question, you might please press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Brian Essex with Goldman Sachs. Please go ahead.

Great. Good afternoon, and thank you for taking the question. And TJ, Jim, congrats on the results. Nice consistent performance on the backdrop of a lot of macro uncertainty. And I guess on that point, could you help us understand what you're seeing from a macro perspective? I understand the FX. But, you know, what we've heard across the software landscape with regard to longer sales cycles, more scrutiny of enterprise budgets, more layers of approval needed to get deals done. And then, you know, to the extent that you might bill in U.S. currency or U.S. dollars, perhaps product becoming more expensive for some of the customers outside the U.S. Maybe if you could frame some of those points out, that'd be super helpful.

Sure. And Brian, let me address it first and then TJ can add some commentary on top as well. So I think, you know, partly what you just said, obviously we're seeing some or most of all of that in various different pieces. The first obviously is FX. We called that out in the remarks just prior to the question. So we definitely see that as a headwind, and we're going to see that continuing for the second half of the year. So for sure, that's definitely an impact. We did see at the end of the second quarter some elongation of some sales cycles. So we would expect to see that to continue into the second half of the year as well. And I think we're trying to be prudent here. and conscientious of that. And really, when you think about it, that's what we've built into thinking about the second half of the year. Those were two key factors in our thinking. FX, obviously the headwind on the more global macroeconomic environment that we're in right now, geopolitical influences, trying to be conservative to a certain degree, but also taking that into account and reflecting that in what we expect to deliver and then what obviously we're sharing in terms of guidance. And then maybe the third thing that is also influencing our kind of thinking internally, and those first two are definitely much more macro-driven, and the third one is maybe a little bit more internally focused, where we're seeing a lot more of our customers and the mix in terms of product mix. We actually sold more migration product in the first half than we were anticipating. which has an impact for us, and I think you and I have talked about this, we don't include migration in our ARR. So that product, since the mix shifted and we actually sold more, which was great, our customers were demanding it and we were there to satisfy it, but it obviously has an impact on our ARR. And we saw that in really Q1 and Q2, and we're expecting to see that continue for the second half of the year. So we've also brought that into our thinking and and kind of adjusted our guidance even on ARR to include both the first two macro conditions and then also the third, which is a little bit more specific to us. So we've kind of factored all of those things into our thinking.

Brian, thanks for the question. I just want to comment on overall the macro conditions that Jim outlined are things that we cannot control, but things that we can control. So I just came back from a tour in EMEA, our Munich office, to meet with our EMEA management team, as well as Japan, first time since COVID pandemic. The overall tenure of our sales leaders and our partners are one of bullishness and optimism. So there's still tremendous demand. this shift to cloud and the need for AppPoint's ability to help our customers to scale and deploy across hybrid complex scenarios, especially also in Japan where they are a couple years behind the Europeans in terms of going to cloud. So a lot of the partners are looking to us to help them accelerate that digital transformation. So macro aside, we think that by continuing to invest in your channel, by allowing us to scale and mitigate some of these macro conditions. But overall, the Microsoft Cloud market is vast, and the opportunity in front of us remains very, very large.

Right. No, super helpful. Thank you, TJ. And maybe I could have you maybe follow up on that. How are CIOs thinking from a budget scrutiny perspective? I mean, a lot of enterprises are under pressure to operate more efficiently and cut costs. it, you know, what is, what is kind of the ROI framework that they're looking at when they're looking at, you know, your migration platform is, is that accelerating adoption? I mean, I'd certainly think that, you know, particularly as they, as they, as they migrate to, you know, kind of a more South centric platform, that's going to enable easier deployment and consumption of the platform. But what is that initial hurdle that they have to get over in terms of, Is ROI a compelling driver, or is this something that they are just already committed to, and that's what's driving the momentum?

There's definitely ROI drivers. There's momentum to consolidate environments CIOs need to support, both on-prem and in cloud. This plays well into our wheelhouse of being a platform provider. Not only do we make it very cost-effective and efficient for them to migrate from legacy as well as different cloud platforms into Microsoft cloud. But of course, once they're with our new in trust product line, which is one of our fastest growing product line, allow them to do license and entitlement management and delegate administration, which effectively lower the cost of running in cloud. So ROI and platform consolidation definitely plays a part. Of course, there's also been consolidation in our ecosystem as everyone know, especially in the MSP space. There, the partners are also looking for consistent track record and steady platforms to invest and be strategic with. And there also AppPoint is shining through.

Got it. Very helpful. Thank you so much. Thanks, Brian.

The next question is from Jason Ader with William Blair. Please go ahead.

Yeah, thank you. Good afternoon, guys. I wanted to ask first about the macro commentary from Microsoft about softness in the SMB space. You talked about elongation of sales cycles. I'm assuming you were talking about enterprise, but are you also seeing some slowdown in the SMB? And then just a clarification, you talked about the last couple weeks of July. I'm assuming it's also continued through the first six weeks of this quarter. Is that fair to say?

Yeah, I'll make the first comment. Yes, the elongation deal cycle are more on the enterprise side. And increasingly, our mid-market SMB side is the fast-growing and bigger percentage of our business. So we don't see that on the SMB side. In fact, we actually see, because of the consolidation in the market and on the SMB side, we're actually picking up, again, three-digit, continue that fast-paced seed growth. We are offering some campaigns and incentives for partners to switch over to us even faster in the SMB side. So we don't see any slowdown on the SMB side for us. Again, it's a big market. So we have a small sliver. It's for us to grab market share. And I'll leave it to Jim to answer that part.

Yeah. So and then on the I think the other piece was the elongation in terms of continuation for the last 13 weeks. Yeah, which we saw at the end of the quarter. Yeah, we're baking that in. We're still seeing some of that, and we're planning, we're assuming, Jason, that that continues for the second half of the year. And again, trying to be conservative, that's what we're seeing now. It may turn, it may change, but we're planning as if it's going to continue, and we've kind of baked that into the guidance.

Good, thank you. And then, TJ, how do you interpret the increased momentum in the migration products? Is it just the lingering impact of COVID kind of accelerating the shift to cloud, or is there something else going on there?

Yeah, it's really interesting. We get increased demands in migration, especially at MIA. There is quite a bit of momentum there across hybrid deployments, a lot of big migration deals across our enterprise customers. It's a continued pickup pace in consolidation platforms. We think part of that is ROI-driven. So, yeah, it's a very interesting phenomenon.

Yeah, and usually, you know, Jason, we see more of it focused on new customers coming in. where they're coming in as a, you know, the tip of the spear being migration in a lot of cases. But in the first two quarters of this year, and particularly second quarter, we saw more of our existing customers using our migration products, right, and engaging us there, which is a little different than in the past. And I think it goes to some of what TJ was saying, again, trying to de-risk a little bit and be more, you know, focused and have a hybrid solution on their end, Migration is a key element to be able to do that.

So you interpret it as just acceleration to cloud? Exactly. So existing customers that may be in the cloud a little bit already, but now they're just kind of saying, you know what, we've got to just get there faster.

Yeah, and consolidation as well. So absolutely. Gotcha.

Okay. And then last one for me, just for you, T.J., Which specific SKUs are you seeing the most momentum? I know you've talked about that in the past and love kind of a real-time view on what's doing really well in your product set.

Yeah, as I mentioned, this whole Entrust product portfolio, which is part of our control suite, continue to gain real good momentum. It's along the line of SaaS management. we're increasingly investing into that area to essentially help customers once they're in cloud to better control costs and better control access patterns and delegation and also multi-tenant management. So as customers get into cloud and realize the nuances of data sprawl, that becomes a very important topic. So we continue to see control suite to be a fast-growing SKU. Of course, having said that, our resiliency suite, as we mentioned before in the last couple quarters, is 50% of our business, which is led by a backup as a service, especially with the ransomware detection and recovery capabilities. So that continues to be a big piece of our revenue.

Very good. Thanks, guys. Good luck.

Thank you, Jason.

Thanks, Jason.

The next question is from Derek Wood with Cowan and Company. Please go ahead.

Great. And thanks. Congrats on a solid quarter. I wanted to ask about the progression of the new hunter-farmer model and just trying to think of potential headwinds or tailwinds. So I guess one, how has sales retention been trending through these changes? And then Two, you know, assuming most account changes have been made, how are you feeling about setting up for kind of stronger upsell, cross-sell in the second half?

Okay. Yeah, so great question. The Hunter farmer specialization model, as we mentioned earlier, the accounts are all allocated. It does take time for the new account owners of the existing patch to introduce themselves to the customers and establish a relationship to do the upsell and cross-sell. So you're absolutely right. It does take time to do that, and we expect that will uplift the upsell and cross-sell dollar values in the second half of the year. Of course, Jim also talked about the occurrence of migration projects that were part of the upsell into existing accounts. We see a lot more migration in existing customers. So that's part of the equation, even though that doesn't necessarily contribute to our ARR number today. So, yeah, so in terms of churn, though, that's a very good question. We, like all tech companies, are experiencing higher than historical churn. Historically, we're actually much higher. better than our industry peers in terms of controlling high retention. But Q1, Q2 this year, we do see higher than usual churn for us, even though compared to our industry peers, we're still below those churn rates. Having said that, though, we're now in Q3 starting to see that come down because the market is cooling. And we do see some tech companies announcing either hiring freezes or shedding of workforces. So we see that term pressure going down second half of the year.

Okay, TJ, thanks. Helpful color. Jim, one for you. If I look at your guidance for Q3 in the full year, we obviously come back into the Q4 and, you know, it attenuates kind of flat revenue quarter on quarter. And I know you saw a similar dynamic last year, but historically, I did think that was one time last year. Historically, you did have, you know, decent sequential strength in Q4. Can you just talk about the dynamics on that revenue progression? And then just, you know, the guidance would insinuate that you're kind of exiting Q4 with about, you know, mid-upper teens revenue growth, but you're guiding to, you know, 31% ARR growth at year end. So it's a pretty big delta. Uh, can you talk about why that's such a big Delta and how we should think about that potentially converging in 2023? Yeah.

So maybe the first, the first piece of that first, in terms of thinking about Q3 and Q4. So I think again, this is where we're, we're really trying to be conscientious and you're right that historically we would think about Q3 being a strong quarter because of our public sector and that being a driver, a key driver in Q3. And then Q4 historically being software industry, Q4 being stronger. And what we're trying to do there is really just be conscientious and be somewhat cautious in terms of the bigger macro environment as to what's happening. And so just trying to be a little bit conservative there and not get out over our skis too far. So again, that's really the pullback there is just trying to address it in that way. Um, so again, nothing more than that than, than really no major shift. We would still be, be thinking about it the same way in the longer term environment that our Q3 would be strong and our Q4 would ultimately be stronger. But in this year, based on what we're seeing in the market right now, we're just trying to be conservative. And then in terms of ARR, so we, we definitely have this mix in terms of ARR and revenue. Um, and so again, we're just seeing that, that as we lay out the forecast for the rest of the year, We do have a little bit of that mix that will show us roughly getting to 31%, about 28% without FX impact, and then about 31% assuming the FX impact. So, you know, that's really just the forecast of where we are and what we see in those dynamics. We're being as conservative as we can on the revenue side. and think we're still being conservative on the ARR side, but we're going to get to that 31%. And as I mentioned, I think there's three impacts on ARR. We've got the FX impacts. We have the macroeconomic environment that we're trying to shift a little bit downward. And then the third component is the migration component to our business that we don't include in ARR. So those three components are impacting. But again, I think we feel pretty strong about getting to the 28% pre-FX and then taking into account FX, getting to that 31. Okay.

All right. Thank you. Thanks, Derek.

And the next question is from Kirk Matern with Evercore. Please go ahead.

Yeah, thanks very much. Two questions for me. I guess, TJ, just to start, can you just talk a little bit more about some of those enterprise deals that are getting, seeing elongated sales cycles? Is it, price sensitivity from the buyer? Is it additional approval from higher up? I guess are there things you all can do from a sales perspective to help make sure those type of deals don't get pushed out too long or don't get pushed aside for, say, three, six months? And I guess if you saw some of that elongation, the ones that maybe you thought would close in June started to close in July. I'm just trying to get a sense on you know, what are maybe the driving factors there and if any of those have started to settle out a little bit?

Right. Great question. Overall, we're actually pretty happy with the momentum of our enterprise continued business. The elongation in some of the accounts are due to the additional approval process. What we think actually continue to help us is our additional focus around security. So actually recently we just obtained another contract level of security certification. Um, so those type of cloud ops and cloud security validation really helps move along this approval process in large enterprises, along with obviously, uh, data sovereignty and multiple instances around the world. Um, so yeah, we were working to streamline, uh, some of the process on our side, including, uh, click throughs, uh, agreements and also, uh, another, um, new avenue we've found to be able to accelerate approval process is leveraging channel. So we have leveraged channel for medium to small businesses, but now we're looking at also leveraging channel for large enterprise customers. What happens is when those large enterprise customers typically have a procurement through a partner, those agreement and T's and C's has already pre-negotiated. So it actually abstract out kind of the negotiation on our side. We're going to try that as well as a way to accelerate deal cycles. We think that that's a really potential good way to leverage channel.

That's helpful. And Jim, can you just remind us, when you have deals that come up for renewal from a SaaS perspective, is there anything similar in your contract that you guys can can use? Or I guess if you have those levers, are you pulling them right now or are you trying to leave them alone? I guess just give us a sense of kind of how you guys think about pricing right now from a product perspective.

Sure. Good question, Kirk. And you were breaking up on our end a little bit there, but I think I got the gist of your question around contracts up for renewal pricing and So I will tell you there's a couple things we're doing there. So one is in most of our new contracts and even going back into last year, we are building in price escalations into the contracts so that when they are up for renewal, there is effectively a feature already built in for an escalation. So that's number one. And then when we think about pricing, so there are certain areas in our product suites where we can improve pricing, where it's not as competitive, and then there are other areas where it is competitive. So we look at the pricing really on a product-by-product basis, not just across the board and, hey, can we raise prices or not? It's literally at a product-by-product basis. And then in each individual account, we're looking at them as they're up for renewal, What's the value proposition, the engagement, all of those things to consider where we can improve our pricing and margin. We're looking to do that. But, again, the biggest key for us is building it into the contracts up front. That was something we started more and more last year, and it continues now. Again, having that built in gives us the best chance, you know, when it's up for renewal.

That's helpful. And, actually, if I could say something. It's your answer to Derek's question on sort of the 3Q, 4Q. Are you seeing anything different right now in terms of your government customers maybe in the way they think about SaaS products versus, say, term deals or the way they want to be sold? Do you see any change in that this year? It would obviously have an impact on RevRec, so I was just kind of curious how you guys are thinking about that. Thanks.

Yeah, thanks, Kirk. So right now, no. I mean, I think overall, I would say that so we're not seeing any changes there. That's a group that historically has done some hybrid as well and not a complete migration over to SAS. So when I think of our percentage, when you look at our Q2 revenue allocation kind of splits between SAS and term, which would be our hybrid piece, I think you're going to see similar trends in Q3 and Q4. So I wouldn't expect any significant change there. I would expect it to be similar to Q2.

Thank you.

The next question is from Nehal Chokshi with Maxim Group. Please go ahead.

Yeah, thanks. That's right, Northland Capital Markets. That's right. Your growth for incremental ARR has been flashed for 1H22, and your updated guidance implies that that incremental ARR accelerates to about 30% in 2H22. So have you seen evidence yet that that acceleration in incremental ARR is starting to play through?

Yeah, we are seeing it already. So kind of alluding to some of the The slowdown we saw at the end of Q2, but we are seeing in terms of the pipeline build and all of those kind of let's call them leading indicators that we would see going into Q3 and Q4 are really strong. And so give us that confidence that those numbers that you just alluded to for Q3 and Q4, you know, are very attainable.

Got it. Great. And then on a year-over-year basis, your sales and marketing was up quite a bit year-over-year, but on a Q2 basis, it was down. What's going on there in terms of the Q2 trajectory on sales and marketing?

So there's two elements, right? One is there's an FX component to it that we, on the expense side, actually benefit from. So that's one component. And then the second component is just the way some of the timing of our expenses work. So you're going to see a bigger tick up in Q3 for some of those expenses. Some of our marketing expenses kind of just have a, you know, obviously have a timing issue to them in terms of when they're actually incurred. And then we also obviously, as TJ alluded to before, had higher than expected turnover in some areas of the business, including sales. And that's been now rectified, but we saw some of that impact in Q2 as well. So part of it's timing, part of it is FX, and again, you're going to see, obviously, you'll see improvements there in Q3. You're going to see continued investments, including more marketing spend, but again, that was just related to timing.

Okay, great. And I presume that you do not have any FX hedging programs in place, correct? Correct.

We currently know we don't have any hedging programs that we're working on. And if you think about it, we have a little bit of a natural hedge built in between our revenue and expenses as you've seen even in Q2. Great.

Okay. Thank you.

The next question is from Brett Noblock with Cantor Fitzgerald. Please go ahead.

Hi, TJ and Jim. How are we doing? Just a couple questions for me. First, regarding headcount, it has been a pretty big increase across all segments on a year-over-year basis. How do you think you're positioned now? Do you expect that pace of headcount growth to remain robust, or do you expect that to level off?

A lot of the headcount growth is our investment to into lower cost regions. So we, for example, expanded our Vietnam office in terms of R&D headcounts, as well as our Philippines office in terms of operations support. So a lot of the headcount come from there. We are looking at creating redundancy and doing some de-risking in the current macro climate here. So that would, we think it's a short-term situation as we drive towards efficiency. over the longer term to potentially consolidate some of the function roles. But, yeah, so at the same time, though, the business is growing at a nice clip. The market in front of us is massive. So we're not looking at slowing down our business growth.

Yeah, I think maybe just one additional comment on that. So I think if you think of the Q3 and Q4 guidance that we just put out, we have um we obviously kind of brought down revenue to based on the thinking that we've kind of already illustrated but we're keeping our operating income guidance the same and so what we're you know what we're thinking there is is that we're actually going to manage those expenses so to answer your question about like the growth it obviously will decline as a percentage because again we're going to manage to those original kind of targets for you know non-GAAP operating income. And I think it's important there that we recognize that in this economic environment right now where we're being conservative and understanding what the revenue could be, we also want to take the same approach on our expenses and be much more conscious in terms of how we're investing and understanding that if we're being conservative on the revenue and understanding that there's impacts there, We also need to be prudent on the expenses. And so, again, so we're doing that, and you'll see that reflected in Q3 and Q4.

Understood. Thank you. And then on the rebrand of EDU Tech and MavenPoint, can you maybe remind us how big of a business that is and maybe where that ranks as a priority or maybe a growth driver over the medium term?

Yeah, we always said the vertical solutions is one of our growth drivers. We currently just don't disclose those specific business verticals, but it's a business that's growing really nicely for us. We're actually very excited about that. So the rebranding showcases a pivot towards corporate learning and development, which is a much, much bigger market in addition to training management. And we're also looking at LinkedIn, Viva Learning integration, So, yeah, it's one of our high-growth verticals. We always say that, you know, on top of our confidence platform, this data orchestration, security, and governance platform, we're now showcasing vertical solutions as a way to continue to extend and increase into accounts and increase the ARPU. So education space is really a shining example of success there.

That's helpful. And then maybe just one more on the share repurchase activity. I guess, have you guys continued to buy since the end of the quarter? How should we think about that going forward? Is it on a predetermined schedule or a bit more ad hoc?

Yeah, good question. So, yeah, up until through June 30th, we had spent about $10 million in that buyback program. We did continue subsequent to the end of the year or end of June. And I would expect You know, right now it's a little bit more systematic, but I would expect that we will spend roughly about 10 million as well in Q3. It may be a little bit, you know, the beauty of the program that we have in place, as you know, is it gives us flexibility. And one of the things we were looking to do in implementing a program like this was that we did have flexibility. It's been more systematic up until this point, but we do have the flexibility to kind of discontinue, restart, and do a variety of things. And that flexibility is good as we think about other uses of cash over the next quarter as well. It gives us that flexibility to adjust.

That's very helpful. Thanks, guys. Really appreciate it. Thank you.

Thank you.

This concludes the question and answer session. I would now like to turn the conference back over to TJ for any closing remarks.

Thank you. I'd just like to say that we continue to make strong progress on our strategic priorities in this uncertain economic and geopolitical environment. Throughout our company's history, we have shown our ability to weather dynamic market environments by growing while being prudent with expenditures. Our go-to-market strategy positions us well for new logo acquisitions, a growing partner ecosystem, and the ongoing expansion of existing customers to whom we deliver exceptional service today. This quarter, I had the opportunity to spend time in Munich with our MIA leadership team and talk about the continuous strong demand we see from our customers and partners, as well as the value we are providing with our solutions across complex deployment scenarios for their digital transformation initiatives. And as I mentioned earlier, just last week, I was in Tokyo for the first time since the COVID pandemic, where I met with all of our top Japanese partners and saw firsthand how excited they are with that point being able to help advise them, and accelerate their SaaS transformation. This speaks to the robustness of our growing partner ecosystem. We know it's a privilege to have our shareholder trust and faith in our ability to navigate the current market conditions, focus on consistent execution, and ultimately deliver long-term shareholder value. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.