monday.com Ltd. (NASDAQ:MNDY) Q3 2023 Earnings Call Transcript

monday.com Ltd. (NASDAQ:MNDY) Q3 2023 Earnings Call Transcript November 13, 2023

monday.com Ltd. beats earnings expectations. Reported EPS is $0.64, expectations were $0.18.

Operator: Thank you for standing by, and welcome to the monday.com Third Quarter Fiscal Year 2023 Earnings Conference Call. I would now like to welcome Byron Stephen, Head of Investor Relations to begin the call. Byron, over to you.

Byron Stephen: Hello, everyone, and thank you for joining us on today’s conference call to discuss the financial results for monday.com’s third quarter fiscal year 2023. Joining me today are Roy Mann and Eran Zinman, co-CEOs of monday.com and Eliran Glazer, monday.com CFO. We released our results for the third 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 and 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 our 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. As we reflect on our most recent quarter, it is with heavy hearts that we acknowledge the recent tragic events that have unfolded in Israel. Our thoughts are with all those affected by recent violent terrorist attacks. At this time, the impact on the current situation of our global operation is minimal, and we remain confident in our ability to meet all our business and financial targets. In terms of revenue, Israel accounts for a low single-digit percentage of our total ARR. While only approximately 7% of our global workforce have been called up for reserve duty, our global employees have gone above and beyond to seamlessly feel any gaps to help ensure our business continues to run smoothly.

Furthermore, all of our data servers are distributed globally across North America, Europe and Australia, ensuring our operations will continue seamlessly. We are monitoring the situation closely and will make necessary estimate to our plans as needed. Now let me turn to our results this quarter. We are pleased to share that we have achieved another quarter of strong growth, impressive margin improvement and amazing cash generation. In Q3, we continued to demonstrate our ability to scale with efficiency, posting record non-GAAP operating margin of 13% and a record free cash flow margin of 34%. I’ll now turn it over to Eran to walk you through some of our product highlights this quarter.

Eran Zinman: Thank you, Roy. We remain focused on our multiproduct strategy and ensuring that our products can successfully mail cross functional collaboration for our customers. Our new products continue to show a remarkable cross-sell opportunity with 2,534 initial work management accounts adopting one of our new products. We are dedicated to providing exceptional solutions that meet the evolving needs of our customers, and we believe that our new products will play a pivotal role in achieving this. Our target is to open access to our new monday sales CRM and mondayDB products to all customers by the end of Q1 of next year. In Q2, we’ve successfully completed mondayDB 1.0. With the completion of that phase, all monday customers have been transitioned to our new cutting-edge infrastructure and initial feedback has been amazing.

Users are noticing a meaningful boost in performance and capabilities of the Work OS platform. Our next phase, mondayDB 1.1 dashboards is now live and already showing significant improvements in load times and performance of our largest and most complex dashboards. We’re also beginning to see great initial results from our new monday AI capabilities. Specifically, the AI formula builder and the AI solution builder. Formula builder is already saving users time and effort and to date, has helped over 5,000 users build advanced formula capabilities. We’re excited that the opportunities we see ahead as we seek to generate meaningful value for our customers through the power of AI. The AI solution builder is also receiving very positive feedback from customers.

We’re utilizing it to easily set up fully operation personalized boards. As always, we are very proud of the money.com team achievement in this quarter, and we remain highly confident in our opportunities ahead. As a reminder, we will be hosting our first Investor Day as a company at our New York City Elevate Conference on December 6. We look forward to seeing many of you in person and sharing our vision, strategy and product roadmap and I need to gain deeper insights into our operations and future plans. With that, I’ll now turn it over to Eliran to cover our financial and guidance.

Eliran Glazer: Thank you, Eran, and thank you to everyone for joining our call. Today, I’ll review our third quarter fiscal 2022 results in detail and provide updated guidance. We reported strong results in Q3 with record quarterly free cash flow and non-GAAP operating income for the third consecutive quarter. Our results in the quarter demonstrate our consistent execution as well as the healthy customer demand we see for the monday.com work operating system platform and our products. Total revenue came in at $189.2 million in Q3, up 38% from the year ago quarter. Our overall net dollar retention rate remained steady in Q3 reflecting our continued resilience through a more challenging macroeconomic environment. While our full year 2023 guidance still assumes MDR to be slightly below 110%, we are encouraged by the signs of stabilization that we witnessed during the most recent quarter.

As a reminder, our net dollar retention rate is trailing four quarter weighted average calculation. For the reminder of the financial metrics disclosed unless otherwise noted, I will be referencing non-GAAP financial measures. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Third quarter gross margin was 89%. In the medium to long term, we continue to expect gross margin to be in the high 80s range. Research and development expense was $28.1 million or 15% of revenue compared to 19% in Q3 2022. In the medium to long term, we anticipate R&D expense as a percentage of revenue to be in the high teens as we build out our product suite and scale our work operating system platform, both horizontally and vertically.

Sales and marketing expense was $101.5 million or 54% of revenue compared to 60% in Q3 2022. G&A expense was $15.2 million or 8% of revenue compared to 11% in Q3 2022. Net income was $32 million, up from $2.6 million in Q3 2022. Diluted net income per share was $0.64 based on 51.5 million fully diluted shares outstanding. Total employee headcount was 1,744, an increase of 98 employees since Q2 ’23. We expect to continue hiring over the next year with a focus on our R&D product and sales teams as we build out our platform and product suite. Moving on to the balance sheet and cash flow. We ended the quarter with $1.50 billion in cash and cash equivalents at the end of Q3 ’23 up from $989 million at the end of Q2 ’23. Free cash flow for Q3 ’23 was $64.9 million and free cash flow margin as defined as free cash flow as a percentage of revenue was 34%.

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 fourth quarter of fiscal year 2023, we expect our revenue to be in the range of $196 million to $198 million, representing growth of 31% to 32% year-over-year. We expect non-GAAP operating income of $7 million to $9 million and an operating margin of 4% to 5%. For the full year 2023, we now expect revenue to be in the range of $723 million to $725 million, representing growth of 39% to 40% year-over-year. We expect full year non-GAAP operating income of $47 million to $49 million and an operating margin of approximately 7%. I’ll now turn it over to the operator for your questions.

Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Kash Rangan with Goldman Sachs. Please go ahead.

Kash Rangan: Hi. Thank you very much. And I’m happy to hear that your employees are safe, and I wish that you world continues to be very safe with the turmoil that’s going on. With respect to the business, first of all, congratulations on the quarter. I’m curious to hear your further expand the thoughts on the stabilization you saw in the expansion rate in the quarter. And also as you take a step back with the broadening out of the platform and the capabilities, and the different buying centers and the personas that you can go after, such as Dev, CRM and who knows what it turns in the future, how is the go-to-market approach of the company changing – you’re good entrepreneurs, you’ve been through multiple businesses before and you can understand the nuances of how go-to-market might have to evolve given the broadening of the product? Just curious to hear your thoughts on those two things. Thank you so much.

Eliran Glazer: Hi Kash, this is Eliran. I will answer your first question, and then I will refer to Eran to address your second question. So with regard to the stabilization of the MDR, as a reminder, we are looking at MDR as a weighted average of the last four quarters. So what we saw when you were looking at the trailing 12 months, basically that it’s flattening. We saw a decline in the past that was as part of also the macroeconomic headwinds and the fact that expansion was lower than we anticipated or what we saw in the past. But over the last few months, we saw that on a month-by-month basis, basically it’s threatening and this is encouraging us to believe that there is going to be potentially a stabilization to the long term. And this is also driven by the fact that we see a very healthy top of funnel demand than additional new customers that are joining the platform.

Eran Zinman: Yes. And this is Eran, Kash. So regarding the new products, our product ecosystem and how it helps in terms of our go-to-market, so definitely having multiple personas and multiple verticals really helps in two ways, really. One is our ability to do both performance marketing across multiple verticals, just make our acquisition much more efficient. And this goes all the way to events and exhibitions and we have different basically personas that can buy the software. But more than that, it allows us to be more aggressive because our LTV for each customer is much greater. We don’t just compete in one vertical, but a customer might start with a CRM and then expand into work management or vice versa. So the total LTV of each customer is much greater, which allow us to be potentially more aggressive going forward in how we acquire customers. So it definitely opened up our ability to acquire customers and expand them over time.

Kash Rangan: Wonderful. Many thanks, and congratulations again.

Operator: Our next question comes from the line of Pinjalim Bora with JPMorgan. Please go ahead.

Pinjalim Bora: Thanks. And congrats on the quarter from me as well. Can I ask you on the top of the final comment that you just made. Maybe help us understand that momentum going into Q4 so far and if the conversion rates of the top of the funnel so far in Q4 that you have seen has been consistent or not versus Q3?

Eran Zinman: Yes. So in terms of customer acquisition and top-of-funnel activity, we see still very strong demand, very stable. It’s across all customer sizes, both SMB and more enterprise customers. We continue to grow our Enterprise segment. It grew 57% year-over-year in the last quarter. And like we’ve mentioned, like the only impact that we’re seeing right now is less seat expansion from existing customers. But apart from that, our customer acquisition, the momentum that we see with new customers across all products is very stable and strong.

Pinjalim Bora: Understood. Thank you for that. And if I can ask you on the regional structure, the hybrid regional structure that you have kind of embarked upon. A few questions on that, just on that change that you’re making. Can you help us understand what portion of your sales is driven by outbound today? And where do you see that kind of going? And as these regional heads kind of start building their teams, should we expect kind of an acceleration in the sales rep hiring going into next year? And how are you layering in kind of the CRM and the Dev go-to-market in that outbound motions.

Eran Zinman: Yes, Pinjalim, this is Eran. You were breaking up a little bit. You were asking about the outbound momentum that we see. Is that correct?

Pinjalim Bora: Yes, the regional us talking to the regional sales structure.

Eran Zinman: Yes. Okay. basically — sorry, go ahead.

Pinjalim Bora: The regional sales structure that you’re highlighting, right?

Eran Zinman: Regional sales structure – yes. Yes. So basically, we announced last quarter, the promoted both Jamison to be a regional manager for North America and Dean for APAC region. And definitely, it’s part of the movement that we’re receiving a stronger presence in both of those regions, but also scaling those regions dramatically. As we said, we’re also doing a lot of outbound sales reaching larger customers, Fortune 500 customers, in addition to our performance marketing. So for us, it’s continued that momentum as a company. And it just gives us over time more access to larger and larger enterprises, and we continue to scale that effort.

Pinjalim Bora: Thank you.

Operator: Our next question comes from the line of Steve Enders with Citi. Please go ahead.

Steve Enders: Okay. Great. Thanks for taking the question. I’m glad to hear everyone is safe over at monday. I guess maybe just would like to kind of start on that part. I think you called out 7% of employees have been called up to reserves at this point. I guess, how do you go about managing the organization when you have that level of disruption. And I guess, secondarily, like as you think about hiring, it seems like discontinued expectations for that going into next year. How do you think about what that means for future hiring plans and backfilling some of those called up individuals there?

Roy Mann: It’s Roy. So the impact we have right now on the plans we have is minimal. The reason impact but it’s something we’re dealing with, and it has a very short-term effect. Regarding hiring, we’re have a very strong hiring plan for next year and also this year. So we’re on track, and that’s been going well.

Eran Zinman: Yes. Maybe, Stephen, this is Ron. I can add that Israel only accounts for a low single-digit percentage of our ARR and there’s very little impact over there, although we see a little bit, but very small impact, and it’s a small part of our revenue. And also in terms of data servers, it’s all distributed globally. We don’t have currently any data centers in Israel across North America, Europe, Australia. So in terms of data integrity, servers, operations, we see no impact. And as we mentioned on the business side, it’s minimal impact mostly to Israeli customers.

Steve Enders: Okay. Got you. That’s helpful. And then just on the free cash flow in the quarter, I mean really, really strong there. I guess anything to call out that was either onetime in nature. How should we be thinking about maybe some of the puts and takes there as we think about going into next quarter or next year?