Samsara Inc. (NYSE:IOT) Q2 2024 Earnings Call Transcript

Samsara Inc. (NYSE:IOT) Q2 2024 Earnings Call Transcript August 31, 2023

Samsara Inc. beats earnings expectations. Reported EPS is $0.01, expectations were $-0.02.

Mike Chang: Good afternoon, and welcome to Samsara’s Second Quarter Fiscal 2024 Earnings Call. I’m Mike Chang, Samsara’s Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Chief Executive Officer and Co-Founder, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we’ll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described fully in our SEC filings.

Any forward-looking statements that we make on this call are based on assumptions as of today, August 31, 2023, and we undertake no obligation to update these statements as a result of new information or future events unless required by law. During today’s call, some of our discussions will include our second quarter fiscal 2024 financial results. We’d like to point out that the Company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenue and revenue growth. Reconciliations of GAAP to non-GAAP financial measures are provided in our press release and investor presentation. We’ll make opening remarks, dive into highlights for the quarter and then open the call up for Q&A.

With that, I’ll hand over the call to Sanjit.

Sanjit Biswas: Thanks, Mike, and thank you, everyone, for joining us today. Samsara achieved another strong quarter as we continue to deliver rapid ROI for the world’s leading and most complex organizations. We ended Q2 with an ARR of $930 million, growing 40% year-over-year. Q2 is also our first adjusted free cash flow positive quarter, and we are proud to have achieved this milestone towards becoming a self-sustaining business. Our vision is to be a multi-decade partner for our customers in driving their digital transformation and profitability is an important step in that journey. Our customers represent more than 40% of the global GDP and are the backbone of the global economy. They’re leaders in construction, food and beverage, transportation, agriculture and field services.

In Q2, we saw continued momentum with large customers. We added a record 140 large customers, bringing us to over 1,500 customers with over $100,000 in ARR, growing 53% year-over-year. This includes New Jersey Transit, National Grid and BoartLongyear, the world’s leading provider of drilling services. Our customers’ success is central to our company’s success, and we are grateful to have earned their partnership and trust. This past June, we had a chance to celebrate our customers by bringing together nearly 1,000 leaders from the largest physical operations organizations in the World and Beyond our annual customer conference. At the event, we learned more about the challenges they’re facing and discuss how Samsara’s connected operations Cloud is delivering value through digitization.

It was a great opportunity to hear our customers’ top priorities, which is critical as we shape and prioritize our R&D efforts. Throughout our conversations, it was evident that the appetite for digital transformation is robust and growing. We also held our connected operations award ceremony where we celebrated our customers who achieved an outsized impact on our platform. This year, we honored a number of industry leaders, including DHL, our connected operations, innovation, winner and Sobeys, our winner of most sustainable operations. DHL is one of the largest logistics companies in the world, serving more than 220 countries and delivering 1.7 billion parcels annually. They have complex global operations and a frontline workforce of 600,000 people.

Using Samsara for safety and telematics across 20 sites, DHL Express saw a 26% reduction in accidents and a 49% reduction in accident-related costs. Equally as impressive, DHL supply chain also saw a 50% reduction in driver turnover reaching their lowest driver vacancy ever. Driver turnover is a major cost for our customers, and it’s incredible to see the positive impact our products can have by helping companies enhance safety and improve retention. Let’s turn to Sobeys, one of the largest supermarket chains in Canada with more than 200,000 employees across 2,700 locations. They have ambitious sustainability goals with a go green target date of 2035 to substantially lower their emissions. Using Samsara, they served — they saved 46,000 gallons of diesel leading to a savings of 469 metric tons of carbon emissions in just four months.

We really enjoyed our customer conversations throughout Beyond and I’m excited to announce that next year, we’ll be hosting our conference in Chicago with even more customers, partners and leaders across the world of physical operations. A key priority for our customers is reshaping the worker experience. While there are millions of employees who work in corporate back office, 70% to 80% of the world’s workforce are frontline workers, saving frontline employees time with digital workflows and other technologies to modernize their experience can have an outsized impact for an organization. A prime example of this is one of the largest air carriers in the world, which is using Samsara to digitize its ground support equipment operations across some of its major U.S. hubs.

They’re using our telematics and equipment monitoring applications to manage thousands of pieces of equipment from baggage carts to passenger boarding stairs and more. They have seen impressive results, saving their employees valuable time by helping them locate equipment often outside in all types of weather conditions in minutes instead of hours. In 1Hub alone, they reported saving more than 2,600 hours searching for ground support equipment and it’s already impacting customer experience. They’ve reduced delays in kickoff flights, the first flights of the day, which has a cascading impact on their operational schedule and customer experience. We are proud to help support their frontline teams and drive these results for their business. Our customers trust us as a strategic partner to make the jobs their frontline workforce better, safer and more efficient.

At Beyond, we announced two new products to further empower their workers, connected forms and mobile experience management. Launching later this year, connected forms allows customers to digitize any custom form such as inspections or incident reports and enables workers to complete them on the go. The Silver Gates Construction, a leading construction equipment transportation company use connected forms through an early access to streamline equipment inspections. They have seen significant value already and reported a 90% reduction in administrative time through eliminating the need to process paperwork. You can read more about this exciting use case in our shareholder letter found on our Investor Relations website. Mobile Experience Management, or MEM, gives operations leaders the ability to easily customize control and secure devices for remote environments their frontline teams operate in.

U.S. Logistics Final Mile company serving the eastern half of the United States has seen substantial improvements with MEM. Being able to more efficiently assist and train drivers remotely has resulted in a reported 80% reduction in average driver call times. They also reported a 70% reduction in data usage while eliminating disruption for their drivers, supporting their safety on the road. As we build for the long term, we’re investing in technology and talent that will drive value for our customers now and in the future. We listen to our customers through our customer feedback loop and use those insights to deliver purpose-built solutions that address their most pressing needs. In addition to connected forms in MEM, this year in Beyond, we also announced three innovations to drive operational efficiencies, Virtual Coach, Find My Asset and Data Connectors.

Customer centricity is central to our business. I’m excited to bring an important new voice of the customer to Samsara’s Board of Directors with the appointment of Todd Bluedorn. Todd brings nearly 30 years of leadership experience within the industrial sector, including 15 years as Chief Executive Officer and Chairman of Lennox International, a leading global HVAC company and leadership roles at United Technologies and Texas Instruments. He brings a deep understanding of our customers’ needs and has a proven track record of execution and operational which will only enhance our ability to deliver for our customers. We are thrilled to welcome Todd to the Board. And finally, I wanted to share that we were recently recognized by several organizations as a great place to work.

We earned our 2023 Great Place to Work Certification, were named a Best Workplace for Innovators by Fast Company and were named a 2023 U.K.’s best workplace for women. We are proud of creating a culture and a company that are employees into working for. It’s been a milestone quarter for us at Samsara. We’re operating at scale, have tremendous momentum fueled by customers who find value and ROI in our platform and have taken an important step towards becoming a self-sustaining business because of our continued focus on durable and efficient growth. I would like to thank all of the Samsarians, customers, partners and investors for joining us on this decades-long journey. I’ll now hand it over to Dominic to go over the financial highlights for the quarter.

Dominic Phillips: Thank you, Sanjit. Q2 is highlighted by achieving our first quarter of positive adjusted free cash flow. In addition to hitting this milestone in Q2, we expect to remain adjusted free cash flow positive for the full year and going forward. This was also another quarter of high growth at scale. Our year-over-year net new ARR growth accelerated for the second consecutive quarter, resulting in sustained high growth for both total ARR and revenue. In Q2, we added $74 million of net new ARR, a quarterly record, representing 33% year-over-year growth, which was our highest growth over the past six quarters. This also represented 32 percentage points of year-over-year growth acceleration at a larger scale. Q2 ending ARR was $930 million, growing 40% year-over-year, and revenue was $219 million, growing 43% year-over-year, which is the same growth rate as last quarter at a larger scale.

Several factors drove our strong top line performance. First, we continue to focus on serving large physical operations customers with complex operations that are more likely to utilize our full suite of applications. We now have 1,515 $100,000-plus ARR customers including a record quarterly increase of 140 or 53% year-over-year growth, which is our third consecutive quarter of maintaining this growth rate at a larger scale. $100,000-plus ARR customers represent our fastest-growing cohort. In Q2, ARR from these customers grew 53% year-over-year, representing the second consecutive quarter of accelerating year-over-year growth. As a result, 100,000-plus ARR customers contributed 50% of total ARR mix, up from 46% one year ago. Second, this quarter included a balanced mix of landing new customers and expanding existing customer relationships.

New customers represented approximately half of net new ACV and seven of the top 10 deals were new logos, including three that were greater than $1 million, one of which is a leading clean energy provider serving more than 20 million people in the Northeastern United States. Using Samsara’s EV features and sustainability dashboard, they are realizing hard and fast ROI by reducing the consumption of more than 10 million gallons of fuel per year. Expansions to existing customers represented the other half of net new ACV, the largest of which was a more than $1 million video-based safety expansion to a critical infrastructure provider. During the pilot phase, the customer realized a 79% reduction in mobile usage events and a 50% reduction in speeding events.

In addition to fewer accidents, this customer expects to lower insurance premiums improve asset utilization and reduce fuel costs, all with Samsara. And third, while our core businesses drove most of our Q2 performance, we also executed well across several new frontiers. For example, state and local governments, municipalities and school districts are becoming increasingly important end markets for Samsara. In Q2, we saw strong public sector momentum, including two of our top five new customers and two of our top five expansion deals. In addition to public sector, we continue to see growing end market diversity and Q2, 84% of net new ACV came from non-transportation verticals, up from 78% in Q2 last year, with particular strength in energy, utilities, construction and field services.

And lastly, we continue to see strength in non-vehicle applications. We now have three separate products contributing more than $100 million of ARR each and growing more than 30% year-over-year, including equipment monitoring used to locate and manage non-vehicle assets in the field. In Q2, we signed our largest ever equipment monitoring deal and approximately $1 million expansion to a top 10 customer. In addition to driving strong top line growth, we continue to deliver operating efficiency improvements across our business as we scale. Q2 gross margin was 75%, a quarterly record and approximately 2 percentage points higher year-over-year, driven largely by optimizing cloud, cellular and customer support costs. Q2 operating margin was negative 3% compared to negative 13% in Q2 FY ’23 and Q2 adjusted free cash flow margin was positive for the first time at 2% or $5 million compared to negative 25% or negative $38 million in Q2 FY ’23, primarily from improved operating leverage and continued working capital improvements.

Okay. Now turning to guidance. For Q3 FY ’24, we expect total revenue to be between $223 million and $225 million or between 31% and 33% year-over-year growth. Based on our Q2 results and updated outlook for the remainder of FY ’24, we’re raising our full year revenue guidance to be between $896 million and $900 million or between 37% and 38% year-over-year growth. As a reminder, our fiscal year always ends on the Saturday closest to February 1, which means every six years, our fiscal year calendar includes 53 weeks instead of 52. As such, FY ’24 includes an extra week in Q4, resulting in 14 weeks instead of our typical 13-week quarter. We expect the extra week will add less than 3 percentage points of year-over-year growth in FY ’24 and which was already factored into our prior guidance as well as the current guidance we provided today.

Additionally, we don’t expect the extra week in FY ’24 will have a material impact on our key profitability metrics because we will incur an additional week of expenses while also recognizing an additional week of revenue. To wrap up, we are pleased with our performance through the first half of FY ’24 and our improved outlook for the remainder of the year. We are digitizing the world of physical operations and helping our customers become safer, more efficient and more sustainable. With our markets, products and customer focus, we are well positioned to continue delivering durable and efficient growth. With that, I’ll hand it over to Mike to moderate Q&A.

A – Mike Chang: Thanks, Dominic. We will now open the line up for questions. When it’s your turn, please limit your questions to one main question and one follow-up question. [Operator Instructions] The first question today comes from Keith Weiss at Morgan Stanley, followed by Michael Turrin at Wells Fargo.

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Q&A Session

Chris Quintero: This is Chris Quintero on for Keith Weiss. Sanjit, really great to see that largest ever equipment monitoring deal. So congrats on that. What are some of the learnings that you have from selling telematics video safety into fleet set you can bring to make more of a push on the equipment monitoring side into industries like construction and public sector where maybe some Samsara doesn’t have that initial name recognition like it does within the fleet side of things?

Sanjit Biswas: So Chris, we’re really excited to see that $1 million-plus expansion in — with equipment monitoring. It is interesting to think about what lessons can we bring over. One of the most fascinating things is a lot of these customers with huge numbers of assets in the field didn’t know that they could track all of that equipment. And so it sounds kind of simplistic, but they thought GPS tracking was really limited to their over-the-road vehicles. And that’s often where we start. So that expansion that we’re talking about, in many cases, will start with telematics. The lessons that we’re able to bring over are really around ROI. What are you doing in terms of understanding your asset utilization, should you be remarketing some of your assets or utilizing them differently.

And to mention construction, it’s a newer industry vertical for us, but I’m proud to say we now serve six of the top 10 largest construction companies in the U.S. So we do have that foothold or traction. But for many of them, it’s an education journey that they can track more than just their vehicles.

Chris Quintero: Got it. Very helpful. And then, Dominic, revenue guidance for Q3 implies lower than normal kind of seasonal growth with more of a back end of Q4 implied seasonal growth rate. Is there anything to call out there from a seasonality perspective?

Dominic Phillips: Well, I think similar to the guidance philosophy that we’ve used throughout the year, I would frame our revenue guidance is de-risked. There’s still macro uncertainty in front of us, and we feel highly confident that this is a number that we’re going to be able to hit. I’d also just again reiterate that the implied Q4 guidance includes this extra week in Q4, a 14-week quarter instead of 13 week and so that also will have an impact on the revenue growth in that quarter and therefore, in Q3.

Mike Chang: Our next question comes from Michael Turrin at Wells Fargo, followed by Matt Pfau at William Blair.

Michael Turrin: Great. The second straight quarter, we’re seeing just outsized results on net new ARR. At the midpoint of the year, I’m just wondering if there’s anything you’d look back on as a key point of focus you had starting the year that’s maybe helping drive some of the first top out performance we’re seeing, and any surrounding commentary coming out of the Beyond event that we had a few months back to just help support the continued momentum there?

Dominic Phillips: Michael, it’s Dominic. I think that the investments we’ve made over the last couple of years have really helped us get off to a really strong start in the first half of the year. And I think just the broader customer demand, the fact that we’re able to provide hard and fast ROI, our customers’ operations budgets are generally increasing. I call that two of three leaders are increasing their operation technology budget. But we’ve made a lot of investments in areas like large customers and back-to-back quarters of record ads, and we’re seeing a balance between new logos and expansions, and then some of our newer frontiers public sector, we called up the equipment monitoring. So those are investments we’ve been making for a couple of years, and I think we’re just seeing the continued momentum in those businesses over the first half of the year.

Sanjit Biswas: And if I can just add a couple of things we heard it at Beyond. Dominic just mentioned large customer momentum. We saw that really come through it Beyond. And many of these large customers that have complex physical operations, and they’re using this data that’s now in our platform, the system of record for their physical operations to connect into other systems. So that’s another big tailwind we have is this appetite for data and interest in getting more visibility. And just to put a number on, they’re connecting us into more than six systems on average. And so that’s a really unique position that we have that I think is a functioning as a tailwind for us in the market.

Michael Turrin: That’s great. And maybe just one on free cash flow. You just hit a big milestone there. Some of the supporting commentary suggests guiding for breakeven effectively for the back half of the year. We don’t have much of a seasonal history to look back on. I know there are a lot of focus efforts put in the back half of last year to help get to the levels that you’re currently operating at. So just anything you can comment on, Dominic, on the seasonal profile we should expect from the cash flow going forward and how you think about the pace of trajectory there now that you’ve reached that important milestone.

Dominic Phillips: Yes. Obviously, with free cash flow, there’s stuff that happens at the end of quarter, at the beginning of quarters, it’s seasonal or predictable as like ratable revenue recognition. And so, we — strong free cash flow in the quarter and I think for the back half of the year, we’re seeing breakeven in the last few quarters, and we’ll kind of see but we can do to our goal is really to focus on the full year, and we feel confident that we’re going to be free cash flow positive, not only as we did in Q2, but for the full year as well.

Michael Turrin: Congrats on a strong first half.

Mike Chang: So, our next question comes from Matt Pfau at William Blair, followed by Sterling Auty at MoffetNathanson.

Matt Pfau: I wanted to ask first on the seven of the top 10 deals that were from new customers. I think that’s up very significantly from the first quarter. But if you were to look back historically, how does that mix compare. And if it’s up, what factors are driving that? I mean, I’m sure it’s some combination of signing larger customers as well as customers making a bigger commitment upfront, but anything you would point to?

Dominic Phillips: Yes. I mean I think if you go back to Q4, it was like more new logos than it was expansions. And then in Q1, it flipped and 60% of our net new ACV came from expansion. And now we’re kind of at parity. So kind of 51% expansion, 49% new logos. So — and again, the way that we compensate our sales force, we just care about getting as much ARR as we possibly can, and they’re compensated to drive overall net new ACV and whether that comes from a new logo or an expansion to an existing customer, it’s the same commission rate. And so, these things can be a little bit lumpy and which of those two are driving more of the net new ACV. But it’s been pretty balanced over the last few quarters. And again, you’re right, a very strong new logo quarter for us.

Matt Pfau: Great. And then I just wanted to follow up on the gross margin in the quarter. Good to see that up. I think the guidance implies that, that would decline a bit in the back half of the year. Any reason why you would expect that to decline in the back half?

Dominic Phillips: Again, there’s timing implications of gross margins quarter-to-quarter, I think we would just focus investors on the full year results were we’re steadily making progress and more and more leverage out of gross margins and getting some optimizations around cloud and cellular and customer support, but the kind of the timing of when those expenses land within a year can fluctuate. And again, I would focus investors. Most of the leverage in the business going forward will come from operating expenses below the gross margin line.