Asana, Inc. (NYSE:ASAN) Q3 2023 Earnings Call Transcript

Asana, Inc. (NYSE:ASAN) Q3 2023 Earnings Call Transcript December 1, 2022

Asana, Inc. beats earnings expectations. Reported EPS is $-0.26, expectations were $-0.32.

Operator: Good afternoon. 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. I would now like to pass the conference over to our host, Catherine Buan. Please go ahead.

Catherine Buan: Hi, 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 Moskovitz, Asana’s Co-Founder and CEO; Anne Remondi, 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 non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measure the 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 web page at investors.asana.com.

And with that, I’d like to turn the call over to Dustin.

Dustin Moskovitz: 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 GAAP 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 2021, we accelerated revenue growth year-over-year, so we ramped up heavily in the second half of fiscal year 2022 to increase capacity for what we believe could potentially be an even bigger year in fiscal 2023. 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 are 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 are 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 are 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 this season of annual planning, we are 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 hot spots are. With this birds-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 13 top 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 with 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 2024, we will 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 are specifically focused on helping leaders across operations move faster, and continuing 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 are able to maximize efficiency and pivot work to achieve critical organizational goals. We are 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 are making decisive moves to improve our margin profile.

With over $545 million in cash, we believe we are fully funded to execute on our current strategy and achieve free cash flow positive by the end of calendar 2024. We are 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 we will continue to invest conscientiously, while maintaining our leadership in product innovation. And now, I’ll turn it over to Anne.

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Anne Raimondi: 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 US. 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 am hearing. There is increased scrutiny on deals globally. Executives want higher and faster ROI from their investments. There is increased participation of executives in deals and work management investments are being elevated to the CIO/CFO level more than they have ever been. During 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 continued to gain traction in healthcare. Norton Healthcare, the hospital and health care 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 check list of every step to ensure it’s done accurately and successfully.

You could liken this workflow to on-boarding 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 is a testament to our product’s deep value and flexibility. Founder, 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 reps 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 have a lot of work ahead. 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 customer needs and drive growth across our large customer base.

We are 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 life cycle; and bringing in new leadership to elevate our enterprise success to the next level. With that, I’ll hand it over to Tim.

Tim Wan: 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 US 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 has grown 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 remained 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 Anne mentioned, we did see customers pausing growth or hiring more slowly and the expansions 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. Gross 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 $0.26. Last month, we reduced our global headcount by approximately 9% as part of a restructuring designed to better manage the business with a balance towards growth and profitability. This reduction will result in non-recurring restructuring charges 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 2023 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 RPO will be recognized over the next twelve 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 wanted 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-recurring 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 2023 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 $0.28 to $0.27 assuming basic and diluted weighted average shares outstanding of approximately 215 million. For the full fiscal year 2023, we now expect revenues to be in a 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 are 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 persist 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.

Dustin Moskovitz: Before we go to questions, I wanted to summarize by noting like many of our peers were operating in a very challenging macroeconomic environment. So we’re actively managing to mitigate the impact 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.

Catherine Buan: Thank you, Dustin. And with that, I’ll turn it back to the operator for the Q&A session.

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Andrew DeGasperi with Berenberg. Please go ahead.

Andrew DeGasperi: Thanks for taking my question. I guess, we’re clearly seeing similar kind of weakness across most software categories. I was just wondering in the conversation that you had 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?

Anne Raimondi: Hey, Andrew, 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 de-prioritization of the category, just as they evaluate, where they’re going to make those investments. So the theme in these periods, I think, is 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.

Andrew DeGasperi: That’s helpful. And then maybe on the restructuring. I was just wondering what does that translate in terms of the time line to breakeven, I guess, from a profitability point of view, from a rotation point of view. Is there anything you can comment on that?

Dustin Moskovitz: Yes. Andrew, as I kind of mentioned on the call, no change in terms of time line. 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.

Operator: Thank you. Our next question comes from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron: Thanks. Hey guys. I guess I want to go into the head count reduction. Can you give me a little bit more color on how this 9% spreads are across the functions? And I guess, the associated question with this, how do I think about how this catches up to you, meaning, clearly, there’s some sales functions that are part of this as well? And how do you think about the capacity loss or the points of growth quarter growth eliminated through this as we think about fiscal 2024?

Dustin Moskovitz: Yes, thanks. I’ll start off. This is Dustin. So, just thinking about where we reduced roles, a lot of how we structured our hiring plan for fiscal 2023, we front loaded quite a lot of hiring especially in sales and marketing and especially in talent acquisition to help us do the front-loaded hiring. And so — and then we had an ambitious plan for R&D as well, but we had it more pace throughout the year. And we ended up really moderating and then pausing hiring fairly early in the year. So, when we came to think about the risk, we really looked at it primarily through the lens of sort of unwinding the over investment we made in the first two categories and really rightsizing it to the amount of demand we are seeing in the market. And so 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 2024 enabled to serve our best customers. And anything you want to add to that, Anne?