monday.com Ltd. (NASDAQ:MNDY) Q1 2023 Earnings Call Transcript May 15, 2023

monday.com Ltd. misses on earnings expectations. Reported EPS is $-0.32 EPS, expectations were $-0.28.

Operator: Good day. My name is John Louis and I will be your conference operator today. At this time, I would like to welcome everyone to monday.com’s First Quarter Fiscal Year 2023 Earnings Conference Call. I would like to turn the call over to monday.com’s Director of Investor Relations, Mr. Byron Stephen. Please go ahead.

Byron Stephen: Hello, everyone. And thank you for joining us on today’s conference call to discuss financial results for monday.com’s first quarter fiscal year 2023. Joining me today are Roy Mann and Eran Zinman, co-CEOs of monday.com, and Eliran Glazer, monday.com’s CFO. We released our results for the first quarter earlier today. You can find our quarterly shareholder letter along with our investor presentation, and a replay of today’s webcast under the News & Events section of our IR website at ir.monday.com. Certain statements made on the call today will be forward-looking statements, which reflect management’s best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations.

Please refer to our earnings release for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and the earnings presentation for today’s call, which are posted on our Investor Relations website. Now, let me turn the call over to Roy.

Roy Mann: Thank you, Byron. And thank you everyone for joining us today. After a strong fiscal year of 2022, we are happy to say that we kept the momentum going with an exceptional Q1 in fiscal year 2023. Despite the persistent uncertainties in the macroenvironment, we continue to invest in our growth and profitability at scale, and we are seeing the results. Q1 revenue totaled $162.3 million, an increase of 50% year-over-year. We generated a record $38.7 million in free cash flow during the quarter and are well positioned in meeting our goal of positive free cash flow for the third straight year. Additionally, we are pleased to report that we are now guiding to positive non-GAAP operating profit for fiscal year 2023, two years ahead of expectations.

Eliran will walk you through our guidance in more detail. Customers acquisition continued to be exceptionally strong. Our fastest growing customer segment remains the enterprise where we grew customers by 75% to 1,683 customers, marking a record number of quarterly net new enterprise customers. Equally impressive has been the fast adoption and strong customer feedback of our monday sales CRM product. Customers love monday sales CRM as it’s more customers and easy to use than traditional CRM tools. In Q1, we opened our monday sales CRM to a selection of our existing customer base. And the response has been tremendous. Total sales CRM account accelerated to 5,441 accounts, representing a record number of quarterly net new sales CRM accounts. We are incredibly pleased about all the recent business and product accomplishments this quarter, and believe we are well positioned to deliver our goals for fiscal year 2023 and beyond.

Let me now turn it over to Eran to walk you through some of our recent innovation efforts.

Eran Zinman : Thank you, Roy. This quarter, we’re excited to announce our plans for incorporating AI into our Work OS platform, which we’ve already started implementing. The key components of our AI strategy includes increasing monday.com users efficiency, increasing our own internal efficiency, and in the future, harnessing the power of our proprietary data, spanning over 200 different business verticals. This month, the first version of monday AI Assistant is going live, with features such as automated task generation, email composition, and document salaries, all features which will greatly increase the efficiency, speed and general experience of our users. In June, we are opening our platform to third party developers to build AI apps on the monday.com Work OS, increasing collaboration and speedy innovation.

These apps will be available on our monday AI Assistant infrastructure. Internally too, we are focusing on using the monday.com data to enhance our operations through AI, including automating parts of our sales operations, our customer experience and adding an AI layer to our inhouse business intelligence tool, BigBrain. Finally, we plan to harness our data to help future customers navigate the best ways to set up and maintain the most optimal work flows and automations as well as connect the right people to the right processes. This can significantly improve monday.com’s speed of adoption within companies and further enhance data driven product development initiatives. This quarter, we’re also delighted to kick off the first phase of mondayDB.

As a reminder, mondayDB is a brand new data infrastructure for the monday Work OS platform, enabling bigger workflows, larger boards and dashboards, more robust developer capabilities and improved overall performance. mondayDB is being released in multiple phases over the next year, with each phase expected to boost performance and scale. The first phase of mondayDB is focused on monday Boards. Now available to 30% of accounts, mondayDB 1.0 is already having a big effect on board performance and roll times, especially on large and complex boards. MondayDB 1.0 loads boards with thousands of items within a matter of seconds, allowing customers to work with bigger, more complex workflows than ever. We expect mondayDB 1.0 to be rolled out to all customers by the end of Q2.

In addition to our innovation efforts, we continue to make strides in accelerating our efforts in building our apps marketplace. This quarter, enterprise collaboration app provider, the Adaptavist Group, joined us for an app accelerator project. The event focused on introducing several potential new apps and supercharging Adaptavist’s first monday.com app, Unlimited Subitems, which has quickly become a customer favorite. Working with a large enterprise app provider such as Adaptavist, and AppFire, will allow us to build a strong foundation and take our marketplace to the next level. With that, let we turn it back over to Roy.

Roy Mann : Thank you, Eran. We continue to make progress on our ESG efforts and leading publications are taking notice. monday.com’s emergency response team recently received an honorable mention in the corporate social responsibility category of Fast Company’s 2023 World Changing Ideas List. This prestigious list honors initiatives that use companies’ platforms and power to help advance change, either internally for the community or for the world at large. To read more about our emergency response team’s effort and all of our ESG initiatives, please see our recent published 2022 ESG report. None of our achievements this quarter would have been possible without our amazing monday.com team. We continue to invest in our people with recent opening of the new APAC headquarters in Sydney and increased our overall headcount in the quarter to 1,582 employees.

We are grateful to all our employees for their hard work and their contribution to the strong start to fiscal 2023. With that, I’ll now turn it over to Eliran to cover our financials and guidance.

Eliran Glazer : Thank you, Roy. And thank you to everyone for joining our call. Today, I’ll review our first quarter fiscal 2023 results in detail and provide updated guidance. We started the year exceptionally strong. Total revenue in Q1 came in at $162 3 million, up 50% from the year-ago quarter. Excluding the impact of foreign exchange, revenue grew 51% year-over-year. As expected, our overall net dollar retention rate declined slightly in Q1, reflecting slower enterprise customer seat expansion amid the challenging macroeconomic environment. We continue to expect moderate pressure on NDR throughout fiscal year 2023. As a reminder, our NDR is a trailing four quarter weighted average calculation. For the remainder of the financial metrics disclosed, unless otherwise noted, I will be referencing our non-GAAP financial measures.

We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. First quarter gross margin was 90%. In the medium to long term, we continue to expect gross margin to remain in the high 80s range. Research and development expense was $28.5 million or 18% of revenue in line with Q1 2022. We plan to continue investing significantly in R&D in fiscal year 2023 as we build out our product suite and scale our Work OS platform both horizontally and vertically. Sales and marketing expense was $102.7 million or 63% of revenue compared to 100% in Q1 2022. G&A expense was $15.8 million or 10% of revenue compared to 11% in Q1 2022. Net income was $7.2 million, up from a loss of $43.2 million in Q1 2022. Diluted net income per share was $0.14, based on 50.8 million fully diluted shares outstanding.

As Roy mentioned, total employee headcount was 1,582, an increase of 33 employees since Q4 2022. WE expect to continue hiring throughout fiscal 2023 with the focus on our R&D and product team as we build out our platform and product suite. Moving on to the balance sheet and cash flow. We ended the quarter with $935.6 million in cash and cash equivalents, up from $885.9 million at the end of Q4 2022. Free cash flow for Q1 was $38.7 million and free cash flow margin as defined as free cash flow as a percentage of revenue was 24%. We now expect to report positive free cash flow on a consistent quarterly basis moving forward and to achieve our third consecutive year of being free cash flow positive in fiscal 2023. Free cash flow is defined as net cash from operating activities less cash used for property and equipment and capitalized software costs.

Now let’s turn to our updated outlook for fiscal year 2023. For the second quarter of fiscal year 2023, we expect our revenue to be in the range of $168 million to $170 million, representing growth of 36$ to 37% year-over-year. We expect non-GAAP operating income of $2 million to $4 million and an operating margin of 1% to 2%. For the full year 2023, we now expect revenue to be in the range of $702 million to $706 million, representing growth of 35% to 36% year-over-year. We expect folio non-GAAP operating income of $8 million to $12 million and an operating margin of approximately 1%. I’ll now turn it over to the operator for your question.

Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Kash Rangan of Goldman Sachs.

Operator: Your next question comes from the line of Pinjalim Bora of J.P. Morgan.

Operator: Your next question comes from the line of Jackson Ader of SVB.

Operator: Your next question comes from the line of Arjun Bhatia of William Blair.

Operator: Your next question comes from the line of Brent Bracelin.

Operator: Your next question comes from the line of Steve Enders of Citigroup.

Operator: Your next question comes from the line of Jason Celino Of KeyBanc Capital Markets.

Operator: Your next question comes from the line of Brent Thill of Jefferies.

Operator: Your next question comes from Scott Berg of Needham.

Operator: [Operator Instructions]. Our next question comes from the line of George Iwanyc of Oppenheimer.

Operator: Your next question comes from the line of Derrick Wood of TD Cowen.

Operator: Our next question comes from the line of David Hynes of Canaccord.

Operator: Your next question comes from the line of Andrew DeGasperi of Berenberg.

Operator: Your next question comes from the line of Shebly Seyrafi of FBN Securities.

Operator: And your next question comes from the line of Robert Simmons of D.A. Davidson.

Operator: Thank you. There are no further questions at this time. I’d like to turn the call back over to Byron for closing remarks.

Byron Stephen : Thank you for everyone for joining the call today and hope you have a great rest of the day.

Roy Mann: Thank you.

Operator: This concludes today’s conference call. You may now disconnect.