Enfusion, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Infusion's first quarter 2023 earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. Following the speaker's remarks, we will open the lines for questions. As a reminder, this conference call is being recorded. I'd now like to turn the call over to Ignatius Joku, head of investor relations, to begin.

Good morning, and thank you, operator. We welcome you to Infusion's first quarter 2023 earnings conference call. Hosting today's call are Oleg Movchin, Infusion's chief executive officer, and Brad Herring, Infusion's chief financial officer. Please note, our quarterly shareholder letter, which includes our quarterly financial results, have all been posted to our IR website. I'd like to remind you that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC and are available in the investor relations section in our website. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them following today's call, except as required by law. In addition, today's call may include non-GAAP measures. These GAAP measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today's quarterly shareholder letter, which is available on the company's website. With that, I'd like to turn the call over to Oleg to begin.

Good morning, and thank you all for joining us today to discuss our first quarter 2023 results. I'm happy to announce another strong quarter for Infusion. Our business performed in line with our expectations for both revenue and profitability, despite ongoing macroeconomic and market uncertainty. Infusion continues to capture hearts and minds of both new and existing clients across all investment strategies, asset classes, and regions. We're focused on enhancing and protecting our unique competitive advantage centered around the best-in-class software and services offering. This model is the strategic foundation of our ability to unlock new and adjacent market segments within alternative investment space, increase our market share with traditional investment managers, and expand our global footprint. Despite historically extreme negative performance across all asset classes last year and ongoing macroeconomic uncertainty, our business has delivered strong outcomes this quarter. However, we are seeing now, in real time, a more challenging environment for the investment management industry, as it is dealing with unique market dynamics. Predictably, the managers are recalibrating budgets, reviewing technology spending, and delaying their purchasing decisions. As anticipated and discussed on the last quarter's earnings call, all these factors contributed to some short-term headwinds in our business. Importantly, however, this market environment is not unfamiliar to us. It is precisely during times like this when Infusion's business model tends to prove its flexibility and resilience, and we tend to use these situations as opportunities to amplify growth and accelerate market share expansion. This year is no exception. We'll continue to take business away from stale, inefficient, and expensive legacy technologies in competitive situations. We're doubling down on scaling our competitive edge by delivering unparalleled technology and best-in-class client experience to the investment managers and asset owners globally. Our ability to execute on this strategy will unquestionably drive exceptional shareholder value for many years to come. Now, let me walk you through the key highlights of our financial performance for the quarter. Revenue grew 20% to $41 million, reflecting resilient client demand for our software and services. Adjusted EBITDA was $5.7 million, and represented a margin of 13.9%. ARR grew 21% year over year to 167 million. I will let Brett Herring unpack our financial results and provide more color. I'm especially proud of our team's focus on driving operational excellence, optimizing operational efficiencies, and ongoing expense discipline. All these efforts combined with the built-in business flexibility enabled us to maintain our strong margin profile. Now, I would like to highlight a few strategic new wins that bring our vision to life across all regions. In the US, revenue grew 16% year over year, which reflects the market dynamics outlined above. I'm delighted to announce that we signed an agreement with a multi-billion dollar new hedge fund, one of the largest hedge fund launches year to date. The firm was looking for a technology platform that supports its unique special situations investment framework, which includes strategies such as loan origination and direct lending, and involves equities, equity derivatives, corporate debt, and credit derivatives. The fund manager partnered with Infusion because of our ability to support their investment mandate across a broad set of asset classes and instrument types, platform flexibility, and its comprehensive and fully integrated end-to-end architecture. This partnership delivers more evidence of our ability to win large and complex hedge fund launches in this environment. In EMEA, revenue grew 37% year over year, driven by solid sales execution and aided by ongoing strength in the region, particularly in the Middle East. I'm excited to announce that we signed a marquee deal with a London-based investment management arm of a well-known global venture capital fund. This alternative investment manager with over 20 billion in AUM manages multiple portfolios of late stage private and public companies. In this conversion, Infusion is replacing the pieced together outdated technology mix with our fully integrated and robust cloud native offering that supports all front, middle, back office requirements of the client. The fund manager selected Infusion because of our ability to support both public and private investments cloud capabilities, and managed services offering. In addition, I'm also pleased to announce that we entered into an agreement with a newly launched global macro and credit fund to provide a powerful solution that offers a complete set of front-to-back functionality. We're particularly excited about this deal because it was the first fund sourced through a broader relationship with a dedicated managed account platform in a cap global investment management. In a cap, is another example of how dedicated separately managed account platforms can quickly and efficiently launch new alternative investment vehicles using Infusion's scalable and flexible cloud-native end-to-end technology. As a result, the client can focus on generating alpha and, in a cap, can direct their efforts on investment sourcing and structuring, portfolio construction, risk management, and dedicated account management. We believe this is one of many investment managers that will be sourced through our relationship with INACAP. And we continue to see investor demand for scalable multi-manager or multi-strategy products delivered through either SMAs or commingled vehicles. In APAC, revenue grew by 20% year over year. We continue to see success across the region. For example, we signed one of the largest Asian longshore equity hedge funds in Singapore to update their legacy platform with Infusion software. The investment manager was using an incumbent legacy provider with limited functionality, which resulted in the use of manual and error-prone processes. This win demonstrates our continuing expansion into the APAC region and highlights the value our clients see in Infusion's best-in-class software and services. Shifting to product strategy, I'd like to share with you how we have continued to broaden our partner ecosystem, and in doing so, allowed our clients to use our platform as an operating system to access unique software capabilities of our technology partners and drive meaningful improvements in how clients interact with our platform as a result. Specifically, I'm thrilled with our new strategic partnership with Quantigo to deliver Infusion's clients Quantigo Axioma Risk, an enterprise-level risk management solution. With Axioma Risk, our clients can benefit from multi-asset class risk capabilities, including exposure management, multi-factor risk models, scenario analytics, and risk attribution. As a result, fund managers of all sizes can make better investment in portfolio construction decisions informed by a comprehensive view of their risk profiles. With Axioma's robust and comprehensive risk capabilities, Infusion further enhances the value we deliver to our clients. Importantly, this partnership showcases Infusion's ongoing commitment to leverage our open architecture and MAKO offering a ubiquitous platform for the investment management industry that facilitates not only operational workflows, but also investment decision-making. We continue to invest in developing the best-in-class, enterprise-grade SaaS platform. For our clients, that means continuous improvement, lower cost of ownership, increased productivity, and ever-expanding functionality. In the first quarter, Infusion rolled out 320 enhancements and features. For example, we added support for order entry for asset swap convertible option transaction in our OMS, which enriches a set of capabilities for clients who employ convertible arbitrage strategies. We also added a new enhancement for clients that trade credit, both cash bonds and credit derivatives. Our team developed a new tool that supports fixed and floating rate bond trading. Foreign Fusion is just another day in the office. We continue to deploy these enhancements and new capabilities on a weekly basis and to improve client experience at the highest rate in the industry. Now let's turn to market dynamics. While our team continues to execute at a high level, the sustained macroeconomic headwinds have challenged the investment management space. However, we remain encouraged as we see signs of stabilization and expect a reduction in macro uncertainty to drive materially better dynamics in the back half of the year. For instance, Recent industry data suggests a significant uptick in new hedge fund launches year to date. Given our differentiated offering, we have an opportunity to capture a significant share of upcoming new fund launches. In fact, we have won an outside share of the largest hedge fund launches so far this year. Further, we see several themes that will position us to emerge from this current market environment in a stronger competitive position. First, secular tailwinds remain in our favor. The industry is in the early innings of digital transformation forms, disparate legacy systems to robust end to end client native solutions. Second, our qualified pipeline for conversions and upmarket opportunities remains healthy. Recent market volatility has pushed fund managers to reimagine their technology infrastructure. As a result, these managers look at infusion to help optimize their cost structure and improve productivity. Third, we continue to focus on our strategy to increase the share of our customer wallet. As our clients are realizing the value added and lower cost of the fully integrated solution, we are capturing this opportunity to expand our client relationships from PMS only to OEMS, NGL, and accounting capabilities. Along the same lines, with the tremendous potential for expanding our managed services offering in conjunction with our core software offering. Importantly, not only does it drive a better economic relationship with our clients on a win-win basis, but also enhances durability of our financial profile and makes Infusion more competitive when it comes to complex conversions for larger hedge funds and institutional managers. Finally, we're investing in the future readiness of our business. by bringing more scale and robustness to our core platform, introducing new functionality, and streamlining our onboarding, client support, and managed services. We view these investments as critical to sustaining and expanding our competitive advantage and generating exceptional growth rates and profitability profile of our franchise. To conclude, despite market challenges, our business fundamentals remain strong, durable, and scalable. Infusion continues to demonstrate exceptional product differentiation that drives value creation for our customers and our shareholders. Since Infusion was founded, we have navigated several challenging market environments and economic cycles. Even still, we grew through them and came out stronger, better, more resilient, and impossible to kill. This current climate is no different, and today we leverage and grow what made us good in the first place, unique technology, passion for our clients, pride in our brand, and our one Infusion culture of integrity and operating excellence. Infusion continues to create unparalleled value for our clients. From new H1 launches to large, complex, multi-manager platform, institutional investment managers, wealth managers, family offices, and asset owners. We remain convinced that our clients, both current and future, we'll see in crystallized infusion undeniable value proposition, which will translate into accelerated and durable long-term value creation for our shareholders. I will now turn the call over to Brad Herring to discuss our financials.

Thanks, Oleg, and thank you, everyone, for joining us today. I'm pleased to report yet another solid quarter for infusion despite the challenging macro environment for investment managers. For the first quarter, we generated revenue of $41 million, an increase of 20% over the same quarter last year. As Oleg discussed, these results were in line with our expectations and consistent with the guidance commentary we provided on our last earnings call. Revenue growth was driven by new sales, as well as further penetration into our existing customer base, as made evident by our NDR of over 100%. First quarter adjusted gross profit, which excludes stock-based compensation, increased by 19% year over year to $27.9 million. This represents an adjusted gross margin of 68.2%. These results include previously mentioned investments in our onboarding and client services capabilities targeted to deliver a best in class and scalable client experience. As we continue to make prudent investments in our client facing activities, we expect adjusted gross margins to remain between 68 and 70% for the next several quarters. Adjusted EBITDA for the quarter was $5.7 million. up over 200% compared to Q1 of last year. Against our revenues of $41 million, this represents an adjusted EBITDA margin of 13.9%, up over 850 basis points from the same period a year ago. Year-over-year margin expansion was generated by a combination of high pass-through rates on incremental revenues matched with prudent expense management as we continue to balance our long-term vision of delivering superior revenue growth and expanding profitability. For the quarter, we generated adjusted free cash flow of $4.5 million compared to negative $9.4 million in the same period a year ago. Current quarter results represent an 80% conversion rate against our adjusted EBITDA. Gap net income for the quarter was $4.7 million, up from negative $12.5 million in the same period last year. We ended the quarter with approximately $55 million in cash and cash equivalents and no debt. This cash position, combined with ongoing positive free cash flow production, provides us with a number of options to fund our portfolio and strategic initiatives. On to some of our operating metrics. First quarter ARR was $167 million, up 21% year over year. Net dollar retention, excluding involuntary churn, was 111%, down 490 basis points from the previous quarter. Net dollar retention including involuntary churn was 106% in the quarter. As I discussed on our last earnings call, we expect short-term volatility in net dollar retention as participants in the investment management sector remain focused on optimizing their cost structures in reaction to macro-level forces. We signed 27 new logos in the first quarter, exiting the quarter with 813 contracted clients. As Oleg mentioned, Q1 saw an increased number of hedge funds wind down without the typical launch that would redeploy those assets. Based on the first few weeks of Q2, however, hedge fund launches have picked up and launch counts have accelerated. Finally, the average size of our customers has increased approximately 10% compared to the same period last year, a reflection of our continued strategy to move up market. Now let's turn to our outlook for 2023. First and foremost, we are reaffirming our previous guidance of $185 to $190 million for full year revenues and $32 to $34 million for full year adjusted EBITDA. Let me take a minute to provide some color on our position. To start, we've talked about how continued volatility within the financial markets creates a challenging environment for our clients as they look to realign their expense structures to their current levels of fee generation. This has a dual effect on Infusion's business. First, As our back book of existing customers work through their expenses, fees from our customers may decrease, putting near-term downward pressure on reported revenues and NDR. On the other hand, with respect to our front book or prospective clients, current market conditions provide a significant tailwind as this environment has created a catalyst event for asset managers to explore reductions in the total cost of ownership of their infrastructure. Our proven software and servicing capabilities combined with a lower total cost of ownership puts us in a unique position to win new clients as these opportunities arise. This is evident by our healthy pipeline of qualified leads and subsequent win rates. The timing of monetizing these tailwinds, however, tends to be measured more in weeks and months as we work through sales cycles and the onboarding process. Lastly, for modeling purposes, we are revising the projection of stock-based compensation for the full year to approximately $10 million from $12 million, as previously mentioned. With that, I'd like to open up the call for questions. Operator, you may go ahead.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your questions. We'll pause here briefly as questions are registered. The first question comes from the line of Dylan Becker with William Blair. You may now proceed.

back on. I think Oleg, you mentioned it and Brad, you highlighted it as well, but kind of some of the customer segmentation, some of the trends you're seeing, the move up markets reflected in kind of the customer spend. We're starting to lap kind of maybe some of those optimizations, reiterating guidance here, but wanted to kind of go back through some of those tailwinds and drivers that kind of give you the incremental confidence in the two half and kind of the overall kind of broader tailwinds to support kind of broader industry digitization as well.

Thanks. Sure. So, you know, kind of the theme continues to be the same. You know, we're observing, you know, purchasing patterns. We're observing, we're talking to our clients all the time. We're talking to prospects, of course. And, you know, the same underlying theme. So it's a balance between people tapping on the brakes after 2022 and people thinking about how to... reduce the costs and scale into what they see as potentially uncertain environment going forward. On the other hand, it is a balance. And so from pipeline perspective, we see a lot of opportunity for us to capture market share and actually accelerate toward the second half of the year. Another thing I think is interesting as far as churn is concerned, it gives you a little insight into how we're positioning the business, which is most of that volatility comes from the US. In fact, in APAC and EMEA, we see stability. This is where we're focusing our efforts going forward. You know, if you think about regional breakdown of our position versus sort of core and adjacent markets, as we go higher up the chain and away from U.S., we expect our business being rebalanced toward more stable profile. And this is where we're focused. Of course, U.S. is our backyard, our core area. We play in both defense and offense properly. but there's some sort of beta component to the market that we cannot control, and that's reflected in our flexing our muscle with respect to operating expense control. So that's kind of a high-level summary.

Hey, Dylan, this is Brad. I'll add one thing to that. Olga and I were pretty active in the first quarter out talking to investors As part of those conversations, we have a unique opportunity to kind of probe on investors to test some of these hypotheses around the decision-making processes within the investor base. So everything we've said around customers looking for opportunities to kind of revisit their infrastructure spend, their infrastructure to run their businesses, has all been confirmed through those conversations. So I give you that context that it's not just kind of anecdotal here's what we feel, we've been able to observe it firsthand, and that's another big point of confidence for us.

And just one touch point, Dylan, we also are focused on upsells, and most of that success also comes, it's counterintuitive maybe, but as people are thinking about reducing total cost of ownership, at the same time, because they're already our clients, we do see some success in capturing both OMS and the backend jail and accounting from just pure PMS clients. And that results, you know, automatically or semi-automatically in cost savings for our current client base.

Got it. That's super helpful. It makes a ton of sense. Maybe even like some of that platform standardization playing out too. I guess maybe, Well, as you're having these conversations, right, like companies, your customers are trying to figure out the best way to operate kind of going forward. How much of the value proposition lies in cost synergies, operating efficiency versus the ability for them to go out and win new mandates, new AUM afforded by kind of the visibility of unifying some of these systems as well?

Thanks. That's an excellent question. I think for Let me think about it for a second. I think for launches it's a bit more important. We're looking around competitive landscape and talking to PB consultants and just consultants to the asset management space. It seems to be somewhat more important for launches. you know, in many cases, especially given our latest success in winning large launches, we're sort of one of those boxes that investors check, you know, hey, you know, you have a fusion in place, so you're operating in, you know, standards must be high and everything is good. For large institutional clients, I think there are a couple of things there. Number one, I would say the costs and efficiencies are probably subpar. top considerations. However, as I mentioned earlier, the new recurring theme here is that while our sort of prototypical user persona, if you will, is sort of middle to back office operator or CFO or COO, we increasingly see the demand from institutional investors to actually put the system and the related analytics in front of the portfolio manager. So people actually that are making investment decisions. And that is an interesting thing for us because it allows us to complete the loop, you know, of the decision-making process and back to the app. So from data to decisions to decision implementation from that, you know, portfolio construction environment back to our OMS and the sort of rinse and repeat. And we are In that particular context, we are revamping our product strategy for the infusion analytics side, which sees increasing demand as well. It's really in its, frankly speaking, infancy, but we have quite a few large clients on it, and we see a lot of potential there, and it's a very high-margin business for us.

Got it. Thank you, guys. Appreciate you taking the time.

Of course.

Thank you.

Thank you, Mr. Becker. The next question comes from the line of James Fossett with Morgan Stanley. You may now proceed.

Hey, thank you very much, gentlemen. Appreciate the color on your outlook. I'm wondering if you can speak a little bit to the visibility you have with some of the recent conversion wins, which, you know, obviously take longer to monetize, at least initially. And particularly as it relates to the timing of the flow through to revenue, you know, post implementation, just trying to understand, you know, your level of confidence and visibility into what appears to be a pretty sizable back half acceleration in terms of your full year outlook.

Hey, James, this is Brad. I'll take that. So fair question. And it's also why we tried to provide some color in the pre-remarks. So just to kind of expand on a little bit. Two things are really happening. One, we are seeing hedge funds pick up. We saw them kind of slow down. We talked about in Q4, we saw a little bit of slow down in Q1, but at the back half of Q1 toward the end, we did see hedge funds start to pick up. So we do have visibility and we're starting to see the counts of those funds pick up, getting back to more normal levels as the funds from those unwound hedge funds are now redeployed. So that's one element. that gives us confidence as we look through Q2 through four. The other one is we do have a much better pipeline in terms of quality today than we've had historically. And that pipeline's a byproduct of us scrubbing through it, but it's also a byproduct of us spending more time out on the road, generating leads, not only as part of investor conversations, but also generating leads in terms of a sales effort. So when we look at our pipeline, it's in the best condition it's been in in quite some time. To get back to your question on timing, it really depends, right, on some of the, I'll call them More vanilla type launches, those are measured in weeks and short months. If you get into the much more complicated large hedge funds, you certainly could be talking several months out before modernization takes place. But keep in mind, the first thing that will go live is PMS. That will always be the first revenue stream. Once we board that, then there's typically a couple of months before you get into OEMS and the ability for us to drive all the connections through. But, you know, if you look at the back half of the year, when you combine hedge fund launches with a really robust and qualified pipeline that is mixed between short-term monetization and medium and long-term monetization, that's where we get our confidence.

Jim, just to supplement this, so, you know, just generically, we actually are heavily invested in that particular area. You know, we view the, you know, us being able to onboard our clients quickly and smoothly is one of our sources of competitive advantage. Of course, we can never and will never stop improving. For us, it's just a simple strategy thing. It's a switching cost element and we're going to, we will never stop until that switching cost is as close to zero as possible. And competitively, especially as we move up market, that becomes, actually it's just It's not just a nice thing to have, but also a source of competitive advantage against incumbents such as Aladdin and SimCorp, which take years to onboard clients of similar profile. We're really focused on pulling revenue from the future to the present.

Got it. I know you touched on this whole thing in prepared remarks in response to that question around particularly involuntary churn among hedge fund clients. But, you know, it seems like I think that's the first quarter since you've been public at least where your total client count has actually contracted. Can you speak to if there was any voluntary churn or the mix of voluntary versus involuntary churn in the quarter, especially given that it appears to be having, you know, some impact on NDR performance?

Yeah, that's a great question, Jim. So when you look at our voluntary churn, it still remains to be an insignificant number. If you look at the number of clients that actually churned off of us and think of that as a deconversion rather than an unwind, it's low single digits in terms of counts even. It's percentage-wise, it's even less than that.

Yeah, I will just say a couple of things. I alluded to when Dylan was asking questions. So we're tracking it very closely. So the beta components of the market is quite high, actually. We had the churn as high as 6% to 8% at the end of 2019. Right now, that figure is roughly 6-ish, as you see in our results. The voluntary component has been stable for the last three, four years. The lowest it's been is just under 1%. Now it's hovering around You know, just below 2%, it has been stable over the last year and a half.

Great. Thanks a lot, Brad. Thanks, Oleg.

Yeah, and I just, you know, Jim, again, to reiterate what I said to Dylan before, you know, just the business rebalancing, both from downstream to upstream and, you know, away from U.S. globally, it's just going to make it stable, and it's a strategic thing for us.

Got it. Got it. Thanks.

Sure. Thanks.

Thank you, Mr. Fawcett. The next question comes from the line of Parker Lane with Stifle. You may now proceed.

Hi, guys. Thanks for taking the question. You know, in this more challenging environment, are you guys seeing, as organizations recalibrate their budgets, pricing becoming much more and more of a dynamic in the deal discussion? And I guess... What sort of tactics are you deploying on that front? Are you looking to get more aggressive to get your foot in the door with some of these customers and seeing an opportunity if pricing is one of the centerpieces of the discussion?

Hey, Parker. This is Brad. I'll take that. We are actually not seeing a whole lot of pricing topics come up. I think for us it's about we're not a price-sensitive provider. You know, we go in and put our solution in front of our competitors that may or may not be more price sensitive than us. But we're not seeing price compression. The uniqueness, I think, that we have is because we come with that full stack. It does certainly give us more latitude in how we go to market, you know, and how we can bundle up the entire kind of end-to-end solution between PMS and OEMS and analytics and accounting and everything else. That gives us more latitude, but we're not seeing a general price compression, even though the environment's been pressured.

Yeah. So, Parker, just one element to it. There's a market segment. It's not so much price compression related to a recent environment. It's just been price competitive over the last several years, and some of the incumbent players and also some of the new entrants that are just much, much cheaper, their capabilities set much more narrow. When launches are concerned within a very price sensitive, low AUM launch type segment, think $25, $50 million type launches, even $100 million launches, we're playing defense there, but we strategically and tactically refuse to compete purely in price. We compete on capabilities. And if those, you know, startups decide to, you know, go away and take a much more limited capability set, you know, for $20,000 less, you know, we have no problem with that. And as they grow, we typically see them when we convert them, you know, a year and two years from now, even when they're successful. And when they're not successful, you know, we don't really care.

Got it. Understood. Very helpful. And then, Brad, if I think about the metrics of clients and average contract value and weave that in with your commentary about hedge fund closures, curious if you could characterize or give us a sense of the scale of those hedge funds that closed from an average contract value. Did these tend to be smaller customers, or was it a pretty solid mix there? Just any color on that would be really helpful.

Yeah, that's not far. Yeah, those are the small ones. You know, certainly the ones that are closing typically the ones that are unwinding are going to be on the smaller side compared to our average book.

Perfect. Got it. Thanks again, guys. Yep.

Thank you, Mr. Lane. The next question comes from the line of Koji Akita with Bank of America. You may now proceed.

Yeah. Hey, guys. Thanks for taking the questions. I wanted to ask a question on ARR and And more specifically, how we should be thinking about ARR growth for the rest of the year. So the question is, how do you guys think about, or maybe how we should be thinking about when we should anticipate ARR growth to trough this year? When I look at the model, the ARR growth comps ease in the second half, but the 1Q, kind of the net new ARR was 2.3 million So even if we increase quarterly net new ARR every quarter from here on out for the rest of the year, ARR growth can slow quite a bit this year. So just trying to reconcile how you guys think about ARR growth for this year. Thanks.

yeah koji i'll take that um yeah i think you're going to continue to see arr grow um you know it's a byproduct of a couple of things obviously you know one is like i mentioned before you're going to see some short-term pressure on a couple of elements within arr on our back book so i think in the near term you're going to see probably a little bit slower growth but then as those clients we're boarding you know, start to monetize, you're going to see that ARR start to accelerate. So I don't know that I'm going to see it necessarily a trough as much as you might see, you know, some variability in the growth rates between, you know, first half and as you get into the back half of next year, and even more importantly, probably as you get into 2024.

No, got it. That's actually very, very helpful. Thank you. And just a follow-up question here. I think in the prepared remarks, you mentioned that You guys are seeing data out there that the end markets may be stabilizing and even with prospects of improving later this year. So the question is on your reaffirmed guidance today. Are there any assumptions of an improving macro or maybe a change in the underlying assumptions on what the macro looks like that's embedded in the guide for this year? Thanks, guys. Thanks for taking the questions.

No, sure, Koji. When we gave the guidance, even when we talked about it last quarter, we had mentioned we expected the first half to be a bit slower than the back half. So we're not seeing necessarily any changes in that as much as more reaffirmation that we're starting to see it play out that way, especially as we got toward the end of Q1. So it's not an update in necessarily our philosophies or our own internal models. It's just it's playing out as we somewhat expected it to when we provided the guidance last quarter.

Oh, got it. No, no, that's really, really helpful. Thank you guys so much for taking the questions. Appreciate it. Of course, Gorgia. Thanks.

Thank you, Mr. Akita. The next question comes from the line of Gabriella Borges with Goldman Sachs. You may now proceed.

Hi, this is Callie Valenti on for Gabriella. First one for me, understand that NRR tends to move around quite a bit between quarters and appreciate the color you gave on existing customer behavior on the call. Any expectation that NRR would improve in the back half as well as just seeing more of those conversions?

Yeah, this is Brad. I'll take that. Yes, that's exactly right. I mean, we mentioned last quarter we expected some near-term volatility on NDR. And think of it primarily as the difference between the timing of the back book and the front book. Like I mentioned in my remarks, the Short-term impact is more of the back book impact, which will drive NDR down, which is what drove our NDR for our Q1 results. But as the front book starts to board with PMS, and then, for example, like we've always talked about kind of a land and expand model where those customers then bring on the different modules over time, they'll be bringing on OEMS, they'll be bringing on analytics, they'll be bringing on managed services. you'd see that NDR start to recover back to more normal levels, probably in the mid to upper teens. But in the near term, yes, you would expect to see exactly the way this has played out.

Okay, thank you. That makes sense. And then what have you been seeing in terms of sales productivity, kind of, you know, how that trended in 1Q and how you're seeing that trend post 1Q? Are you seeing a step up in sales productivity that's giving you confidence in the guidance?

Yes, we do. So, you know, it definitely, you know, while this trough can maybe, you know, extend itself, so it's not a V-shaped recovery, it may be, you know, L-type recovery, we definitely see the pipeline getting richer, you know, people are more engaged and, you know, we're having pretty good conversations there. But, you know, as we said before, We cannot predict how much time the recovery will take, how much time the step-in breaks will take, but we definitely see some positive signs in the cadence of the conversations and people's focus and our ability to close deals. So that's another data point that gives us confidence in the back end of the year. including upsell conversations. So it's not just the new conversations and our conversations about, you know, other verticals with sale, OMS, GL and accounting, and managed services upsells as well.

Okay, great. Thank you. Thank you, Ms. Borges. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. No further questions have been registered, so at this time I'll pass the conference back to management team for any additional remarks.

Well, thank you all for all the questions. I look forward to reconnecting with you all shortly. Thank you, investors, for their trust, and we'll continue to focus on execution for the balance of the year.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.