Earnings Call Transcript - INTA Q2 2022

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Intapp's Second Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star then the one key on your phone. If you require operator assistance, please press star then zero. I would now like to hand the conference over to your speaker host, David Trone, Senior Vice President of Investor Relations.

David Trone, Senior Vice President of Investor Relations

Thank you. Welcome to Intapp's Second Quarter Fiscal Year 2022 Earnings Conference Call. On the call with me today are John Hall, Chairman and CEO of Intapp, and Steve Robertson, Chief Financial Officer. During the course of this conference call we may make forward-looking statements regarding trends, strategies, and the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations until certain assumptions made as of today's date and are subject to various risks and uncertainties described in our SEC filings and other publicly available documents. Intapp disclaims any obligation to update or revise any forward-looking statements. Further on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC prior to this call. With that, I'll hand the conversation over to John.

John Hall, CEO

Thank you. And welcome to the team, David. Good afternoon, everyone. Thank you for joining us. We ended our fiscal second quarter and calendar year 2021 with continued dedication to our corporate mission. To enable professional and financial services firms to better connect their people, processes, and data through our AI-powered software solutions. As a reminder for those of you who may be new to our story, our team has focused on this sector for more than 20 years. Our clients are the professionals who work in the large professional and financial services firms that were traditionally organized as partnerships. This is a large global industry that brings in $3 trillion in fees every year. But it has been underserved and overlooked by the technology industry because its firms are organized differently than the traditional corporations that make up the rest of the technology market. Traditional corporate employees tend to be organized into functional departments like sales, finance, or IT. Their workflows and data needs are specialized to those functions. In contrast, the professional clients whom we serve grow their careers by developing and leveraging individually specialized knowledge and expertise about their chosen domain. Our professionals drive their career success and their firm's success by leveraging that expertise to develop and build key investor and client relationships, to grow and retain business with those clients, and ultimately to deliver great results and returns for their clients on a wide range of projects. The unique working model that these professionals execute every day is different from the traditional sales or operations department workflows that traditional CRM and ERP systems were designed for. We've built our Cloud based on 20 years of working directly with these firms. Intapp’s purpose-built industry Cloud understands these professionals' focus to build and develop their own area of expertise and then arms them with the modern power of AI to help them make better, more market data-driven, more insightful, and more competitive judgments and recommendations. Intapp has built the modern industry Cloud for the global professional and financial services industry. Today, professional and financial services firms are rapidly adopting Cloud for several reasons, including seeking greater agility to respond to market changes, improving access to data, and market intelligence, and better connecting their global workforce and the broader ecosystem. We've established a trusted brand in these markets due to our deep knowledge of their unique workflows and our industry-leading technology architecture. With our reputation and our specialized product strategy, we are focused on leading the cloud transformation for these firms. The market demand and acceptance of our cloud solution is evident. In our second quarter, our Cloud ARR grew 52% to $135.3 million. Cloud now represents 56% of our total ARR of $240 million, which is up 27% year-over-year. We earned SaaS and support revenue of $47 million, up 36% year-over-year, and total revenue of $64.7 million, up 30% year-over-year. We ended December serving over 2,000 firms in over 40 countries around the globe. During our November call, I outlined several of our unique technology capabilities and how they directly address the critical needs of our clients. Today, I'll share a bit about our go-to-market organization to better illustrate how we interact with clients and prospects to drive demand for our solutions and deliver client success. We have evolved a unique go-to-market model to serve this industry based on our two decades of focus on the professional investors and advisors who work in these firms. Leveraging our go-to-market organization, our entire business has moved to a SaaS model, and we are enabling our target industry to make its own digital transformation to the Cloud. This shift to the Cloud is both accelerating our growth and improving outcomes for our clients, which drives the virtuous cycle of continued adoption and net revenue retention. Our client-facing teams include industry experts themselves, who have deep sector knowledge specific to the private capital, investment banking, legal, accounting, and consulting markets. Our integrated sales and marketing programs at the industry level drive repeatable and predictable pipeline growth through both inbound lead generation and cross-selling programs. Our go-to-market team applies both account expertise and solution expertise resources to this pipeline to surround each opportunity. Our sales engineering experts focus on key solution use cases such as coverage management, relationship management, deal management, marketing and business development, operations and finance, and risk and compliance. Our ability to deliver unique proposals, demonstrations, and business cases to our clients is a significant competitive advantage and leaves high win rates in all of our markets. For example, our team recently won a strategic opportunity at IQ EQ, a leading investor services group with over 3,700 global employees and assets under administration of over $500 billion. Our solution will help enhance the relationship management capabilities of the firm. The ability of our services and technology teams to configure our platform to the unique use cases of IQ EQ was critical to both winning the business and driving success for the client. The new platform will support information sharing, firm-wide knowledge capture and expanded visibility into client relationships to help the IQ EQ team better support the expanding needs of clients. Our industry experts in presales and services bring this to life for clients like IQ EQ. This investment in our own deep bench of market expertise, building a unique team over many years who know and are known in this market, represents a sustainable competitive advantage for Intapp. Our go-to-market strategy has also developed ways to successfully engage with firms of different sizes. We generally offer smaller firms our full platform and its suite of solutions, enabling the firm to build its operations around our industry Cloud. And we grow users with the firm as we bring out new functionality. For example, Graphite Capital, a leading U.K. mid-market private equity firm, recently selected our Cloud platform to boost the efficiency of their deal, value creation, and investor relations teams. This is a good example of our integrated marketing, sales, and technical engagement with clients. After a series of discovery meetings supported by our marketing program, our sales and sales engineering teams showcased the potential of the technology for the firm's leaders. Working collaboratively with the client, we prioritize use cases that are most important to the firm's strategy, and we're now in the process of deploying those. We will continue to work with them over time to support their evolving needs as the firm grows. Larger firms often select a phased approach to adopting the Intapp cloud platform. We recently onboarded an independent global business advisory firm with over 6,000 employees. During the sales discovery process, we identified a specific use case to support improved compliance around their business intake process, with a focus on some complex regulatory requirements in Europe. Our pursuit required a deep understanding of EU regulations, sophisticated technical demonstrations, and a strong integration with their existing enterprise IT strategy. Working collaboratively with the firm's experts, we identified a strategy for our cloud platform to both solve their immediate requirements and to set the firm up for additional adoption over time. We see significant growth opportunity within our clients as we expand upselling with more adoption and cross-selling with new solutions. As we expressed in our S-1, we believe there is over $1 billion in expansion revenue opportunity in our top 100 clients alone. We invest in both client support and client relationship management to ensure that we continue to delight our clients. For example, a large global law firm and a long-standing Intapp client using multiple Intapp solutions recently sought to modernize their approach to handling conflicts, business intake, and overall risk management. They will soon deploy Intapp's cloud solutions for risks and intake, which will allow them to move faster to support client needs while ensuring full adherence to complex regulatory requirements. As part of this project, we are also helping the firm accelerate cloud migration for their on-prem Intapp solutions to our industry cloud. Our go-to-market also includes a strong client marketing program. In Q2, we hosted Intapp connects '21, our annual user conference. Over a two-day period, more than 1,700 registered guests attended keynotes and sessions led by experts and peers in the professional and financial services industry. Leaders from multiple sectors discussed the changing landscape and how to find opportunities, build the right teams, and harvest knowledge to drive better outcomes. This event is just one way our continued go-to-market program engages our clients in strategic discussions around how they can modernize and adopt solutions that better connect their people, processes, and data. These examples illustrate our industry-specific go-to-market function and rely on a few key Intapp advantages. First, our low-code platform is designed for the industry and is configurable for each firm, allowing each client's unique needs to be served without requiring custom code. Next, our investment in experts with experience in these industries who can help identify and showcase how our technology supports and meets the requirements of industry-specific use cases for each client. Next, our services and client success teams, along with our partner ecosystem, focus on not just successful deployment, but successful adoption of our solutions. Finally, in concert with our clients over the past 20 years, we have developed a unique go-to-market approach that meets the needs of these special partner-led firms. We have developed a well-earned reputation as a trusted provider within our client community. And today we often generate new business through network effects within this community. Our long-standing client relationships act as a significant driver of new opportunities for us as professionals move between firms. We believe our unique go-to-market model, designed to serve the specific needs of this industry, is a sustainable, long-term competitive advantage. Our teams are working across the firm with the technology and departmental leaders that support the firm and the professionals themselves. As our industry accelerates its move to the Cloud, our teams will guide all these constituents on how to best take advantage of the transformation. As we mentioned on our last call, over the past year we have invested in building out a larger, integrated go-to-market function to pursue our large and growing TAM. We will continue to invest as long as we see opportunity for growth, particularly to ensure that we remain the leader as our clients make the move to the cloud. We hired aggressively in Q2, and we are bullish that these new hires will help us to continue to capitalize on the market opportunity in front of us. As our cloud continues to grow, we're able to drive further growth through adoption and expansion of the sticky long-term subscription revenue. I will now turn the call over to Steve to discuss our financial results.

Stephen Robertson, CFO

Thanks, John, and thanks everyone for joining us today. Before I go through the numbers, I'd like to quickly review a few fundamentals of our financial model. As John discussed, the professional and financial firms that we serve are rapidly adopting purpose-built cloud solutions. Today, nearly all of our new customer wins are for cloud solutions, and recurring revenue makes up approximately 85% to 90% of our total revenue. We believe Cloud ARR and total ARR metrics are good indicators of the consistent growth of our annual recurring software business. For the second quarter of Fiscal 2022, our cloud ARR grew 52% year-over-year, and our total ARR grew 27% year-over-year. In terms of revenue recognition, Cloud ARR is recognized as SaaS revenue rateably following a new sale or renewal. On-premises ARR is recognized in two parts: 50% as subscription license revenue, recognized upfront at the time of the sale or renewal, and 50% as support revenue, recognized rateably and included in our SaaS and support revenue line. Because it is recognized rateably, SaaS and support revenue will generally be more predictable quarter to quarter. In contrast, subscription license revenue can vary quarter-to-quarter because it is recognized as revenue episodically, when the subscription licenses are initially delivered or renewed. Okay. Moving to our numbers. Q2 was another strong quarter for Intapp as follows. Total revenue was $64.7 million, up 30% year-over-year, driven primarily by continued strong sales of our Cloud solutions and solid growth in professional services revenue. SaaS and support revenue was $47 million, up 36% year-over-year, reflecting both new sales to new clients and upsells and cross-sales to existing clients of Intapp purpose-built cloud solutions. Subscription license revenue was $9.3 million compared to $9.8 million in the prior year period, primarily reflecting renewals of on-premises subscription licenses. As noted previously, this revenue line item is somewhat variable on a quarterly basis. Professional services revenue was $8.4 million compared to $5.2 million in the prior year period, reflecting implementations of new software in a more normalized market as compared to the COVID-influenced prior year period. Overall, we continue to execute our land and expand model, ending the quarter with more than 2,000 clients, 467 of which had ARR of more than $100,000, up from 380 in the prior year period. In addition, we upsold and cross-sold our existing clients such that our trailing 12 months net revenue retention rate was above our expected range of 108% to 112% for the second quarter in a row. Before discussing gross margins, expenses, and profitability, please note that I will be discussing non-GAAP results going forward. As a reminder, our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found in our earnings press release and its supplemental financial tables. Gross margin was 68.5% as compared to 68.9% in the prior year period, reflecting a slight mixed shift in the current period. For our recurring revenue solutions, gross margin was up modestly year-over-year to 82.5%. Operating expenses were $44.5 million, a $12.3 million increase year-over-year as we continue to invest in sales, marketing, and product development to support our growth. As compared to the prior year's quarter, this spend reflects expenses of being a publicly traded company, as well as a more normalized spending pattern than during the Second Quarter of fiscal 2021 when we were still prudently managing the uncertainty of the COVID pandemic. Sales and marketing expenses were $18.7 million, a $5.5 million increase year-over-year as a function of increased headcount and sales commission investments to capture new business in our growing markets. R&D expense was $13.1 million, a $2.0 million increase year-over-year as we increased headcount and made investments in our product roadmap. G&A expense was $12.6 million, a $4.8 million increase year-over-year in line with expected expense increases associated with being a publicly traded company. The non-GAAP operating loss was $0.2 million as compared to our Second Quarter fiscal 2021 operating profit of $2.0 million, primarily reflecting the year-over-year increase in operating expenses just discussed. The non-GAAP net loss per share was fractionally negative in the second quarter of FY ‘22 as compared to a loss of $0.12 in the second quarter of fiscal 2021, primarily reflecting a year-over-year reduction in interest expense and an increase in the weighted average share count. Turning to the balance sheet, we ended the second quarter with $56.0 million in cash and cash equivalents, an increase of $18.4 million from the end of fiscal 2021, and $0 debt outstanding. Accounts receivable decreased by $8.1 million since the end of fiscal 2021, in line with the expected seasonality of our billings and collections. In our last quarter, we told you that we would forward invest in growth, and we did so through strong go-to-market hiring during Q2. However, a number of our Q2 hires pushed to their start dates to January, and Omicron-related factors temporarily reduced our T&E and marketing program expenses for Q2, a trend we expect will abate in Q3. Because of these factors, and because we continue to see opportunities to forward invest in sales, marketing, and R&D to drive further growth, we are raising our profitability guidance somewhat moderately at this time. We expect to manage the business for positive free cash flow while running modest operating losses in line with our previous guidance for the next few quarters. Now turning to guidance. For the third quarter of Fiscal '22, we expect SaaS and support revenue of between $47 million and $48 million and total revenue in the range of $65 million to $66 million. We expect a non-GAAP operating loss in the range of $5 million to $6 million and a non-GAAP net loss per share in the range of $0.09 to $0.11 using a basic share count of approximately 61 million common shares outstanding. For the full year fiscal '22, we expect SaaS and support revenue of between $185 million and $189 million and total revenue in the range of $258 million to $262 million. We also expect a non-GAAP operating loss in the range of $11 million to $15 million and a non-GAAP net loss per share in the range of $0.24 to $0.28 using a basic share count weighted for fiscal year '22 of approximately 61 million common shares outstanding. With that, John and I look forward to taking your questions.

Operator, Operator

Ladies and gentlemen, now our first question is coming from the line of Jackson Ader. Your line is open.

Jackson Ader, Analyst

Great. Thanks for taking our questions, guys. The first one is on the net new logo growth. So if we look at the 50 or so that you added in the quarter, could you maybe give us a sense for what are some of the top-end markets that contribute to that 50 new logos?

Stephen Robertson, CFO

Well, Jackson, let me take that. Thanks, and good to hear you today. Most of our new logos generally in a quarter are driven in the financial services business where we have both private capital markets and investment banking and other financial clients. There are numerous of them and we have some real momentum there. We tend to have fewer new logos in our professional services segments where we've been in business longer and where much of our sales opportunity tends to be more of an upsell or cross-sell nature than new logos per se.

Jackson Ader, Analyst

Okay. Perfect. That actually leads into the second question about the net revenue retention being above the 108 to 112 range. What is driving this? Are existing law firms or professional services adding other lines of business or geographies? Are they introducing new products at a faster rate than expected? What is contributing to the upside to the 112?

Stephen Robertson, CFO

Well, what we're seeing really is some pretty balanced good sales motions across the board. And in financial services, that typically leans towards upsell of additional users, where people have achieved success in the implementation. And it's working well, and more people want to sign up for it. In professional services in legal and elsewhere, it's typically cross-sell of additional product functionality. And there's lots of opportunity there. So it's a fairly balanced contribution from both. And yes, it's been better than our range here, two quarters in a row. So we continue to look at that and are pleased with it.

Jackson Ader, Analyst

Okay, great. Thanks for taking my question.

Stephen Robertson, CFO

Yeah.

Operator, Operator

Now our next question is coming from the line of Koji Ikeda. Your line is open.

Koji Ikeda, Analyst

Hey, John and Steve. Thanks for taking my questions. Really great quarter. I wanted to build on that last question from Jackson. So NRR was above that 108 to 112 range second straight quarter there, so great news. When would you feel comfortable maybe raising that range? And then digging in a little bit more, on this quarter for the NRR, was it higher than last quarter? So any sort of color there would be helpful.

John Hall, CEO

Sure. Well, I think it's fair to say that if we see this kind of sustained success by next quarter, there's a chance we would consider changing this, revising somewhat next quarter, Koji. We were right around where we were last quarter, to be honest. We were just as good if not slightly better than last quarter. So we're optimistic about that. And we just want to be careful with the trends we see and it works out quarter to quarter, but really good business firing on all cylinders here, right now across the board.

Koji Ikeda, Analyst

Thank you. Regarding the Cloud side of ARR, I appreciate the insight on new logos from financial services. With the 50% growth for the second consecutive quarter, can you clarify if this growth is primarily driven by DealCloud at OnePlace, and whether it's more related to financial services compared to professional services? How should we interpret the sources of strength in the Cloud ARR growth?

John Hall, CEO

Well, now really it is pretty balanced on an absolute dollar basis between the two, if you will. I think that as we said before, just based on where the two parts of the business started and their history and size and so forth, there's a little bit quicker growth in financial services than in professional services on a sort of a percentage growth rate basis. But we're getting pretty good and pretty balanced contribution from both as part of the Cloud growth. As you know, all the new sales are Cloud, they're coming from those two twin engines, if you will.

Koji Ikeda, Analyst

Got it. Got it. Thanks guys. Thanks for taking my questions. Appreciate it.

John Hall, CEO

You bet.

Operator, Operator

Our next question is coming from the line of Kevin McVeigh. Your line is open.

Kevin McVeigh, Analyst

Thanks so much. And let me add my congratulations as well. Just to follow up on the client success, it seems like you're capturing a larger percentage of clients where they are over 100,000. Can you help us understand what the average client size is today in terms of employees and how that's been trending over the last couple of quarters?

Stephen Robertson, CFO

Well, I'm not sure I have employees and an average size for you in terms of ARR obviously, if you just divide our ARR by the 2,000 plus clients, so you'll see that the average for the business is over $100,000 but there's a spread there. In terms of employee size, I don't want to hazard a number for you. John, you may have some color you would add there.

John Hall, CEO

Well, the range of firms that we sell to today that we count on our client base goes from a handful of people at a just started private capital firm, maybe five to 20 people at the small end. The largest firms are the global investment or advisory firms, including the Big Four, which could have 180,000 to 200,000 employees. So the platform does scale. We've built it in a way that supports the largest firms in the world, and then we get the Cloud benefit of being able to provide that level of capability and AI power down to the smallest just-started firms. So our go-to-market is organized by industry, but also by firm size. And we engage a little bit differently depending on the scale of the firm, but overall, we're able to address the big chunk of the professional financial services market globally. So we're excited about the progress that we're making and winning clients of these different sizes because it shows the growth potential of the business into the market.

Kevin McVeigh, Analyst

That's great. That's great. And then it seems like given the acceleration in the revenue, help us maybe dimensionalize it. Not really any kind of COVID-related pull-forward, just given the continued acceleration. Is that fair? I mean, from an implementation or just overall client spend perspective.

Stephen Robertson, CFO

There’s no pull forward from the next quarter, if that’s what you’re asking. There are some COVID-related comparisons if you look back at the full year and quarter-over-quarter. However, we are currently operating in a normalized and favorable business environment. That’s our primary focus right now.

Kevin McVeigh, Analyst

Great. Congrats again.

Stephen Robertson, CFO

Thanks.

Operator, Operator

Our next question is coming from the line of Brian Peterson of Raymond James. Your line is open.

Brian Peterson, Analyst

Well, thanks, gentlemen. And I'll echo my congrats on the strong results. So first one, John, I'm curious, regarding the user conference. Anything that you can share in terms of customer conversations or pipeline or any kind of developments from the pipeline in terms of how that may play out over the next few years.

John Hall, CEO

Thanks, Brian. The Intapp Connect ‘21 event was a fantastic event. We had 1,700 folks attend from across all the sub-verticals that we call on. One of the interesting things that came out of it was how common and shared the challenges were for these firms that have a little bit of a different specialty each one, but the professionals are grappling with the same issues and the business services teams that support the firms are grappling with the same issues. So there was a lot of enthusiasm across the sub-verticals to work together on discussing common opportunities for technology transformation. So that was a big theme that came out of it. There also was a real discussion of the impact of COVID on opening the eyes of these firms to digital transformation, to the Cloud, and to better enabling dispersed or hybrid workforces. So a lot of the conversations were reinforcing what we've been experiencing, which is that these firms, through COVID, have shifted some of their focus towards better technology enablement and digital transformation for their people to compete in a changed environment. So there's a lot of discussion about that too. To your question about pipeline, it was a very successful event for us. A lot of new attendees that we had not met before, as well as a lot of our installed base coming and people referring to each other to get into the Intapp community. So we're encouraged by the enthusiasm for what we're doing out there. And I think you're seeing some of it flow through to some of the results.

Brian Peterson, Analyst

That's great to hear, and maybe a follow-up for Steve. I know you mentioned some of the hiring efforts, and we'll see those investments start to kick off in the third quarter here. How do we think about that investment intensity in a go-to-market effort, especially as we're thinking about a couple of years out? Should we expect that to continue going forward, or should we start to see some benefits of those in the coming years? Thanks, guys.

Stephen Robertson, CFO

Yes. We are continuing to forward invest when we can in sales and marketing. As we've said last quarter, we've had some success here so far this year, and that continues. We are adding to our sales and marketing resources at north of a 25% annualized growth rate at the moment. And I think that since we see so much opportunity right now, we're going to continue to look to do that. And there's hiring and ramp up time and so on that's part of the mix. So productivity improves after someone starts and it gets better. But we're optimistic, and we'll continue to do that going forward as we see this market opportunity in front of us.

Brian Peterson, Analyst

Thank you.

Operator, Operator

Our next question is coming from the line of Parker Lane. Your line is open.