Earnings Call Transcript - ASAN Q2 2023

Operator, Operator

Good afternoon and thank you for attending today’s Asana Second Quarter Fiscal Year 2023 Earnings Call. My name is Austin, and I’ll be your moderator for today. I’d now like to pass the conference over to our host, Catherine Buan. Catherine, you may proceed.

Catherine Buan, Host

Good afternoon, and thank you for joining us on today’s conference call to discuss the financial results for Asana’s second quarter fiscal 2023. 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 regarding free cash flow, our financial outlook, strategic plans, our 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 lastly, in service of investors and customers who need ESG data for reporting and RFP requirements for our many enterprise deals, we publish comprehensive and easy-to-use disclosures around ESG on our IR website. You’ll find downloadable SASB index data and climate data along with our annual ESG report. And with that I’d like to turn the call over to Dustin.

Dustin Moskovitz, CEO

Thank you Catherine, and thank you to everyone for joining us on the call today. Asana’s Q2 results beat expectations on both the top line and the bottom line. Revenue grew 51% year-over-year and beat our guidance by 6%, driven by strength in the U.S. and the enterprise businesses. We had 462 customers spending $100,000 or more in annualized GAAP revenue and are seeing broad adoption at some of the world’s leading enterprises. The dollar-based net retention rate remains strong overall. Across our customers spending $100,000 or more, the dollar-based net retention rate is well over 145%, illustrating that we are not only winning large deals but these large deals have the highest expansion rate among our customer cohorts. In particular, our enterprise business is growing more rapidly than our overall growth rate, and thus becoming a larger and larger portion of our business over time. We remain committed to building the most effective, scalable work management platform capable of serving organizations of all sizes around the world. Evidence of our progress includes our continued success with the industry’s largest deployments, plus our end-user adoption rate, now at over 2.5 million paid seats. As a result, we are raising our top line guidance for the fiscal year 2023 to $544 million to $547 million, representing a growth rate of 44% to 45%. We expect currency headwinds to continue to be a significant factor this year. Excluding the currency impact, our guidance would represent 46% to 47% growth. We are winning across important industries and with iconic enterprise leaders. And where we have the greatest leverage, we are focusing, growing, and investing to win. The growth we have seen over the last several quarters is being driven by both the trends we see in the market and the way our product strategy delivers on what companies need as a result. Companies are investing in solutions that offer time to value, help them do more with their technology stack, and better align their employees around the work that matters. And the bigger the company, the more true this becomes. We recently performed an analysis of how our enterprise customers get value from Asana and found that the vast majority are using it for cross-functional collaboration. I share this with you because this is truly how we are most differentiated from other work management software. These tools make it easy to track single projects for single teams. In contrast, more than half of all work tracked in Asana is cross-functional in nature. This number jumps to over 60% for customers spending more than $100,000, and we see an even higher proportion of this cross-functional collaboration in the features we’ve built as we’ve moved upmarket, including Goals and Portfolios. Asana also creates shared clarity and accountability at every level. Leaders have to know how the work being done delivers on business priorities. Asana uniquely does this because the Work Graph creates a map for all of the work in your organization, including where it stands, the people responsible, and how it connects all the way up to company-wide goals. That’s incredibly powerful, especially when it’s critical to keep a large team in sync around changing plans. The Asana platform serves as a critical hub for your most important business applications, helping customers make better use of existing investments and giving employees a single place to track requests across email, chat, documents, and other frequently used applications. Asana is built on the foundation of safety, security, and performance at scale that global enterprises expect. Companies are continuing to recognize Asana as an essential partner for solving modern work challenges. This is why we continue to improve on and expand the functionalities required by the largest and most complex organizations. We have a strong fiscal year 2023 product cycle and on October 11th will be giving investors a preview of how we will be delivering even more value in three big ways that help companies successfully execute on their top priorities. First, by helping decision-makers quickly understand the health of strategic work across the organization. Asana Goals is already the number one product, according to the G2 Enterprise Objectives and Key Results software market, and we’re about to make it even better. Customers will soon be able to use the Salesforce for Goals integration, our first out-of-the-box integration for Asana Goals. When work happens in Salesforce, the progress of linked goals in Asana will be automatically updated, making it easier to monitor impact and make informed decisions. Leaders will also be able to get a bird’s eye view of Goals in Universal Reporting, including the ability to report, filter, and group Goals metadata. We are also rolling out all-new integrations from Asana Partners that help our customers improve the productivity and quality of work across their applications. New Rules integrations with Gmail, PagerDuty, Twilio, and more automate work across tools to help teams stay connected and remove bottlenecks. Context switching between tools makes it hard for individuals to stay focused on the work itself and, oftentimes, causes that work to fall through the cracks. With a new Asana for Workplace integration with Meta, teams can create Asana tasks, receive project notifications, and see link previews for important status or milestone updates right from Workplace. A new independent report by Nucleus found that Asana can cut the time it takes to complete a project by as much as 60% and increase project loads by up to 25%, without adding staff. The study also found that users of Asana reduce errors by as much as 90% when automating complex processes. The third thing to note about our product roadmap this fall is that we are further elevating security, privacy, and compliance. Asana now offers data residency options and flexibility in Australia and Japan to meet customers’ needs, in addition to EMEA. We’re also supporting global organizations with enhanced Mobile Data Controls, so admins can ensure data stays secure with biometric authentication and restricted attachment sharing, while empowering employees to work from the Asana app anywhere. For companies that store, consume, and transmit personal health information for different business processes, Asana plans to introduce a HIPAA-compliant offering this fall. And our new API and partnerships will provide IT leaders with Data Loss Prevention, eDiscovery, and Archiving solutions for increased control and support of security and compliance controls while still facilitating important cross-functional connection. I’ll close by acknowledging that we are actively managing our business and staying vigilant as we carefully navigate through the current macroeconomic cycle. We will continue to balance growth and profitability, which includes managing our investments conscientiously while maintaining our leadership in product innovation and vision. And now, I’ll turn it over to Anne.

Anne Raimondi, COO

Thanks, Dustin. It’s the conversations we have with our customers that make us so confident in our investments in product innovation. As we move up market, our product strategy has successfully evolved to address customers’ growing needs. These up-market product announcements will help to further drive adoption of our business and enterprise tier. In Q2, the U.S. region and enterprise segment led our overall growth. This is a good indication that Asana is a great market fit for organizations today, especially with the challenges and opportunities they are facing now and going forward. Over the last several months I’ve been on the road spending time with our customers around the world. The stories they share with me are amazing. These are just a couple of key observations. First, our conversations in enterprises are moving up the authority chain. Digital transformation is mainstream and work management is an essential component of that. In enterprises, as Dustin showed with the data, cross-functional collaboration is not a thing they do, it’s everything they do in order to run their business processes. Asana is a critical platform that allows companies to work the way things get done, cross-functionally. The market fit is clear. Second, we are closing deals with some of the largest and most recognized brands in the world. Some of the most prominent and successful companies across industries, such as Media, Automotive, Financial Services, and Telecom, are choosing Asana to help them grow, compete, and leverage their tech stack investments. We now have 462 customers spending over $100,000 on an annualized basis, and these larger deals represent our fastest growing customer cohort, up 105% year-over-year. Third, the more our customers use Asana, the more they realize value and this increases product adoption. We are seeing more new users join existing Asana Enterprise deployments and quickly collaborate cross-functionally with colleagues. Our dollar-based net retention rate for customers over $100,000 is well above 145%. And Fourth, Asana is a beloved brand. Customers love Asana and want Asana to win. One customer who runs an operational team said: “Asana has been a game changer for our organization. We’ve been able to streamline how requests for products come to our team, and move away from never-ending email chains with overlapping voices and calls for edits. Thanks Asana!”. Our brand equity is remarkable. Overall, we continue to see strong demand, and we are closing deals with large customers and we have strong engagement across our user base. As I look across our customer base, we are seeing broad cross-industry adoption with significant traction in Fortune 100 customers, of which over 80% use Asana. Some of the most important companies in the world are adopting and expanding with Asana this year. To call out a few: One of the world’s largest automotive manufacturers is a growing customer. They are using Asana Enterprise in R&D divisions to improve clarity across the organization about the status of various initiatives and how they are progressing toward their goals. A well-known and one of the largest container shipping lines and vessel operators is another six-figure customer. They are using Asana Enterprise for critical customer contract logistics workflows, to ensure shipments are fulfilled in their Warehouse and Distribution division. One of the largest global grocery and convenience store chains headquartered in Europe is using Asana Enterprise in their online shopping division to ensure efficient execution with cross-functional workflows across sales and operations. And one of the largest telecommunications companies has thousands of employees using Asana Enterprise for managing their global supply chain initiatives, orchestrating their field technicians and retail operations. In fact, in the technology space overall, 8 out of the top 10 tech companies in the world are Asana paying customers. We are also gaining early traction with financial services companies that are using Asana to help automate critical operational workflows, saving time and increasing productivity. In Q2, Morningstar again expanded their use of Asana across research, operations, marketing, and client services. We also signed an expansion deal in Q2 with one of the largest hedge funds headquartered in New York and Chicago. And we are in conversations with other large North American and European banks. We are seeing an impact in the healthcare industry as well. As Dustin mentioned, we expect to have a HIPAA compliant offering broadly available in a few months, which we expect to enhance our position with healthcare customers going forward. Another big industry that has been going through significant digitization is media. In the media world, bringing their product to market is their core service and it needs to be done faster and more effectively to stay competitive. Asana is the strategic partner of choice for several major media companies. In Q2, we closed a deal with Vox Media. They’ve now expanded and uptiered to Asana Enterprise, using Asana to ensure their core workflows for revenue generating partnerships from RFP process to deal close. ViacomCBS which is now a part of Paramount, and Discovery, along with other premium media brands are all customers we’re proud to partner with as they embrace the future of work. And as I noted earlier, Telecom is another vertical where we have strong traction. In Q2, we closed a deal with one of Asia Pacific’s largest telcos. This was a land deal and another big industry win for us. Also in Q2, we won Three UK, a British telecommunications and internet service provider. They’re deploying hundreds of Enterprise seats. We are also deployed in the largest telco in the world, who expanded their seats this quarter. And of course, there is T-Mobile, an existing customer, using Asana for developing strategies to launch new products. These companies are leaders in their respective industries and know what it means to leverage innovation and technology to be fast, responsive, and effective. Work is cross-functional and companies need a platform that allows teams to collaborate across the organization. They are choosing Asana because they believe Asana is the best platform available for work management. While it’s hard to predict how the current macro environment is going to impact our various customers in the short term, we believe the long-term secular trends in digital transformation remain intact and the importance of work management software will continue to grow. We remain committed to our long-term strategy. We believe we can win the category as the awareness grows and our unique capabilities meet customer needs, providing time to value in weeks, not years, and high ongoing return on investment. With that, I’ll hand it over to Tim.

Tim Wan, CFO

Thank you Anne. Q2 revenue growth showed continued strength in the business overall. Revenues came in at $134.9 million, up 51% year-over-year. This puts us at an annualized quarterly revenue run rate of $540 million, over $0.5 billion. Revenue from the U.S. grew 59% year-over-year, accounting for 60% of our total revenue. International grew 39% year-over-year, accounting for 40% of our revenue. Currency impacted our international growth rate by roughly 400 basis points and the overall revenue growth rate by 200 basis points. International growth would have been 44% year-over-year and total revenue growth would have been 53% year-over-year without the impact of currency. At 64% growth, revenue from customers spending $5,000 or more on an annualized basis is a good leading indicator of our core growth. This cohort represented 72% of our revenues in Q2, up from 66% in the year-ago quarter and speaks to our success as we continue to move up-market. The revenue growth for this cohort of customers in the U.S. grew even faster at 73% year-over-year. We now have over 131,000 paying customers at the end of Q2, up approximately 5,000 in the quarter. We have 18,040 customers spending $5,000 or more on an annualized basis, up 41% year-over-year. We now have 1,141 customers spending $50,000 or more on an annualized basis, up 91% year-over-year. Our largest customers remain our fastest-growing cohort. We have 462 customers spending $100,000 or more on an annualized basis and the customer cohort is growing at 105% year-over-year. We believe this metric is a good proxy for our enterprise business, and you can expect us to continue updating this number in coming quarters. As a reminder, we define these customer cohorts based on annualized GAAP revenues in a given quarter. We will be sunsetting the use of $50,000-plus and total customers stats over the next two quarters and instead plan to use $5,000-plus and $100,000-plus stats as key indicators for the health of our business moving forward as we believe they are more aligned to the core business growth and future success with enterprise customers. We’ll continue to disclose the current metrics on our IR website through the end of the fiscal year. Our dollar-based net retention rates remained strong across every cohort. Our overall dollar-based net-retention rate was over 120%. Among customers spending $5,000 or more, our dollar-based net-retention rate was over 130%. And among customers spending $50,000 or more, our dollar-based net-retention rate was over 145%. As a reminder, our dollar-based net-retention rate is a trailing four-quarter average calculation. 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 90.1%, improved from 89.2% in the year-ago quarter. Research and development was $50.4 million, or 37% of revenue. We continue investing to win and fuel innovation in our proprietary technology which will help us deliver on our vision. Sales and marketing was $94.7 million, or 70% of revenue. We front-loaded many of our customer-facing roles this year to build sales capacity and infrastructure for the second half and beyond. G&A was $39.1 million, or 29% of revenue, which includes $2.5 million in costs related to a reduction in the size of our recruiting team. Excluding the one-time cost, G&A as a percentage of revenue would have been 27%. Operating loss was $62.6 million, and operating loss margin was 46%. Net loss was $64.3 million, and our net loss per share was $0.34. Moving on to the balance sheet and cash flow. Cash and marketable securities including long-term investments at the end of Q2 were approximately $239 million. Our remaining performance obligations, or RPO, was $261.6 million, up 53% from the year-ago quarter. 87% of our RPO will be recognized over the next 12 months. That current portion of RPO grew 55% from the year-ago quarter. Total deferred revenue at the end of Q2 was $210.2 million, up 51% year-over-year. While we don’t normally comment on calculated billings, since currency had such a significant impact this quarter, I wanted to call out that calculated billings grew 43% year-over-year when we factor in the currency impact. 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. In Q2 free cash flow was negative $42.3 million or negative 31.3% on a margin basis. Moving on to our outlook. For Q3 fiscal 2023 we expect revenues of $138.5 million to $139.5 million, representing growth rates of 38% to 39% year-over-year. We expect non-GAAP loss from operations of $66 million to $63 million, which is a significant decline in growth of operating expenses year-over-year. We are targeting flat operating margins quarter-over-quarter at the midpoint. And we expect net loss per share of $0.33 to $0.32 assuming basic and diluted weighted average shares outstanding of approximately 203 million which includes the newly issued shares. For the full fiscal year 2023, we expect revenues to be $544 million to $547 million, representing a growth rate of 44% to 45% for the full year. We expect FX to negatively impact our full-year growth by approximately 200 basis points. Excluding the currency impact, our growth would have been 46% to 47% year-over-year. We expect operating loss margin to be between 45% to 44% for the full fiscal year. As you can see from our guidance, we front-loaded our investments for the year. You should expect 2 percentage points of operating loss margin improvement in the second half of the year versus the first half, and even more improvement next year. In addition, as you have seen in today’s press release, we announced a private placement by our CEO. Dustin purchased approximately 19 million shares of Class A common stock at $18.16 per share, which was the closing trading price of our Class A common stock on Friday, September 2, 2022. This investment of $350 million will increase our cash balance to over $585 million in total. We believe that this additional capital will provide sufficient funding to execute on our current strategies and for us to achieve positive free cash flow, which we are targeting before the end of calendar year 2024. In addition, here are some of the major initiatives we are undertaking as part of our focus on efficiencies. We’ve moderated headcount growth significantly and you’ll begin to see it manifest in the G&A and R&D expenses first. We’ve already slowed headcount growth from 13% sequentially in Q1 to 5% in Q2, showing a change in momentum and highlighting our commitment to expense management. We are focused on leveraging the existing infrastructure that we’ve built over the last several quarters, for example, ensuring our sales reps are successfully ramped. We are also pacing out other investments in various geographic markets and prioritizing the highest ROI go-to-market initiatives. We are actively working to drive more leverage in our cost structure and have taken significant measures to manage spend. With strong top-line growth, high gross margins, and our focus on increased efficiencies we believe we are on a solid path to generating free cash flow. Importantly, there are no changes to our long-term product strategy that has to date helped us succeed at being the most scalable and widely deployed platform across our space. For example, we will continue to invest in product and marketing activities to support the momentum behind our enterprise product announcements in October. These will continue to drive our high growth and success in the enterprise. With that, I’ll hand it back to Dustin for some final closing remarks.

Dustin Moskovitz, CEO

Thanks Tim. I am investing further in Asana because I strongly believe the market opportunity is enormous and that the Work Graph is the best possible solution for helping Enterprises achieve their most important goals, which always involve cross-functional workflows and necessitate clarity at every level. The market is ready and our customers are validating our strategy every day. Finally, I know our team is the very best in work management and hungry to achieve our mission. We are still in the earliest stages and we intend to win.

Catherine Buan, Host

And with that, I’ll turn it back to the operator for questions.

Operator, Operator

Thank you. Our first question is with Brent Bracelin from Piper Sandler.

Brent Bracelin, Analyst

Thank you. Good afternoon. I wanted to double-click into the large customer cohort, triple-digit growth in $100,000-plus cohort customers. Sounds like cross-functional collaboration is really resonating here. What is driving the momentum in large customers, I guess, for maybe Anne or Dustin? And are there things you can do to maybe emphasize the strength in large enterprise, redirect some sales and marketing dollars to what appear to be a segment of the market where you’re having a tremendous amount of success?

Dustin Moskovitz, CEO

Yes. Thanks for that question. This is Dustin. I mean, I think a lot of it is really the product strategy, which really shines to differentiate from our competitors when you have larger organizations because they’re doing more strategic cross-functional work. And we’re finding that the majority of all collaborative activity in Asana is cross-functional in nature. So I think you were finding that value proposition in using it, and so we want to make that a nice feedback loop. So, we’re investing further in the product roadmap to emphasize the functionality that’s most used cross-functionally. And so it’s things like Goals, and we’re doing a launch around that includes some improvements in October, improving Portfolios. A lot of our roadmap over the next year is going to make those even more powerful. Improving reporting, talked a little bit about being able to report on Goals & Reporting, but also there are a lot of great enhancements there. So that really helps us accentuate the value of the Work Graph for these large organizations, making it more useful to larger teams, making it more useful to senior leaders and executives. And then, we feed that right back into our sales approach. So teaching the sales team how to do value-based selling around not only the productivity increases we can give to the team broadly but to the insight and clarity we can give to senior leaders as they’re able to understand. We sort of think of the upper levels of the Work Graph or we sometimes have pyramid of clarity. So there’s a lot more we can do there. And then yes, feeding that right back into our marketing approach as well, having more messages to appeal to larger organizations, making sure we’re targeting our spend in channels that can find those types of personas and buyers, and then having that feed all the way through the customer journey.

Brent Bracelin, Analyst

Thank you. And then just a follow-up here for Tim. It’s great to see the additional $385 million cash infusion. It sounds like this provides a healthy bridge to positive free cash flow. How are you thinking about getting there in the next two years? Where are you going to drive that most of the improvement? 70% of revenue tied to the sales and marketing still seems high on a relative basis through peers. Is that really where you see it could drive the most amount of leverage here in efficiency over the next couple of years? Any color there on how you get to positive free cash flow within three years would be helpful. Thanks.

Tim Wan, CFO

Yes. Hey Brent, this is Tim. Great question. We're highly focused on finding efficiencies throughout the organization. Initially, you'll notice improvements in G&A and R&D within our operating income statement. Over time, we anticipate better results in sales and marketing as we concentrate our efforts on moving upmarket. The momentum we've observed in North America and enterprise, which grew 59%, will be areas where we continue to invest. In markets where the payback might be longer or where ROI is less certain, we plan to reduce our investments. We're being very cautious with our investments while maintaining a strong focus on what we can achieve with our existing infrastructure.

Operator, Operator

Our next question is with Alex Zukin from Wolfe Research.

Alex Zukin, Analyst

Perfect. Hey guys. Can you hear me okay? Can you guys hear me okay?

Dustin Moskovitz, CEO

Yes. We can hear you. Go for it.

Alex Zukin, Analyst

Perfect. I have a question for Dustin or Anne. As you engage in discussions with senior leaders at some of your larger customers or prospects, how are these conversations evolving in light of the potential for a tougher macro environment? Many companies are mentioning longer sales cycles in enterprise deals or larger contracts being reduced in scope. Some investors have raised questions about the distinction between mission-critical necessities and optional features, and there's considerable discussion on where this software fits in that spectrum. So, I'm curious about the nature of the conversations you're having now and whether this is affecting sales cycles in any way, or if it might actually be beneficial for you. I also have a quick follow-up.

Anne Raimondi, COO

Yes. Hey Alex, it’s Anne. Thanks for that question. I’ll start off. So, I mean we’re conscious that the macro environment is clearly impacting software purchasing overall. But what we’re seeing in work management is it’s still early and seeing some of the height growth given the problems that we solve are persistent. So, I’ve been able to be on the road meeting with customers, which has been great. And I think what we’re seeing the response to, as Dustin mentioned, is our differentiated product strategy. So specifically conversations around goals with CEOs, COOs, CIOs, who are trying to figure out how they can rapidly adjust plans and cascade those throughout the organization. And so with Asana, they’re able to do that in a really agile fashion. And so, the conversations we’re having are much more about how they can respond in this environment quickly. You asked a specific question about deal cycle times. And certainly, as we move upmarket and are working on larger deals, we’re going to see that those cycle times are a bit longer than where we’ve come from. And we’re also monitoring that because customers are scrutinizing spend. But overall, in terms of higher-level conversations we’re having in organizations, it’s been very positive because of our Goals product.

Alex Zukin, Analyst

Perfect. I have another question regarding the company's incremental profit profile. As we look towards the future, you're projecting to reach cash flow profitability by the end of calendar year 2025. What balance of growth and profitability are you considering? Are you aiming to break even and maintain that while funding a higher growth rate, or is your objective to move closer to your long-term operating margin target, potentially accelerating progress through engagement with higher-margin customers as you move upmarket?

Dustin Moskovitz, CEO

Hey, this is Dustin. I want to clarify that the timeline we outlined is before the end of calendar 2025, specifically by the end of calendar 2024. While this is in the foreseeable future, it is still a long way off, making it challenging to predict how we will manage the business as we reach that point. We aim to manage our cash effectively and focus on our best growth opportunities. As mentioned, this will naturally occur as we target larger customers, which provide a better cost structure. I expect to achieve real margins rather than just maintaining the status quo. Our goal is to capture the category, looking for growth investment opportunities that align with what is available at that time. The long-term profit margins we have previously communicated will likely come with a slower growth rate. I hope this presents a favorable trade-off for investors, whether we are growing rapidly and want to continue investing or experiencing slower growth while working to enhance our margin profile.

Operator, Operator

Our next question is with Andrew DeGasperi from Berenberg.

Andrew DeGasperi, Analyst

Just on the framework for the full year guidance, I was just wondering, are you assuming any worsening conditions in the back half of the year? And maybe could you also discuss whether in terms of the customer metrics, has churn in any way meaningfully increased, or has it stayed steady? And I have a follow-up.

Tim Wan, CFO

Hey Andrew, this is Tim. Regarding our guidance, we are reflecting the momentum we are witnessing in North America and enterprise, while also adjusting our outlook for international markets, especially in Europe. We are optimistic about our operating margin guidance, as we have various levers at our disposal to manage it. In terms of the net retention rate, we anticipate it will remain stable. There haven't been any significant changes or declines in that area, and we are particularly encouraged by the performance in large enterprise and higher-paying accounts, where the net expansion rate is still above 145%. The main uncertainty, honestly, for us and likely for all software companies, is the potential economic impact in Europe—whether it will be limited to Europe or have wider repercussions. We don't have clarity on that yet. I hope my comments help provide some insight into our guidance considerations.

Andrew DeGasperi, Analyst

Great. Dustin, regarding your investment, I was curious if the size of it is intended to create a buffer to achieve positive free cash flow. Should we expect you to continue investing in Asana from time to time in the future?

Dustin Moskovitz, CEO

That’s a great question. I don’t think I can say anything about what the future holds, but this is a really big investment even relative to past investments I’ve made. And it’s not something I’m looking to do as sort of like an ongoing program but just when it makes sense from the investor standpoint. And I just want to reiterate that, I talked about this a little bit on the last call, but these are always somewhat slow diligent decisions for me. And it’s really about the long-term potential of the stock and how big the market opportunity is. And so, I just think it’s important to always see the investment decisions through that lens rather than reactions to short-term changes in the market.

Operator, Operator

Our next question is from Brent Thill from Jefferies.

Brent Thill, Analyst

Thanks, Dustin. I'm following up on your ownership, which is quite significant given the time you’ve invested. Many are likely wondering why you didn’t consider expanding the ownership to a wider group of investors. Could you share your reasoning on why this approach was the best fit? And Tim, could you explain why we aren’t seeing more leverage in sales and marketing? It remains at 70% of revenue, which is very high. Is it that you're fully committed because you see the market as being underpenetrated? Please give us an idea of when we might expect to see more efficiency there since it appears to be the largest area where we could improve.

Tim Wan, CFO

Sure. I’ll begin by addressing sales and marketing, and then I will also respond to the question regarding funding. Concerning sales and marketing, we have previously mentioned our strategy of front-loading much of our sales hiring this year. This investment was substantially front-loaded, and we anticipate that this increased capacity will come into play in the latter half of the year, helping to boost the productivity of our sales representatives in the coming year. Therefore, you can expect to see greater efficiency in our sales and marketing efforts, particularly in the latter half of next year, as we empower our sales team to become more successful over time. Regarding funding and the various considerations involved, much of the pertinent information is available in the 8-K. We convened a special committee of independent Board members to assess all the available options. After thorough evaluation, we collectively determined that this was the best path forward. I encourage you to read the 8-K for more detailed information about this placement.

Operator, Operator

Our next question is with Steve Enders from Citi.

Steve Enders, Analyst

As we consider the outlook for fiscal ‘25 and your path to breakeven, are there any adjustments needed in your investment plans compared to your previous expectations? Also, regarding the EBIT outlook, which appears to be declining on a dollar basis, when do you anticipate that trend will reverse and we will start to see some leverage in the model?

Tim Wan, CFO

Yes. Let me address the second part of your question first regarding our expectations for the model's performance and when we anticipate seeing leverage. For the latter half of this year, we expect an improvement of about 2 points in operating margin, with more significant enhancements in our operating margin and free cash flow margin starting next year. We have made substantial investments this year, but we have also significantly slowed our headcount growth. However, much of that headcount growth will become effective in the latter half of this year and into next year, helping to drive growth and enhance efficiency with our existing infrastructure. While it may take some time, we do see a clear path to improving our operating margin and free cash flow margin. We also have a plan in place to achieve positive free cash flow by the end of 2024.

Dustin Moskovitz, CEO

This is Dustin. I’ll do my best to explain how our plans have changed. It's a bit challenging to be specific about this initial potential alternative scenario. However, what's become clear is that we are placing greater emphasis on areas where we have strengths, particularly in terms of profitability across channels and regions. This shift means we're not investing in more speculative areas, like emerging markets. Previously, in a stronger economy, those speculative investments were more viable because there was more capital available and easier access to funding, which translated to better profitability due to advantageous currency exchanges. Now, compared to this time last year, having the same number of customers and seats will yield reduced revenue and profit. Therefore, we're concentrating our hiring and programmatic spending in developing markets and higher-end segments. Consequently, this narrows our timeline to profitability, and it also means we won't be pursuing a broad approach across all segments and regions simultaneously. This may lead to some limitations on our growth rate in the next few years compared to the previous scenario. However, given the current economic climate, it would not be sensible to operate with multiple plans.

Steve Enders, Analyst

Okay. That's very helpful. As you consider the business and enterprise tier adoption, how have you seen that resonate in the current environment? How should we think about the mix of expansion this quarter from the feeds compared to upgrading to the higher-priced tiers?

Anne Raimondi, COO

Yes, this is Anne. I'll address that question. We are experiencing strong growth in both our business and enterprise tiers, which together accounted for 67% of revenue in Q2, marking a 69% increase year-over-year. This is a very positive indicator, especially for larger customers, as these tiers are highly valuable to them. We are committed to ensuring that we provide significant value in both of these tiers from a go-to-market perspective. We've also mentioned the upcoming announcements and improvements in Goals, and we are seeing strong adoption of Goals driving growth in both tiers.

Operator, Operator

Our next question is with George Iwanyc from Oppenheimer.

George Iwanyc, Analyst

Anne, following up on your answer, can you maybe give us an update on the competitive environment and maybe what you’re seeing from a wall-to-wall deployment perspective? Is that growing in many cases or pretty much staying consistent?

Anne Raimondi, COO

Thank you for the question. We are noticing significant growth in our mid-market segment, particularly as companies are increasingly adopting our Goals product from a top-down approach. This growth is largely due to our ability to assist customers with their key cross-functional initiatives. As more work is done in Asana, it attracts other colleagues who need visibility into Goals. We also offer top-down visibility for executives, helping them identify bottlenecks, opportunities, and make more agile planning decisions. As we enter the season where many customers are engaging in strategic and Goals planning, we anticipate a surge of interest in Asana.

George Iwanyc, Analyst

Okay. And Anne, maybe could you give us some perspective on just the new customer pipeline? And I understand like the macro uncertainty around expansion. Are you seeing any changes with new customer generation?

Anne Raimondi, COO

Yes. The way that we really think about our pipeline is we have a lot of opportunity to expand with existing customers. So, we are in 80% of Fortune 100 companies, but we still have a lot of opportunity for seat growth. And so, we have a lot of focus on that opportunity. And then, the other way that we also think about it in this environment is we are incredibly vigilant in managing and monitoring pipeline on a weekly basis. I’m super grateful to our team around the world on how hard they’re working to make sure we’re reaching and serving customers really quickly in this environment.

Operator, Operator

Our next question is from Shebly Seyrafi from FBN Securities.

Shebly Seyrafi, Analyst

So, you just slowed down headcount growth materially. What kind of headcount growth are you anticipating in the back half of the year? And then related to that, consensus has your revenue growth at 31% next year, fiscal ‘24. How do you think the slower headcount growth impacts your revenue growth?

Tim Wan, CFO

Hey Shebly, this is Tim. I want to mention that we have front-loaded many of our hiring efforts this year. The macro environment has shifted, so we are being very selective about how our representatives are ramping up, which markets they are in, and their success rates. As we continue to build momentum and empower these representatives, I believe their success will significantly contribute to our growth. Right now, we’re not prepared to provide guidance for next year; we will share that during our Q4 earnings call. We have already provided guidance for this year and the latter half, so I hope that gives you enough insight into our strategy for the business.

Shebly Seyrafi, Analyst

Okay. And secondly, a lot of your software peers have noted an elongation in sales cycles, deal compression, needing more C-level approvals. Are you seeing any of that in the United States, at least so far? And do you anticipate seeing that in the back half of the year?

Anne Raimondi, COO

So this is Anne. I’ll answer that. We’re certainly seeing that in this environment in the buying process, especially in larger enterprise companies, there are more decision-makers involved. I think we also just expected that as we move upmarket and serve larger customers. But we’re certainly conscious of that and monitoring our deal cycle times. Something to also keep in mind is we continue to have a very healthy commercial business, which has much faster close times.

Operator, Operator

Our next question is with Robert Simmons from D.A. Davidson.

Robert Simmons, Analyst

Kind of following up on the last one. What are you seeing in terms of more kind of top-of-funnel type activity, free-to-paid conversion? And then also on the flip side of things, and gross churn?

Tim Wan, CFO

Yes. I would say on the gross churn, we haven’t seen any material change, particularly with our large customers, who continue to maintain low single digits. This really demonstrates the value we add and the cross-functional nature of the platform, allowing teams to expand. Regarding the top of the funnel, we haven’t observed any dramatic shifts. Our focus remains on moving upmarket and winning in the enterprise space, reflecting a shift in our own go-to-market strategy.

Anne Raimondi, COO

Yes. I’ll add on to that. The way to think about it is we’re continuing to turn the dial on our paid acquisition spend to segments and markets that are better aligned with our direct sales motion and customers with higher lifetime value. So that’s maybe how to think about our top-of-funnel. And then to answer your question on free-to-paid conversion, we’re not seeing any change in that quarter-over-quarter.

Dustin Moskovitz, CEO

Can I jump in on that one as well real quick? I just want to point out, just reading between the lines, sometimes people look at the total customer count as sort of indicative of the top-of-funnel health. And I think it’s just worth pointing out that when you have a high-volume customer business like ours and some of the other work management companies, those numbers are really dominated by very small customers, not just SMBs but actually very small businesses, sometimes less than 10 employees. And so, given our shift to be focusing more upmarket, it’s less of a good leading indicator for us because there can only be 100 total first-time paying customers in the Fortune 100, and that’s really where we’re focused. So, a lot more of our business and our growth over time is focused on expansion. And that’s why we like to report on things like total paid seats. I think that’s a really important metric for evaluating the scale and health of work management companies in the public market. And additionally, I think it sort of ties back to the prior question about how we’ll grow next year. A lot of our growth will be in developing and expanding our existing customers, not acquiring a high volume of new customers. And I must point out, our net dollar retention is over 120% overall. And then again, as you get into those bigger customers where we’re growing the fastest, that number just keeps climbing. So, it’s over 145% for customers spending $50,000 or more, and that does translate to a similar number or better $100,000 cohort as well.

Operator, Operator

Our next question is with Pinjalim Bora from JPMorgan.

Pinjalim Bora, Analyst

Dustin, you are clearly experiencing significant success with large customers. Having over 80% of the Fortune 100 is impressive. However, some of your competitors also report similar or even better numbers. How do you perceive the potential within these large accounts as time progresses? How do you envision this dynamic evolving?

Dustin Moskovitz, CEO

Yes. Thank you for asking that question. I love to hear exactly that type of thing. Our whole product strategy is really designed to give you increasing returns to scale as you deploy Asana further into more of the company. It really becomes a horizontal infrastructure that’s used by everyone in the team. And it’s really just a special difference when you get to this place where you know if you want to assign a task to somebody or find out their information, you can trust that they’re using Asana, you don’t have to go out which work management tools they’re using first. And we’re seeing a lot of signs of strength through that, including what we see as the largest work management deployment in the industry. We do hear about coexistence with competitive products, but from our experience and talking to these customers and mapping the accounts, those deployments are much smaller, tend to be used in small pockets of the organization, tend to be used in siloed functions. And we’ve talked about our largest deployment is 100,000 seats right now all in one single company. I haven’t heard anything like that from these other competitors that are in theory coexisting with us. They tend not to talk about their largest firms at all. Sometimes they talk about active users, but that’s different than paid seats. So, I feel pretty confident that we have the farthest reach into those big customers, and we intend to double down on that success.

Pinjalim Bora, Analyst

Thank you. As you approach cash flow breakeven by the end of calendar year 2024, how are you planning to develop the indirect channel? How crucial do you see this for achieving your goal, especially as you reduce hiring? Could you provide insight into the current percentage of bookings coming from the indirect channel compared to what you anticipate in the next two years?

Anne Raimondi, COO

Yes. I can speak to indirect channels. It’s still a small part of our business, but we’re seeing some great traction with partners all over the world. We have great traction in India. Throughout Europe, we’re seeing great partners kind of bring us into both industries and geographies to extend our reach. So, we’ll continue to invest in that. It’s an important part of our business, but I would also just say that we see ourselves as still early in that.

Operator, Operator

Our next question is with Josh Baer from Morgan Stanley.

Josh Baer, Analyst

I think in various software markets over the years, we’ve observed a shift in preference between best-of-breed solutions and suites. In your work management market, what is the current status of that dynamic between best-of-breed versus suites? And has that changed in the last three to five months due to the macro environment? Thank you.

Dustin Moskovitz, CEO

Yes. That’s a great question. Certainly, we’re big believers that companies want the best-of-breed product for work management. And I’ve talked sometimes over the years about this. When we think about the various categories within software, work management is one of the richest and has the most surface area for product differentiation and really achieving differentiated value outcomes for customers. So, I think that it’s a dangerous place to sort of compromise in order to bundle it with part of your suite. We really haven’t seen a whole lot of that behavior right now. It’s difficult to even think of like particular examples. And honestly, I thought it would be more of a factor at this stage in the category development just given who some of the larger players are. But really, we’re still seeing most customers engage with thinking about the work management product itself. We honestly even have some customers that are divisions within those larger organizations that sell these products that include work management, and they still see Asana as the solution for their sort of local team. So, that’s still what looks like for the foreseeable future. I definitely haven’t seen anything marked change as part of the macro context.

Operator, Operator

Our next question is with Patrick Walravens from JMP Securities.

Patrick Walravens, Analyst

Thank you. It’s JMP. So maybe Anne or Dustin, it seems like there’s a major opportunity for Asana probably in the federal government with all those employees in the armed forces. So, is Asana FedRAMP authorized? And if not, where are you in that process? And how do you feel about that opportunity?

Anne Raimondi, COO

Hey. Thanks for that question. We believe that there’s an opportunity for Asana everywhere that there’s cross-functional collaboration. And so, as we think about which industries and verticals, we’re certainly looking to government. Government is super broad from both like local and federal. We are early in the FedRAMP process. Dustin mentioned, we’re really focused on finishing out HIPAA compliance for our healthcare customers. But I think you’ll see us take the same approach to looking at demand and interest and then making sure that we’re meeting customer needs, especially around things like compliance.

Catherine Buan, Host

That concludes our Q&A. So, I’ll now hand the conference back to Catherine for any closing remarks. Thanks everyone for joining us today. Before we close out, I just wanted to remind you, we do have an event on October 11th here in San Francisco. It’s an intimate Q&A with one of our best customers. It will be the CIO, and they’ll be talking about how they’re using Asana for some amazing strategic initiatives. So look out for the invitation and we’re looking forward to seeing you. Thank you.

Operator, Operator

That concludes today’s call. Thank you for your participation. You may now disconnect your lines.