Earnings Call Transcript - AMPL Q2 2023

Yaoxian Chew, Vice President of Investor Relations

Hello, everyone. Welcome to Amplitude's Second Quarter 2023 Earnings Conference Call. I'm Yaoxian Chew, Vice President of Investor Relations. Joining me are Spenser Skates, CEO and Co-Founder of Amplitude, and Criss Harms, the company's Chief Financial Officer. During today's call, management will make forward-looking statements, including statements regarding our financial outlook for the third quarter and full year '23, the expected performance of our products, our expected quarterly and long-term growth, investments, and overall future prospects. These forward-looking statements are based on current information, assumptions, and expectations and are subject to risks and uncertainties, some of which are beyond our control and could cause actual results to differ materially from those described in these statements. Further information on the risks that could cause actual results to differ is included in our filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, and we assume no obligation to update these statements after today's call, except as required by law. Certain financial measures used on today's call are expressed on a non-GAAP basis. We use these non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures are limitations and should not be used in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at investors@amplitude.com. With that, I'll hand the call over to Spenser.

Spenser Skates, CEO and Co-Founder

Thanks, Yao, and good afternoon, everyone. Welcome to our second quarter earnings call. We appreciate you taking the time to join us. I'll be talking about three topics: our Q2 results and an update on our execution, the progress we're making with platform and product innovation, and our competitive landscape and customer adoption. Let's start with a summary of the Q2 financials. We closed the second quarter with $67.8 million in revenue, up 17% year-over-year. This is above the high end of the guidance we gave in Q1. Annual recurring revenue was $268 million. Our total customer count increased to 2,344 customers. Non-GAAP gross margin improved to 77.5%, up 3 percentage points year-over-year. This contributed to our first non-GAAP profitable EPS quarter. We generated record operating cash flow of $20.4 million and positive free cash flow of $19.3 million. With this result, we expect to be firmly in free cash flow positive territory as a company going forward. I'm pleased with our revenue beat, especially given the persistent challenges in the macro environment. Let me touch on a couple of those for a moment. Larger companies continue to optimize for their current level of end customer activity. We remain exposed to startups who are feeling that pressure more intensely. Continued cost cutting is causing churn to tick up as macro ripple effects work their way to that portion of our customer base. While difficult, we believe these short-term challenges are just a temporary part of this macro cycle. There are several areas that fuel our cautious optimism here. We see how our platform approach is resonating with customers, improving our competitive position against legacy and point solutions. Win rates remained robust in Q2 and we continue to win deals against as well as replace legacy players. We continue to refine our integrated go-to-market efforts, get closer to our customers, and build on the strong pipeline we saw in Q2. We are executing with urgency as a company. A lot is happening under the surface. New leaders are raising the bar. I'm pleased with the progress we're making here as a team. We're focused on what we can control. This means operating responsibly against our growth outlook while leaning into the massive opportunities that lie ahead. Our mission is to help companies build better digital products and experiences. I'll take this opportunity to provide a clear framework for our ongoing efforts. The first pillar is what we call 'win simple,' shorthand for how we're making it easier for everyone to get started with Amplitude. Many companies need more help getting started in driving digital maturity. Today's customers demand an experience that's effortless, offers fast time to value, and meets them where they are. One key facet of win simple is improving the user experience and we've been hard at work there. Last quarter, we talked about early positive feedback around our new chart creation flow and layouts. We introduced more improvements in Q2, including industry-specific templates and a new homepage experience. We are striving to make Amplitude easier to adopt. We've doubled the conversion rate of users finding insights from templates and are seeing continuing week-on-week improvements in uptake. In some cases, we've seen users create their first Amplitude chart 40% faster. The second pillar is 'win the enterprise.' As part of our path to $1 billion and beyond, we are focused on meeting the needs of traditional enterprises. We are leading with use cases, taking a value-based selling and delivery approach and expanding the audiences we focus on. Product and behavioral data is important to everyone in an organization. Marketing teams can target the right customers, engineering teams can identify bugs, and data teams can make detailed recommendations, all from product signals. We are already seeing this approach bear fruit. It drove one of our largest ever expansions in the quarter with an enterprise customer that's been with us since 2015. The third is 'win the category.' Every business with a digital product and a digital experience for its customers needs to know more about what those customers love, what causes them to get stuck, and what keeps them coming back. Our vision for the future state is one where real-time operationalized product data is mission-critical to shaping dynamic and adaptive digital products and experiences. The lines between product, web, and marketing analytics are blurring and the spaces will start to converge. Companies of all shapes and sizes are finding that legacy approaches cannot sufficiently address the universal needs of acquisition, retention, and monetization. Everyone wants to understand their customers better. Amplitude tells you exactly what your customers do and how they behave. We represent the best way to listen to your customers in an age of digital transformation. The center of gravity continues to shift toward product as more companies realize this. We have the strategic high ground in this convergence and intend to lead this massive category. Underpinning those three pillars is 'win together,' the glue that binds all. The systems and processes that helped us grow from $10 million in revenue to where we are today will not be the ones that take us to $1 billion and beyond. We are systematically up-leveling every area of our business, so we can deliver exceptional value for our customers. When our customers win, we win. Against that strategic backdrop, let's turn our attention to product development progress in Q2. Our platform approach is resonating with customers. We are benefiting from vendor consolidation; an increasing number of companies chose to land with a combination of analytics, experiment, and CDP in the first half of 2023. CFOs have been given a mandate to mercilessly target duplicative or inefficient spend. In this environment, we continue to see point solutions suffering disproportionately. Many customers struggled to deliver on the data insights and actions that are so critical to product and engineering teams. We think that the majority of our base benefits from the addition of experiment. Traction here remains encouraging as some of the largest wins in Q2 included experiment upfront. Our CDP solution also continues to mature rapidly with Amplitude now close to parity with many CDP market leaders in terms of connections. Our approach to CDP has primarily been about reducing friction and duplicative costs for our smaller customers. In Q2, we saw increased interest from multiple enterprise customers expressing a need for holistic solutions across data and analytics. We announced warehouse-native Amplitude at the Snowflake summit in June. Our warehouse-native approach is all about extending what has made Amplitude successful: being the most open, agnostic, and trusted way to access and find insights from our customers' data. By providing access to Amplitude product insights directly from the data warehouse, we're making it easier for data teams to manage data and for product teams to use those insights confidently. Companies are taking differing approaches as it relates to the governance and storage of their data. We want to be wherever our customers are along their journey. We believe this warehouse-native option will be a natural on-ramp for many enterprise customers who have already made significant investments in their warehouse strategy. While early, we also believe this can be additive to our core Amplitude value proposition in many ways, including potential new personas and workloads. AI developments are an exciting opportunity for us to evolve how users engage with and find value from our platform. Product teams follow and iteratively build, ship, use, and learn. Companies like GitHub and Figma have made massive improvements to the build and ship phases with AI that made it possible for developers to go from prototype to production in record time. At Amplitude, we're using AI to improve the use and learn phases. AI greatly accelerates the ability to get value out of huge quantities of data. We've amassed one of the largest databases of digital customer behavior in the world. We spent the past 10 years pioneering the behavioral graph. We've already helped product teams leverage AI and ML techniques with our recommendation engine and product monitoring. Today, we're really excited to introduce Amplitude AI, a suite of AI-powered features. Here are two highlights. The first is 'ask Amplitude,' which uses AI to shorten the learning curve for anyone getting started with Amplitude. Type in a question like 'How long does it take for new versus returning users to make a purchase?' and it will show a chart with the answer you need. The second is 'data assistant,' which uses AI to make data governance effortless. It determines the most important ways to improve your data quality and automate certain updates. By improving data quality and trust, we're helping customers get value from Amplitude faster. We're also releasing functionality that automates formula creation and short naming. Teams can pick from a variety of suggestions so they can move fast and stay in control. These new features will help us accelerate time to value and expand the base of users we speak to, enabling us to win simple. We believe AI will dramatically improve the caliber of digital products and experiences, and Amplitude will help make that happen. I'd like to talk about our second quarter success with customers from multiple industries. We both landed and grew our relationship with customers around the world, like Careem, Beachbody, Western Union, Alteryx, Cloudflare, Carta, and TaxJar. Other customers this quarter included airlines and supermarket chains. It's clear that the need for Amplitude is a universal one. We expanded with a brand-name global sports organization to help drive global fan acquisition growth. This is a fantastic case study of the opportunity ahead of us as traditional enterprises continue with their digital transformation. To succeed, they needed to unify user data to personalize the fan experience across digital and nondigital properties. Marketing and product managers needed a shared view of the customer journey in a way to test hypotheses, target relevant audiences, and personalize content features. The organization's direct-to-consumer arm was already using Amplitude, but other teams used a combination of legacy tooling and marketing technologies. They couldn't scale, which caused major delays in massive engineering requirements. Amplitude's digital analytics platform was the clear choice for the business, and we're excited to help grow the subscriber base and, in turn, increase the company's broadcast rights to the tune of billions a year. Spin by OXXO is a financial app that provides mobile payments transactions, deposit funds, cash withdrawals, and card services. Spin has been an Amplitude customer since 2020. Over the last 18 months, they have upgraded plans, added Amplitude experiment, and most recently in Q2, led to competing CDP for Amplitude. Their expanding use of Amplitude has enabled them to optimize their user journey, manage high user growth, and accelerate their presence in the LatAm market. Spin has grown from 0 to 5 million users in just 1 year. Their goal is to double this by December, and we want to help them achieve that. Against the backdrop of a challenging macro environment, we're steadfastly positive about our long-term potential and the opportunities in front of us. I believe in our ability to deliver in the months and years ahead. I'm incredibly proud of our entire team for everything they've done so far this year. With that, thank you for your interest in Amplitude. I'd now like to turn it over to Criss to walk through the financial results.

Christopher Harms, CFO

Thanks, Spenser, and thanks to everyone joining us today. Amplitude's Q2 results demonstrate steady execution against a challenging environment. In the face of an uncooperative macro environment, we expect to be firmly in free cash flow positive territory as a company going forward. We are intentionally shaping Amplitude to drive more operating leverage at scale. We've made strong progress, which I believe will eventually position us for reaccelerating growth. Now on to our second quarter results. As a reminder, all financial results that I will be discussing, with the exception of revenue, remaining performance obligations, and balance sheet figures are non-GAAP. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found in our earnings press release and supplemental financials on our IR website. Second quarter revenue was $67.8 million, up 17% year-over-year. Total ARR increased to $268 million, an increase of 18% year-over-year and $6 million sequentially. Here's more context. Implicit in the color on revenue guidance we provided in the prior quarter was projected record high levels of churn in Q2. Those expectations came to fruition, consistent with our internal projections of a 50-50 split between full and partial churn. Of note, within partial churn, we saw significant optimizations with two large customers, one of which is a crypto company and one of which is a large digital native customer. Within full churn was the expected concentration of accounts in the predominantly technology startup segment and commercial segment. New ARR in Q2 saw a rebound from the prior quarter. This was marked by a particularly large expansion as a longtime customer drastically grew both the scope and volume of their Amplitude relationship. That expansion deal was not the only one for the quarter. We again saw sequential growth in customers across both our $1 million-plus and $100,000-plus ACV base. Accordingly, our mix in Q2 was a little over 2:1 between expand and land new ARR. Lastly, we had strong execution on our newer products with Experiment and CDP together now exceeding $20 million ARR. NRR, on a trailing 12-month basis, declined sequentially to 108%. In-period NRR was 101%, down from 118% in Q2 2022. Gross retention this quarter was in the mid-80s. Total RPO was $246 million, up 8% year-over-year. Current RPO was $192 million, flat sequentially but up 13% year-over-year and represented approximately 78% of total RPO. Gross margin was 77.5%, up 3 percentage points year-over-year and quarter-over-quarter. This was primarily due to the restructuring of our customer success organization in April and continuing improvements in unit hosting costs. Sales and marketing expenses were $31 million or 45% of revenue, down from 53% a year ago. R&D expenses were $12.9 million or 19% of revenue, down from 22% a year ago. G&A expenses were $9.8 million or 14% of revenue, down from 15% a year ago. Operating loss was a negative $0.8 million or a negative 1% of revenue, a 14 percentage point improvement on a year-over-year basis and an 11 percentage point improvement on a sequential basis. Net income per share was $0.02 based on 126.3 million fully diluted shares compared to a loss of $0.08 with 111 million shares a year ago. All of the operating figures I just conveyed are exclusive of the restructuring charges we incurred in Q2 that approximated $8 million. Free cash flow was a positive $19.3 million or 29% of revenue, a 14 percentage point improvement on a year-over-year basis. This free cash flow figure incorporates a negative $3.8 million cash impact from our April restructuring. Finally, cash, cash equivalents, and marketable securities were $319 million at the end of Q2. Now on to our outlook. For the third quarter, we are expecting revenue between $69.7 million and $70.3 million, representing an annual growth rate of 14% at the midpoint. Non-GAAP operating income between positive $0.6 million and $1.0 million; non-GAAP net income per share to be between $0.02 and $0.03, assuming shares outstanding of approximately 128.3 million as measured on a fully diluted basis. For the full year, we are raising our 2023 revenue guidance to be between $273.6 million and $275.6 million, an annual growth rate of 15% to 16%. We expect non-GAAP operating loss between $7.6 million and $5.2 million, and we expect non-GAAP net income per share to be $0.02 to $0.04, assuming shares outstanding of approximately 127.6 million as measured on a fully diluted basis. As you adjust your models, keep in mind the following: we finished Q2 better than we expected, but we still see a very challenging macro environment. Total Q2 ARR performance was positively impacted by a single large expansion. We believe renewal dynamics will remain challenging for the rest of the year. We're coming up on a slightly smaller renewal base in the second half versus the first half, and this renewal base steps up in the first quarter of 2024. We also think that optimizations will persist into 2024 as our customers continue to deal with their varying levels of demand. Restructuring charges will impact free cash flow negatively by approximately in Q3. Starting with the August 15 RSU vesting date, we will begin utilizing more of a withhold-to-cover approach to taxes rather than exclusively using the sell-to-cover approach, which we have done historically. We estimate using $5 million to $6 million in this cycle. At a minimum, we intend to continue this approach through the November 2023 cycle, and we'll update you in the future with more specificity on our approach for 2024. We expect about $3 million of interest income per quarter. And finally, gross margins should remain in the 77% to 78% range. In summary, this quarter was better than expected, but we're not satisfied. We're pleased to be operating as a free cash flow positive company. We're hard at work on improving the business and investing in key areas that we believe will eventually lead to reaccelerating growth. With that, I will open up for Q&A.

Yaoxian Chew, Vice President of Investor Relations

Our first question comes from Koji Ikeda of Bank of America, followed by Patrick Schulz from Baird.

Koji Ikeda, Analyst

So the first question here really on kind of the three growth metrics here, looking at RPO, I guess it's CRPO and RPO, thinking about the deceleration there. But the billings was good against a tough comp, and then you also raised the full-year revenue guidance, but the revenue guide implies flat 4Q revenue growth. So really, how to reconcile all that with what sounds like to be maybe a stabilizing to slightly improving demand environment? I mean, I guess, what is the key metric to look at here to judge the underlying fundamental growth?

Christopher Harms, CFO

Koji, as always, you are very good with your math. Look, I focus on the ARR. The $6 million sequential was a very positive upside for us. But we do acknowledge it was significantly impacted by one large expansion. As we look through the remainder of the year as we consider our focus on winning enterprises, all that we're doing within our operating functions across go-to-market, R&D, and G&A, we recognize we'll be in a different operating position in the future. But against the macro conditions of churn and others, we have continued, implicit in our revenue guide, a very neutral performance of new ARR across Q3 and a corresponding impact into Q4 revenue.

Koji Ikeda, Analyst

Got it. I wanted to touch upon that large expansion deal. I thought it was pretty interesting that you called out it was a customer since 2015. So maybe talk a little bit more about this customer. Was it a department expansion, new product expansion? And I think maybe more importantly, did this customer optimize in the past year, and now are they coming back to expand? And maybe this is an early indication or some sort of green shoots that other large customers that have optimized in the past could start coming back to expand with you guys?

Spenser Skates, CEO and Co-Founder

Yes. I think there's a few things that happened. So one, I think it's representative of larger expansions that we've seen in the past. Obviously, in 2021, we saw a number of large expansions just generally across our customer base for customers who have been using us for many years. And so this was in that vein where the amount of volume and the scope of the deployment continued to increase, and they wanted to set up an ELA so that they didn't have to worry about further volume increases in the future. We also had a new product introduced as part of this. So that was really exciting to see as well. And then the last thing, just to call out very candidly, I think we had Nate, in particular, a new CRO, did a really great job of building a really strong relationship with one of the key executives there that was instrumental in driving this new ELA. So a very, very positive signal. Again, just a single data point, I think it speaks to the broad opportunity that is going to happen as the macro does come back. And so we'll obviously take the wind and we're thinking about how do we be more systematic and scale that motion across our entire go-to-market team.

Yaoxian Chew, Vice President of Investor Relations

Next, Patrick Schulz from Baird, followed by Nick Altmann from Scotia.

Patrick Schulz, Analyst

I guess first, I just wanted to touch on the competitive environment a bit. I believe the no new day-to-day for Google Analytics was in July, and you guys have proved to talk about this being an opportunity for Amplitude to take share. Curious if you guys have seen any changes to your win rates over the past few quarters, particularly as the macro has remained challenged and vendor consolidation continues?

Spenser Skates, CEO and Co-Founder

Yes. So Google Analytics has been huge for us. So there's actually three dates with Google Analytics. The free plan sunset date was July, as you mentioned. Google optimized a sunsetting in October, and then the enterprise version of Universal Analytics is sunsetting next year. And so we're going to expect to see continued customers migrating from Google Analytics to Amplitude. You see that show up in a number of ways. Obviously, we called out a number of wins last quarter that were specifically Google Analytics replacements. And then just the increase in customer count broadly is another thing that's driven by that. We've created, I think what we're seeing is the convergence of marketing, product, and experience analytics. And so we're going to continue to drive on improving our capabilities in both marketing and experience analytics so that we're set up to drive full consolidation in the category. I think the last thing I'll comment on Google Analytics is though, even though the sunset date has already happened, there are still lots of teams that maybe they're on GA4, but the experience is not working out, and so they're still evaluating other vendors now. And so we're seeing that contribute towards more Amplitude evaluations and growth in our business.

Patrick Schulz, Analyst

Okay. I appreciate the color; your response is very helpful. And then, Criss, maybe this one is for you. You have raised profitability guidance once again. So it's clear this is a big focus for you guys internally. You've been on the job now for a little over a quarter. So just curious where you see the biggest opportunities to better leverage the expense base. Aside from just the natural benefit you guys will see to margins as revenue recovers. Just maybe how you're thinking about the trade-off between investing for growth once we get through the challenging macro and improving profitability?

Christopher Harms, CFO

Yes. No, all good points. When we talked about the April restructure that was very much for me, a restructuring, right, getting very focused on how we invested in the go-to-market functions. The changes that Thomas was implementing there, the reduction we did on the customer success, and obviously, its impact on the gross margin impact. Inclusive in that is we've continued to make engineering investments to improve our unit hosting cost. Some of the changes I've weaved into the Q3 and Q4 really reflect on an expense structure, not necessarily a decision between investing or dropping into profitability, but more fine-tuning kind of my expense calibration of where we're heading. As we think into the future, we're going to continue to make that trade-off. One of the things I will point to is we did increase our investment and we're continuing to plan to increase our investment into our professional services organization, both our recurring subscription, technical account managers as well as more of our implementation professional services capacity in bench. One of the pillars that we focus on is winning the enterprise; we recognize the whole product delivery concept for them and the integral role that those two functions, both at the implementation as well as a dedicated technical account person moving forward, play. We'll continue to make those choices. As you work through our numbers, you'll see that, look, our SaaS magic number is not where we want it to be. Thomas, Nate, and the rest of the team are really focused on operationalizing discipline and really driving a much more return on effort within our go-to-market motion. As that starts to come to fruition, we've talked about we really put that as the basis to our growth into 2024 as we start to be more effective on that front as well as leveraging our PLG motion more on the bottom end. So for us, it is very much about making more effective use of the investment levels that we've kind of recalibrated at coming out of the April restructure.

Yaoxian Chew, Vice President of Investor Relations

Next question from Nick Altmann from Scotia, followed by Taylor McGinnis from UBS. I don't see Nick. Taylor from UBS, followed by Elizabeth Porter from Morgan Stanley.

Claire Gerdes, Analyst

This is Claire Gerdes on for Taylor. So just one on the guide. You raised the fiscal '23 revenues a little more than the Q2 beat. And when we back into the 4Q implied revenue guide, it implies sequential growth of only 1-ish percent, so below 3Q. Is that just conservatism? Or is there anything specific to 4Q that we should be keeping in mind?

Christopher Harms, CFO

You also clearly inclusive in the full-year guide was the ARR performance in Q2 and the contribution it's going to give us to the rest of the year. And then again, reflective of some of the points we made on the macro conditions, our expectation on the Q3 ARR performance as embedded into our guide is really a day zero neutral position. Therefore, a really nominal contribution into the Q4 period. I would equate almost all of the increase in the revenue guide, reflective of what's in the rearview mirror, both from the Q2 revenue beat as well as the overall ARR performance and the way it will play out through the rest of the year.

Yaoxian Chew, Vice President of Investor Relations

Next question from Elizabeth Porter from Morgan Stanley, followed by Arjun Bhatia from Blair.

Elizabeth Porter, Analyst

I wanted to follow up on your comment around just the convergence of marketing, product, and experience analytics. So could you give us some color on how the mix of users has changed over the last year since the IPO? And then how does that change your access to budgets as you're addressing a larger base? Are you seeing any sort of improvement in the budget that you guys are able to address and speak to?

Spenser Skates, CEO and Co-Founder

Yes, for sure. So first, I'd say product has historically been our main persona since we started the company, and that has been the predominant user base. I think the change that we've seen is more and more marketing teams use Amplitude. So that was in the single digits when we first started to think about marketing analytics, and now it's in the teens in terms of total percentage of our user base. And so we've definitely seen an uptick because of our marketing analytics capabilities and because of the convergence that I talked about. I think marketing is also essential to win the enterprise. I think what we've seen is that, particularly in the traditional enterprises, marketing tends to control the budget. So it's not just a question of just getting in product. Like as an example, I was visiting one of our large media customers in the U.K. a few months ago, and the Chief Product Officer there was a huge supporter and champion of us, and they were trying to get us into the mainstreaming app of their media product, and they had to bring in the CMO as well. Now, after the CMO saw we had a bunch of marketing capabilities, they're like, 'Hey, this is great, we're signed off on this.' We'd love to expand with Amplitude. And so I think instead of in the technology industry, you may start in product and then expand to marketing over time. I think what we're seeing in the traditional enterprise is you often want to land with marketing right away. And then to the last part of your question, absolutely allows us to get more budget. So a huge, huge deal from that standpoint. I think what we've seen in the last five years is a ton of innovation in the digital analytics space. We've obviously been the leader in that. And what you're going to see over the next five years is you're starting to see the signs of consolidation, both in terms of analytics, experiment, CDP, as well as along with dimensions of marketing and experience analytics. So we'll continue to come out with more offerings there so that we are able to drive that consolidation and come out on top.

Elizabeth Porter, Analyst

Great. And then just as a follow-up on some of the Amplitude AI announcements, how should we think about those impacting the financial model? Is it more incorporating features, and that's going to attract kind of more customers and improve retention rates? Or is there some sort of direct monetization that you guys see an opportunity to pursue?

Spenser Skates, CEO and Co-Founder

Yes, we're not doing any direct monetization at this time. It's all about that first pillar I talked about, very simple. So how do you make it much easier for customers who aren't familiar with digital analytics to onboard and get value out of what we do? And so the Ask Amplitude is a great example of that. You just type in your question into a text box. You get an answer back. You don't have to do anything about how to use Amplitude. You don't have to know anything about your data taxonomy; it's going to pull the full insight together for you. A lot of the stuff around the data management that I talked about also is about making it much easier to manage data at scale. And so again, we're not monetizing; it's making a lot of existing things that we do significantly easier, particularly for companies that aren't used to using digital analytics.

Yaoxian Chew, Vice President of Investor Relations

Next question from Arjun Bhatia from Blair, followed by Clarke Jeffries from Piper.

Arjun Bhatia, Analyst

Spenser, maybe going back to the CDP and the marketing persona aspect. Can you touch on where the Amplitude CDP is from a future parity perspective with some of the stand-alone CDPs that are in the market or even other CDP that are part of a broader marketing tech stack because there are those other offerings there? And how have you been navigating kind of switching personas to get more into the marketing department versus your historical advantage, which has been in product?

Spenser Skates, CEO and Co-Founder

Yes, the primary factor we evaluate with CDPs is the number of connections, specifically the variety of endpoints available for data transmission. There are many potential endpoints to consider, and we are nearly on par with leading CDPs in that regard, which contributed to the transition from OXXO. We're currently seeing customers adopt it as a viable option. Regarding the CDP, we don’t insist that customers must use the Amplitude CDP; it simply provides more ways to access data. We believe that data will be stored across various locations within an enterprise, whether that’s in a CDP, a cloud data warehouse, or an internal database. Thus, the more integrations we support and the easier we make data access, the better it is for everyone. Apologies, Arjun, could you repeat your question about the marketing aspect?

Arjun Bhatia, Analyst

To just get access to the marketing persona to the CMO versus historically, you've been selling more to product teams.

Spenser Skates, CEO and Co-Founder

Yes, I believe there is a growing demand within traditional enterprises to engage in marketing immediately, as I mentioned earlier. This is why we are focused on developing those aspects. We've observed an increase in our user base within marketing, rising from single digits to now being in the teens in terms of the total percentage of end users involved in marketing, which enables us to capture more budgets. It seems that we recognize the power dynamic hasn't completely shifted to product teams within these non-tech companies. Therefore, it's essential to start by ensuring the marketing team is satisfied with a comprehensive view of the customer, rather than just focusing on the product.

Arjun Bhatia, Analyst

Okay. Got it. That makes sense. And then maybe just a broader question. It seems like as we're looking at Q2 results, as we're looking at the forecast, there seems to be an impact from a small number of customers, right, that might drive volatility one way or the other. Can you touch on just customer concentration at a high level? And as you look through the remainder of the year, do you see other potential high-dollar customers that could have an impact on your forecast one way or another? I guess, just how are you thinking about that for the rest of the year?

Spenser Skates, CEO and Co-Founder

Yes, I believe that compared to other companies of our size, we have a significant number of million-dollar customers. This concentration leads to some volatility, as you mentioned, Arjun. I was involved with two of those instances. The cryptocurrency sector has faced challenges, prompting a resizing by one customer, which was also reflected in the resizing by the technology company Criss referred to. In both cases, those customers experienced layoffs and are seeking short-term budget assistance, necessitating these adjustments. However, Amplitude usage among those customers has actually increased, which is encouraging. They anticipate continued growth with us over the long term, which is a positive outlook. This situation represents temporary volatility as they realign their expectations regarding end customer growth. We've analyzed both Q3 and Q4 and expect the adjustments to persist throughout this year. Q2 stands out as the largest quarter in terms of renewal dollars, making it the most affected by churn. While Q2 may peak in absolute dollar terms, we expect similar trends in Q3 and Q4, which we have already factored into our projections.

Yaoxian Chew, Vice President of Investor Relations

Next question from Clarke Jeffries from Piper, followed by Gil Luria from D.A. Davidson.

William Jeffries, Analyst

Spenser, I wanted to ask about the AI technologies that you're announcing and maybe more broadly, which do you think is a larger opportunity in terms of the solution set today, whether it's a conversational interface or something that's more along the data management lines. I had imagined Amplitude has been using machine learning for a long time. And really the step function is on the language, natural language processing side. And so just wanted to get your thoughts on what it means long term. And then I have a follow-up for Criss.

Spenser Skates, CEO and Co-Founder

I don't have all the clear answers regarding the specific contributions, but I can share our current thesis on the space. First, we have one of the largest real data sets globally, and AI excels at extracting and summarizing insights from extensive data. This technology has the potential to significantly enhance analytics, whether it involves ensuring the right data is collected, categorizing information, generating insights, or turning those insights into action through experiments. Currently, companies rely on human efforts for each of these steps, and I believe AI can create exponential improvements in all of them. As a result, we're on the brink of transformation in the analytics space with AI. We're still in the early stages, but what excites me is that we are the first digital analytics company to introduce any LLM-based technology that enhances our offerings. I previously mentioned tools like Ask Amplitude, data taxonomy tools, formula suggestions, and chart name suggestions. This is just the initial step, and much more is to come. In the long run, it's about how we can effectively operationalize this data across various business areas, and I believe AI will speed up our capabilities in this regard. There is significantly more value to be created compared to the current manual processes. Although we're in the very early stages, I see it becoming a crucial element of the future of digital analytics.

William Jeffries, Analyst

Absolutely. And then Criss, I just wanted to ask about stock-based compensation. If you could give us sort of any expectations on how that would trend maybe over the near term? How is the cost base being factored in? And so maybe we have a little bit more of a conversation about GAAP operating profitability. You mentioned that withhold to cover, but I was just wondering if you could maybe lay out the stock-based comp trend.

Christopher Harms, CFO

Yes, I know it reached its highest percentage of revenue last quarter. It has been on an upward trend, currently around 32% to 33%. We're looking to see that decrease over time. I haven't focused much on the forward-looking outlook and have been more concentrated on where we currently stand. We are making adjustments regarding how we're managing cash to support the recovery you've mentioned. Clark, I will be more engaged in the forward-looking aspects, but it hasn't been my priority in the last quarter.

Yaoxian Chew, Vice President of Investor Relations

Next question from Gil Luria from D.A. Davidson, followed by Tyler Radke from Citi.

Gil Luria, Analyst

You mentioned verticalization of the platform. Maybe can you just talk about what that means in your go-forward picture is for how the platform can evolve over time? And then maybe just in addition to that, how the go-to-market changes in order to compensate that.

Spenser Skates, CEO and Co-Founder

Yes. There are different levels of verticalization, and we are starting with a fundamental step. We aim to enhance the existing Amplitude product by providing templates and guides tailored for specific industries such as media, e-commerce, financial services, and B2B. This will allow users to instrument various elements and access ready-made dashboards. For me, this aligns with our goals of simplifying processes and targeting enterprise clients. Many of those customers seek our guidance since they often don’t know what questions to ask regarding the data. They would appreciate clear directives like the 20 events they need to instrument, enabling them to generate various insights without navigating the challenges on their own. I'm very enthusiastic about this approach. I believe Thomas and Nate are still in the early stages of exploring this concept. It will be a long-term effort to refocus our sales team. Currently, we are too small to specialize in verticals extensively. We’ve done some targeted efforts in specific regions, like having sales reps in New York focus on financial services. However, we are still quite a way from implementing anything more significant in this regard. This will be a multi-year journey as we grow and evolve our strategies.

Yaoxian Chew, Vice President of Investor Relations

Next question, Tyler Radke from Citi, followed by Michael Turits from KeyBanc.

Tyler Radke, Analyst

I wanted to ask you, Spenser, about the Amplitude warehouse native offering that you discussed. Could you provide more examples of the new types of use cases and users you are seeing with that product? Additionally, what does it streamline and what benefits does it provide you?

Spenser Skates, CEO and Co-Founder

The key point is to explain what the warehouse native offering is, why we implemented it, and how it aligns with our strategy. Many companies are now using cloud data warehouses as their main source for product behavioral data. In such scenarios, it becomes much more efficient to have an application that operates natively on Snowflake and connects directly to that data without transferring it to Amplitude. We have a native application that functions within a Snowflake instance using that data, enabling users to access much of our digital analytics features immediately. This setup takes only 10% of the time needed for the traditional Amplitude implementation when the data is already available in the data warehouse. Strategically, we're doing this for two main reasons. First, we anticipate data will be stored in various locations, with cloud data warehouses being one. By expanding our compatibility with multiple data sources, we increase our chances of success in the market and make it easier for users to adopt Amplitude. This approach is about meeting customers where they are. Second, the warehouse native offering serves as an entry point to more advanced capabilities. It can be seen as a simplified version of Amplitude. As users seek greater speed and functionality, they can transition to more advanced versions of Amplitude. Ultimately, this is about expanding our reach within Snowflake's customer base and will extend to additional cloud data warehouses in the future, allowing us to accommodate various data sources, including warehouses and customer data platforms.

Tyler Radke, Analyst

Okay. So are we expanding our focus beyond the product persona with those additional aspects?

Spenser Skates, CEO and Co-Founder

Many companies are evaluating their needs based on data, which allows us to connect with data-driven organizations. These organizations can be categorized as product-led, marketing-led, or data-led, depending on their industry and size. Our offering is particularly beneficial for those where the data leader plays a significant role.

Christopher Harms, CFO

I think we were just undersourced just as we were oversourced on the customer success team, we were undersourced on the pro services. I gave it just as an anecdotal example of look, as we see areas that need incremental investment, we're not going to hesitate to do that. That being said, free cash flow positive obviously gives us a ton of flexibility about what we're doing, getting to a non-GAAP EPS kind of positive state this last quarter, a great milestone, and as I said, we're kind of guiding the Q3 on a profitability standpoint. All I was trying to indicate there is that when we see the areas that meet the incremental investment, we're not going to hesitate to do it.

Yaoxian Chew, Vice President of Investor Relations

Last question from Nick Altmann from Scotia. I think we have you at this time, Nick.

Nicholas Altmann, Analyst

Just a follow-up on Tyler's question on the renewal side of the equation. When you look at the gross renewal rates for the enterprise side of the business versus more of the SMB side of the business, how meaningful is the delta there in terms of the gross renewal rates?

Christopher Harms, CFO

So I know that I have it. I'm visualizing the chart in my head, but I don't want to call it out without having looked at it again. When we do the call back, I'm happy to give you that spread.

Nicholas Altmann, Analyst

Okay. Fair enough. And then earlier, you talked about how actually the second half maybe has less of a renewal base and 2Q is actually a pretty significant renewal quarter for you guys. I guess I wanted to ask how you're sort of thinking about renewals with your customers? And sort of what are sort of the levers that you're pulling to combat those? Is it more discounts? Is it trying to sign shorter-term deals? Like what are sort of the things you're doing on your side of the equation to help maintain customer spend and sort of lift those renewal rates in the second half?

Spenser Skates, CEO and Co-Founder

Yes, there are many strategies in place. It's our top priority from both a product and market perspective. One approach is to move towards longer-term contracts while providing more discounts. In instances where customers may want to downsize, we look for other opportunities within their businesses to expand or cross-sell new products like Experiment and CDP, which has proven successful. We will continue this as more customers recognize these offerings. In situations like the one we mentioned with the cryptocurrency company facing layoffs and budget constraints, our goal is to be a strong long-term partner. We will collaborate with them to agree on a reasonable rate because we believe these customers will remain with us long-term. As they return to growth, we want to grow alongside them. Additionally, our ability to predict outcomes has significantly improved. Thomas and Nate have excelled in this area. We performed nearly as expected in Q2, and as we look ahead to Q3 and Q4, we remain aligned with our earlier expectations. While there’s still room for improvement, our predictability has greatly enhanced our ability to address issues early and maintain our customer base.

Yaoxian Chew, Vice President of Investor Relations

Great. Thank you. With that, I'm seeing no further questions in queue. We will be at the Citi Global Technology Conference and Piper Sandler Growth Franchise Conference in September. Details will be posted on our IR website. Thank you very much for attending our Q2 earnings conference call. You may now disconnect.

Spenser Skates, CEO and Co-Founder

Thanks, everyone.