monday.com Ltd. (NASDAQ:MNDY) Q2 2023 Earnings Call Transcript

monday.com Ltd. (NASDAQ:MNDY) Q2 2023 Earnings Call Transcript August 14, 2023

monday.com Ltd. beats earnings expectations. Reported EPS is $0.41, expectations were $0.14.

Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to monday.com’s Second 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 the financial results for monday.com’s second 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 second 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. In the second quarter, we continued to make significant strides in executing our long-term strategy, deliver exceptional results. Revenue grew 42% as demand for our customers remain healthy. We continue to demonstrate improved operating efficiency and cash generation, reflecting our ongoing commitment to driving sustainable growth, Eliran will talk you through our financial performance in more detail. This quarter, we are thrilled to announce the completion and release of Monday DB 1.0 to all our accounts. This is the initial version of our brand-new infrastructure for the Work OS platform. With Monday DB customers are already experiencing large and more complex boards loading 5 times faster, enabling them to work more efficiently and handle data-intensive and complicated workflows.

Future releases of Monday DB will provide even more speed, enhancement, scalability and functionality. In Q2, we also launched our AI assistant and introduced several new AI capabilities. This include automated desk generation, formula builder, e-mail composition and content generation. Additionally, we opened our AI assistant infrastructure to external developers and hosted a global AI Hackathon, which generated tremendous interest with over 1,600 registrants and more than 40 AI apps developed, the Hackathon showcased the enthusiasm and talent within our monday.com community. We have also been working to optimize our infrastructure and interface to enhance the user experience and reinforce a robust multiproduct ecosystem. We see an extraordinary opportunity to enhance cross-selling efforts, strengthen inter-department organizational connection and solidify monday.com as a vital partner across all business use cases.

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

Eran Zinman: Thank you, Roy. As Roy mentioned, we remain focused on our multiproduct strategy and ensuring that our products can successfully enable cross-functional collaboration for our customers. Monday Cell CRM is now available to approximately half of our customers, and we continue to see strong demand for the product. We are committed to continuously elevating our cell CRM product with best-in-class features. This quarter, we introduced new mass emailing capabilities, allowing users to reach out to multiple contacts through Monday cell CRM. In addition, we’ve revamped and upgraded our mobile item page making it easier than ever before to access and update information on the go. We also recently announced that Monday Dev successfully transitioned out of beta.

Initial demand for the product has been strong, and Monday Dev has already earned a place as one of the top bug track and softwares on G2. As we gradually roll out Monday Cell CRM and Monday Dev to our existing customer base, we see an incredible opportunity to foster cross-selling. Since the launch of our product suite in 2022, we’ve seen an impressive 1,656 accounts initially began with our work management product and later expand their portfolio with an additional product. This significant expansion underscores the value of our offering and the trust our customers have placed in us. Separately, we are excited to announce that we are elevating the workflow experience for our customers with the introduction of Monday workflows add-on. Monday workflows offers a fully customizable and visually intuitive interface, empowering users to build workflows with ease.

By utilizing drag-and-drop blocks, Monday workflow simplifies the entire workflow creation process, making it accessible to users of all levels of technical expertise. The new Monday workflow is currently open to 20% of our customers and will be gradually open to all customers by the end of Q3. With that, let me turn it back over to Roy.

Roy Mann: Thank you, Eran. As we continue to grow, we are focused on ensuring we have the right team and the right place to lead monday.com into the future, and we took steps in the quarter to strengthen our management team with the promotion of 2 senior executives. Daniel Lereya appointed as the first Chief Product and Technology Officer, and Shiran Nawi was appointed as our Chief People and Legal Officer. Both Daniel and Shiran has served as an outstanding senior leaders for many years here at monday.com and we are confident that they will both excel in these new worlds. Finally, we are excited to announce that this year’s New York City Elevate Conference on December 6, will feature a segment exclusively for our shareholders.

Mark your calendars and join us for our first ever Investor Day as we showcase our exciting journey ahead. We are incredibly proud of what the monday.com team accomplished this quarter. We are just scratching the surface of our potential, and we are excited about the opportunities to continue to generate sustainable long-term value for our shareholders. With that, I’ll turn it over to Eliran to cover our financial and guidance.

Eliran Glazer: Thank you to everyone for joining our call. Today, I’ll review our second quarter fiscal ’22 results in detail and provide updated guidance. Q2 2023 was another strong quarter driven by increasing customer demand for the monday.com Work OS platform and product suite. Total revenue in Q2 came in at $175.7 million, up 42% from the year ago quarter. Excluding the impact of foreign exchange, revenue grew 43% year-over-year. Our overall net dollar retention rate declined in Q2, reflecting a continued slowdown in customer seat expansion amid the challenging macroeconomic environment. We continue to expect some pressure on NDR in the second half of fiscal year ’23, and our guidance now assumes full year NDR slightly below 110%.

As a reminder, our NDR is trailing 4 quarter weighted average calculation. 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 earnings release. Second quarter gross margin was 19%. In the medium to long term, we continue to expect gross margin to be in the high 80s range. Research and development expense was $27.9 million or 16% of revenue compared to 19% in 2022. For fiscal year ’23, we anticipate that R&D expenses as a percentage of revenue to be in the high teens as we build our product suite and scale our work OS platform, both horizontally and vertically. Sales and marketing expense was $98.8 million or 56% of revenue compared to 70% in Q2 2022.

G&A expense was $14.7 million or 8% of revenue compared to 12% in Q2 ’22. Net income was $21 million, up from a loss of $14.9 million in Q2 2022. Diluted net income per share was $0.41 based on 51.2 million fully diluted shares outstanding. As of the end of the quarter, total employee head count was 1,646, an increase of 64 employees since Q1 ’23. We expect to continue hiring throughout the course of fiscal year ’23 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 $989.4 million in cash and cash equivalents, up from $935.6 million at the end of Q1 ’23. Free cash flow for Q2 was $45.9 million, and free cash flow margin as defined as free cash flow as a percentage of revenue, was 26%.

We continue to 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 year ’23. Free cash flow is defined as net cash from operating activities, last cash used for property and equipment and capitalized software costs. Now let’s turn to our updated outlook for fiscal year 2023. For the third quarter of fiscal year ’23, we expect our revenue to be in the range of $181 million to $183 million, representing growth of 32% to 34% year-over-year. We expect non-GAAP operating income of $4 million to $6 million and an operating margin of 2% to 3%. For the full year of 2023, we now expect revenue to be in the range of $713 million to $717 million, representing growth of 37% and 38% year-over-year.

We expect full year non-GAAP operating income of $24 million to $28 million and an operating margin of 2% to 4%. We I’ll now turn it over to the operator for your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Kash Rangan with Goldman Sachs. Your line is open.

Kash Rangan: Congratulations on the superb quarter. Roy, Eran and Eliran. Glad to see the growth and the free cash flow margin expansion here. I’m curious to get your thoughts on the DB work OS and also the database product. What is the unique differentiation that Monday has for these products within its customer base? And if these products are successful, should we expect net expansion rate to stabilize at some point? When do you think we see the bottom in that? Because obviously, if you’ve got installed base potential for these two products, we should start to see a turn in that metric. So just wondering if you have any thoughts on that.

Eran Zinman: So just to repeat the first part of your question, you were asking about Monday DB and Monday debt?

Kash Rangan: The differentiation of these two products within your base versus the competition?

Eran Zinman: Yes. So Monday DB, Monday database is basically, it’s not a product, but a new set of capabilities that we released to all of our accounts and users. You can think about it as the infrastructure change and the impact of that, we just announced that we finished the deployment of version 1.0, which is ahead of schedule and a major milestone for us as a company. This new infrastructure just allows customers to dramatically scale on top of our platform in terms of size of boards, size of dashboards, automations, integrations. And we think that this will lead to enterprise customers being able to dramatically scale their operations and accounts, add more users, more use cases, which will ultimately lead to more net extension and more usage and more attention among our larger customers.

Monday Dev is our product that’s competing in the Dev industry, basically allowing developers and product managers and designers to work effectively on agile sprints and managed R&D operations. And this product is going very nicely. We just launched out of beta, as we mentioned. And we see some good numbers and momentum, and we see this as a very strategic industry for us as a company.

Roy Mann: Yes, it’s Roy. I can add that like the differentiator we see for Dev and all our products, also CRM and the work management the fact that we are in a platform. The products are built on top of the platform, which allows our customers to shape the solution to whatever they see fit and how their organization works. And we see this as a huge advantage also on deals and with customers when we talk with them, it’s a major thing that it’s built on top of the work OS.

Eliran Glazer: And I will address your question on MG.

Kash Rangan: Yes.

Eliran Glazer: I wanted to just [MDR], but please follow up on maybe you have

Kash Rangan: No. I just wanted to get the thoughts on — what is kind of missing in the marketplace with the Dev community that you think you could address the particular problem? That was what I was curious about.

Roy Mann: So I think there is like one major player within this market. And what we see is that it’s very geared towards developers. When we look at the R&D teams, it’s comprised also of product people and designers, and then you have the rest of the company that you want to connect to. And with Monday, we feel — our customers feel they can customize it better have a workflow where everyone takes part more and it’s also more connected to other parts of the organization and not just the developers.