Earnings Call Transcript - ASAN Q2 2024

Operator, Operator

Thank you for joining us, and welcome to Asana’s earnings call for the second quarter of fiscal year 2024. All participants are currently in listen-only mode. Following the presentation, we will have a question-and-answer session. I will now pass the call to Catherine Buan, Head of Investor Relations. Please continue.

Catherine Buan, Head of Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Asana’s second 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.

Dustin Moskovitz, CEO

Thank you, Catherine, and thank you all for joining us on the call today. We reported Q2 results, exceeding expectations for both revenue and earnings. Revenues in Q2 increased by 20% year-over-year, as we continue to secure large deals in the enterprise segment. Our non-GAAP operating margins rose by 40 percentage points year-over-year, and we achieved positive free cash flow of $14.6 million in the quarter. Our growth is driven by some of the largest and most strategic companies worldwide choosing Asana. In Q2, we closed and expanded deals across various industries including manufacturing, professional services, healthcare, logistics, media, and financial services. Our key customers are modernizing their workflows and are choosing Asana for large-scale work management. Looking ahead to the next generation of work management, particularly with the deeper integration of AI, these relationships will only grow in value. Despite ongoing macroeconomic challenges and increased budget scrutiny within enterprises, customer sentiment appears to be stabilizing. Clients are seeking to consolidate their vendors and maximize their return on investment, which is leading them to Asana. We help them achieve their objectives more efficiently and quickly than ever. In fact, we've seen a rise in multi-year commitments both year-over-year and sequentially this quarter. We made significant strides in enhancing our non-GAAP operating margins in Q2 and anticipate substantial year-over-year improvement for the full year as we concentrate on operational efficiency and growth, which Tim will discuss further. In the first half of the year, we have navigated macro challenges while focusing on our enterprise strategy, enhancing sales execution, and strengthening our enterprise leadership team, including the recent appointment of our new Chief Revenue Officer, Ed McDonnell. It is important to address artificial intelligence, given the opportunities it creates for Asana and our users. I’m extremely enthusiastic about this. I have been passionate about AI for many years. Asana is fortunate to be situated alongside many leaders in AI like Anthropic and OpenAI, and I have been involved with these companies since their inception as an early supporter. AI gained significant attention in November of last year with the launch of ChatGPT. However, as the initial excitement has faded for some, I believe the potential of AI is still underestimated. People aren't thinking broadly enough and might overlook the rapid advancements in foundational models. While chatbots are often viewed as mere demonstrations, the real potential of AI will emerge when it is fully integrated into other software, enabling users to achieve excellent results without needing to be experts in prompting, and allowing developers to tremendously boost their productivity. I acknowledge the skepticism surrounding AI, particularly concerns about inaccuracies and the lack of transparency. Many people want assurance that AI provides reliable and helpful guidance, necessitating an understanding of the reasoning behind its recommendations. Instances of AI producing unreliable outputs erode trust, especially when the decision-making process isn't traceable. We have been developing Asana’s Work Graph data model for over a decade, and we believe it will become increasingly valuable in an AI-driven future because of the capabilities it offers through Asana Intelligence. The Work Graph provides a single source of truth for work data, structured to reflect how work is conducted within organizations. It connects data across the enterprise, encompassing work, functions, teams, and individuals. This interconnectedness is crucial as it captures details and allows AI to derive more accurate conclusions at various levels. With the Asana Work Graph, we are ideally positioned in the work management space to address the black box issue by clarifying its operations and explaining its assumptions based on comprehensive analysis of work data across all teams. For example, consider a company preparing for a global product launch involving teams in R&D, marketing, product marketing, and sales. Each team contributes to the launch with their own projects and work streams, all tracked within a single portfolio in Asana. Asana Intelligence can analyze every aspect of this work and quickly identify risks and delays using detailed information from relevant tasks, which may have otherwise gone unnoticed. Thanks to the Work Graph and AI, these hidden challenges can be recognized promptly, and Asana Intelligence will clarify how it arrived at that conclusion using the available work data and relationships. Asana will visualize this crucial dependency's potential impact on timelines. The Work Graph enhances the intelligibility of organizational processes for AI and makes the AI’s foundational assumptions clear to all team members. This clarity is essential for enterprise-level necessities such as permissions, access control, and accountability. Asana Intelligence, driven by the Work Graph, will provide a common framework that aligns human intentions with AI insights as they collaborate to achieve customer objectives. We believe Asana is the only work management platform designed for enterprise-scale deployments, with proven capabilities to support up to 200,000 seats and company-wide implementations, a sentiment echoed by our enterprise clients. As our adoption grows across enterprises, the value we deliver increases. The Work Graph's cross-functional nature is crucial when integrating AI because information silos can obscure valuable context. Even if AI retrieves context from another silo, establishing connections can be challenging, while the Work Graph data model makes these relationships clear. AI also enhances our ability to offer customers greater scalability in their Asana usage. In conclusion, Asana will utilize an enterprise's Work Graph to enhance the user experience across the board, particularly at the executive level. AI serves as a significant accelerator of Asana's core mission: to help organizations thrive by linking company-wide goals to the strategic initiatives and work needed to achieve them. We envision creating entirely new interfaces that facilitate collaboration between teams and the powerful AI models that simplify their tasks. This is our current focus for innovation. We have introduced a range of new AI features currently in beta, such as Writing Assistant, Instant Summaries, and Work Organizer. Additional beta features include Health Checks for improved clarity and accountability and Ask Asana Anything for maximizing impact. Our roadmap also includes future features like Goals-Based Resource Management and AI-assisted Smart Workflows. We’re just beginning this journey and plan to showcase a new wave of innovation at our Work Innovation Summit on October 3rd in New York City. This will be our most anticipated customer event of the year, featuring a visionary keynote, renowned speakers, industry leaders from operations, IT, and marketing, and a special investor session discussing product plans, market strategies, and financial outlook. We will host customers at our Work Innovation Center to present their Work Innovation Score, an advanced benchmark created by leading experts. This score, powered by the Work Graph and AI, is designed to gauge an organization's innovation capabilities, both current and future. The Work Innovation Score will reveal customers' innovation potential, enabling them to recognize strengths and identify challenges. This offering is unique in the market and is exclusive to Asana, gaining particular favor among our largest and most strategic customers. We look forward to including more customers in this program and seeing you in New York City on October 3rd. In closing, despite facing significant challenges, we have made notable progress in the first half of the fiscal year, and we are encouraged by traction with some of the largest companies globally as we move forward with our future product roadmap.

Anne Raimondi, COO

Thanks, Dustin. The story in Q2 was really about continued enterprise growth and building our enterprise leadership bench. We’ve talked about our strategy for moving upmarket, and we are working and executing on this plan. That said, I know the macro situation is still top of mind, so let me address that upfront. Overall the sentiment in our customer base has remained the same versus last quarter. While it hasn’t yet improved, it also has not gotten worse. Budgets continue to be scrutinized, seats are being optimized, and decisions for expansion are being pushed out. But as customers continue to optimize budgets, we are also getting positive competitive signals, where customers are consolidating, removing incumbents, and choosing Asana. I also want to talk about net retention rate trends. As the de facto choice for some of the largest tech companies in the world, Asana has likely seen disproportionate exposure to any pullback in that vertical, which is about 30% of our business. Importantly, much of this has been less seat expansion as opposed to anything else and that remained a factor this quarter. For example, in some cases even when a customer was choosing to expand into new use cases and departments, this was often offset by removing seats that were downsized as a part of a budget pullback. Conversely, as we approach the anniversary of the beginning of this trend, we expect to benefit from any rebound in future quarters. Top of funnel demand was stable versus last quarter and our pipeline continues to build. The US grew 22% year-over-year, while international grew 18%. If I split off EMEA separately, EMEA had a particularly solid quarter, reporting the fastest growth across our major regions. Our new leadership and regional model in EMEA are in place, and we are getting increased traction. We closed several of our largest net new deals in EMEA as a result of our improved execution. Growth in our Business and Enterprise tiers led overall growth at 32% year-over-year and represents 73% of our revenue. We believe this is a good proxy for our traction within larger customers. Asana goals, portfolios and reporting are key differentiators for us. Adoption has continued to be strong, and these investments are leading to consolidation wins. Our top down use-case and value selling is resonating and it is allowing us to land large deals. Our enterprise customers representing organizations with over 2,000 employees, continue to be our fastest growing customer segment. And this segment is further diversifying. Approximately 80% of the net new $100,000 plus customers in Q2 were in non-tech sectors. Executives are planning long term about how to invest in work management capabilities, and this is driving multi-year commitments for us. And there is not a single enterprise customer that isn’t asking us about AI and automations in Asana. We believe our AI roadmap will help to further drive adoption and expansion within customers. We are seeing new lands and expansions broadly across several diverse industries. First, we set a new record with our largest land deal in Asana history. One of the largest multinational cybersecurity companies chose Asana in a multi-million dollar consolidation win. During the RFP process they evaluated multiple work management apps that they were using across the company based on several factors. The company will be methodically ripping out legacy apps and replacing them with Asana across the organization over three phases. This was a very significant win on many fronts, in particular how successfully we can execute on a top down, value based sales motion. Also, I am very excited about another net new customer, one of the largest professional services companies in the world based in the U.K., with over 12,000 employees worldwide. Their CMO was looking for a centralized global platform to ensure a consistent brand experience across markets and channels. It's a multi-year deployment that represents a great deal of potential. In addition, a large healthcare manufacturing company headquartered in Switzerland with over 9,000 employees is expanding with Asana and replacing a legacy incumbent. The company has grown significantly through acquisitions and will make Asana available to employees globally. This was another multi-year, strategic deal. We signed several deals this quarter with manufacturing companies, one of the larger deals was with Fujitsu, one of the largest IT companies in the world. We’re also seeing continued success in the financial services industry. We had a six-figure early renewal and expansion with a large financial services firm in the consumer credit space after they saw significant value from Asana in their marketing and strategic planning functions in just six months. They’re bringing more teams onto our enterprise platform to manage everything from OKRs to project plans so they can make informed decisions about their strategic initiatives to improve goal attainment. We also had an expansion with the subsidiary of a major U.S. insurance company for a two-year prepaid contract. The company uses Asana to manage developing new products to enter new industries. Security and governance are very important to them, so Asana Enterprise capabilities were among the reasons we won. You may or may not know, but Asana is very, very popular across the sports business. We closed deals this quarter with one of the English Premier League’s most highly decorated football clubs, as well as with the New York Islanders, and the NCAA. And importantly, we continue to win in the healthcare and biotech vertical as well, with two six-figure deals in the U.S. As you know we announced HIPAA compliance about a year ago and have been gaining momentum in this vertical supported by our compliance and security offerings. As you can see, we've already helped dozens of our largest customers with their digital transformation initiatives. We believe digital transformation is an enormous secular trend, but the Intelligence Transformation with AI has the potential to be an even larger opportunity for Asana, and we're preparing to be a leading platform for change in this new revolution of technology. 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 and more industries. But we have more work to do. Looking to the second half and the beginning of next year, we continue to focus on improving expansion rates through customer success programs and initiatives. Deepening our partnerships with our strategic accounts. Rolling out new packaging, which we will talk about more on October 3rd. And enterprise leadership. We are thrilled to welcome Ed McDonnell as our new chief revenue officer. He is most recently from Salesforce and spent 10 years there scaling the Marketing Cloud and multiple vertical businesses from $100 million to a $3.5 billion business today. He also has experience from Eloqua, McGraw Financial, and Thomson Reuters. He has a remarkable track record and deep experience leading and scaling some of the most well-known enterprise software businesses. With Ed, Shannon Duffy, our CMO, and Neeracha Taychakhoonavudh, our Chief Customer Officer, and the rest of our go to market team, we are focused on elevating our sales motion for the next phase of growth. We are improving our sales enablement capabilities and lead generation initiatives targeted at enterprise accounts. We are creating a repeatable playbook to scale enterprise accounts to become $100,000 or more customers and beyond. We are improving on our customer success strategy to scalably serve more customers. Importantly, we can focus on better serving our most strategic customers. These long-term partnerships play a critical role in our product roadmap and our vision to strategically serve large scale customers which we believe will help us further drive growth.

Tim Wan, CFO

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. We continue to see headwinds from a macro standpoint and in our technology segment, and you see that especially in our net dollar retention rate metrics. We also have more work to do as we develop our enterprise go-to-market muscle and continue transitioning upmarket. Meanwhile, the performance at the low end of the market is dragging down overall growth. On the other hand, I am really proud of the efforts the team put in to manage costs and improve efficiency. We have made substantial progress on improving our operating margin and delivered our first positive free cash flow quarter since going public. On to our Q2 results. Q2 revenues came in at $162.5 million, up 20% year-over-year. Revenue from customers spending $5,000 or more on an annualized basis grew 24% year-over-year. This cohort represented 74% of our revenues in Q2, up from 72% in the year-ago quarter. We have 20,782 customers spending $5,000 or more on an annualized basis. We have 553 customers spending $100,000 or more on an annualized basis and this customer cohort grew at 20% 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, driven by lower expansion and downgrades. Our overall dollar-based net-retention rate was over 10%. Among customers spending $5,000 or more, our dollar-based net-retention rate was over 110%. And among customers spending $100,000 or more, our dollar-based net-retention rate was over 125%. 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, demonstrating the value we deliver for our enterprise customers. Companies remain mindful of the near-term economic challenges, and we therefore expect our overall dollar-based net retention rates to trend lower, particularly in the lower end of the market. I’ll speak specifically to that outlook 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. Keep in mind, non-GAAP results exclude stock-based compensation and non-cash expenses related to impairment. Gross margins came in at 90.3%. Research and Development was $52.3 million, or 32% of revenue, an improvement from 37% a year ago. Sales and Marketing were $79.6 million, or 49% of revenue, an improvement from 70% a year ago. G&A was $25.1 million, or 15% of revenue, an improvement from 29% a year ago. Operating loss was $10.4 million, and our operating loss margin was 6%, representing a 40 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 $8.4 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 Q2 were approximately $537.5 million. Our remaining performance obligations, or RPO, was $333.4 million, up 27% from the year-ago quarter. 86% of RPO will be recognized over the next 12-months. That current portion of RPO grew 26% from the year-ago quarter. Our total ending Q2 deferred revenue was $261.1 million, up 24% 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. Q2 free cash flow was positive $14.6 million or 9% on a margin basis, an improvement from negative 31% from the year-ago quarter. Moving to guidance, for Q3 Fiscal 2024 we expect revenues of $163.5 million to $164.5 million, representing growth of 16% year over year. We expect non-GAAP loss from operations of $25.0 million to $23.0 million, representing an operating margin of negative 15% at the midpoint of guidance, a measurable improvement from the same year ago period. And we expect net loss per share of $0.11 to $0.10 assuming basic and diluted weighted average shares outstanding of approximately 221 million. For the full fiscal year 2024, we expect revenue to be in a range of $642.0 million to $648.0 million, representing a growth rate of 17% to 18% year-over-year. We expect non-GAAP loss from operations of $93.0 million to $85.0 million, representing an operating margin of negative 14% at the midpoint of guidance, down from negative 38% in fiscal 2023. And we expect net loss per share of $0.42 to $0.39 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 and that headwinds persist through the end of this year. We expect continued compression in our dollar-based net retention rate, but we expect it will remain above 100%. We also have changes in leadership for our sales organization that may 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. While this quarter's free cash flow may not repeat next quarter we remain committed to delivering sustained positive free cash flow by the end of calendar 2024 and thereafter. As we work towards reaching sustained free cash flow, we are encouraged by the progress we’ve made and I am optimistic about our future. Over the next 18-24 months we anticipate incremental growth will be driven by: one, economic recovery in the most impacted verticals, such as the tech sector, paired with improved execution on our go to market initiatives under our new leadership team; two, new capabilities driven by advances in AI; and three, our new packaging strategy, which we will talk about on October 3rd. We look forward to seeing you all in NYC on October 3rd where we will dive deeper into these topics during the investor session. And with that, I’ll turn it back to the operator for questions.

Operator, Operator

Thank you. Our first question comes from the line of Andrew DeGasperi of Berenberg.

Andrew DeGasperi, Analyst

Thank you for taking my question. First, could you provide more details about the largest land deal you've secured this quarter? Specifically, what transpired during the discussions with that customer, what aspects of Asana stood out to them, and what did they find important? Additionally, do you believe this success can be replicated in the future?

Anne Raimondi, COO

Hi, Andrew, it's Anne. Thanks so much for your question. Yes, happy to share a little bit more insight on that deal. Really, the customer was looking for an opportunity to grow with one partner over multiple years. They cared a lot about reducing tech sprawl, they wanted to replace at least seven existing applications that they had seen used across many of their departments. In particular, this company had acquired a lot of other companies. And so being able to consolidate all in one platform is really important. They're looking to increase collaboration and standardization and really ultimately deliver products faster. And so we're really excited to work with them in all the different departments that were part of the RFP process. Ultimately, our view on where AI is going, how we can scale our security and the fact that we had already successfully deployed up to 200,000 employees in our largest account helped secure that. So we're looking forward to doing more of those, especially where CIOs are driving the decision-making process across the organization.

Andrew DeGasperi, Analyst

Thanks. And then maybe on EMEA. Can you maybe lay out a little bit what wasn't working there? At least what is working better right now? I mean what changes did you implement besides, obviously, the new leadership there? And could you replicate that change to other regions as well?

Anne Raimondi, COO

Yes. So we are really excited about the new leadership in EMEA. I think a few things. Certainly, with the leadership, there's also a focus on larger deals and really ensuring that we've got repeatability and discipline around the large deal pipeline and large deal close rates. And then we've aligned both our corporate and enterprise teams by region under the new leadership. So that was a change we had previously sort of centralized leadership for our corporate segment, but now it's aligned by our largest markets. So we're excited to see that momentum. It certainly contributed to the two large lands that I mentioned before, one with a professional services organization with 12,000 employees and one with a health care manufacturing firm with 9,000 employees. So excited to see more of that. And we do believe that is something that is replicable. We're seeing some great signs in Japan, which is another strategic market where we've got a great new leader on board as well.

Steve Enders, Analyst

Thank you for addressing my questions. I would like to inquire about the consolidation activity you've experienced and the significant success you've achieved in that area. How much of an increase have you noticed in consolidation opportunities, especially considering the fluctuating macroeconomic conditions? Additionally, as we look ahead to more large deal activities, what should we expect regarding the pipeline for those opportunities in the second half of the year?

Anne Raimondi, COO

Yes. Thank you so much, Steve. What we are seeing in this environment as there's more scrutiny both by CIOs and CFOs on budget spend that the interest in opportunities to consolidate is increasing, and we've seen that across the last several quarters. In particular, as they evaluate where they have different investments already and where they can improve them going forward. And in particular, for us, the ability to bring that all onto one platform and benefit from increased collaboration on the platform. That is what's driving the consolidation considerations. And then I do think the focus on security and scale is really important as CIOs in particular, are looking to consolidate. So we are also seeing that for some legacy applications that exist in customer accounts. There's active evaluation of how those might be replaced by Asana. So definitely, in our pipeline, we're seeing more opportunities that are focused specifically on consolidation.

Tim Wan, CFO

Yes. I would like to mention a couple of points. Firstly, we are still experiencing some headwinds, particularly within our tech segment. Many tech companies have had layoffs, and we need to navigate their renewals over the next six to nine months. Secondly, we are currently undergoing changes in our sales leadership, and I want to ensure that the team has enough time and support to implement the necessary adjustments to regain momentum and expand their team. So those are the two main points.

Dustin Moskovitz, CEO

If I could add to that, I believe that our perspective has evolved over the last 90 days. We anticipated some challenges, especially within the tech organizations, and while the situation hasn't improved, it also hasn't worsened. We continue to observe ongoing scrutiny regarding budgets.

George Iwanyc, Analyst

Thank you for taking my question. Maybe, Dustin, you started off with AI and gave us some perspective on that. And maybe digging deeper into the AI topic, how do you feel Asana can best differentiate with AI? And then when you look at rolling out the products, how should we think about the ability to monetize it?

Dustin Moskovitz, CEO

Yes, I'm happy to discuss that. I also want to remind everyone about the event we're hosting in October where we'll dive deeper into these topics. First, regarding differentiation, what really sets Asana apart is our Work Graph data model. We have always considered AI in the design of that model over the past decade, and we believe it will become even more valuable in an AI-driven future. The Work Graph ensures that there's a single source of truth for work data, structured in a way that is scalable and aligns with how work is organized among our customers. By connecting work data across the enterprise, functions, teams, and individuals without duplicating information, we create a powerful data connection that encompasses both the whole and the individual parts. This allows AI to use the underlying elements of work to draw accurate conclusions at various levels. This positioning helps us address the 'black-box' issue associated with AI, as we can clearly illustrate the work and clarify assumptions based on facts and analyses across teams, regardless of detail level. Our customers have also noted how our AI features, currently in beta, bring the Work Graph to life, helping them understand the value of these connections. We see this as a virtuous cycle that strengthens our market differentiation with our core value proposition, data model, and enhanced AI functionality. The Work Graph makes the work process comprehensible to AI while simultaneously making AI understandable for organizations. Customers appreciate the collaborative nature of human and AI working together, with a constant human element involved. On monetization, we don’t have many specifics to share right now, but we will discuss our packaging changes at the investor event in October. These changes are aimed at accelerating the enterprise on-ramp and thoughtfully organizing AI within those packages. As I've mentioned before, AI isn't a single component; it exists in each package. As the AI functionality becomes more complex and the underlying computerized work becomes more demanding, these capabilities will be reflected in higher enterprise packages. We have also considered the possibility of an add-on; however, the initial launch will not include that. We're paying attention to how other enterprise products are monetizing and planning to learn from their successes and challenges. In the short term, the main focus will be on helping our customers upgrade through our packages, which represents our primary monetization advantage and emphasizes Asana's differentiation, allowing us to secure more deals.

Tim Wan, CFO

Yes, I believe we have made significant progress on our operating margin while taking a balanced approach to our investments and our path to profitability. At a macro level, we will continue to invest in AI. Additionally, as we see improvements in productivity and efficiency within our sales and marketing teams, we will feel more confident in increasing our investments in that area.

Jackson Ader, Analyst

Thanks for taking our questions. Dustin, you mentioned earlier in the call some of the other AI successes in the Bay Area. It seems that some of the early winners from an investor perspective are among the largest technology and software companies that are publicly investable. I'm interested in how you view Asana's position within the AI landscape compared to these tech giants.

Dustin Moskovitz, CEO

I think there are a few ways to consider this. Earlier, I was mainly discussing the foundational model builders like OpenAI and Anthropic, with our relationship to them as customers. We're adding value on top of their infrastructure. We're grateful for the significant capital investments they've made, which help us in terms of API costs. Our efforts are built on their platform. I'm not completely clear on who you refer to as the other large public companies; NVIDIA is quite different, for example. Many of the public stocks that have gained traction are cloud compute providers. We see ourselves as customers within their framework. I believe Asana will play a role in the next generation of value creation by figuring out how to integrate these services into existing workflows, which can be much more effective. Currently, what many people are familiar with are open-ended chat applications where you can ask various questions, which is powerful and flexible, but most users prefer guidance on what works best, especially in work management. We're noticing that the API requests we make are highly structured and often templated. We're also helping users understand what types of questions yield the best results; they often start with very broad inquiries, but being specific is much more effective. The more we can offer pre-defined options and multi-step workflows that guide users to the most beneficial results, the more value they can derive from those fundamental platforms. We see ourselves as creating value built upon those foundational technologies.

Jackson Ader, Analyst

Great, that's helpful. For my follow-up, I'd like to ask Tim or Anne: Regarding the weakness at the low end, do you think it might be related to Asana shifting resources upmarket, causing competitors to fill the gap? Or could there be other factors affecting budgets or macroeconomic conditions that are impacting the low end more than enterprise budgets? Thank you.

Tim Wan, CFO

Great question. I would say that we have redirected many of our investments from the lower end of the market to focus on the upper end, which contributes to the slower growth of revenue from our customers with less than 5,000 compared to those with more than 500,000. Additionally, the collaborative work management category is still emerging, and there is significant potential for growth. It’s not necessarily a situation where one player will dominate across all segments. Therefore, as we move upmarket, it’s likely that other competitors will remain concentrated on the lower end of the market in the long run.

Alex Zukin, Analyst

Thank you for taking the question. Dustin, I'll pose the first one to you. It's somewhat related to AI. If we take a moment to consider how you envision customers will actually pay for the AI features you're developing, what can you share about your positioning and how investors in Asana might benefit from your investments and experience? Additionally, in light of GPU availability, when do you anticipate customers will start seeing a return on investment? Conceptually, what are your insights on what customers are willing to pay for and what they are not, based on your discussions? Lastly, when do you expect to be able to deliver this product to market in a way that maximizes monetization opportunities and boosts retention?

Dustin Moskovitz, CEO

Thank you for the question. It’s challenging to answer because I don’t see it as a straightforward launch. Instead, it’s more of an evolution of our roadmap. In many respects, it has already started since we have customers in the private beta, and we plan to move into a broader beta during our events in October, introducing some functionalities. Additionally, our teams are already working on future developments and adding more customers to the beta features. We discuss our roadmap with customers during briefings, which influences their purchasing decisions regarding long-term partnerships. A significant factor is how we differentiate based on our AI vision, which is proving beneficial now and will continue to be. The October event represents a crucial opportunity for us to share our story, particularly in a visual format that’s difficult to convey in these earnings calls. We will keep building on this, especially regarding customers moving to more advanced AI functionalities, and there may be advantages for those transitioning from free to premium. We’ve considered this internally but haven’t formalized any specific models. Thus, the improvements will come in stages rather than a singular moment that significantly impacts revenue.

Anne Raimondi, COO

Sorry, are you asking about customer feedback as well. So I just wanted to add a couple of things in terms of what we're hearing from customers. In the conversations with CIOs at our largest customers, whether that's a global live events company or the leading vacation rental platform in the world, what they're telling us is, first and foremost, they're excited to have a strategic partner to help them build out their AI strategy because right now, it does feel overwhelming the number of choices out there. And so things that they care about are data specifically, where it comes from, how it's used. They care very much about security and they care a lot about transparency in how AI is deployed. And so for work management, in particular, it's very straightforward for them to see how AI will accelerate what they're already trying to do, whether that's in projects or portfolios or connecting that work to goals. And so more than anything, our conversations really are starting to be how we can help them really figure out their AI strategy and then be able to deploy it in Asana. So we're really excited about the early feedback and the desire for customers to help us shape the roadmap. And how engaged they are. So I just wanted to share a little bit more of that color.

Alex Zukin, Analyst

That's super helpful. And then maybe, Tim, a similarly open-ended question for you on the numbers. Again, if we look at some of the commentary, it suggests that multiyear deals were strong, enterprise traction continues to be really positive. So I'm trying to square that with the forward-looking metrics. Like if we look at billings, it's kind of in the low-teens growth this quarter. The RPO bookings kind of similarly in that low teens kind of dimension. So is there anything that is kind of one-time in nature specifically that we should be paying attention to? Because your guidance for Q4 kind of implies you're exiting the year just over double-digit growth. The Street has you doing something a lot better than that for next year. So given the commentary you made around the six to nine months of kind of still having that renewal headwind within these large tech companies like when should we see kind of the turn happen? Is that a Q1 phenomenon? Q2? And how do we think about that?

Tim Wan, CFO

Yes, that's a great question, Alex. For clarity, while we are encouraged by the multi-year deals, they still represent a small percentage of our total billings. Additionally, we are seeing a consistent operating environment similar to the first half of the year, with no significant changes currently. I believe it will take another two to three quarters for all the renewals to settle, which will give us a more favorable comparison afterward. We also have new sales leadership joining, and we want to ensure they have the opportunity to make the necessary changes as we move upmarket.

Josh Baer, Analyst

Great. Thank you for the question. I wanted to ask one on the net retention rates. Tim, just kind of thinking to some of your comments on some areas not as strong as they hoped and sort of taking another two to three quarters to get easier comps. Just wondering like what gives you confidence that retention rate can remain above 100%, just kind of looking at some of the trend lines and deceleration that we've been seeing.

Tim Wan, CFO

Yes, I would say that we've observed a mix of downgrades and expansions that have contributed to the compression in our net expansion rate. Companies are not growing as quickly as they had in previous years. Firms that anticipated growth have had to implement layoffs and adjust their renewals with us. I believe these issues will sort themselves out over time. One positive aspect is that when we analyze logo churn, particularly among our large customers, it remains stable. The companies utilizing our services are continuing with us, despite their downgrades or slower expansion. As the economy improves, I expect these companies to hire again and increase their use of our services. Additionally, as we enhance our offerings, I anticipate they will upgrade to more advanced packages that we will be launching later this year. Yes, I think this last quarter was similar to what we experienced in the first quarter and the fourth quarter of last year, where the beginning was a bit slower and most of the larger deals tended to close in the last month of the quarter. Traditionally, August has some seasonality for us, mostly because it's a slower month in EMEA as many are on vacation. However, when we examine our pipeline and how we entered the quarter, we feel optimistic about the current outlook for this quarter.

Robert Simmons, Analyst

Hey, thanks for taking the question. I was wondering if you can give a little more color on the net retention number. First, was it closer to 105 or to 110? And then how did it trend over the quarter and so far in 3Q?

Tim Wan, CFO

Yes. I think what we disclosed is that was over 105. So last quarter, I think I believe we said it was over 110. So you can imagine kind of the data point and the trend lines of that why we would drop the disclosure from 110 to 105. I think it's certainly stronger outside of tech. Similar to what we discussed regarding the different segments, we have experienced challenges in both tech and non-tech, but it is definitely more noticeable in the tech segment.

Patrick Walravens, Analyst

Great. Thank you. Dustin, I know it's kind of off message, but I was intrigued when you commented that the AI functionality might help with the free-to-premium conversion. So, you guys really haven’t talked about that for a while. Remind us how many free users are there? And what is the size of that opportunity?

Dustin Moskovitz, CEO

I don’t have the number of free users on hand, but I think the opportunity may be limited. It's somewhat uncertain whether it will materialize. We have been monitoring other vendors who cater to a prosumer market, and we've noticed that some of their customers are willing to pay for upgrades even for single-player use. Most of our user base consists of individuals and prosumer use cases. I believe some of them might find this upgrade more appealing than features designed for teams. There's more value in it for certain individual users, even if they aren’t collaborating much. That's why I brought it up, but I do think it's a small opportunity and may not have a significant impact. I would prefer that this doesn’t factor into analyst models.

Tim Wan, CFO

Yes. You should expect our free cash flow to be negative for both Q3 and Q4. However, we will see improvements on a year-over-year basis, and the margin will improve compared to Q1. Q2 was affected by a large invoice from one of our largest customers, which we collected in that quarter, positively impacting our free cash flow. We don’t anticipate seeing a similar situation for another year, but there will be year-over-year improvement.

Dustin Moskovitz, CEO

I'm Sorry, that word was weight turbulence? Well, Ed is a really seasoned executive, and he's built a number of teams over his career and has seen where we're going. So he's come in and really demonstrated the ability to make decisions quickly, inspire the team and just like get the lay of the land really quickly. I was actually really impressed even before he started. He went really deep on the company, did a ton of research and really got to know us. So he was able to sort of onboard and hit the ground running and has just been sprinting ever since he got here and has already made a lot of progress. So I feel really good about it right now. We're still only, I think, fifth week, 1 month in. And so there's still going to be a learning curve, but it's been really impressive so far. And so I'm optimistic about minimal wake turbulence.

Catherine Buan, Head of Investor Relations

Thank you again for joining us today and making the time to hear our earnings results. We look forward to seeing you in New York on October 3.

Operator, Operator

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