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spk05: Good afternoon. Thank you for attending the Momentum Global Third Quarter Earnings Call. My name is Matt and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Gary Fugis, VP of IR. Gary, please go ahead.
spk01: Thank you. Good afternoon and welcome to the Momentum Global Third Quarter 2022 Earnings Call. Joining me on today's call is Xander Lurie, CEO and interim CFO. After Xander's prepared remarks, we'll take your question. Prior to this call, we issued a press release with our Q3 2022 financial results, as well as management prepared remarks for today's call. These items are posted on our investor relations website at investor.momentive.ai. During the course of this call, management will make forward-looking statements, which are subject to various risks and uncertainties, including statements relating to our strategy, financial outlook, investments, revenue, operating margin, and free cash flow. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, in particular in the section entitled Risk Factors in our quarterly and annual reports, and we refer you to these filings. Our discussion today will include non-GAAP financial measures unless otherwise stated. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from our GAAP results. Reconciliation of GAAP to non-GAAP results may be found in our earnings release, which is furnished with our 8K filed today with the SEC and may also be found on our investor relations website. Finally, please note that the growth rates cited in today's prepared remarks are on a year-over-year basis unless otherwise stated. With that, I'll now turn the call over to Xander.
spk02: Thank you, Gary. In a year of challenges, the Momentum team is showing resilience. We're navigating an increasingly tougher macro environment where we are helping customers ask, listen, and act to grow their businesses. We're positioning the company to reach our long-term revenue growth and profitability targets. And in Q3, we continued to make progress in three key areas, reinvigorating the self-serve channel, expanding relationships within our existing customers, and improving non-gap operating. which rose to 7.6% in Q3 and exceeded the high end of our guidance range. The restructuring plan we executed in mid-October sets us up for a more efficient go-to-market motion and better operating leverage. We now expect to drive approximately 15% non-GAAP operating margin in Q4 at the midpoint of guidance, and we believe we can continue to drive operating leverage in full year 2023 as compared to 2022. We published a press release this afternoon that addresses our third quarter financial results in detail. Today, I'll hit the Q3 highlights, provide an update on our go-to-market and operating leverage initiatives, then share our updated outlook. Then we'll take your questions. For Q3, revenue of $121.4 million increased 6% year-over-year and was at the midpoint of our guidance range, as both our sales-assisted and self-serve go-to-market channels delivered revenue in line with our expectations. On a constant currency basis, revenue increased approximately 7.5%. Remaining performance obligations, or RPO, increased 10% to $244.5 million. Non-GAAP gross margin was 84% in Q3, up both year-over-year and sequentially. Our strong gross margin profile is foundational to driving long-term operating leverage. Non-GAAP operating margin of 7.6% exceeded the high end of our 5% to 7% guidance range, as we continue to generate leverage in sales and marketing and G&A. Free cash flow was $0.2 million, which includes the impact of more than $15 million of transaction and restructuring costs paid out in the quarter. Excluding these outlays, free cash flow would have been approximately $15.7 million for the quarter. And we ended the quarter with approximately $193 million in total cash and $8 million in net cash. which reflects the impact of 1.6 million shares repurchased in the quarter for approximately $15 million. Sales-assisted revenue of $46.7 million increased 24% year-over-year and is now at a $185 million run rate. We ended the quarter with 15,400 customers, up 46%. Customers in the quarter included Booth UK, Duracell, Humana, Mary Kay, TravelX, and Wanolo. It was a mixed quarter. In new sales, we saw macro-driven budget pressures and elongating sales cycles. At the same time, our nascent expansion motion continued to scale at a healthy clip. Our Insight Solutions product line, formerly known as Market Research, continued to take the brunt of the macro headlines, as this offering primarily targets buyers in macro-impacted areas like financial services and marketing leaders, and generates the majority of our $100,000-plus deals. There are strong signals that the sales assistant channel is benefiting from the secular market trends we discussed on our investor day. Our customers love our products. Our renewal rates are improving even in challenging market conditions. We had a record level of expansion bookings in Q3, which helped us at the end of the quarter, and with more than 2,240 customers spending more than $25,000 annually with us, up 25%. And approximately 900 customers using more than one of our products. We continue to build the muscle to go deeper and broader with existing customers, like Big Bus Tours, a SurveyMonkey self-serve customer since 2018 that recently expanded to SurveyMonkey Enterprise to track and measure NPS on a weekly basis across more than two dozen cities. Or Duracell, who first purchased market research credits in 2020 to gain insights into device usage habits, and then more than doubled their spend with us to explore household battery use in multiple geographies. Expansion is one part of our larger strategy to deliver more profitable growth. We also took action to match our go-to-market motions to the value of the customers they serve. In July, we began serving our low-end enterprise customers with our high-velocity sales team. Historically, that team had sold an even lower average order value product, Teams, well served by our digital channel. The team shifted over the course of a quarter to handle SMB deals, This change means starting in Q3, the sales assistant customer metric no longer includes new teams deals. However, as a result, our go-to-market motions became more efficient and our human touch selling is focused on customers with a clear path to expansion. Further, in our efforts to streamline our go-to-market motions and drive efficiency across the entire company, we put in place a restructuring plan to drive even more efficient new customer acquisition. Greater scale and customer expansion and improved overall profitability. The strategy includes three key components. First, we are implementing a plan to reduce the size of the team dedicated to outbound lead generation and eliminate the SMB sales team, as their win rates and deal sizes are too small to justify their cost structure. With our streamlined market segmentation model, SMB deals will be transacted through our website or through our high velocity sales team. We're increasing the account executive team's focus on new deals where we can land bigger customer relationships and expand with them over time. In a challenging macro environment, we believe six-figure customers with our more expensive competitors will be looking for alternative providers that offer more value. That's us. Third, we're dedicating a portion of the sales team to drive more expansion within the existing sales-assisted customer base. We have the scale in the revenue base and the product market fit. Expansion drives larger initial deals and longer customer lifetimes with a more efficient cost structure. This plan builds upon the go-to-market changes we enacted about a year ago. We believe these additional actions will result in greater efficiencies, more profitable growth, and an accelerated path towards our long-term profitability targets. In self-serve, the channel revenue of $74.6 million was in line with our expectations. Conversion, average order value, and retention metrics continue to remain healthy. and in line with historical trends. In Q3 and into October, we saw clear signals that our efforts to reinvigorate the TAPA funnel are working. Our investments in search engine optimization, or SEO, search engine marketing, SEM, website and branding for SurveyMonkey, including the successful SurveyMonkey ad campaign launch, are generating growth in user signups for free plans, which is a key leading indicator for new paid revenue growth. In Q3, US signups experienced its best year-over-year growth in six quarters. We are by no means declaring victory, but the leading indicators are encouraging and we know what we need to do to fully reinvigorate the self-serve channel. With continued execution and momentum from the top of the funnel, we believe we can begin improving the trajectory of self-serve bookings starting in 2023. Before we take your questions, I'd like to review our Q4 and full year 2022 guidance and provide some early commentary on 2023. For Q4, we expect revenue to be in the range of approximately $120 to $122 million. At the midpoint, this implies approximately 3% growth on a reported basis and approximately 6% on a constant currency basis. Guidance reflects the macroeconomic impact on new sales and project completions in the Insight Solutions business. Recall that Insight Solutions revenue is recognized primarily on a project basis versus the pure SaaS subscription model of our other major products. We expect Q4 non-GAAP operating margin to be in the range of approximately 14% to 16%, which reflects the combined impact of the increased operating rigor we established at the start of this year and the early contributions of the restructuring plan. Based on year-to-date actual performance, and our Q4 guidance, our updated full-year 2022 guidance is as follows. We expect full-year 2022 total revenue in the range of approximately $479 to $481 million, which assumes sales-assisted channel revenue growth in the mid-20s and roughly flat self-serve channel revenue growth. We anticipate a non-GAAP operating margin in the range of 7%. And while we are not providing formal guidance for next year, we believe we can continue to drive operating leverage in full year 2023 as compared to 2022. We expect full year free cash flow in the range of negative $5 million to negative $10 million, which includes the impact of approximately $33 million in one-time transaction related and restructuring expenses, a portion of which were accrued as expenses in 2021, but result in cash outflows in 2022. Excluding this amount, free cash flow would be in the range of $23 to $28 million. 2022 has had its challenges, but the momentum business is healthy and resilient. We can endure through bumpy macro conditions. Our customer base is approaching 1 million paying users, and they love how our products help them listen, analyze, and act to grow their businesses. We're positioning the business for more profitable growth, and we will continue to support our customers, act with integrity, and redouble our commitment to deliver for shareholders. Thank you, and I'll now take your questions.
spk05: If you would like to ask a question, please dial star followed by one on your telephone keypad. If for any reason you would like to remove that question, please dial star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Chad Bennett with Craig Helen. Your line is now open.
spk04: Great. Thanks for taking my questions. Nice job, Xander. Obviously, the macro is getting tougher and tougher, and we're hearing it from everybody on executing in the quarter, and operating average was great, and the guide for that is great also. Just on that topic, so I know in the investor day and I think on the Q3 call, you know, for next year, for fiscal year 23, you were pretty specific that, you know, you'd see kind of five points or 500 bps of operating leverage next year in 23 relative to 22. Is that still kind of in the realm of thinking? I know you said you've improved. Are you still kind of thinking in that range?
spk02: Hey, Chad. Yeah, thanks for the good words. You know, I'm not going to give any 2023 guidance now. I will reaffirm that that, you know, at least 500 basis points is our goal on the profit initiative. What I will say in terms of the expense envelope, you know, never have we gone into a year thinking that headcount will remain, you know, constant year over year. And that's the mode we're in right now. It is absolutely buckle down operational rigor. And so, With our expense envelope in Q4 kind of flowing into full year 2023, it provides a lot of opportunity for margin expansion if we hit on our bookings initiatives. So that's what we're all focused on.
spk04: So maybe a different topic. On the self-serve side of the business, I think you talked about effectively it's strengthening throughout the quarter and into October. So, and I think record signups or signups, you know, six quarter best year over year growth. What is the kind of cycle or the lag from, you know, signup growth that you're seeing or acceleration to paid conversions? Is it three months, six months? What has that been historically?
spk02: Yeah, it's a good question. You know, we have 20 years of cohort data here. And with 900,000 paying subscribers, you know, around the world, we have the ability to kind of really understand what drives it. And so this year, it's been all hands on deck to deliver better content, which drives search engine optimization. You know, CRISPR search engine marketing against our competitors and really buying up and down the head and tail and torso of our keywords. And then a really sharp ad campaign that we delivered with Jean-Carlo Esposito. And so, you know, as you heard us say, best delivery year-over-year sign-ups in six quarters. October was strong. The conversion to paid subs is, of course, the money question because, you know, free sign-ups don't deliver. And that's traditionally in the 30- to 90-day range. It varies by cohort. You know, the intent or the high intent of the sign-ups tends to be stronger when they come via – SEO or SEM. Those are folks who are looking for our product, looking for HR type surveys, etc. Some signups, you know, come via less high intent and tend to have lower conversion or longer lag conversion. They need to try the product more. So, you know, prior cohort data should be dispositive here, but these are different conditions and more challenging conditions. So 30 to 90 days is what we've seen traditionally, and we'll report back as we see those free subs turn into paid subs.
spk04: Got it. And then maybe one last one real quick for me. So just with respect to the sales-assisted side of the business, it looks like enterprise customers or sales-assisted customers went down sequentially. And I'm not sure how much of that were the changes you made on the high-velocity team and SMB and teams and whatnot. But it seems like, at least in your commentary, just churn there was actually stable to better. And net expansion, which might not show up in a customer number, was very strong. So can you just kind of take us through kind of the sales-assisted customer sequential? And then I'll hop off. Thanks.
spk02: Yeah. Yeah, thanks, Chad. Let me say, first, in the positive category, really, really good job by our customer success team and expansion team. That is the motion that we are most dedicated to. We have 15,400 sales-assisted customers. who are buying and loving our products, the Duracells and B of A's and Humana's of the world. You know, we never land with site-wide deals, and so it's always about getting in with surveys and then that upsell and cross-sell motion into some of our insights products. And so to see gross revenue retention and net revenue retention up quarter over quarter, year over year, super strong, we can really grow and thrive in 2023 by focusing on that expansion motion. Our new chief customer officer, who now is responsible for sales, Ken Ewell, and his team are really architecting You know, really smart go-to-market in terms of demand gen, cross-selling motions, incentives, et cetera, to be successful there. Secondly, on your question around, you know, number of customers, we moved that low kind of SMB sub-$7,000 deal outside of our high-velocity team. So we want them moving up market and then moving the low SKUs back to the web. And that digital channel has always been a great channel for us. I think in our fervor to grow, grow, grow, we let them expand into selling teams, and while that was successful in helping drive logos, it wasn't the kind of ROI we expect. And so the lower SKUs will be sold via digital, and then that high-velocity team will move up in terms of their quota attainment. And so new was challenging for us, like others, this quarter. I would say just the overall macro environment and employee risks, more cost-conscious folks you know, it's more challenging for new, but it just gets me all the more focused on our expansion initiatives.
spk05: Got it. Thanks much.
spk02: Thanks, Jeff.
spk05: Thank you for your question. The next question is from the line of Ryan McDonald with Needham. Your line is now open.
spk00: Thanks for taking my questions. Xander, maybe first one on the restructuring plan. So you quantified the sort of $4 to $5 million of expense that will hit in fourth quarter as a result of that. But can you talk about what your expectations are in terms of annualized cost savings that will be generated out of this? And then should we consider the restructuring plan to be incremental to sort of the operating margin trajectory you outlined at the investor day? Or was this always sort of a part of that operating plan that you talked about? Thanks.
spk02: Hey, Ryan, I think the 4 to 5 million, if you extrapolate, multiply that times four, you're in the right ballpark. And then as far as our August investor relations day, I think the macro environment deteriorated a bit over the last couple months, but we also contemplated getting more rigorous on expense control and total company headcount while preparing those materials. And so I wouldn't say it's totally incremental, but as I said to Chad in the prior question, I do believe we are moving into 2023 with a very firm handle on our expense envelope, and it looks a lot like our Q4 expense envelope. And that's just a very different level of operational rigor than we've had in the past when we move into a new fiscal year with a cost envelope that's expanding by 20% or 25%. So it's going to be all eyes on the bookings and revenue number, and that will have a lot of impact on that margin number. But we're moving into this mode. with the ability and opportunity to really drive margin expansion if we deliver on the top line.
spk00: Super helpful, Culler. Thanks. And then maybe the follow-up, you know, so obviously a big focus on customer expansion motion as you kind of try to re-accelerate the growth here in the business. And, you know, it sounded like that one of the key components of that is really cross-selling surveys with insights or market research. And I think as a part of that, you were planning or trying to pilot out a subscription-based offering for Insights. Just curious how that progress is going on the pilot and when should we expect that to be sort of fully rolled out, generally available to customers?
spk02: Yeah, it's a great question. As our R&D team did a great job over the last few years of developing these new solutions for marketing leaders that we're winning some of the most discerning and demanding marketing buyers in the world. But it has been delivered more on a project basis or on an annual basis. And so our gross renewal rates are not as good as the traditional SaaS. So we've just launched a pilot program with some customers over the last few weeks. So I don't have any update on how that's rolling out. But our CSMs and account executives will have feedback in terms of how well that's being received. It would be a huge win for us if we could develop more predictability and higher GRR. for those customers. We know the products are fantastic and well received and super valuable in a market where folks are getting more cost conscious. They're going to be coming to us. So it'd be great to get them on a subscription plan. But I don't have an update for you yet. All right. Thanks. We'll stay tuned.
spk05: All right, Ryan. Take care. Thank you for your question. The next question is from the line of Parker Lane with Stiefel. Your line is now open.
spk03: Hi, Xander. This is Matthew Kickert. I'm for Parker. My first question is, you know, last where you talked about new brand campaigns. I'm curious what the initial traction has been for those campaigns and if it's helping to accelerate the self-service rebound at all.
spk02: Yeah, thank you, Matthew. The Giancarlo Esposito campaign won a lot of nice accolades, but more importantly, it drove a whole bunch of traffic. to SurveyMonkey around the idea of, you know, how can I ask, listen, and then act for my stakeholders? And so we've seen this really sharp rebound in terms of signups to SurveyMonkey, as I mentioned before, you know, the best new growth in six quarters and, you know, October was strong. But as I also said, you just can't take any victory lap for free signups. And so it's now on us to make sure that those users get an opportunity to try the product, see the value of our templates and how that data can help them. interpret and make smart decisions on behalf of their customers or employees or students, etc. And so, you know, we guided to what we thought was an appropriate projection of that conversion rate. It takes 30 to 90 days, and we'll report back as we have new updates. But I think most importantly, this category is strong. Our brand is super healthy. You know, for reasons that I outlined earlier in the year, our resources and attention got diluted into some other areas, but it's all eyes on the ball right now. And you know, signups is the number one correlated driver and indicator into our future paid bookings.
spk03: Got it. That's great to hear. And then secondly, as you speak to increased number of customers that are using multiple products, what are some of the factors that customers are considering when they're looking at non-core products? And then if a customer decides not to add that non-core solution, are they going with a competitor or are they just deciding to not buy any new solutions at all?
spk02: Yeah, so the market that we approach, we go to market with products that are core. So I would characterize our surveys products, our insights products, and our CX products as the products that we're super focused on. Today we have 15,400 sales as customers. The number of customers spending more than $25,000 with us annually was up 25% year-over-year. That number is approaching 2,300. And the number of customers who are buying multiple products is now 900. That was also up significantly year over year. We almost always land with our Surveys Enterprise products, SurveyMonkey Enterprise. And that provides us an opportunity to move into the org now that we have an account relationship with a customer, now that we have a MSA in place with the legal team. And as we are delivering value, we have the opportunity to either upsell or cross-sell those market research products. You know, the sales team is familiar with me saying, like, if this company is big enough to be buying our SurveyMonkey Enterprise product, they are also big enough to be doing market research, product research, you know, understanding the different cohorts of how their customers are responding. And then, of course, vice versa. If a company lands with our market research product, they need the kind of enterprise-oriented survey solution that's integrated with their business systems. that we can offer in SurveyMonkey Enterprise. So almost all of our 15,400 customers are great candidates to be cross-sell. And that's what we're focused on in that expansion motion with some really good success. If they don't come to us, look, we do have competitors. Qualtrics is a strong competitor in the market. You know, we beat Qualtrics, you know, heads up and in RFPs often, and I'm sure they beat us as well. But look, I think both companies are going to thrive. We have Medallia and there's some other providers, no need to name. And there are also a whole lot of offline services companies. The market research or insights category is an $80 billion category, and the vast majority of it is offline, trapped in more expensive, longer sales cycles with services firms, professional services firms that are going to be under a lot of rigor and scrutiny in a challenging macro environment.
spk03: Okay, that's great insight. Thank you very much for taking my questions.
spk05: Thank you, Matthew. Thank you for your question. There are currently no further questions registered. So as a reminder, it is star one on your telephone keypad.
spk02: All right. Well, let me just sign off here and thank you all for joining and for your questions and your support. Obviously, a challenging macroeconomic environment, but I believe that we are positioning this company for future acceleration of revenue by our focus on our self-serve channel, by our focus on expansion in our sales channel, and then a whole lot of focus and operational rigor to drive margin. And we look forward to reporting back in a few months. In the interim, we look forward to seeing you at the Credit Suisse and Wells Fargo Securities Conferences this quarter. Wishing you all a great evening. Take care.
spk05: That concludes the conference call. Thank you for your participation. You may now disconnect your line.
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