Samsara Inc. Q2 FY2023 Earnings Call

Good afternoon and welcome to Samsara's Second Quarter Fiscal 2023 Earnings Call. I'm Mike Chang, Samsara's Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Co-Founder and Chief Executive Officer, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we'll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described more fully in our SEC filings. Any forward-looking statements that we make on this call are based on assumptions as of today, August 31, 2022, and we undertake no obligation to update these statements as a result of new information or future events, unless required by law. During today's call, some of our discussions will include our second quarter fiscal 2023 financial results. We'd like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except for revenues and revenue growth. Reconciliations of GAAP to non-GAAP financial measures are provided with the press release and investor presentation. We'll make opening remarks, dive into highlights for Q2, and then open up the call for Q&A. With that, I'll hand over the call to Sanjit.

Thanks, Mike, and thank you everyone for joining us today. We delivered another strong quarter, surpassing $660 million of ARR, growing more than 50% year-over-year. We continued our large customer momentum and ended Q2 with nearly 990 customers with ARR over $100,000. While we saw strength in the business, we recognize that Samsara is not insulated from the current macroeconomic environment. Throughout the quarter, customer demand remained at historically consistent levels, but we saw elongated sales cycles compared to periods of stronger economic growth. Despite macroeconomic headwinds, we continue to see strong demand because of three core themes. First, our customers are the critical infrastructure that powers the global economy. They span diverse industries that include some of the largest food distributors, chemical companies, energy utilities, freight carriers, and municipalities. Many of them have been around for over half a century and have survived challenging economic cycles. Second, our customers are challenged with rising inflation and interest rates, disrupted supply chains, tight labor markets, and geopolitical risk. They need solutions that provide a rapid return on investment. Samsara's Connected Operations Cloud is a deflationary lever that helps our customers control costs by running smarter, safer, and more efficient operations. And third, Samsara is becoming the system of record for physical operations. Customers are using our cloud as a command center for their day-to-day operations. At Samsara, we focus on building relationships with our customers, solving their problems, and delivering a great customer experience. At the center of this process is the Samsara customer feedback loop, where we listen and respond to their greatest needs. In Q2, we hosted our inaugural Samsara Investor Day and our first customer conference, Samsara Beyond. We brought hundreds of our customers together to discuss the future of physical operations and to learn from other customers about how they can use our Connected Operations Cloud to unlock value for their businesses and network. Many of them shared what a unique and beneficial learning experience it was for them to connect with other operations leaders digitizing their businesses. So we're excited to make this an annual event. During the conference, we also celebrated the Connected Operations Award winners. These awards recognize organizations that have transformed their operations and are seeing tremendous ROI. As you can see from this list, there is a lot to celebrate. Let's double-click on our Digital Transformation of the Year Award winner, Artera. For context, supply chain shortages mean that our customers have to do more with less. Trailers are hard to come by, and industrial equipment is expensive. We use data to provide visibility into existing equipment and assets so customers can control their costs and optimize usage. Many of our customers haven't had access to this kind of data before. Artera is a leading provider of critical infrastructure services. Our Connected Operations Cloud helped them identify inefficiencies in their equipment usage, unlocking $10 million of cash flow to invest in priority areas. In addition to helping Artera unlock efficiencies, our cloud increased the safety of their operations. Samsara helped them decrease accidents by 40% year-to-date. Artera is just one of many outstanding examples of the power of digitization. Customers across industries and geographies are achieving amazing things with our Connected Operations Cloud. Our customers know they have to continue investing in digital transformation; it is a proven way to fight inflation. Our offerings are becoming a must-have for companies looking to streamline their operations, reduce their cost stacks, and gain more visibility and control into their operations. Let's look at ArcBest, who are using our cloud to streamline worker productivity. ArcBest is the 14th largest for-hire fleet in the United States with over 2,700 city vehicles and over 7,000 drivers. With Samsara, they've integrated data from multiple platforms, improved their safety program, and have next-level visibility into their operations. They use our open API to create a customer integration that reduced time spent managing unassigned hours of service by 50%. Here's another example of driving operational resilience: one of the largest school districts in the state of Georgia improved their asset and fuel efficiency with Samsara. They serve over 180,000 students in 141 schools, and safely transporting students to and from school is a top priority. Using Samsara's vehicle telematics and several integrations to manage bus routes, they made their buses more punctual. They have over 2,000 buses, and now they're also monitoring vehicle diagnostics like tire pressure and idling and accessing Samsara's fuel reports to save money. In these two examples, we shared how Samsara's Connected Operations Cloud improves the efficiency and sustainability of operations through better data visibility. We're also investing in digitizing the worker experience by eliminating inefficient pen-and-paper processes, streamlining the user experience, and delivering solutions for the modern workforce. For example, Superior Plus Propane is enhancing safety workflows to save lives. Superior is a leading U.S. propane distributor, serving 24 states with 2,300 trucks and more than 1,000 drivers. Within just six months of installing the AI Dash Cams and launching our video-based safety coaching programs, they achieved a 90% reduction in speeding. And on top of that, Superior has seen a 52% reduction in on-the-road accident costs and a 50% reduction in rollovers. Our customers are competing in a tight labor market, and our platform gives them a competitive edge in attracting, onboarding, and retaining workers because we provide easy-to-use tools that are in line with the modern technologies they use every day. We're doubling down on transforming the worker experience with innovative new features that simplify day-to-day tasks, keep workers safe, and ultimately make their workplaces more connected. This quarter, we announced a number of new product features, including customizable driver workflows, in-cab nudges, multi-stop ETAs, and remote support for administrators to streamline troubleshooting from anywhere. We believe we're in the early stages of a large market opportunity that has been underserved by technology. We want our Connected Operations Cloud to be the system of record for physical operations. As we bring more data into our platform, we're able to provide an increasing number of actionable insights and fundamentally reimagine the way our customers do business. Take Liberty Energy for example. With Samsara as their system of record and our open API, Liberty Energy created a custom integration. They've connected real-time operations data from their machines to their tax software. As a result, they can more accurately represent their operations and more accurately report to the government. Because of this one integration, Liberty Energy expects to save $10 million every year. They've unlocked a new level of operational visibility, and this single integration more than pays for their Samsara investment. We are delivering more value for customers by creating the largest open ecosystem for physical operations. This quarter, we announced new OEM partnerships with two of the largest U.S. automakers, Stellantis and General Motors; as well as Thermo King, a global leader in transport temperature control systems. With our increasing data asset, we're excited to scale our product offerings and double down on product innovation. This quarter, we continued to invest in our product leadership by hiring Jeffrey Hausman as Chief Product Officer from ServiceNow and appointing Kiren Sekar as our company's first Chief Strategy Officer. Jeff's strong background in cloud operations, data analytics, and infrastructure technologies will help us as we scale. Kiren has led our product team since founding. In his new role as Chief Strategy Officer, he will continue leading new product incubation and development. We're also building capacity to serve increasing customer demand. We're seeing our remote work model unlock access to the global talent pool. As a result, Q2 was also our best hiring quarter since the pandemic began. I'd like to end with a thank you to all Samsarians, as well as our customers, partners, and our investors for your continued support. We're still in the early stages of our tremendous market opportunity to digitally transform the world of operations. I'm looking forward to what we'll achieve next.

Thanks, Sanjit. As a reminder, please refer to our shareholder letter, press release and investor presentation at investors.samsara.com for additional information on our Q2 results and financial guidance. Q2 was highlighted by strong top line growth and continued operating efficiency improvements. However, the quarter was also impacted by broader macroeconomic headwinds, which contributed to some instances of elongated sales cycles, such as higher levels of required deal approval, longer trial periods, and intensified ROI validation compared to periods of stronger economic growth. Having said that, we saw no significant change in pipeline conversion or win rates for most of our core customers, and demand remains robust. We continue to be well positioned to directly reduce our customers' operating costs in an inflationary environment, and our results reflect the importance of digital transformation taking place across the world of physical operations. Q2 ending ARR was $663 million, growing 52% year-over-year, and Q2 revenue was $154 million, also growing 52% year-over-year. Several factors drove our strong top line performance in Q2, the first of which was a continued focus on landing and expanding with large customers. We now have 989 $100,000-plus ARR customers, a quarterly increase of 92 and an annual increase of 374 or 61% year-over-year growth. More specifically, we saw strength within our largest customers. We ended Q2 with 41 $1 million-plus ARR customers, a record quarterly increase of 7 and almost doubling over the past year. While the majority of these additions were customer expansions, we also landed two new $1 million-plus ARR logos who are now top 15 customers, one of the world's largest crane and equipment companies and a top 10 less-than-truckload transportation carrier. Next, multiproduct transactions continue to significantly contribute to our top line growth, showing the strength of our Connected Operations Cloud in the market. Eight of our ten largest deals in Q2 included subscriptions to two or more products, and five of the top ten deals included three or more products. More broadly, more than 70% of core customers and more than 90% of large customers subscribe to multiple applications. We're also seeing multiproduct strength at scale. Our video-based Safety product crossed the $300 million ARR milestone, and Vehicle Telematics ended at more than $250 million of ARR. And finally, while this was another strong quarter for our core products, our emerging products stood out in Q2. We saw a quarterly record 17% of net new ACV come from our nonfleet applications, including our second and third largest equipment monitoring deals ever. In fact, while nonfleet applications are more than 10% of ARR, our customer adoption is much higher. Almost half of our core multiproduct customers and almost two-thirds of our large multiproduct customers subscribe to nonfleet products. This shows the breadth of our customer adoption, and we see a significant opportunity to expand the depth of adoption within our customer base by monetizing a broader set of nonvehicle assets. In addition to our strong top line performance, we continue to focus on driving operating efficiency improvements across our business as we scale. As a result, we saw strong year-over-year leverage across all functions. Our Q2 non-GAAP gross margin was 73%, a year-over-year improvement of 1 percentage point, primarily from product optimizations, improved one-time commercial strategies, and larger scale. Our operating margin was negative 13%, an annual improvement of more than 50% or approximately 17 percentage points year-over-year, driven by leverage across all functions. And our adjusted free cash flow margin improved by more than 20 percentage points year-over-year. Over the past couple of years, free cash flow margin began to lag operating margin due to the global supply chain disruption and the associated increase in component and logistics costs. However, we started to see free cash flow margin converging in Q2 of this year, and we expect that trend to continue with supply chain improvements. As a result, we believe operating margin is a good leading indicator for profitability while we continue to navigate a supply chain constrained environment. Okay. Now turning to guidance. For Q3, we expect total revenue to be between $154 million and $156 million, representing year-over-year growth between 35% and 37%, and non-GAAP operating margin to be approximately negative 20%. Based on our Q2 results and increased forecast clarity for the second half of the year, we're raising our full year revenue guidance to be between $610 million and $614 million or between 42% and 43% year-over-year growth. In addition to increasing our top line guidance, we continue to focus on achieving savings through improved operating efficiencies. As a result, we're also raising our FY '23 non-GAAP operating margin guidance to negative 18%. And finally, we also included some additional modeling notes for Q3 and full year FY '23 in our shareholder letter. To wrap up, while we're operating in an uncertain macroeconomic environment, we are pleased with our performance in the first half of the year. We are digitizing the world of physical operations, and our cloud is becoming our customers' system of record. As a result, we remain committed to driving durable growth along with improved operating efficiencies on our path to profitability.

Thank you, Dominic. We will now open the line for questions. The first question today comes from Alex Zukin at Wolfe, followed by Matt at William Blair.

Can you hear me okay? Perfect. I think it was a really strong quarter. Congratulations. One of the standout features I noticed was how much of the new annual contract value is coming from the emerging product category. You mentioned multiple million-dollar deals where those upsells came together. For investors looking to envision the long-term potential of the platform, did you feel that this was more of an internal focus and a push from the go-to-market team, or was it driven by customer demand for more from the platform? Was this quarter a significant turning point, or just a convergence of events? Given the macroeconomic backdrop, that seemed particularly strong. I have a quick follow-up.

So Alex, I'll take that one. This is Sanjit. I would say it was probably more pull than push from us. In general, our sales team is a generalist organization. They're able to sell all the products and really focus on solving customer problems. We saw customers realize that they can digitize more of their physical operations in terms of other nonvehicle fleet assets, for example, trailers, generators, compressors, bulldozers, yellow-iron equipment using construction and so on. So I think now the market is starting to realize that this expands well beyond just fleets of vehicles to all kinds of operational assets. And that pull is what we see reflecting that 17% of net new ACV. We're going to continue to invest in that product line and make sure it's well integrated in our platform and connected across all the reports and APIs. But I think this is a bit more of the market starting to realize you can digitize a lot more.

I believe we've highlighted this at Investor Day and in the shareholder letter. What excites us is that although nonfleet applications account for over 10% of our annual recurring revenue, we are witnessing significantly higher customer adoption. Nearly 50% of our multiproduct core customers and about two-thirds of our multiproduct large customers are already utilizing a nonfleet application. As mentioned in the letter, many of these are emerging from expansions. For instance, one of our top five customers, who was already using our services for telematics, safety, and equipment, has opted to add additional nonvehicle assets, marking an expansion to a large customer. Given the adoption we are witnessing, we are truly enthusiastic about the potential to return to our existing customers and introduce a wider range of assets.

That makes a lot of sense, and it's great to see. I have a follow-up for you, Dom. I want to understand how the macro sensitivities you mentioned and the elongating sales cycles affected net new ARR this quarter, which was very strong. Did those factors create any challenges for net new ARR? Would it have been even stronger without those impacts? Additionally, how should we think about the seasonality and linearity of net new ARR moving forward in light of the macro backdrop?

Yes. We are definitely seeing elongated sales cycles. And so customers are using more rigor as they're going through the process of signing the contract. They are really making sure that they're nailed down on the ROI analysis. They're at times asking to do longer trials and making sure that they've got the right internal resources to go through the deployment and so that they're getting the ROI as quickly as possible. And so we definitely saw some elongated sales cycles, and that probably had some impact on the top line. I think specifically, we were a little stronger in some areas. So we called out nonfleet applications. It was a pretty good international quarter. We talked about the large customer momentum. It was a strong renewals quarter. We were a little softer in some other areas. And really, that came in with our smallest customer. The small customer segment is a little bit more impacted by macro. But I think we're also excited that for the year, we're ahead on our profitability goals, and that really allowed us to move up our full year guidance. And so we've got some really good kind of levers where we can make adjustments to how we're spending money based on what we're seeing from top line performance.

Great quarter. Wanted to first ask on the two $1 million-plus new logos that you added in the quarter. Have you ever signed initial deals of this size? And then with these customers, are they just larger than some of the customers that you've added in the past, and that's what drove the large deal size? Or are there other factors that made these customers feel comfortable committing to that large of a deal initially?

We now have 41 customers paying over $1 million in annual recurring revenue. Many of these were new customers acquired at that level, but most were existing customers who expanded their assets over time. Last year, we only secured two new customers at that size throughout the entire year, whereas we achieved that same number in the second quarter alone, and I anticipate more will follow in the latter half of the year. This demonstrates our capability to attract larger clients or have our current customers grow. It reflects the strategic investments we’ve made in targeting the enterprise market and securing larger accounts. Achieving these deals requires significant go-to-market and R&D investment, and they do take time to finalize. Therefore, we are pleased to see these investments yielding results in the second quarter.

Okay. Great. I just wanted to follow up on the margin guidance. It suggests that the second half will have lower margins compared to the second quarter. Is this primarily due to strong hiring in Q2 affecting the back half, or should we consider other factors?

Yes. I believe there are two main reasons. First, while Q2 was a record quarter for hiring, much of it was weighted towards the end of the period, so you'll see more of that expense reflected in Q3. Additionally, some expenses that we anticipated would occur in Q2 are now expected to take place later in the year. I want to highlight that our full year guidance for operating margin has improved from minus 20% to minus 18%. The entire implied operating profit increase in Q2 is contributing to this improvement in our full year margin projection.

No. I mean I think if you look at our overall customer base today, we don't have any massively large customers that are driving a significant portion of our ARR. And so I don't expect there to be any sort of large material swing deals that could have a material impact on the trajectory of our ARR for the rest of the year.

Great job with the Q2 results. It's been fairly consistent. You're adding more than 90 customers each quarter on the $100,000 customer metric. You mentioned that 60% of the expansions come from existing customers. Perhaps, Dom, you could elaborate on the visibility you have regarding that expansion path with the existing customer base. Are you noticing anything that might indicate a shift in how you expect the trend between net new customers and expansion customers to develop from here?

We currently have a strong balance of our net new annual contract value coming from approximately half expansion and half new customers, and this has been fairly consistent over the past several quarters and the last year. I expect this trend to continue moving forward. There is significant potential for acquiring new customers, and the usual buying approach is to land and expand. Customers typically start with one product or a specific set of assets, possibly beginning in one subsidiary or geographic region, before gradually expanding. As they derive value from the Samsara platform, they will integrate more assets into it. We believe this customer adoption trend will persist.

So Michael, why don't I start with the kind of context on the supply chain, if Dominic wants to add on any details on free cash flow versus operating margin. We are seeing improvement in our upstream supply chain. So it's been fairly consistent over the last couple of months. Our key components, we have greater visibility into. A lot of the smaller passive components are more readily available on the market. And the automotive components have been actually the most challenging to procure. And we're seeing signs of recovery, especially as we look forward to early calendar year '23. And then on top of that, we've been able to manage our costs a little bit better in terms of stabilizing and shifting more of our freight to ocean as opposed to by air. So I think the way that we're thinking about it is while we're not out of the woods yet, costs are still elevated from where they were a couple of years ago. We are seeing that recovery happen in the supply chain, and that's showing through in the cash flow.

Yes. And I would just, again, point to the shareholder letter and the investor deck, where we've got the chart with the gross margin, operating margin, and free cash flow margin at the bottom. We have this table that shows kind of the difference between operating margin and free cash flow margin. And you can see like in Q2 of last year, the gap was 16% at Investor Day. And in Q1, we talked about the Q1 FY '23 difference was 18%. And now it's down to 12% in Q2. I would expect that gap to continue to shrink in Q3 and Q4. As to Sanjit's point, we get more visibility over supply chain and operate in a more kind of normal environment.

This is Anushtha for Matt Hedberg. Can you hear me okay?

Yes, we can hear you.

I wanted to follow up on the extended deal cycles you mentioned. Did you observe this trend in any particular industries, or was it more widespread?

I would say the effect we've seen has been broad-based. It's not any particular industry, whether it's transportation or energy utilities or even the local governments we serve. I would say everyone is making sure they've got that ROI case lined up and that they have their teams ready to deploy. And I think Dominic highlighted that's the sort of underlying reason. That's, again, not specific to a single industry.

Got it. And then could you talk about how sustainable the digitization trend in physical operations has been in an unstable macro environment? How do the customer conversations evolve in such an environment?

So I would say this trend towards digitization has been a kind of long arc, and it's continuing. They're actually seeing more opportunities and business reasons to drive the digitization. As you think about challenges in the supply chain, I mentioned it a little bit earlier in the call, but it's hard to procure trailers. It's hard to procure equipment in this environment. And so we see customers trying to be more efficient with their asset utilization. I think they're also thinking about their own cash and can they take some of those underutilized assets and remarket them, sell them off, in other words, to raise cash and reinvest in their business. We also see fuel prices have fluctuated quite a lot over the last quarter and really over the past year. We've seen some recovery now. But even if you take a closer look at the price of diesel, it's elevated. And so many of our customers are saying, can we become more efficient and more sustainable? In other words, use less fuel using all of this data. So I would say these are all the sort of tailwind effects that we have that are in favor of digitization. It just is, simply, these customers are going through a transformation. It's new for them.

Congrats, guys, on a strong quarter. Sanjit, you mentioned that you guys hired a new Chief Product Officer, came from ServiceNow, ran the IT operations portfolio. Are there any new product strategies to call out or anticipate coming down the pike? And in particular, just this notion of maybe having tiered pricing and going after new monetization strategies. Just any thoughts to share on potential new pricing or packaging strategies?

So Derrick, for us, this is about a long-term perspective. We are very excited to have Jeff on board because he has experience with the scale we are reaching as we continue to grow as a company. We're also catering to more large and complex customers with over $1 million in ACV footprints. There’s an opportunity to introduce new products and innovations. While we don’t have any specific changes in pricing models or new packages to announce right now, it’s something we’re considering. As we invest in R&D, we're evaluating the best ways to package and price these innovations, and that’s what Jeff will focus on in the coming years.

Yes, yes. So I think our view is that for the second half of the year, we think that the customer demand, the pipeline, and the win rates, all of those things, we expect to remain strong because of this trend, digital transformation in the world of physical operations. We don't think that's going away. And again, this is a solution that plays really well in this type of environment where we can help customers directly reduce their operating costs. We also do expect that the macro headwinds, broader uncertainty are going to continue, the elongated sales cycles. We expect that, that will continue as there's kind of economic uncertainty. I think the way that we view it, though, is like while we can't control the broader macro impact, we are really using this as an opportunity to drive even more profitability. And so that is something that is really within our control. And we'll balance the way that we kind of spend money based on what we're seeing on the top line. We were able to raise our operating margin, our free cash flow margin for the rest of the year, and we're continuing to look for ways to find other efficiencies within our business.

This is actually Peter Burkly on for Kirk. So obviously, you're getting a lot of questions about the macro. So kind of just following along that train of thought. Intuitively, it would make sense that the telematics piece of the business would sort of hold up better given companies are looking for ways to rein in their spending. And so having the ability to make more informed decisions regarding fuel efficiency and the like would be helpful. So just curious, is that a fair characterization? And if not, is there anything that you guys would call out as it relates to strength in any other products specifically?

So Peter, this is Sanjit. It's interesting. I was just on a customer tour where Jeff and I visited probably 8 or 10 customers in a pretty short time span. And there was a lot of interest not just for telematics but also our safety products. Turns out people get into accidents regardless of the interest rate. And so they are thinking about how do they manage those insurance payout costs. That's a very real business problem for them. We talked about some of the value proposition of connected equipment, getting better asset visibility. So I would say it's really all of these pillars are working in favor. And we're seeing that as we land new customers, they're landing as multiproduct transactions. So we hear from our customers. They are investing in that platform and digitization across their operations, not just specifically telematics. And that's exactly what we're building towards.

Okay. Great. That's helpful color, Sanjit. appreciate that. If I could sneak in one more maybe. You guys obviously have a pretty impressive growth trajectory. But again, just curious, given the dynamics in the macro today, how you're sort of thinking about that ramp to profitability. Just wondering if there's any levers in particular that you'd call out. Or is it more kind of on the flip side still, sort of full steam ahead from your guys' perspective in terms of just investing for growth?

No, it's definitely the former. This has become a big priority for us internally. We have several projects in progress to really speed up our timeline to breakeven. Our operating margin has improved by more than 50% year-over-year, with over 20 percentage points of improvement in free cash flow. It is a significant focus for us. We expect to see continued leverage year-over-year, and we're dedicated to progressing towards breakeven.

My first question, I was curious, which verticals are you seeing particular strength in right now? And where might there be possible weaknesses?

Ella, this is Sanjit. Generally, we are experiencing strong demand across various industry segments, and I wouldn't pinpoint a specific vertical. We've discussed some themes beyond digitization, and different dynamics are influencing each of the markets we operate in. Labor shortages seem to be a common issue across the board. However, Dominic, do you have any additional insights on this?

Yes. I mean, I think just digitizing the world of physical operations like moves across all of these segments. Every industry right now is looking for ways to improve efficiency, to lower cost, regardless of industry, and that's really what we're building towards and what we're selling into. And so we're seeing really strong customer demand across all verticals.

Can you hear me okay?

Yes, I can hear you, Kash. Great.

There has been a significant improvement in our operating margin and progress in free cash flow. Given that you haven't encountered major challenges in your business, it seems that the value of your product is quite substantial. I'm curious if you've considered the possibility of raising prices and whether the market could absorb that increase, which would obviously benefit profitability. Additionally, regarding your input costs, at what point does the supply and inventory situation normalize? We are hearing that inventories are starting to build up at lower costs. At what stage would that be reflected back to you, particularly if you're considering raising prices, while your input costs might also decrease? Where do we stand on that? Or is that too optimistic?

Sure. So Kash, I'll start and maybe Dominic can add on. In general, we do look at pricing and strategy every year or so, and that's something that's just been built into the company. As we continue to invest in R&D, you will see us introduce new packages for customers. And we're thinking about different pricing strategies as we go and penetrate the market. We don't have any specific changes that are being announced today. But that is something that's on our mind, and it's something we've always thought about. I don't know, Dominic, if you want to cover input costs.

Maybe on the second one on the input costs. I think the supply chain availability is improving somewhat. You're starting to see again free cash flow margin converge back into operating margin. And again, we expect that to continue in the second half of the year as the supply chain continues to improve. But that is why, I think, we're trying to point investors and analysts to look at non-GAAP operating margin as kind of the leading indicator of where we expect profitability to be because in the longer term, we do expect free cash flow and operating margin to converge. And so that's kind of the leading indicator of where we expect things to be.

And just if I can tack on one more thing. I'm just incredibly proud of how well the team worked together to ensure that we have supply and maintain our gross margins. We've been able to maintain the gross margin profile in the low 70s in spite of all these supply chain issues and fulfill our customer demand. So that's not been an easy task. A lot of creativity required behind the scenes, but I think we manage well through it.

Thanks, Kash. This concludes the question-and-answer portion. Thank you all for attending our Q2 fiscal year 2023 earnings call. Before I let you go, I have a short announcement for upcoming conferences. We will be participating in the Wolfe TMT Conference on September 7 and the Evercore Technology Conference on September 7 and the Goldman Sachs Communacopia Technology Conference on September 13. We look forward to seeing you at one of these events in person. That's it for today's meeting. If you have any follow-up questions, you can e-mail us directly at ir@samsara.com. Thanks again. Bye, everyone.