Asana, Inc. Q3 FY2024 Earnings Call

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Asana's third quarter fiscal year 2024. With me on today's call are Dustin Moskovitz, Asana's Co-Founder and CEO; Anne Raimondi, our Chief Operating Officer and Head of Business; and Tim Wan, our Chief Financial Officer. Today's call will include forward-looking statements, including statements regarding our expectations for free cash flow, our financial outlook, strategic plans, market position and growth opportunities. Forward-looking statements involve risks, uncertainties, and assumptions that may cause our actual results to be materially different from those expressed or implied by the forward-looking statements. Please refer to our filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents are available in our earnings release, which is posted on our Investor Relations webpage at investors.asana.com. And with that, I'd like to turn the call over to Dustin.

Thank you, Catherine, and thank you all for joining us on the call today. In Q3, we beat our top- and bottom-line expectations again and continued to build on our leadership in the enterprise. Q3 revenues grew 18% year-over-year, and non-GAAP operating loss margins were 5.9%, an improvement of over 30 percentage points versus the year-ago period. Top-line growth was led by our continued success in the enterprise. Revenues from our Core customers, or those spending $5,000 or more on an annualized basis, grew 20%, and revenue from our enterprise customers grew at an even faster clip. Dollar-based net retention rate from customers spending $100,000 or more on an annualized basis, which we view as an indicator of traction among enterprise customers, came in at over 120%, greater than the dollar-based net retention rate for our overall customer base. As you can see, our investments in the enterprise are beginning to pay off as we further our partnerships with some of the largest companies across major industries. While the macroeconomic headwinds continue, especially impacting business in our renewal base, we are seeing signs of stabilization in new business. Overall, awareness and demand for work management continues to expand. Across our total customer base, we are at over 3 million paid seats, showing increasing adoption of Asana worldwide. From an operational standpoint, we have made great progress on improving our non-GAAP operating margins. On a nine-month basis, margins improved 34 percentage points year-over-year. We expect improvement in non-GAAP operating margin year-over-year for the full year, as we focus on operational efficiency and growth, which Tim will talk about more. This year is an important transition period for us. In the past year, we have optimized our investments across our organization, making substantial year-over-year improvements in our margins each quarter. We have brought onboard enterprise software veterans to lead our go-to-market strategy and execution. And we are embarking on a new product cycle of innovation on our industry leading platform, leveraging AI. With that, let me turn to our progress on the product side. So, what have we announced? In early October, we rolled-out: Smart Summaries to identify action items and highlights from conversations, tasks, and comments; Smart Editor to write clearer, more compelling responses that strike the right tone; and Smart Fields to organize projects with auto-generated custom fields. We also started rolling out two more features in November: first, Smart Answers to get timely answers and insights about projects, identify blockers, and determine next steps; and second, Smart Status to identify blind spots, open questions, and roadblocks with automatic status updates. We've had great early feedback from beta customers. Tens of thousands of users are learning our AI powered features. One of the most popular has been Smart Summaries that not only helps you identify action items and highlights from conversations, tasks, and comments but also automatically generates subtasks. This allows for more flexibility and much greater productivity. One of our beta customers specifically liked Smart Status. They told us that they currently spend two to two-and-a-half hours every other week reading context to do this manually. They added 'I am especially excited to see you roll this out at the portfolio level.' And I'm excited about that too, because it's going to powerfully amplify the value you get from connecting work across levels in the Asana Work Graph, without requiring any additional work from customers. In contrast to some other approaches, we're focused on integrating AI into existing user workflows to maximize their value, like creating a new project, building out the details of a task, including suggesting subtasks, or writing a new status summary for a project. And customers are really excited about some of our upcoming roadmap that uses all our Work Graph context to intelligently orchestrate work, like helping predict the time required for tasks so they can more easily plan and manage their work. The interest and momentum when it comes to Asana and AI is growing. As you know, we had successful customer events in New York City and London last quarter with our Work Innovation Summit, focused on AI and the future of work. We expect to continue the marketing momentum into next year. As we shared at the Work Innovation Summit and our Investor Day, the way we have engineered our products with AI is more than a Co-pilot for individuals. We see it as both Co-pilot and Air Traffic Control for entire organizations. The Work Graph serves as a shared map, powering Asana Intelligence, helping to align human intention with AI guidance as they work together to achieve a customer's goals. Unlike tools that are narrowly focused on individuals or specific teams and use cases, Asana maps the relationships across the entire company between individuals, teams, and the work they're trying to achieve, ensuring you get reliable, accurate, and trusted generative output. Simply asking open-ended questions about all the training data used to train a foundation model yields results that aren't as useful, leading to hallucinations that decrease trust in and adoption of AI. With Asana, AI amplifies the power of connecting our customers' work to their business goals, allowing them to accomplish things within the right context. This is a highly differentiated capability that customers are very excited about and the summit attendees reported an 'Aha' moment on the value of the Work Graph when seeing our AI demos. We also recently hosted an Asana Intelligence training event with over 1,500 people from leading organizations in industries such as media, transportation, education, food and beverage and of course tech, illustrating how broad interest in Asana Intelligence is growing. Notably, we're also seeing adoption of Asana within leading AI companies like Anthropic, OpenAI and Alignment Research Center. Our new packaging strategy, introduced at our Investor Day in October and launched less than a month ago, will further adoption of AI and help on-ramp customers to our Advanced and Enterprise tiers. Early feedback from the sales force was that customers are excited to learn about our multiple enterprise offerings. In closing, I'm more excited than ever about the potential of Asana, and where we can go with the platform and capabilities. For example, it's even more amazing to work with our own R&D team right now. I'll have an idea for something LLMs might do in the product and very often a couple weeks later they'll come back and say they've got a working version, that it was easier to build than they expected, and the output is more impressive than they predicted it would be. Everything we are focused on today is in service of enterprise growth: building pipeline, retention and C-level customer engagement.

Thanks, Dustin. In Q3, we continued to be impacted by macroeconomic headwinds. Deal cycles continue to be longer and budgets continue to be a significant factor. However, as Dustin mentioned, we are beginning to see signs of stabilization, especially for new business which includes expansion. We still need to work through some of the original headwinds that are impacting larger customers. Geographically we saw bright spots in Asia, especially Japan, and Europe this quarter. As an example, Asana was particularly strong with high profile retail and consumer product goods companies this quarter. Our pipeline continues to build, especially with the success of events such as our Work Innovation Summit in New York City and London in October. Revenue from our top two product tiers grew over 25% in Q3. As we continue to roll out our new packaging that was shared at Investor Day, we expect to see new customers, in particular, accelerate their journey into our premium tiers, to utilize our most unique enterprise capabilities. Enterprise customers representing organizations with over 2,000 employees continue to be our fastest growing customer cohort. Executives are planning long term and looking to partner with one strategic partner, and we believe this is driving multi-year commitments for us. Our enterprise customers are asking us about AI and automations in Asana. For example, customers we're meeting with through our Executive Briefing program are excited about the roll up of status reports using Asana's AI features. Currently, writing project status might take hours, but with AI, each report can be written in just a few minutes, while never missing an important detail, leaving employees and executives with more time for more valuable work. Also, Asana plus AI helps organizations ramp usage where change management may otherwise be a factor. We believe our AI roadmap and our new packaging will help to further drive adoption. We are seeing new business broadly across several diverse industries, healthcare, financial services, media, transportation, manufacturing, among many others. Within Media, customers rely on Asana to manage their core business processes such as developing on-air creative, managing production workflows, and sourcing new talent on our platform. Paramount Global, a leading global media and entertainment company, has been a customer of ours for a few years now and expanded their use of Asana to all their employees this quarter. And we had another large media conglomerate, Direct TV, that had a significant expansion this quarter. We're seeing continued growth within the healthcare and biotech vertical this quarter. For example, Norton Healthcare, who we have talked about in the past, increased their commitment with Asana this quarter. They use Asana to onboard hundreds of new physician providers to their vast hospital and healthcare system. Additionally, another healthcare provider that serves over 100 million people around the world expanded their use of Asana. Departments that serve their clinical programs, as well as marketing and financial operations, rely on Asana to automate work, manage strategic projects, enable seamless collaboration across teams, and facilitate executive reporting so they can increase operating efficiency to drive better patient outcomes. And we continue to expand in other industries. A global transportation and food delivery marketplace company expanded their use of Asana in a multi-year early renewal deal. Our robust analytics capabilities, Jira data sync integration, and product roadmap, including AI capabilities, were key factors for this win. Our enterprise solution is a strategic application for the company and is used cross-functionally by many departments for everything from business strategy planning to product development to account management. One of the largest hospitality companies in the world headquartered in France chose Asana in a multi-year land deal for their global marketing, communications, and e-commerce departments. A Global 2000 retail company with over 1,000 store locations expanded their use of Asana and upgraded to our enterprise solution to manage the openings and maintenance of their metro stores, as well as their quarterly planning workflow. And some of the most influential leaders in tech are expanding. Following the momentum from Q2, we expanded significantly with a large, high-profile enterprise software company. This is a good leading indicator that when tech recovers, it could be a tailwind for us. In summary, we are seeing more multi-year deals, up both sequentially and year-over-year, winning on vendor consolidation decisions, and are continuing to diversify our enterprise success across more industries. But we still have more work to do. Looking to Q4 and the beginning of next year, we continue to focus on: building pipeline for new enterprise ARR with targeted events and executive meetings around the world; improving expansion rates through customer success programs and strategic initiatives, such as the introduction of AI in our new product tiers; enhancing our professional services offering which will deepen our partnerships within our most strategic accounts; and increasing adoption of our differentiated enterprise capabilities.

Thank you, Anne. While I'm pleased with our high level results, some of the underlying drivers were not as strong as we had hoped. As Anne mentioned, we continue to see headwinds from a macro standpoint, which continues to impact our dollar-based net retention rates. We also have more work to do as we develop our enterprise go-to-market muscle and continue transitioning upmarket. By the same token, I am proud of the efforts the team has put in to manage costs and improve efficiency. We continued to make substantial progress on improving our operating margins. On to our Q3 results. Q3 revenues came in at $166.5 million, up 18% year-over-year. We have 21,346 Core customers, or customers spending $5,000 or more on an annualized basis. Revenue from Core customers grew 20% year-over-year. This cohort represented 74% of our revenues in Q3, up from 73% in the year-ago quarter. We have 580 customers spending $100,000 or more on an annualized basis and this customer cohort grew at 18% year-over-year. As a reminder, we define these customer cohorts based on annualized GAAP revenues in a given quarter. Our dollar-based net retention rates were lower, mainly driven by seat adjustments. Our overall dollar-based net retention rate was over 100%. Our dollar-based net retention rate for our Core customers was over 105%. And customers spending $100,000 or more, our dollar-based net retention rate was over 120%. As a reminder, our dollar-based net retention rate is a trailing four quarter average calculation and thus a lagging indicator. We continue to see stable logo churn rates overall and low churn in our largest accounts. However, companies remain mindful of the near-term economic challenges. I'll speak specifically to our outlook regarding this in a moment. As I turn to expense items and profitability, I would like to point out that I will be discussing non-GAAP results in the balance of my remarks. Gross margins came in at 90.6%. Research and development was $51.2 million, or 31% of revenue, an improvement from 36% a year ago. Sales and marketing was $82.6 million, or 50% of revenue, an improvement from 70% a year ago. G&A was $26.9 million, or 16% of revenue, an improvement from 22% a year ago. Operating loss was $9.8 million, and our operating loss margin was 6%, representing a 31 percentage point margin improvement versus a year ago. The improvement in our operating margin demonstrates our ability to take a balanced approach to growth and profitability. Net loss was $8.2 million, and our net loss per share was $0.04. Moving on to the balance sheet and cash flow. Cash and marketable securities at the end of Q3 were approximately $530 million. Our remaining performance obligations, or RPO, was $335.1 million, up 23% from the year-ago quarter. We expect 85% of RPO will be recognized over the next 12 months. That current portion of RPO grew 21% from the year-ago quarter. Our total ending Q3 deferred revenue was $255.4 million, up 19% year-over-year. Our free cash flow is defined as net cash from operating activities, less cash used in property and equipment and capitalized software costs, excluding non-recurring items such as costs related to restructuring. Q3 free cash flow was negative $11.5 million or negative 7% on a margin basis, an improvement from negative 34% from the year-ago quarter. On a year-to-date basis, our free cash flow was negative $13.4 million, approximately $120 million improvement from the same year-ago period. Moving to guidance. For Q4 fiscal 2024, we expect revenues of $167 million to $168 million, representing growth of 11% to 12% year-over-year. We expect non-GAAP loss from operations of $23 million to $21 million, representing an operating margin of negative 13% at the midpoint of guidance, a measurable improvement from the same year-ago period. And we expect net loss per share of $0.10 to $0.09, assuming basic and diluted weighted average shares outstanding of approximately 223 million. For the full fiscal year 2024, we expect revenue to be in a range of $648.5 million to $649.5 million, representing a growth rate of 19% year-over-year. We expect non-GAAP loss from operations of $66 million to $64 million, representing an operating margin of negative 10% at the midpoint of guidance, an improvement from negative 38% in fiscal 2023. And we expect net loss per share of $0.27 to $0.26, assuming basic and diluted weighted average shares outstanding of approximately 219 million. Our guidance assumes that there is no change in the current macroeconomic environment. We expect our overall dollar-based net retention rate to remain above 100% for the year. We continue to believe dollar-based net retention rates should bottom in Q1 at plus or minus 100%, when a number of large deals from the previous year renew. In addition, the leadership changes we have made in our sales organization will take time to manifest. We are committed to maintaining a disciplined and balanced approach to optimizing costs and improving efficiency and profitability. We will continue to invest in future growth opportunities, like AI, which we expect will drive long-term value. We remain committed to delivering positive free cash flow by the end of calendar 2024. As we work towards reaching free cash flow, we are encouraged by the progress we've made, and I am optimistic about our future. Over the next 18 to 24 months, we anticipate incremental growth will be driven by: expansion from our Core customers, which will be a tailwind to our NRR; our focus on moving upmarket, so moving more of our customers to the $100,000 spend levels; and our new packaging which will help with more lands, improve adoption and new expansion. And with that, I'll turn it back to the operator for questions.

Our next question comes from the line of Josh Baer of Morgan Stanley.

Great. Thank you very much for the question. I wanted to talk about the shift of upmarket and focus on the enterprise. And just wondering, like, where you think you are, what inning as far as the investments in product go-to-market, just thinking through the packaging strategy, leadership changes, Tim, that you just referenced, and anything else as far as initiatives and focus there?

Hi, Josh. This is Anne. Thanks for your question. Yeah, I think we're feeling good about the investments that we've been making to go upmarket. You called out a couple of different things, so I'll address those. We're really excited that all of our key leadership roles across go-to-market are now filled, and these leaders have been adding great talent to the team where we've needed additional enterprise expertise. We have more ramp reps and reps with greater tenure than this time last year, so we're feeling good about that as well. And we'll continue to invest appropriately to support growth in priority markets so we can reach and serve customers well. On packaging, we're seeing really early positive feedback and interest from customers. In particular, customers really appreciate our approach to providing AI in every paid plan. That's clearly tied to value and supported by our guiding principles for AI. We've only been fully rolled out now for a few weeks, but with two enterprise plans now available, we're already seeing dozens of customer migrations up to those packages that include additional investment in Asana. So, we're excited about that, excited about the quality of the sales conversations with executives and greater velocity in helping these customers choose the right strategic plans for both value and growth. So, more to do, but excited that the investments that we've been making both in go-to-market, the team and product and our plans are starting to have good traction.

Yeah, I mean, I think we kind of said our outlook hasn't really changed. Things haven't gotten noticeably better nor noticeably worse. So, we're still committed to delivering free cash flow by the end of calendar '24.

Thank you for the opportunity to ask a question. I have two inquiries. First, regarding the renewals with some of your largest customers, it appears that you are quite confident about achieving a Net Revenue Retention rate of around 100%. Can you elaborate on the dynamics or activities that contribute to this? What kind of visibility do you have regarding this situation and what have you observed so far? You mentioned larger deals, but how are things progressing with renewals in the context of a competitive landscape? Secondly, I have a quick follow-up for Tim.

Hey, Alex, it's Tim. I think we're seeing that we have a good understanding of the utilization of many of our large accounts. As we indicated on Investor Day, most of the net retention rate is affected by seat adjustments or reductions, primarily due to companies that had layoffs around this time last year and are renewing their contracts while readjusting their workforce. We have a clear idea of which companies are likely to renew and their utilization, so we feel confident about the outlook. While there can always be surprises, we are fairly optimistic about what we see.

Perfect. And then just maybe on the cRPO balance, it was down sequentially. Was that, again, a result of that heightened down-selling pressure? And any way to think about cRPO for Q4, and kind of how to tie that with where we are at a high level for growth next year?

I think that from an RPO or cRPO perspective, it grew by about 21% year-over-year. There is certainly some variability in the nature of the deals. The RPO number is also influenced by renewals, which we have been observing some pressure on in the business.

Yeah, hi. Thanks so much for taking my question. So, maybe first, could you give us a sense of the growth or NRR expansion activity outside of the impacted verticals like tech and where you're seeing the most rationalization or optimization activity? Just perhaps it could help give some visibility to the growth we could see coming on the other side of the tech renewal activity?

I’m not sure if we mentioned this on this call or a previous one, but we have noted before that when we look at our business segmented by tech and non-tech, the non-tech sector is actually growing at a faster rate than our tech business. The pressure we are experiencing regarding renewals and expansion primarily stems from the tech sector. Many of the customer examples that Anne discussed, like those in healthcare and media, are from non-tech businesses, and we are encouraged by our progress there. Another positive point I want to highlight is that in regions where we have had new leaders for about a year, we’ve observed improved performance from those representatives and locations. I’m particularly optimistic about what we’re seeing in Asia and some early indicators from Europe as well. Overall, we are encouraged both by the regions and the non-tech sectors where we have established a presence.

Oh, great. Thank you very much. Dustin, I'm going to go really big picture here. Do you think the changes in the governance of OpenAI is bad for the future of humanity?

Yeah, that is really big picture. I mean, honestly, I sort of don't feel like we know what the changes to the governance of OpenAI are. My understanding is they have a temporary Board whose goal is to create a new governance structure and elect a new Board. And I think we'll have to judge it based on that. I do want to maybe just echo some of the comments I've seen from smarter pundits though of like, I don't think I ever really thought that trying to govern the private companies to act differently was going to be the thing that most de-risked problems with AI. And so I really think it just underscores the need to solve it with higher level regulation rather than government structures.

I would say two things. We are still experiencing pressure on renewals, which is impacting our net expansion rates. However, I believe we will overcome this by the end of Q1, especially since many large tech companies were going through layoffs at the beginning of the quarter. Once we move past that period, we should see some positive momentum in our net revenue retention. Additionally, the regions I mentioned earlier, EMEA and APAC, have exceeded our expectations, but we still need to enhance our efforts in the Americas.

I just want to add too, since layoffs have been in the news again recently, but just by the numbers, I think it's just important to put them in context of the proportion. So, like the cycle we're seeing now from some of the recent announcements, if you just add it up, all up, it's about one-tenth or less than what we saw a year ago. So, those are still headwinds with those specific customers, but it's not nearly the same as what we're sort of trying to lap and cycle out of the numbers.

Thanks for taking the question. I'm on for Steve. You talked about stabilization in new business. I'm wondering if you could just double-click a little bit into what you're seeing there? Any color on what metrics seem to be improving?

In terms of new bookings, we've noticed a consistent trend over the last couple of quarters, particularly in certain geographies that I mentioned. This consistency is evident from a predictable, pipeline, and closed standpoint, which is very encouraging. Last year, we were experiencing a decline in bookings, but currently, the situation appears much more stable. This gives us optimism as we aim to grow our new bookings from this level.

Yeah, George, it's Anne. I'll answer that. It's been great to have Ed on board for a full quarter. We are seeing him create a strong culture of winning, especially in the higher-end market, and he’s driving operational rigor across the team. He’s also fostering a discipline of building strong executive relationships with customers, which has been fantastic to witness. Additionally, there’s a close partnership with our global marketing organization, particularly with the executive events that we mentioned, bringing our customers together to share innovative work management practices. All of this is improving performance, and we expect to see the benefits in the coming quarters. As Ed works closely with the AMER team, we’re also noticing great momentum there.

Hi, this is Chris Fountain on for Rishi Jaluria. Thanks for taking the question. So, I realize the new packaging strategy only went into effect back in November, but just wondering if you could expand a little bit more on the feedback you've heard so far.

Sure. Hey, Chris. I think the feedback that we're hearing both from our field who are having conversations with our customers, our renewals team, our customer success team, and from customers directly themselves is they do really appreciate how we've made AI very accessible in the product in every paid plan. I think that is something that differentiates our approach to AI, AI designed directly into the workflows that employees and leaders are using. So that's actually brought forward some renewal conversations in some cases. We've been, as I mentioned earlier, just pleasantly surprised to see just the level of engagement, even though we're only a couple of weeks out, in terms of customers choosing to move to our enterprise package. And now that we've got two of those choices, I think there's also more robust conversations that we can have with customers who are interested in those features and functionality. But we anticipate we'll continue to share more with you and have more updates in the next quarter, but the first few weeks have been really positive.

Dustin, you announced a public plan to buy 30 million shares by the end of December, and the last filing showed you had close to 9 million. That's a significant amount remaining. Can you provide an overview of your perspective on the progress of this plan, given that it's only 30% completed?

Yes, I can confirm that the 10b5-1 is still in place. We originally filed it in March. At that time, I had to make projections for the future amidst a very volatile market, and I did my best with that. Now, we're seeing how things are unfolding. That's about all I can share on this matter for now.

Yeah. I mean, I think when we look at the renewals that we have coming up and the companies that were impacted at some point this year due to layoff and looking at their utilization, we feel like we have a pretty good handle and plan and understand what that renewal will look like. So, I think we have line of sight. There's always surprises, but I feel like we have a pretty good handle in terms of lapping the difficult comps that we'll have probably by the end of Q1.

Thank you. And we just want to thank you again for joining us today. We know that earnings is a very busy season for you. We appreciate your time, and we look forward to seeing you on the road this month and in January. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.