monday.com Ltd. (NASDAQ:MNDY) Q4 2023 Earnings Call Transcript

monday.com Ltd. (NASDAQ:MNDY) Q4 2023 Earnings Call Transcript February 12, 2024

monday.com Ltd. beats earnings expectations. Reported EPS is $0.65, expectations were $0.3. monday.com Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the monday.com Fourth Quarter Fiscal Year 2023 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Byron Stephen, Director of Investor Relations. Please go-ahead.

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 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 fourth quarter and fiscal year 2023 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 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. As we reflect on our recent Elevate World Tour, including our first-ever Investor Day, we are filled with an incredible sense of energy and purpose as we embark on 2024. The events were a resounding success, bringing together customers, analysts and investors from around the world. Our Elevate World Tour provided us with an opportunity to connect with our users, demo our latest AI and CRM product advancements, and gather valuable feedback. The enthusiasm and engagement displayed in our attendance were truly inspiring, reaffirming our commitment to delivering innovative products that empower teams to achieve their full potential. Furthermore, the additions of our first-ever Investor Day was a significant milestone.

It allowed us to showcase our progress, present our vision for the future, and highlight our expected financial performance in the coming years. The positive response we receive from the investment community fuels our motivation and drives us to reach new heights in the years ahead. Now, turning to our business results for the year. 2023 was a year of incredible growth and progress at monday.com. Despite the prevailing global economic and geopolitical uncertainties, we exceeded all expectations. Revenue of fiscal year 2023 grew a remarkable 41%, driven by strong customer acquisition and expansion, especially with our larger accounts. In addition to a strong top line, we continue to see improving efficiency and reported record annual non-GAAP operating margin and free cash flow.

Our commitment to innovation played a key role in the success of 2023. Over the past year, we launched new capabilities and delivered hundreds of new features, including mondayAI and monday.com workflows. We also elevated our mobile experience and enhanced our security, data protection and permission settings. Let me now turn it over to Eran to walk you through some additional product highlights.

Eran Zinman: Thank you, Roy. In 2023, we upgraded our infrastructure with mondayDB, which boosted Board performance by 5x. mondayDB continues to exceed expectations and remains on schedule. We are now entering phase 2.0 with a focus on the most complex work scenarios, allowing customers to build and manage workflows at scale without being limited by performance constraints. This quarter, we’re excited to announce the launch of monday code. Monday code provides a secure, serverless environment within the Work OS platform where developers can host and run apps with monday’s security and compliance standards built in. With monday code, developers can now avoid the heavy lifting associated with setting up and managing production servers and more easily create apps for our marketplace.

Let me now turn to pricing. Following several months of extensive testing, we recently introduced an updated pricing model ahead of schedule. As part of the rollout, we notified our customers that we’ll be updating these prices across our product suite. Our customers are at the heart of everything we do and we’ve heavily invested in providing the best-in-class Work OS platforms and products. We believe that our products have evolved to provide even greater benefits and meet the ever-changing needs of our end customers. The updated pricing model reflects the value and quality that our products deliver, ensuring that our customers receive the best possible return on their investment. As we enter 2024, we are more energized than ever to continue innovating and pushing the boundaries of what is possible.

Our focus remains on enhancing our Work OS platform and product suite, expanding our enterprise presence and delivering unparalleled value to our customers. Looking ahead, we are well positioned to build our achievements and continue our upward trajectory. With a strong customer base, a focus on innovation, and a resilient business model, monday.com is poised for sustained growth and success in the coming years. With that, I’ll now turn 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 fourth quarter and fiscal 2023 results in detail and provide initial 2024 guidance. As Roy highlighted, Q4 ’23 was a strong finish to an exceptional year. Total revenue in Q4 ’23 came in at $202.6 million, up 35% from a year ago quarter. Revenue for fiscal year ’23 was $729.7 million, up 41% from the prior year. Our overall net dollar retention rate declined slightly in Q4 ’23 to 110%, reflecting continued macroeconomic headwinds. We currently anticipate reported NDR to begin to recover in the second half of fiscal year ’24. As a reminder, our net dollar retention rate is a trailing four-quarter weighted average calculation.

As Eran mentioned, we have recently revised our lease prices to accurately reflect the enhanced value of our Work Operating System platform and product suite for our customers. We expect that this price adjustment will contribute an estimate of $15 million to $20 million of revenue in fiscal year ’24. For the remainder 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 earning release. Fourth 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 $33.3 million in Q4 ’23, or 16% of revenue in line with the year-ago quarter, and $117.8 million in fiscal year ’23, or 16% of revenue, down from 18% in the prior year.

We plan to increase investment in R&D for the foreseeable future as we build out our product suite and scale our work operating system platform both horizontally and vertically. Sales and marketing expense was $110 million in Q4 ’23, or 54% of revenue, in line with the year-ago quarter, and $413 million in fiscal year ’23, or 57% of revenue compared to 69% in the prior year. G&A expense was $17.3 million in Q4 ’23, or 9% of revenue compared to 10% in the year-ago quarter, and $63 million in fiscal year ’23, or 9% of revenue compared to 11% in the prior year. Net income was $33.7 million in Q4 ’23, up from $22.2 million in Q4 ’22, and $94.9 million in fiscal year ’23, up from a loss of $33.4 million in fiscal year ’22. Diluted net income per share was $0.65 in Q4 ’23 and $1.85 in fiscal year ’23, based on $51.6 million and $51.2 million fully diluted shares outstanding, respectively.

Total employee headcount was 1,854, an increase of 110 employees since Q3 ’23. We expect to ramp hiring in fiscal year ’24 with a continued focus on our R&D product and sales team as we built out our platform and product suites. Moving on to the balance sheet and cash flow. We ended the quarter with $1.12 billion in cash and cash equivalents, up from $1.05 billion at the end of Q3 ’23. In Q4 ’23, free cash flow was $55.4 million and free cash flow margin, as defined as free cash flow as a percentage of revenue, was 27%. In fiscal year ’23, free cash flow was $204.9 million and free cash flow margin was 28%. Free cash flow is defined as 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 2024. For the first quarter of fiscal year 2024, we expect our revenue to be in the range of $207 million to $211 million, representing growth of 28% to 30% year-over-year. We expect non-GAAP operating income of $8 million to $12 million, and an operating margin of 4% to 6%. We expect free cash flow of $56 million to $60 million and free cash flow margin of 27% to 29%. For the full year 2024, we expect revenue to be in the range of $926 million to $932 million, representing growth of 27% to 28% year-over-year. We expect full-year non-GAAP operating income of $58 million to $64 million and an operating margin of 6% to 7%. We expect full-year free cash flow of $200 million to $206 million, and free cash flow margin of approximately 22%.

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

See also Top 12 Retirement Savings Tips for 55-to-64-Year-Olds and 25 Most Valuable Oil Companies in the World.

Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Kash Rangan at Goldman Sachs.

Kash Rangan: Hi, guys. Thank you so much, Roy, Eran and Eliran for giving us all the details. Two quick ones. One is when you look at the growth algorithm. We talked about 27 points of growth. But I look at customers with 10-plus usage as a general proxy, that’s grown about 20% and then you have net expansion rate 110%. So just that base logic alone should give you a pretty decent level of growth. And then, when I dig underneath the numbers, as everybody did, the 50k plus in our customers, it’s growing faster, 56%, and 100k is growing even faster. So help us understand how you constructed the guidance in light of this queue in the metrics that suggest that the underlying business is healthier than the guidance seems to suggest.

And also net expansion rates you said second half of ’24, you expect an improvement. I’m wondering if you can add a little bit more commentary on what you saw in the quarter that gives you the confidence that you can see some improvement. Thank you so much once again.

Eliran Glazer: Hi, Kash, it’s Eliran. So thank you for the question. So with regards to our guidance philosophy, this has not materially changed. We’re focused on providing always prudent, achievable and responsible guidance based on the latest data that we have. You know, we mentioned the price increase. So it’s still early days, and it’s going to be staged throughout the year. And then we would like to make sure that we understand what would be the impact throughout the year. With regard to the demand that we already took into account, nothing has changed much from what we saw in Q4 of last year. Still some headwinds in the macroeconomy environment and we assume this will continue also in Q1 and Q2. So this is with regard to guidance.

With regards to your question on NDR, so, you know, when thinking about NDR, it’s – we are looking at the trailing 12 months as well as the weighted average just as a reminder. We report weighted average. So as I mentioned with regards to guidance, we are still seeing lingering macro headwinds, where customers are still cautious in the spend. We said that we expect it to stabilize in the second quarter of 2024. However, it’s important to mention that overall growth retention has had even a small improvement. And, you know, longer term, we remain optimistic with an updated pricing model and further scaling mondayDB and the product suite that is going to be showing, you know, an uptick at second half of the year.

Operator: We’ll move to our next question from Pinjalim Bora at JPMorgan.

Pinjalim Bora: Great. Hi, thank you for taking the questions. Eliran, maybe digging in a little bit more on the pricing side. You said 15 to 20 in the Analyst Day, you were talking about 10. And you’ve materially kind of changed the timing of the price increase release. So maybe help us understand what are the assumptions that you’re making to get to that 15 to 20 in terms of churn, maybe you’re assuming more of the existing to come in the second half of the year. Maybe dig in a little bit more.

Eran Zinman: Yes, Pinjalim. Hi. It’s Eran. I’ll start with regarding to what are the price changes and then I’ll leave over to Eliran to talk about the assumptions for the rest of the year. So overall, our initial plan also, when we presented during the Investor Day, was to roll out the new updated pricing model around June towards H2 – beginning of H2. And we actually managed to finish our AB testing sooner than that and we were ready in terms of our technical stack. So we decided to make it, I would say, three or four months earlier than we initially thought. So we thought kind of mid-June. And it’s now starting to roll out to existing customers. So it’s like three, four months head start in terms of the process. Again, this is the first time we ever done a price increase to our existing base.

We – in the past, we’ve done it to new customers. So we also try to be cautious here and we’re still learning. I would say that so far from what we see, reactions from customers were good. We didn’t see anything we didn’t expect. Everything was in line with our model. So we remain very optimistic.

Eliran Glazer: Yes. And maybe to continue on what Eran is saying with regards to his assumption on the numbers, because we advance it in a quarter, we assume that there’s going to be an impact of around 15% to 75% on what we said on the Investor Day. So if you take the 10 million, this is roughly between 15% to 20%. And I think one of the things that you even mentioned, I believe, in your coverage when we introduced it in the Investor Day, we don’t know to anticipate the churn. So just as a reminder, 80% of our customers are annual subscribers, 20% are monthly. And we assume – we took into account certain assumptions. Currently, you know, it’s going to be something that we are going to see effectively in 16th of January, sorry, February, when it kicked in. So we took some assumptions with regard to possible scenarios. And that is what we baked into the numbers.

Pinjalim Bora: Yes. Understood. One question for Roy, and I’ll see the floor. We have recently heard from some of your customers that monday is becoming kind of an orchestration engine rather than just a work management platform. Somebody was saying that monday is a layer between Workday and Jira. Another person orchestrating – a manufacturer orchestrating between different number of their systems. Do you see monday becoming that orchestration layer facilitating kind of business workflow across multiple systems in an environment?

Roy Mann: Hi, it’s Roy. So thank you for the question. Yes, that’s part of how we see the platform. We worked a lot into creating the workflow tool and integrations and automation. So definitely we see cross-company workflows, handling also orchestration between many other tools. But we also see monday as a platform that kind of trickles through areas that you don’t have software or you couldn’t have specific software and completes any workflow you want. So other than us creating products for core needs of the organization that they do know, okay, we want it to also fit into areas where you just need an extra input or another process in place and then obviously connect any other tool you want in your stack to work together.

Pinjalim Bora: Understood. Very helpful. Thank you.

Operator: We’ll go next to Brent Bracelin at Piper Sandler.

Brent Bracelin: Thank you. I had two quick ones if I could. Number one, if I look at the number of monday dev net new ads that actually accelerated on a quarter-to-quarter basis in Q4. Could you talk a little bit about kind of what drove the momentum there, a little surprise in acceleration at this point. But – and then I have one quick follow-up. Thanks.

Eran Zinman: Hi, Brent. This is Eran. So overall, we continue to improve the product and also improve our go-to-market. As I’ve – as we mentioned, over time, we open our multiproduct suite to more and more customers and we’re now finalizing the final batch of it. It should be over by the end of Q1. So as more of our users are exposed to our multi-products and we improve the acquisition engine and improve the features, we’ve seen the acceleration. We shared some of the data during the Investor Day, but, overall, we continue to see good momentum with all products.

Brent Bracelin: Perfect. And then, obviously, I know, you’ve been trying to focus on larger enterprise customers. We saw a record number of those net-new 50k cohort customers. You talked about the big deal. Could you just walk us through the pipeline of large deals going into next year? Is that going to continue to be an area of strength or is that more seasonal that you’d expect to happen more in Q4? Thanks.

Eran Zinman: Hi, Brent, it’s Eran again. So definitely, we continue to see good momentum in our pipelines. So during the Investor Day, we mentioned – accounted over 25,000 feet, but we continue to see other opportunities like that, some are smaller, some are larger, but, definitely, a very good momentum in the pipeline. So we expect it to be throughout the year, not just concentrated in Q4.

Brent Bracelin: Helpful color. Thank you guys.

Operator: We’ll move next to Steve Enders at Citi.

Steve Enders: Hi, thanks for taking the question. Maybe just to start on Elevate World Tour, I guess. What has been the feedback that you had from customers on some of the newer products, newer initiatives? And what was kind of the most excitement around for some of those newer solutions that you have coming out?

Eran Zinman: Yes, Steven. This is Eran. So overall, the feedback from customers was really good. There was a mixture of customers that used monday for work management, NCRM and dev. And I think the places where we saw the best feedback was around going deep on our platform, both in terms of scale and performance, but also a lot of nuanced features that we have in the roadmap and definitely around security that allow them to increase the usage. Overall, the feedback was good. And also we got great feedback on other customer testimonials. I think just seen the variety of use cases really opened the mind of our customers of what they can achieve more out of Elevate. And we continue to – plan to continue and do this event annually going forward and scale the event as well.

Steve Enders: Yes. Perfect. Great to hear. And then maybe just on the free cash flow guide for the year. How should we be thinking about, I guess, seasonality of that and, you know, looking at the one key strength, in particular? Are there any factors that we should be keeping in mind there and kind of any assumptions on maybe some of the early renewal activity from price increases coming into the quarter?

Eliran Glazer: Sure, Steve. It’s Eliran. So with regards to free cash flow, I would say that the second quarter and the fourth quarter, this is the time when we pay bonuses. You know, in Q2, we pay bonuses for the employees and for the quota-carrying people. And in Q4, we’re paying bonuses for the self-quota-carrying people. So you would see probably a slightly decline if you compare it to Q1overall, because 80% of our customers are on an annual contract and 20% or monthly. This is something that contribute to the scale and the strength of the free cash flow. On the other hand, you know, this allows us also to continue to invest. So potentially there are going to be quarters that we are going to see opportunities. It might open an opportunity to invest. Therefore, there might be some seasonality. But other than what I said, it’s pretty much stable throughout the year.