monday.com Ltd. (NASDAQ:MNDY) Q4 2022 Earnings Call Transcript

monday.com Ltd. (NASDAQ:MNDY) Q4 2022 Earnings Call Transcript February 13, 2023

Operator: Good morning or good afternoon, all. Welcome to the monday.com Fourth Quarter Fiscal Year 2022 Earnings Conference Call. My name is Adam and I’ll be your operator today. . I will now hand the floor over to Byron Stephen to begin. So, Byron, please go ahead when you’re ready.

Byron Stephen: Hello, everyone. And thank you for joining us on today’s conference call to discuss the financial results for monday.com’s fourth quarter and fiscal year 2022. Joining me today are Roy Mann and Eran Zinman, co-CEOs a monday.com, and Eliran Glazer, monday.com CFO. We released our results for the fourth quarter and fiscal year 2022 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 on the investor presentation for today’s call, which are posted on our Investor Relations website. Now, let me turn the call over to Roy.

Roy Mann: Thanks, Byron. And thank you everyone for joining us today. Fiscal year 2022 was a year of significant accomplishments at monday.com. We finished the year more energized than ever, with strong financial results, improved efficiency and continued product innovation. We put this progress on display at our Elevate 2022 World Tour, where we had the opportunity to meet with customers and partners in person. We also announced plans to launch Monday DB, which will upgrade our infrastructure, drive faster board performance, and provide even more flexibility. Monday DB will enhance the way Work OS engine run and store data, ensure that our platform is schemaless, completely flexible and built for infinite scale, supporting 100 times larger boards.

Q4 capped off an amazing year with strong revenue growth and free cash flow expansion. We finished the quarter with $150 million in revenue, $30 million in free cash flow and achieved positive adjusted operating profit for the first time. New customer demand trends also continued to be strong. In FY 2022, we added 34,000 net new customers to monday.com family. Our fastest growing customer segments remained enterprise where we grew customers by 86% to 1,474 customers. While we are seeing healthy new customer demand, we continue to see competitors significantly reduce their performance marketing efforts. As a result, we have been able to build market share and improve overall customer acquisition efficiency. Our results demonstrate that monday.com continue to drive growth and profitability at scale.

Since inception, the company has now generated more than $5 in ARR for every $1 in cash burned. Regardless of macro uncertainties, we believe we are well positioned for the road ahead. Let me now turn it over to Eran to walk you through some of our business highlights for the year.

Eran Zinman : Thank you, Roy. Fiscal year 2022 was another year of phenomenal growth at monday.com, both financially and business wise. We ended the year with $519 million in revenue, up 68% year-over-year, improved overall efficiency and achieved positive free cash flow for the second year in a row. Fiscal year 2022 was also a transformational year for our product. We’ve received incredible feedback on our new Work OS product suite, particularly on monday sales CRM. As a reminder, CRM has only been made available to new customers. And we finished 2022 with 2,458 new monday sales CRM accounts. The fast adoption and strong customer feedback of monday sales CRM has been amazing. Customers tell us they love monday sales CRM as it’s more customizable and easier to use than any traditional CRM tools.

As we begin to slowly roll out monday CRM to our existing customers, we remain focused on adding more powerful features and functionality to make it the best CRM in the industry. As we mentioned, our strong growth continues to be led by enterprise customers. This quarter, we’re particularly excited to announce that one of the world’s leading banks recently adopted monday.com. With a goal to move away from multiple work management and legacy communication tools, monday.com proved to be the best fit for the company. To date, over 1,000 users across multiple teams have adopted monday.com and we are seeing the power of our Work OS enabling collaboration and efficiency. We also made significant progress in expanding our marketplace. In fiscal year 2022, we increase the number of marketplace apps to 217, including 61 monetized apps.

As we look to accelerate efforts in building out the marketplace, we’re excited to announce a new partnership with Appfire, the world’s largest enterprise collaboration app provider with a track record of creating easy-to-use, powerful and reliable apps for the world’s most reputable tech companies. Appfire will allow us to build on our strong foundation and take our marketplace to the next level. With that, let me now turn it back over to Roy.

Photo by Austin Distel on Unsplash

Roy Mann : Thank you, Eran. As we turn our attention to the next fiscal year, we are highly confident in meeting our goals, and there’s a lot we plan to accomplish. In FY 2023, we will be focused on remaining the market leader in work management space. To accomplish this, we will continue to give our users exceptional customer experience with easy to use and intuitive products. We plan to enhance our upmarket efforts through building and scaling our platform and product suite, and expanding existing channels that will allow us to build market share. We expect to accomplish all this while being committed to improving efficiency and delivering positive free cash flow for the third straight year. In closing, Eran and I want to thank the entire monday.com team for your amazing work in making 2022 our most successful year yet. Now, it’s full steam ahead into an exciting 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 fourth quarter and full-year 2022 results in detail and provide initial fiscal year 2023 guidance. We finished fiscal year 2022 exceptionally strong. Total revenue in Q4 2022 came in at $149.9 million, up 57% from the year-ago quarter, and at $519 million in fiscal year 2022, up 68% from the prior year. Excluding the impact of foreign exchange, revenue grew 60% year-over-year in Q4 2022 and 71% year-over-year in fiscal year 2022. Our overall net dollar retention rates remained steady in Q4 2022, reflecting our focus on the organizations with the highest expansion potential and continued resilience to a more challenging macroeconomy environment.

We experienced a decline in net dollar retention for our largest customers, reflecting slower seat expansion in the app market. As a reminder, our net dollar retention is a trailing fourth quarter weighted average calculation. For the remainder of the financial metrics disclosed, unless otherwise noted, I will be reflecting non-GAAP financial measures. We have provided a reconciliation of GAAP to non-GAAP financial in our earnings release. Fourth quarter gross margin was 90%. In the medium to long term, we continue to expand gross margin to remain in the high 80% range. Research and development expense was $24.7 million in Q4 2022 or 16% of revenue, in line with the year-ago quarter, and $94.1 million in fiscal year 2022 or 18% of revenue, up from 17% in the prior year.

We plan to invest significantly in R&D in fiscal year 2023 as we build out our product suite and scale our Work operating system platform both horizontally and vertically. Sales and marketing expense was $80.9 million in Q4 2022 or 54% of revenue compared to 73% in the year-ago quarter and $358.6 million in fiscal year 2022 or 69% of revenue compared to 79% in the prior year. G&A expense was $15 million in Q4 2022 or 10% of revenue compared to 12% in the year ago quarter, and $57.3 million in fiscal year 2022 or 11% of revenue, in line with the prior year. Net income was $22.2 million in Q4 2022 and a loss of $33.4 million in fiscal year 2022. Diluted net income per share was $0.44 in Q4 2022 and negative $0.72 in fiscal year 2022 based on 50.4 million and 45.8 million fully diluted shares outstanding respectively.

Total employee headcount was 1,549, a decline of 3 employees since Q3 2022. Looking to next year, as we build our platform and product suite, we expect to continue hiring for our R&D and product teams. Moving on to the balance sheet and cash flow. We ended the quarter with $885.9 million in cash and cash equivalents, up from $852.6 million at the end of Q3 2022. In Q4 2022, adjusted free cash flow was $29.7 million and adjusted free cash flow margin as defined as adjusted free cash flow as a percentage of revenue was 20%. In fiscal year 2022, adjusted free cash flow was $8.1 million and adjusted free cash flow margin was 2%. Fiscal year 2022 marks our second consecutive year of being adjusted free cash flow positive, and we anticipate to be adjusted free cash flow positive in fiscal year 2023.

Adjusted free cash flow is defined as the net cash from operating activities less cash used for property and equipment and capitalized software cost, excluding non-recurring items. Now let’s turn to our outlook for fiscal year 2023. For the first quarter of fiscal year 2023, we expect our revenue to be in the range of $154 million to $156 million, representing growth of 42% to 44% year-over-year. We expect a non-GAAP operating loss of $19 million to $17 million and a negative operating margin of 13% to 12%. For the full year 2023, we expect revenue to be in the range of $688 million to $693 million, representing growth of 33% to 34% year-over-year. We expect a full year non-GAAP operating loss of $36 million to $32 million and a negative operating margin of approximately 5%.

I’ll now turn it over to the operator for your questions.

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Q&A Session

Operator: . Our first question today comes from Kash Rangan from Goldman Sachs. Kash, your line is open. Please go ahead with your question. Moving on, our next question is from Pinjalim Bora from J.P. Morgan.

Pinjalim Bora: Congrats on the quarter. It seems like a good one. I wanted to understand the guidance a bit. Eliran, if you could tease out maybe the assumptions behind the guidance. Do you expect expansions to kind of continue to deteriorate or your local growth kind of slow? Are you assuming the macro kind of to stay the same or take a step down? Trying to understand if you’re baking a little bit more conservatism than usual for this year.

Eliran Glazer: What we took into account for guidance? So we always take into account the latest trends that we’re seeing. So as we said, there is some challenging macroeconomic conditions. . The reason why NDR is slowing is the fact that the On the budget, so we took it into account as part of the guidance that we provided for the year. In addition to that, we’re seeing improving overall efficiency. And the fact that we’re also generating cash also took into account as part of the guidance. So, we feel comfortable with what we provided, number that we can achieve.

Pinjalim Bora: On CRM, customer growth seems pretty interesting, really solid. It seems like almost 12% to 13% total new customers added in the year were CRM. Want to understand what’s kind of the typical size of customers that you’re landing CRM with? And if you’re seeing any kind of interesting expansion characteristics with those as they kind of understand how to expand monday beyond CRM?

Eran Zinman: This is Eran. As I mentioned previously, right now, the CRM product is mostly offered to new customers. We didn’t offer it to existing customers. In terms of new customers, we get a mixture of both SMBs but also midsize and large organization adopting the product. We’re very happy and excited with the results. The momentum is great with that product and also the feedback that we get from customers. And we kind of predict this momentum to continue into next year. So, right now, we get a healthy mixture of both small and medium sized customers into the pipeline.

Operator: The next question is from Brent Bracelin from Piper Sandler.

Brent Bracelin: My question really is around monday sales CRM. monday marketer really showed up on G2 is the two €“ one of the fastest growing new products in categories. Can you just talk a little bit about the momentum you’re seeing in marketer as well as sales and what’s really driving that? Is there a price point that seems to be resonating with customers? And then talk a little bit about when you plan to roll that out to existing customers. I know that was only for new customers. When do you roll it out to existing?

Eran Zinman: We mentioned previously that about 50% of the new paying customers are CRM customers, but the remaining 50% are split between the marketer and the dev tools. So, definitely, we highlighted the CRM because it has the most momentum, but also two other products also have great momentum that we’re seeing. In terms of releasing those products to existing customers, we plan to do it at like at the end of H1, so mid-year this year. And just to your comment about the G2 rating, I think this shows exactly our strategy that because those products are built on top of the Work OS platform, they already are pretty mature, they offer a lot of advanced features, and we’re able to compete in each one of those markets and achieve high ratings in customers, which is perfectly kind of what we expected and a big part of our strategy as we build those products.

Operator: The next question is from Steven Enders from Citi.

Steven Enders: I guess I’m going to ask a little bit on the outlook on the EBIT line and the strong upside we saw there in the quarter. I guess how should we think about the kind of puts and takes of where you’re investing in incremental OpEx and maybe where there might have been a little bit of pullback from what you’re expecting in 4Q? And I guess, similarly for the outlook, is there a pause in maybe some investments that you’re making on the headcount side or just anything that we should be thinking about as we think about the EBIT outlook for the year?

Eliran Glazer: With regards to the first quarter, we provided operating profit, mostly driven by the fact that we beat on the revenue side, we saw a lower S&M spend due to the fact that it cost us less to acquire customers, it can be because of some of the competitions or the competitors that we stated pulled back. And we believe this is an opportunity for us actually to take market share and to grab land. Some of the hirings that we wanted to do in Q4 were delayed to next year. We would like to focus on having people for engineering and product. This is an area that we will continue to invest. And in addition, in Q4, as part of your year-end audit, there is always kind of reversal for throughout the year. Nevertheless, I would like to emphasize that, from our perspective, we are now into Q1, we will continue to invest still in an efficient manner.

And with regards to overall EBIT that you were asking, we’re currently consistent with our original plan to reach profitability well before 2025, sustainable. And with regards to free cash flow, we said that we are going to be free cash flow for the entire year, not only in H2.

Steven Enders: I do want to ask on the marketplace side and then your relationship with Appfire. I guess how do you kind of view the marketplace opportunity evolving moving forward? How do you think about outside partners and third parties building applications and use cases versus kind of what you would build in-house?

Roy Mann: So, we really care about the marketplace being a huge growth engine for us. We want to invest a lot in partners joining us. Appfire is a great partner to have. And our vision here is to build a very large and robust ecosystem around us. And the way we’re doing it, I think, is unique is that we’re opening the platform up completely. Just as an example, application developers can create now first class citizens within the platform. It’s not something that is second grade or like hidden. Okay? So, they can really build on top of the platform like we do, and we really open up completely. And I think they feel that and they feel that we are a great partner to build upon.

Operator: We have a question from Kash Rangan from Goldman Sachs.