This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: Thank you for attending today's Asana Q3 fiscal year 2023 earnings call. My name is Bethany. I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Catherine Buon. Please go ahead.
spk00: Good afternoon, and thank you for joining us on today's conference call to discuss the financial results of Asana's third quarter fiscal 2023. With me on today's call are Dustin Moskowitz, Asana's co-founder and CEO, Anne Raimondi, our chief operating officer and head of business, and Tim Wan, our chief financial officer. Today's call will include forward-looking statements, including statements regarding our expectations regarding free cash flow, our financial outlook, strategic plans, our market position, and growth opportunities. Forward-looking statements involve risks, uncertainties, and assumptions that may cause our actual results to be materially different from those expressed or implied by the forward-looking statements. Please refer to our filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents are available in our earnings release, which is posted on our Investor Relations webpage at investors.asana.com. And with that, I'd like to turn the call over to Dustin.
spk07: Thank you, Catherine, and thank you to everyone for joining us on the call today. As you saw in the earnings release, Asana reported strong Q3 revenue growth and notable operating margin improvement in the quarter. Revenue in the quarter grew 41% year-over-year, or 43% when adjusted for foreign currency. Operating income was over $11 million better than expectations, a credit to our revenue outperformance as well as our continuing focus on managing our expenses. We had 493 customers spending $100,000 or more in annualized gap revenue, up 78% year over year, and continue to be the work management solution of choice at some of the world's leading enterprises. In addition, our largest deployment has now reached over 150,000 paying seats, further widening our significant lead in enterprise deployments. Our enterprise business is growing more rapidly than our overall growth rate, continuing to become a larger portion of our business over time. And the net retention rate of our customers spending $100,000 or more continues to be very strong at over 140%. And we'll talk more in a moment about some of these large customers who represent some of the world's leading companies and best known brands. Looking back to fiscal 21, we'd accelerated revenue growth year over year. So we ramped up heavily in the second half of fiscal year 22 to increase capacity for what we believed could potentially be an even bigger year in fiscal 23. The last spring, the macroeconomic environment started to turn on our international business. So in Q2, we slowed headcount growth, started pacing investments in lower ROI geographies, and started taking significant measures to manage spend. By September, those conditions became even more challenging, including for our US business. Based on all of these factors, we made the difficult decision last month to reduce the size of our overall organization by 9%. We also adjusted our full year outlook to capture these impacts. Our current expectation is that these factors will persist through the fourth quarter and into the next fiscal year. While the macroeconomic trends have been dynamic, what hasn't changed is the size of our market opportunity and our product strategy. Asana's work management platform is now a strategic choice as organizations look to successfully navigate these uncertain times. I've been on the road recently meeting with customers. We're fortunate to work with some of the most innovative companies in the world, companies that have successfully deployed Asana to tens of thousands of users. This scale and their perspective has given us unique insights into how enterprise organizations are thinking about their current and future software needs. With that, there's three things to note. First, while buying decisions are being considered carefully by the C-suite during this macroeconomic cycle, they're still investing in solutions that help them do more with their tech stack, offer time to value, and focus employees on work that matters. This is a long-term tailwind that will likely continue in the years to come. Second, we're seeing a similar strategy in more traditional industries where there's real urgency to digitally transform and disrupt the old ways of working. Companies in automotive, financial services, professional services, healthcare, manufacturing, and shipping and transportation are automating their workflows with Asana. We're even seeing cross-pollination from organization to organization as Asana advocates take on roles at new companies. A few years ago, the term work management didn't even exist, and today it's approaching the mainstream. And third, especially in this macroeconomic climate and during the season of annual planning, we're repeatedly hearing how critical it is for leaders to have visibility and accountability. This helps to ensure that the work delivers on business priorities. When work is connected to goals in Asana, it creates a dynamic constellation of where things are successfully aligned and where the hotspots are. With this bird's eye view, leaders can take action, pivot quickly, and be more competitive. Asana is honored to be recently recognized for our goal-oriented approach that drives greater enterprise adoption. The Forrester WAVE Collaboration Work Management Tools Q4 2022 evaluation has named Asana a leader in its assessment of the top 13 vendors in the market. The new report specifically calls out our strategic differentiation in two areas. First, for how our work graph data model connects information, people, and objectives that drive work through the organization. And second, for how our goal management structure helps organizations connect disparate teams with a common focus. Asana's recognition as a leader in the Forrester wave follows its number one ranking in the G2 Grid report for objectives and key results, providing strong customer review-based validation of product and competitive differentiation. Early data from our recent Q3 enterprise product announcements has been strong. We're seeing higher quality leads with larger customers at later stages in the funnel. Companies are moving goal management from standalone OKR vendors into Asana, and CIOs are recognizing our product as a consolidation opportunity of key goals and work management. One of our customers has been celebrated for its rapid growth after quickly and successfully shifting strategies. The need for this kind of agility is why they made a Q3 move from their standalone OKR solution to Asana, where they can connect the work that matters to company goals. Some of the big enhancements to goals that we introduced this year have been driving adoption. For example, since launching Goals for the Universal Reporting last quarter, we've seen goal creation has almost doubled in each customer year over year across our $100,000 or more cohort. Our newly HIPAA compliant offering opened new doors this past quarter with companies that store, consume, and transmit personal health information. And even though it was just released, we've already closed multiple deals across healthcare and insurance around the world. Our HIPAA offering will enable them to bring more of their patient care management workflows into Asana. And we've seen large customers in Australia and Japan migrate their work data into our new regional data centers, a testament to their continued usage of and investment in Asana. As we look to fiscal year 24, we'll continue to build out Asana's work graph as a critical navigation system for companies. I'm excited, alongside customers, to share much more on how the power of collective intelligence will accelerate organizations during our next marketing event in Q1. This means our customers get data-backed insights as well as turn-by-turn directions that help them address real business challenges. In the shorter term, we're specifically focused on helping leaders across operations move faster and continue to build for the enterprise at scale. Asana gives strategy and ops a single source of truth to track requests across email, chat, documents, and other frequently used applications. They're able to maximize efficiency and pivot work to achieve critical organizational goals. We're also giving IT the needed roles-based guardrails to scale up onboarding and manage faster and more successful deployments. Before I hand it over to Anne, I want to again acknowledge that we're making decisive moves to improve our margin profile. With over $545 million in cash, we believe we're fully funded to execute on the current strategy and achieve free cash flow positive by the end of calendar 2024. We're not satisfied with our performance and will be focused on driving growth and enhancing our global go-to-market execution. I believe Asana is uniquely positioned to help companies through these current challenges and will continue to invest conscientiously while maintaining our leadership and product innovation. Now I'll turn it over to Anne.
spk01: Thanks, Dustin. As Dustin mentioned, we noticed increasing pressures on our customers at the end of September when the budget tightening and longer deal cycles became more apparent in the U.S. The macro environment was having an impact on some of our customers' ability to increase headcount. As a result, some of our expansion activity slowed, especially in mid-market and smaller accounts. By the end of the quarter, we made the hard decision to restructure and realign our business. Despite the macro backdrop, we continue to see thousands of organizations and large enterprises realizing the value of work management and choosing Asana. While the SMB and very small business markets are softer, we continue to see strong traction in the enterprise organizations and larger deployments. The category is large, and we are still in the early innings, so the competitive dynamics in the market are unchanged. At the same time, the number of multi-year deals went up sequentially and on an annualized basis. More customers are making longer-term commitments with Asana. I spend most of my time with our teams and our customers, and this is what I'm hearing. There's increased scrutiny on deals globally. Executives want higher and faster RI from their investments. There's increased participation of executives in deal and work management investments are being elevated to the CIO, CFO level more than they have ever been. During the dynamic macroeconomic periods like now, organizations are looking to be able to set goals and increase accountability across their business and to make quick resourcing decisions as things shift. The buying environment is more measured, but budget impacts vary across industries, and Asana is well-positioned in these conversations. In the third quarter, we continue to gain traction in healthcare. Norton Healthcare, the hospital and healthcare system that has 340 locations throughout Kentucky and southern Indiana, expanded their use of Asana in Q3. My favorite use case of theirs is how they onboard new physician providers in Asana year round. Previously, they managed this complex process manually, and important documentation like medical certifications and licenses was easily lost in long email threads. Today, they run this whole process in Asana via a purpose-built workflow that includes a checklist of every step to ensure it's done accurately and successfully. You could liken this workflow to onboarding a whole new business unit to a company. This has not only made the process much more efficient so they can scale quickly, but also helps them automate steps and save costs. As Dustin mentioned, the HIPAA compliance announcement this fall is opening doors even further. The product has only been available for over a month, and we have already closed a number of HIPAA-compliant deals. Macroeconomic factors and currency fluctuations have driven up costs. But several industries have benefited and are accelerating the speed at which they deploy their capital into digital transformation. For example, we've seen major Japanese manufacturing companies investing in digital transformation to secure competitive advantage, enhance operations and processes with a focus on the supply chain, and improve profitability through better management with cross-functional visibility. For Asana to be used like this in both innovation centers and core manufacturing departments, it's a testament to our product's deep value and flexibility. Sonder, a leading next-generation hospitality company that operates in over 40 cities across 10 countries, uses Asana to make decisions rapidly and adapt quickly to changing factors. They use Asana across the entire company, from property managers to maintenance teams to the strategic initiatives team. and upgraded to our enterprise solution this quarter for the enhanced security functionality. Another innovative customer using Asana to help manage their supply chain is HelloFresh, the world's leading meal kit provider. Headquartered in Germany and serving 17 countries, HelloFresh's strategic procurement and ingredient development teams use Asana to manage their ingredient sourcing and inventory workflows. Their old way of working wasn't efficient or scalable. Now HelloFresh is able to more quickly develop and launch new seasonal recipes that meet their customers' preferences across 30 different recipes offered each week. In Q3, we continue to see companies in media and financial services expand with us. These are just a few examples of leading companies who are choosing Asana because the work graph is the most scalable platform, connects goals to the work across the organization, and provides quick, measurable business ROI. We are continuing to see broad cross-industry adoption with significant traction in Fortune 100 customers, of which 80% use Asana. These successes are just the beginning and we have a lot of work ahead. The key to success for us is to continually improve our ability to address our customers' needs and drive growth across our large customer base. We're making strategic changes in our organization to better realign resources for long-term, high leverage growth. Our key areas of focus include taking our success with our largest customers and making it a replicable, scalable process across our entire go-to-market motion, serving our smaller customers in a more scalable way by further leveraging our product-led capabilities, maximizing data from product-led motion to better support the sales-led process and customer lifecycle, and bringing in new leadership to elevate our enterprise success to the next level. With that, I'll hand it over to Tim.
spk14: Thank you, Anne. Q3 revenues came in at $141.4 million, up 41% year over year. This puts us at an annualized quarterly revenue run rate of $566 million. Revenue from the U.S. grew 47% year over year, accounting for 61% of our total revenue. International grew 33% year over year, accounting for 39% of our revenue. Currency impacted our international growth rate by roughly 500 basis points and the overall revenue growth rate by about 200 basis points. International growth would have been 38% year-over-year and total revenue growth would have been 43% year-over-year without the impact of currency. Revenue from customers spending $5,000 or more on an annualized basis grew 52% year-over-year. This cohort represented 73% of our revenue in Q3, up from 68% in the year-ago quarter. We have 18,700 customers spending $5,000 or more on an annualized basis, up 32% year-over-year. Our largest customers remain our fastest growing cohort. We have 493 customers spending $100,000 or more on an annualized basis, and the customer cohort is growing at 78% year-over-year. We believe this metric is a good proxy for our enterprise business. As a reminder, we define these customers cohort based on annualized GAAP revenue in a given quarter. Our dollar-based net retention rates remain strong across every cohort. Our overall dollar-based net retention rate was over 120%. Among customers spending $5,000 or more, our dollar-based net retention rate was over 128%. And among customers spending $100,000 or more, our dollar-based net retention rate was over 140%. As a reminder, our dollar-based net retention rate is a trailing four-quarter average calculation. We continue to see stable churn rates across the cohorts and low churn in our large accounts, demonstrating the value we deliver for our enterprise customers. However, as Ann mentioned, we did see customers pausing growth or hiring more slowly, and the expansion in our business slowed as a result. We expect our overall dollar-based net retention rates to trend lower during this economic cycle. As I turn to expense items and profitability, I would like to point out that I will be discussing non-GAAP results in the balance of my remarks. Growth margins came in at 89.6% from 90.7% in the year-ago quarter. Research and development was $50.2 million, or 36% of revenue. We continue investing to win and fuel innovation in our proprietary technology, which will help us deliver on our vision. Sales and marketing was 98.5 million, or 70% of revenue, and G&A was 30.6 million, or 22% of revenue. Operating loss was 52.6 million, and operating loss margin was 37%. The improvement in our operating margin demonstrates our ability to drive more efficient growth and manage our operating expenses with increased discipline. Net loss was 52.4 million, and our net loss per share was 26 cents. Last month, we reduced our global headcount by approximately 9% as part of a restructuring design to better manage the business with a balance towards growth and profitability. This reduction will result in a non-recurring restructuring charge of $9 million to $11 million, which will be excluded from our future non-GAAP results. We expect the charges to be incurred primarily in the fourth quarter of fiscal 23 and our restructuring efforts to ultimately result in annualized savings of roughly $40 million for the company going forward. Moving on to the balance sheet and cash flow. Cash and marketable securities at the end of Q3 were approximately $545.4 million. Our remaining performance obligations or RPO was $271.6 million, up 43% from the year-ago quarter. 86% of our RPO will be recognized over the next 12 months. That current portion of RPO grew 43% from the year-ago quarter. Total deferred revenue at the end of Q3 was $214.8 million, up 39% year-over-year. While we don't normally comment on calculated billings, since currency fluctuations continue to have an impact this quarter, I want to call out that currency impacted calculated billings growth by over 400 basis points, and thus 31% when adjusted for the FX impact. Our free cash flow is defined as net cash from operating activities, less cash used in property and equipment, and capitalized software costs, excluding non-recurrent items. In Q3, free cash flow was negative $48.5 million, or negative 34% on a margin basis. Moving on to our outlook. For Q4 fiscal 23, we expect revenues of $144 million to $146 million, representing growth rates of 30% year-over-year at the midpoint. We expect non-GAAP loss from operations of 60 million to 57 million, and we expect net loss per share of 28 cents to 27 cents, assuming basic and diluted weighted average shares outstanding of approximately 215 million. For the full fiscal 23, we expect revenues to be in the range of 541 million to 543 million, representing a growth rate of 43% year over year. We expect FX to negatively impact our full year growth by approximately 200 basis points. Excluding the currency impact, our growth would have been 45% year over year. We expect non-GAAP loss from operations of $230 million to $227 million. And we expect net loss per share of $1.15 to $1.14, assuming basic and diluted weighted average shares outstanding of approximately $200 million. We're being very measured with our guidance, with several factors in mind. Our outlook assumes that currency doesn't change and macroeconomic factors will continue to drive a more tempered buying environment and increased scrutiny on purchase decisions. And we assume this persists into the next fiscal year. Despite the uncertainty with the macroeconomic environment, we still expect to be free cash flow positive before the end of calendar 2024, while balancing growth and profitability. With that, I'll hand it back to Dustin for some final remarks.
spk07: Before we go to questions, I wanted to summarize by noting, like many of our peers, we're operating in a very challenging macroeconomic environment. So we're actively managing to mitigate the impacts to the bottom line and taking the opportunity to elevate and further build our enterprise business. While we are de-risking for those short-term, I continue to focus on the long-term opportunity. When I meet with customers, I recognize that we have a unique perspective collaborating with some of the largest and most innovative companies in the world, including 80% of the Fortune 100. I'm further reminded that work management is an enormous and under-penetrated market. The underlying business trends remain intact, and I'm excited about Asana's position.
spk00: Thank you, Dustin. And with that, I'll turn it back to the operator for the Q&A session.
spk13: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. Please limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. Our first question comes from the line of Andrew De Gasperi with Barenburg. Please go ahead.
spk11: Thanks for taking my question. I guess, you know, we're clearly seeing similar kind of weakness across most software categories. I was just wondering, in a conversation when you have with investors, is there anything that they're telling you differently in terms of work management and how they prioritize it relative to other software categories?
spk01: Hey, Andrea. It's Anne. Thanks so much for that question. I'll say that what we're seeing is certainly more increased scrutiny on spending on technology overall. Executives want higher and faster ROI from their investments. What we're really seeing is more just a pause on the decision making versus a deprioritization of the category, just as they evaluate where they're going to make those investments. So the theme in these periods, I think, That we're excited about, though, and positive about is executives are looking to be able to set goals and increase accountability across their business. As Dustin mentioned, goals in particular is really resonating. So the fact that we've been increasing our investment there has been helpful in these conversations because they are looking to get faster decision-making rolled out through the company as they're facing these changes. But overall, I would say mostly what we're seeing is more a pause in decision-making than anything.
spk11: That's helpful. And then maybe on the restructuring, I was just wondering, what does that translate in terms of the timeline to break even, I guess, from a profitability point of view, from a financial point of view? Is there anything you can comment on that?
spk14: yeah um andres i kind of mentioned on the call um no change in terms of timeline it uh you know from a go-forward basis the savings from the restructuring was about 40 million on a go-forward basis but we're holding and committed to delivering free cash flow before the end of calendar 2024. thank you our next question comes from the line of the thai kids ron
spk13: with Oppenheimer. Please go ahead.
spk16: Thanks. Hey, guys. I guess I want to go into the headcount reduction. Can you give me a little bit more color on how this 9% spreads across the functions? And I guess the associated question with this, how do I think about how this cut catches up to you? Meaning clearly there's some sales functions that are part of this as well. And How do I think about the capacity loss or the points of growth, you know, quota growth eliminated through this as we think about fiscal 24? Yeah, thanks.
spk07: I'll start off. This is Dustin. So just thinking about where we reduce roles, a lot of how we structured our hiring plan for fiscal 23, we front-loaded quite a lot of hiring uh, especially in sales and marketing and especially in talent acquisition to help us do the front loaded hiring. Uh, and so, um, and then, you know, we had an ambitious plan for, uh, R and D as well, but we had it more paced throughout the year. Uh, and we ended up, um, really moderating and then pausing hiring fairly early in the year. Uh, so when we came to think about the RIF, we really looked at it primarily through the lens of sort of unwinding the over-investment we made in the, in the first two categories. and really right-sizing it to the amount of demand we were seeing in the market. And so, you know, I feel comfortable with the staffing we have now and the people that we have in these roles are ramped and ready for fiscal year 24 and able to serve our best customers. And anything you want to add to that, Anne?
spk01: Yeah. On the sales side in particular, I'll just add that as we did the restructuring, We were really focused on better aligning our teams with our where we see growth, which is an enterprise. So with the softening in SMB due to the macro conditions we made adjustments there to ensure we could increase efficiency and productivity and really make sure that the team, we have here can be set up to be successful. So some other things in particular we're doing are increasing our focus on delivering scaled and efficient programs for those smaller customers without sacrificing the quality of their experience. But a lot of the focus is ensuring we're well-staffed for enterprise growth.
spk16: Okay. Maybe as a follow-up, Dustin, what is it that you need to see for you to feel comfortable re-accelerating hiring again? Like what is the key KPI that you're watching for? Because I'm pretty sure, I mean, clearly you don't want to be behind, right? So the tricky part is to try and put your finger on what would be the right thing to look for to get the green light to go ahead a little bit more aggressively. Can you give us some insight as to what it is that you're looking for to make that decision?
spk07: Uh, yeah, that's a, that's a great question. Um, and certainly one top of mind, I think that a lot of what we're looking at is really macro signal, um, and signal from customers, uh, in the conversation. So Anne talked about, um, you know, some of our best customers, they, they haven't de-prioritized digital transformation, but they do have things a little bit on pause. They themselves, uh, are in many cases are doing rifts or just reacting to changing macro landscape for themselves. and trying to kind of reevaluate and get their footing again and decide, regain confidence to start increasing their deployments. And so to some extent, it will be seeing that happen. So having the customers get back into a place of wanting to expand their deployments more rapidly. And I think in turn, they will be looking to changes in the market, obviously changes in interest rates, and changes in their own customer demand. Now, that said, a lot of our customers are still growing. We would have loved to have had even more growth this quarter, but it's still quite a lot of growth. And so another thing that could happen is just that that growth continues and we grow into our OPEX footprint. And then that would be more of a sort of gradual turn back towards investing and hiring again on our side. And so, yeah, it might be you know, quite acute or it might be more gradual. And I think in both cases, well, in the first case, it will depend on changes in the macro environment, which I do think could happen quickly, but they might not. And then in the second case, just the sort of re-evolving of the customer relationships and category growth.
spk13: Thank you. Our next question comes from the line of Alex. Zukin with Wolf Research. Please go ahead.
spk17: Hey there. This is Alan Rakowski on for Alex Zukin. Thanks for taking the question. Really appreciate the color that you guys provided with respect to the impacts you're seeing from the macro. Can you just dive into the trends you saw on a per month basis through November around expansion trends, free to paid conversions, and just general top of funnel activity? I think that'd be really helpful.
spk14: Hey, this is Tim. I would say like where we kind of, you know, we had talked about in Q2 about the macro impact in Europe. And I would say starting kind of in September, maybe middle of September, towards the end of September, we started seeing some of those same trends and same conversations happening in the U.S. I think what I'm really encouraged about is like even when we go deep into the data, like one of the things that's really, that continues to be strong is kind of like If you look at our 5K customer, that revenue base continues to go at a very healthy clip. You look at our local retention, our local retention is stable and we still continue to have high NRR even for our customers that are above 50K or 100K. But I do think the conversations that we're seeing, the types of engagement we're having is while the pipeline isn't like going away, I think many of our customers are just like taking a beat and saying, hey, what's going on in the market? Everyone is trying to right-size their own cost structure, trying to understand their own outlook based on the macro environment. But we do expect many of these customers to re-engage over the next few months and create opportunity for us. Okay, got it.
spk17: And just as a follow-up to that point, if we're to disaggregate the expansion business and the net new business, Like from our seat, you know, I would assume expansion deals are a little easier to get over the line in this environment, but that's kind of an inconsistent thought depending on, you know, other SaaS providers in the space. So what are you hearing from your reps about these areas and how does that affect your strategy for next year?
spk07: Maybe I'll start and Mike jump in. I mean, it's, It's a little of both, I think, and it depends on the segment. So probably in the smaller segments, SMB and mid-market, maybe a little more pressure against conversion and jumping into something new, a new category they haven't been spending on before, but not too dramatic. And then expansion, more with the enterprise customers. It's not even necessarily that they aren't expanding, but maybe they're just being a little more modest about it. Um, there are a couple of cases where customers were doing rifts and, uh, you know, some of the roles that were eliminated had licensed seats and they simply repurposed them to actually expand usage and other parts of the company. Uh, and so in, in some sense they, they were expanding, it just wasn't necessarily, uh, translating to dollars for us. Um, and then, you know, similarly, all of the currency headwind, uh, really shows up, um, in, in sort of, uh, which turns out to be negative renewals, even if the seats are still there. And we're heavily driven based on those trends and just on seat expansion. So I don't think there's anything that stands out too much. When I think of where our internal forecasts were most off, it was in those more modest expansions relative to what we were hoping for.
spk13: Thank you.
spk01: Yeah, I'll just add to that is our champions are still quite engaged with us on those expansions. And so a lot of the focus in the discussions really is where can we make the highest impact and deliver the highest ROI and in the shortest amount of time. So some of it is just reevaluating together where we expand the deployment and which cross-functional use cases.
spk13: Thank you. Our next question is from the line of Steve Enders with Citi. Please go ahead.
spk10: In the question here, I guess I just want to ask on the expansion within that largest customer and that expanding up to, I think it's 150,000 seats. I guess just wondering, as we think about that account, What were kind of the incremental, you know, use cases or areas that you were beginning to see that expansion take place in? And I guess, how should we think about, you know, kind of the further scalability that you could capture within that account there?
spk01: Yeah, thanks so much for that question. I think what we're actually seeing in that account is expansion across many different divisions and departments. It's a large global. um, organization. And so we are deployed in across many functions, many business units. Um, and really what we're seeing that drives that growth is that there, um, it's really how many of the organizations work and how they onboard new employees, how they train their employees, how they deploy, um, even for their end customers. And so they're codifying essentially how they intend collaboration to work within the organization. So it's not so much sort of one specific use case, but rather that we are now part of the stack of collaboration in that organization. And so we're excited to see that because I think that really is that we feel we can replicate in a lot of our large enterprise customers that are starting to see that similar behavior where it's across multiple departments, it's across multiple divisions, and it's really facilitating those cross-team initiatives that are so critical right now.
spk07: I just want to jump in to add to the question about future potential. I think this is really sort of indicative of a few of our large customers where, again, the In this environment, the company wants to have more control over the pace of deployment and how spend happens. But underneath that, there's quite a lot of organic demand in this account and others, and they're almost being held back from adoption so that the company can pay it in an intentional, controlled way. And that's fine. We'll work with them, but we're excited to embrace that sort of latent demand and work with them when they're back into a place of spending more budget to embrace it and license it.
spk10: Justin Cappos- got it okay that's helpful and then he made a comment in there around. Justin Cappos- Well, there and also kind of in the prepared remarks about kind of taking the lessons you're learning from the largest customers and. Justin Cappos- Trying to apply that to kind of the rest of the go to market strategy to drive enterprise adoption, I guess, what are kind of the key things that you. Justin Cappos- you've learned so far and kind of what are the things that you can control the you know kind of drive that you know drive that expansion notion into other. large potential accounts here?
spk07: Yeah, two great lessons. One sort of plays off of what I was just saying. These companies want to really control how Asana is deployed and be able to automatically manage thousands of accounts at a time and have that synced up with other things they're doing with the organization, so integrated with their other ways of managing people and licenses. be able to have a lot of great visibility into how people are using the product and what kind of value they're getting. And so we're translating that straight into the kinds of views we give in our admin console, how we talk to the customer directly, and what kind of data we're able to sort of provide from them ad hoc. And then the second big thing that we really piloted with this larger customer is more customized in product education. So being able to really, you know, speak their language, have the assets that teach them how to use Asana in that company culture really at the ready, and that can really accelerate adoption. And that's something we're excited to bring to other large customers.
spk13: Thank you. Our next question comes from the line of Brent Phil with Jefferies. Please go ahead.
spk07: Dustin, investors want a faster path to profitability, but we know you have to balance the long term and the potential to take share could be greater in a downturn. So I'm just curious how you're thinking about weighing the short term versus the long term and how you're thinking through that desire from investors to make the quick turn here. Well, yeah. As Tim said, we're still committed to the timeline that we provided last quarter, so I think that's really the overarching picture that we need to balance it. In the short run, I always have heartburn around the category changing and moving on without us, but I'm also just cognizant of the fact that if the customer demand isn't there, then it's easy to spend money inefficiently. uh... and so that you know that sort of easiest place that the sort of turn up and down the throttle there is with with programmatic marketing spend uh... and just uh... from a map basis we we know that uh... uh... the paybacks getting longer and uh... uh... you know just the the media are why you get on that is changing and and we should react to that uh... so i think we're we're relatively well-aligned when markets ready to grow in our customers are ready to grow that's right time for us to be to be spending more aggressively uh... But there are also things that play out over longer cycles, like how our product roadmap works. And so there it's more of a judgment call on what's the right pace. But you can see that we've been getting leverage throughout this year in R&D as a percent of revenue, and I think that will continue. And we'll just be looking at exactly what is the shape of that trend line and when do we have a little more capacity to reinvest there and reinvest in headcount and programmatic spend elsewhere in the company.
spk13: Our next question comes from the line of Josh Baer with Morgan Stanley. Please go ahead.
spk12: Hi, thanks for taking my question. This is Sophie Lee on for Josh Baer. I guess my question is, when you say, you know, you expect NRR to be continued to be pressured going forward, what kind of turn and expansion dynamics are you kind of thinking about? Are those more related to, I guess, less seed expansions, or are you implying more, I guess, lower dollar expansions as customers downgrade to cheaper plans? Just curious what you're thinking about there.
spk14: Yeah. Let me try to answer Brent's question first. I think I was on mute, and then I'll jump back into this churn question. Brent, your question about how to think about the two segments of the business, I would look at our business like the sub-5K as one part of our business and the above 5K as another part of a business. And if you look at that, if you just kind of break that out, our sub-5K business grew at about 18% year-on-year, and our 5K cohort grew north of 50%. And that cohort also has much stronger NRR than the sub-5K. And that's kind of been the way we've been running the business and like how do we move these 5K customers up into 25K, 50K, 100K. And that's really been the motion that we're focused on and we'll continue to invest in. Now back to the churn question or the net expansion rate question. I would probably prioritize it as one, we're not seeing logo churn. Logo churn is actually quite stable. So customers are not churning off Asana. That's one. There's probably some component, but I think it's relatively small, of downgrades, meaning some customers have pre-bought into thinking that they would grow into a certain size, and given the macro environment, they've decided to downgrade during their renewal. So we see some of that. I think the bigger impact primarily has been kind of the expansion rates. The expansion rate is just a combination of customers, like taking a pause right now, just given the macro to try to understand, um, how fast they want to grow their head count, how much hiring they want to do over the next, um, you know, 12 to 24 months. Um, and just have a lot more certainty around their own business before making that investment. So as I kind of mentioned earlier, like the pipeline hasn't changed, the conversations are still happening, but I would say like, we did see some noticeable pause in some deals. where customers are trying to reflect on their own plans before moving forward.
spk12: Sounds good. And a quick follow-up. What are the incentives for customers to sign on to multi-year deals despite a more challenging budgetary environment?
spk14: I would say most of the larger deals are negotiated, so there's some combination of pricing that gets discussed if customers are willing to move into a multi-year deal. And then the other lever for customers, and especially in this environment, I think customers are looking for this, and it impacts billing, is they're asking for different payment terms, a different structure in terms of the timing of which they'll pay us. So those are generally the two things that I would say that customers are kind of looking at. And we did actually have – we did actually saw a noticeable increase in our multi-year deals this quarter versus last quarter, which is really encouraging as well.
spk13: Thank you. Our next question comes from a line of Brent Breslin with Piper Sandler. Please go ahead.
spk15: Good afternoon. Maybe I'll start here with a question for Ann or Tim here on the industry vertical breakout. We've seen several you know, software companies that have gained popularity with digital natives and tech and internet names that are really starting to see their growth being pressured. And so from an industry vertical perspective, what portion of the revenue today is tied to tech internet software and the pause that you're talking about here? Is it predominantly in just tech or are you seeing the pause in both the tech internet space and other areas as well?
spk01: Yeah, Brett, thanks for that question. We have been traditionally very strong in tech, but it's the plurality, not necessarily the majority globally. And so certainly some of what we're seeing comes from what's happening to our tech customers as they pause hiring or in some cases had layoffs. But as we continue to broaden across industries, We're definitely seeing strong fit with media, automotive, financial services, along with professional services, healthcare, consumer goods and retail. So consistent themes in those verticals are the desire for speed in their digital transformation initiative and being able to respond quickly in this macro. So we really feel like we have our value proposition well-suited to these companies that are looking at transformation to better compete and drive efficiency. So yes, tech, we're seeing that, but as we diversify across verticals, really seeing some of those other industries actually embrace transformation more quickly.
spk15: So it sounds like they're It's clearly pause in tech, but in these other areas that you talked about, there is a pause that you're flagging at this point.
spk07: I guess it's really hard to answer that in a blanket way. I think when we were talking about our Q2 results, we were talking about some similar dynamics in Europe. which was a blend of industries. And then this time, tech is a factor, but that is where a lot of these pauses are. But again, in some cases, those customers are deploying more aggressively and we're still signing new multi-year deals or going wall-to-wall in those customers. And in some non-tech cases, there's a pause. And my mental model on the economy is that It's sort of hitting the sectors in waves. And so I'm a little reluctant to say like the whole problem is tech and then, you know, next quarter it's a different sector that's kind of feeling the impact. And so it's really a mix. But that said, I think in America it's a larger plurality, still not the majority, and it's more represented in our very largest customers. So in terms of the strategic accounts expanding a little more modestly, I think it's fair to say that that trend is more concentrated in tech, and it's not something I expect to be ongoing. I think that they're most sort of reacting in an acute sort of shocked way to what happened in the market and really in this particular timeframe.
spk13: Thank you. Our next question comes from the line of Jackson Adder Swift. SVB Securities Moffitt Nathanson, please go ahead.
spk03: All right, thanks for taking my questions, guys. First, Dustin, maybe on the the over hiring of talent, acquisition and new sales that you're talking about. Outside of the macro environment, I'm just curious, like, do you feel like it was working? And And when things start to maybe turn more positive in the macro environment, do you feel like you have a good playbook just to spin that motion back up? Or is it more like you have some learnings that say, I'm not really sure if that was the way to go anyway?
spk07: Sorry, that's a complex question. hypothetical question. I think some things were weren't we're working on some things we revisit revisited as we always do when we're sort of, you know, executing in the wild. But for the most part, you know, I think that the rising tide of the category was continuing and we were investing into that into that trend. And so that just in terms of like the 20,000 foot view, um, yeah, I'd expect it to continue. I think it's still working. Um, we're succeeding in our move up market to enterprise, uh, and especially just seeing, um, you know, a lot of learnings there and exactly how to make customers successful very, very quickly. And again, reintegrating that straight into the product experience. Uh, so all of that, I think will be the strength that we build on. Um, even before we start hiring again, they're still, uh, you know, quite a lot of the saunas here, uh, quite a lot of customers, uh, growing and, Um, so it's a little hard for me to think about it cause it almost sounds like, oh, we stopped the whole engine, but which isn't the case. Um, we're just, uh, we're just taking a beat ourselves before we step on the gas again in the future.
spk03: Okay. All right. Got it. And then, um, as, as my followup, Tim, I just, I'm curious why, why wouldn't $40 million in annual savings bring, bring the timing of the free cashflow break even. in, you know, even if you don't want to like put a date on it, shouldn't $40 million manual savings bring timeline in a little bit?
spk14: Yeah. I mean, I think a lot of this is really about kind of trying to understand and assess, uh, what the macro is going to look like and the growth rate over the next two years. Um, I think to the degree we grow faster, um, I absolutely believe that, you know, we'll be able to pull it in. Um, but if the economy actually gets worse and, you know, sitting here today, there's just like no signals that things will be better yet. So I'd rather we be more cautious and conservative as we continue to provide, you know, both guidance and outlook on kind of the financials.
spk13: Thank you. Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Please go ahead.
spk06: Hey, thanks, everyone, for fitting me in. I guess just a couple Q4 guidance questions. You know, I totally understand, you know, the macro challenges. And I think, Tim, in your prepared remarks, you said that you're assuming the environment to kind of remain the same for Q4. But when I look at kind of the sequential growth, it's much less than what we found Q3. So I guess how conservative is this Q4? And are there any other factors I might not be kind of thinking about?
spk14: I would say we are being extremely thoughtful and conservative in terms of how we provided the Q4 guidance.
spk06: Okay. Perfect. I think, yeah, I think we'll just leave it at that then. I'll pass it on. Okay. Thank you.
spk13: Thank you. Our next question comes from the line of Robert Simmons with BA Davidson. Please go ahead.
spk08: Hey, thanks for taking my question. So one of the things you mentioned in the script was maximizing data from the project-led motion. And I'm wondering if you could give us some more details on what that means. Is that something on the lines of Amazon to kind of get them up and running quickly and that sort of thing? Or is there more to it?
spk01: Yeah, thanks so much for that question. I think we are excited about that on a number of fronts, both in larger accounts where there is, you know, team adoption across the board and how do we get that information more quickly to our sales team with a context on which teams, what's the usage, you know, how they're already collaborating with other teams and departments that are fully deployed. So certainly product data in existing accounts, as well as product data in new accounts and new signups, how we can do a faster, more intelligent job with the scoring of that product usage early in their journey and pass those more quickly to sales to have really relevant and rich conversations early on. A lot of times what we see is if we can get customers set up early on and talk to them about the total potential of Asana, that growth is accelerated. So we just want to do more of that leveraging the rich insights and data we have in our product platform.
spk08: Got it. That makes sense. And then on the HIPAA compliance, can you talk to, you mentioned that it helped you close some deals. Was that important for Norton? And then, yeah, you can call her on that would be helpful.
spk01: Yeah, I know we're excited about it because we're early in it right we've only had it for a couple of months, and it was important in Norton and a number of other deals. We had a nice expansion with global healthcare customer as a result, so there's been a number of. call it smaller deployments within healthcare and healthcare technology organizations. who've been excited for us to become HIPAA compliant to really unlock more opportunities. So I think we feel like we're early on that, but it's been really helpful, both including Norton, as well as a number of other global healthcare customers.
spk13: Thank you. Our next question comes from the line of Fred Lee with Credit Suisse. Please go ahead.
spk05: Hi, this is Tim for Fred Lee. Thank you for taking my question. To what degree do you see achieving your calendar 24 free cash flow target entirely within your control versus dependent on the macroeconomic environment? Or as differently, how broad is the range of macroeconomic scenarios under which you will achieve the target?
spk07: Hey, this is Dustin. You know, I think that we feel comfortable, given the current macro context, that we can achieve free cash flow on the timeline we laid out and that we're fully funded to achieve it, importantly. But it's been a really volatile year, and there have been a lot of surprises, and there could be new things that happen in the future. And so it's really hard to promise that we have complete control over things because there's a lot that we're at the effect of. I've been saying that You know, I'm CEO of the Asana company, but lately Jay Powell has been CEO of the stock price and a lot of the sort of business inputs. But that doesn't mean we can't react to things that change. And so, you know, we're always behind the wheel in some sense. So if new surprises show up, then we may have to make new decisions and reaction. But I think that we still feel pretty good about being able to achieve that timeline. Thank you.
spk13: Thank you. Our next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead.
spk02: Oh, great. Thanks. So look, very big picture, maybe for Dustin, but if anyone else wants to chime in. If you take a current stockholder today and we look forward three years, how do we win and what would make us lose?
spk07: Um, so from a, from a stock, you know, stockholder perspective, it's, it's the business succeeding, um, in, you know, obviously achieving the free cashflow milestone, but also achieving a lot of top line growth. Uh, and the way we win is by moving up market and being the category leader, especially in enterprises. Um, and again, you know, we're talking a lot about the sort of blended overall growth rates for the business, but when you look underneath the hood, um there are a lot of signs of strength in uh in larger categories or sorry the larger segments um so we still have you know 140 percent net dollar retention um across our very largest customers uh we have you know very large individual deployments including 150 000 seats um we have the uh we're in the leader circle from forester um what oh yeah uh 2.5 million seats So we see that we're deploying very quickly into these organizations, into the greenfield opportunity that is the work management category. And so that continuing, I think, is the way to success. There's a lot of ways that competitors might monetize differently in the short run or specialize into different niches. But the Asana strategy is to be the leading pure play work management platform for enterprises. And I think we're on a great path there, and that's how we win. Yeah, I'll leave it at that.
spk02: What do you think is the most likely way you end up losing?
spk07: Well, you know, the common advice is not to focus on the wall, which is why I stopped there. But the most common way to lose, you know, I am worried about other macro surprises, and we're definitely keeping an eye on the war, on inflation, on the situation in China. It's maybe the thing that's least absorbed into the global economy right now. And those will affect everybody. But I think if they slow us down, then that can have an asymmetric impact on us versus the rest of the field and might, you know, might advantage certain players in certain ways. So we'll see what happens. And that's really the primary thing I think about. You know, we have a lot of opportunities to capitalize on in terms of further widening our lead in terms of our product differentiation and making it clear to the market. And I'm not satisfied with how clear it is right now. I think it's very clear to our large customers because they're living it and getting the value proposition and experiencing the increasing returns to scale. But we need to be able to replay that story for investors and for new customers and for analysts. And I think we're getting better at it all the time, but there's a long way to go there. And our competitors have a vested interest in trying to minimize those differences
spk04: um and and so that that's part of the game as well but i feel confident in our ability to succeed in that way thank you our next question comes from the line of rob oliver with baird please go ahead great thanks good afternoon guys thanks for squeezing me in here um and my questions for you and a follow-up for tim You talked in your prepared remarks, Anne, about the elevation of the buying decision to the CEO, CIO level. And I know Dustin said there's no change in the competitive landscape, but when you get up to that level, you're in the turf of some big incumbent legacy companies that have solutions that are trying to compete with you guys very actively. So How, if at all, does the strategy change? I mean, clearly scalability is not an issue. You know, product's not an issue. You guys have the best. But in an environment where maybe, you know, we get into an environment where maybe the best doesn't win, how does the strategy change when you're, you know, competing against some of those larger incumbents?
spk01: Yeah, thanks so much for that question, Rob. I think what we've been seeing is certainly in this environment, CIOs, CFOs are part of the decision-making process for all sort of technology investment. To your question on how we think about it, if there's incumbent technology, I think what our teams are still doing is really focusing deeply on understanding our customers' most pressing business problems And how a sonic can different differentially solve those problems, because in the end that's where they want to make the investment, there might be existing applications, but. A lot of the you know a lot of the execs also recognize that those are not being adopted, even if they're available so in the end the adoption. Of the technology and then the Roi on that is what they're focused on and there's just in this environment just greater scrutiny to double check that. investment and tie it to KPIs. And so that's what a lot of our team is, you know, focused on is making sure we understand that upfront, making sure we align on the KPIs, and then most importantly, delivering on those as we deploy and move forward with them.
spk04: Okay, great. That's, yeah, that's, that's helpful. You want to help a CIO and CFO avoid the decision to buy shelfware that their users don't want when they want you guys. That makes a lot of sense. Tim, glad you're okay. A follow-up for you. Dustin alluded to marketing budgets earlier, and clearly the marketing budget is a big light item for you guys. As you guys push more into enterprise successfully, albeit with the pause that you guys have talked about here, does that give you more leverage on that line item in terms of less focus on that SMB customer or that freemium branding that maybe you had needed to do earlier on? Thank you.
spk07: I do think as we move up market, we'll generally get more leverage in the business You know, perhaps even more on, you know, I don't agree on marketing, but also on R&D and really across all functions. That's a big part of why we're doing it. But, you know, I do think marketing still has a really important role to play in reaching enterprises, including in our existing deployments. You know, I mentioned that we have a lot of organic growth that sometimes the company is holding back, but some of the way that organic growth happens is is supported by our marketing efforts as well. So I think we get similar amounts of ROI in enterprise through some of that spend. And then I'd also just point out that the world's a big place, and we have different levels of category maturity and SANA presence in the market in different countries. And so we'll need to apply marketing dollars in different ways to build that awareness in places where we're less deployed or less present.
spk13: Thank you, that concludes the question and answer session, I would like to pass the conference back to Catherine one for any closing remarks.
spk00: Yes, just want to thank everyone for joining the call today, you know it's a busy weekend really we really appreciate your time and you're covering a sauna. As always, please feel free to call me if you have any follow up questions and we will be out at the various conferences, so we look forward to seeing you on the road thanks very much. That concludes today's conference call.
spk13: I hope you all enjoy the rest of your day. You may now disconnect your lines.
Disclaimer