monday.com Ltd. Q3 FY2022 Earnings Call

Good day. My name is Alex and I'll be your conference operator today. At this time, I would like to welcome everyone to monday.com's Third Quarter Fiscal Year 2022 Earnings Conference Call. I would now like to turn the call over to monday.com's Director of Investor Relations, Mr. Byron Stephen. Please go ahead.

Good day, everyone and thank you for joining us on today's conference call to discuss the financial results for monday.com's third quarter fiscal year 2022. Joining me today are Roy Mann and Eran Zinman, co-CEOs of monday.com and Eliran Glazer, monday.com's CFO. We released our results for the third quarter fiscal year 2022 earlier today. You can find our quarterly shareholder letter along with our investor presentation and a replay of today's webcast under the News and Events section of our IR Website at ir.monday.com. Certain statements made on the call today will be forward-looking statements, which reflect management's best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and the earnings presentation for today's call, which are posted on our Investor Relations Website. With that, let me now turn the call over to Roy.

Thanks, Byron. Good day, everyone and welcome to our third quarter earnings call. We are pleased to say that Q3 was another terrific quarter for monday.com. We posted strong growth with enterprise customers, saw continued momentum in our new Work OS product suite with monday CRM exceeding expectations, scaled our global workforce and operations, and did it all while generating positive adjusted free cash flow. We ended the quarter with revenue of $136.9 million, reflecting growth of 65% year-over-year on a reported basis or 68% on an FX adjusted basis, adjusted free cash flow of $14 million representing a 10% adjusted free cash flow margin. We are closely monitoring uncertainties in the macro environment and the impact it's having on our customer and our business. We currently see two primary headwinds. First, we continue to see pockets of stress in our customer base, in particular in Europe with some indication of softness spreading to other regions. Second, since we have a large presence of business outside the U.S., the strong U.S. dollar has negatively impacted reported results and represents an FX headwind to revenue growth. Despite these uncertainties, new customer demand remains solid and acquisition efficiency improved in Q3. While others are pulling back, we continue to see opportunities and invest for growth and gain market share. With our in-house business intelligence tools, BigBrain we track every marketing campaign in detail allowing us to easily adapt to changes in the business environment. Let me now turn it over to Eran to walk you through our Q3 product highlights.

Thank you, Roy. As Roy mentioned, our strong growth this quarter continues to be led by enterprise customers, with our enterprise base growing 116% year-over-year in Q3. We achieved this by delivering several key updates that are tailored to the needs of larger customers. We continue to invest heavily in the overall performance of the Work OS platform adding more enterprise features and functionality and building our direct sales organization in order to lend larger and expand more with enterprise customers. Most notably this quarter we enhanced board load times by 25%, improved our mobile experience to achieve an amazing 99.8% crash-free rate, and significantly improved our strategic integrations with both Salesforce and Jira to make them as seamless as possible. As a result, as of Q3, customers with 10 plus users now represent 76% of ARR, up from 70% a year ago. Customers with more than $50,000 in ARR now represent 26% of ARR, up from 18% a year ago. We intend to provide these two metrics on a quarterly basis going forward. Next, I would like to highlight the continued success of our Work OS product suite, which represents a huge opportunity for monday.com. In just five months since their launch, we've seen over 3,000 new customers adopt at least one of the new Work OS products. We are extremely encouraged by the adoption that we're seeing in these early stages, especially for monday sales CRM, which consists of over half of the new Work OS product signups. Monday sales CRM is already rated as one of the best CRMs in the market, according to G2, and we continue to focus on making it even better through advancements such as new layouts and new reporting widget types. As a reminder, these new Work OS products have only been made available to new customers and we are excited to roll the products out to our existing customer base in the near future. With that let me now turn it back over to Roy.

Thank you, Eran. Earlier this month over 97,000 registrants from over 174 countries came together for our annual online conference, Elevate. This exciting event offered customers training and product workshops on ways to make the most out of the Work OS, deep insights on how to boost efficiency and improve workflows, and inspiring talks from leading companies and fellow customers. We are also hosting additional invite-only events for industry leaders in New York City, London, and Sydney this month. We are extremely excited to meet many of our customers and partners in person in the coming weeks. At Elevate, we opted to plant one tree in honor of every registrant in place of sending physical gifts. Now we are taking this step further and we will plant 265,000 trees across four different forests in Southeast Africa over the next 18 months. This effort is a reflection of our ongoing commitment to making the planet sustainable, equitable, and safe. Finally, such strong consistent innovation and growth this quarter wouldn't be possible without our amazing team which grew this quarter to over 1,550 employees around the world. We continue to invest in our people with new offices in New York City, Chicago, Miami, and Tokyo. We believe these spaces will invite even more collaboration and community for our teams while providing the flexibility they need to be successful. These offices signify not only where we are right now but where we are going in the future. We are very proud of the growth we achieved this quarter and look forward to carrying this momentum into the end of the year. With that, I'll turn it over to Eliran to cover our financial and guidance.

Thank you, Roy and thank you to everyone for joining our call. Today, I'll review our third quarter results in detail and provide updated guidance for the fourth quarter and full year 2022. We continue to deliver strong growth driven by customers increasingly adopting the broader monday.com Work OS and our product suite across the organization. Total revenue came in at $136.9 million in the third quarter, up 65% year-over-year on an as-reported basis, and 68% on an FX adjusted basis. Additionally, we saw continued operating margin expansion during the quarter stemming from our platform-based lending expense strategy and operational efficiencies. Coming off historical highs, our net dollar retention rate or NDR declined slightly in the third quarter, negatively impacted by a strong U.S. dollar and our increasing ability to lend larger initial deals. NDR for customers with more than $50,000 in ARR was over 145%. NDR for customers with more than 10 users was over 135%, and our NDR for all customers was over 120%. As a reminder, our net dollar retention rate is a trailing four quarter weighted average calculation. For the remainder of the financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. We have provided reconciliation of GAAP to non GAAP financials in our earnings release. Third quarter growth margin was 89%. In the medium to long term, we continue to expect gross margin to remain in the high 80s range. Research and development expense was $26.3 million or 19% of revenue compared to 17% in the year ago quarter. We will continue to invest significantly in R&D throughout the remainder of the year as we build our product suite and scale our Work OS platform both horizontally and vertically. Sales and marketing expense was $82.4 million or 60% of revenue compared to 73% in the year ago quarter. We anticipate sales and marketing expense as a percentage of revenue to be in the mid to high 60s range in Q4. G&A expense was $15.2 million or 11% of revenue compared to 11% in a year ago quarter. Operating loss was $2.2 million and operating margin was negative 2%. Net income was $2.6 million. Diluted net income per share was $0.05 based on 50.3 million fully diluted shares outstanding. Total employee headcount was 1,552, an increase of 63 employees since last quarter. We continue to execute on our hiring playbook that we laid out at the beginning of the year with elevated hiring in the first half and a much slower rate in the second half. We anticipate the discounted level of hiring will be consistent moving forward. Moving on to the balance sheet and cash flow, we ended the quarter with $852.6 million in cash and cash equivalents. Net cash provided by operating activities was $20 million in the quarter. Adjusted free cash flow was $14 million, including approximately $7 million from financial income. Adjusted free cash flow margin was 10%. Adjusted free cash flow is defined as net cash from operating activities less cash used for property and equipment and capitalized software costs excluding nonrecurring items. Now let's turn to our updated outlook for fiscal year 2022. For the fourth quarter of fiscal year 2022, we expect our revenue to be in the range of $140 million to $142 million representing growth of 47% to 49% year-over-year. We expect a non-GAAP operating loss of $22 million to $20 million. For the full year 2022 we now expect as-reported revenue to be in the range of $509 million to $511 million representing growth of 65% to 66% year-over-year. We now expect the full year non-GAAP operating loss of $83 million to $81 million and the negative operating margin of approximately 16%. With the recent strengthening of the U.S. dollar, we estimate that at the current spot rate FX will negatively impact our full year revenue growth estimates by approximately 300 basis points. Given the concerns about the macro economy and the market, we have provided what we believe to be achievable forward-looking guidance. Please note that we will be introducing guidance for the full year 2023 in our fourth quarter earnings. In sum, we remain committed to balancing healthy growth in the business while also staying disciplined on improving efficiency and profitability. We have had an abundance of great opportunities ahead and will continue to make decisions with the longer-term view. I'll now turn it over to the operator for your questions.

Thank you. Our first question for today comes from Steve Enders of Citi. Steve, your line is now open.

Hi, great. Thanks for taking the question. I just wanted to dig in a little bit more into some of the outlook that you're seeing out there and particularly what you're seeing on the billing side. Have there been any changes in customer dynamics either with the FX impact that came in the quarter or anything around the SMB or enterprise segments that you're seeing out there with customers?

Yeah, sure. Hi, Steve. This is Eran. So first of all, one important thing to start with, overall our underlying fundamentals are very strong. We continue to see very strong enterprise growth, NDR remains very high and stable, and we can see the early adoption of our new Work OS product. As we mentioned also in the previous quarter, we continue to see the same FX headwinds that we had and have an impact on our revenue growth and also NDR. And as we mentioned as well, we see some softness in Europe that also continued into Q3. One thing to mention in addition is that in September and October we started to see some indication that the softness is kind of spreading a bit more globally. So definitely we can see that as well. But from another perspective in terms of performance marketing, we continue to heavily invest and acquire new customers. I would say that it has become more efficient for us to acquire new customers due to lower bids in the market, and definitely it's an opportunity for us to gain a larger market share. And also our free to pay conversion overall signs remains very stable. So taking all of that into account, all the fundamentals remain very strong and we continue to gain momentum in the market.

Okay. Now that's helpful. It's great to hear. I guess just again on the kind of the profitability upside in the quarter, can you dig in a little bit more about what were the drivers there? Were there any delays in spending that you have that maybe you shifted some things into Q4 or maybe some changes in kind of hiring expectations? Can you just kind of dig in what really drove the upside here?

Hello, Steve it is Eliran. So first of all, welcome to the conference meeting for the first time. We're operating in accordance with our playbook, web system called BigBrain that is measuring everything that we do. And going back to what Eran said, our performance marketing and marketing spend overall is lower than anticipated because cost per sign up went down therefore we benefit from these efficiencies. Obviously, we beat the top line by $6 million and this impacted our discretionary spending. If there are not necessarily things to do, events or travel, then obviously we are more cautious with the level of spend. So all of these together combined with the way we manage the business from efficiency perspective drove the great margins that we saw in this quarter.

Okay, perfect. Appreciate the color. Thanks for taking the questions.

Thank you. Our next question comes from Pinjalim Bora from J.P. Morgan. Your line is now open. Please go ahead.

Hello, thank you for the question and congratulations on the quarter. I would like to ask about the Work OS products, as the results seem impressive. Can you provide insight into the pricing for these new products? It appears that CRM is performing well; what about the other three products, and how should we assess their contribution this year?

Yeah Pinjalim, thanks for the question. This is Eran. So definitely we're very happy and excited by the results we've seen so far with the new Work OS products. I would say all of them are successful, but CRM definitely stands out as being the most dominant one. We mentioned that over 50% of new customers that are buying those new Work OS products are actually buying the CRM product. And just to mention that all those new customers are basically new paying customers. So we just opened up as of now just for new customers; we haven't started with existing ones yet. All those products have different price points and definitely that's another upside that we're taking into account. We didn't put that into the model yet because it's still early days and small numbers, but definitely the momentum that we're seeing and the growth is very encouraging and promising for the future, and that's part of the reason why we're so excited about this.

Understood. One question for Eliran on billings. When we look at the sequential billings growth it seems a little bit muted. I was wondering if you can tease out the FX impact on billings or if you're seeing any kind of change in invoicing duration and how should we think about billings going forward? Do you think it would lag revenue in the near term?

Sure. So, when we speak about calculated billings, we mentioned this is not the best measurement of our business. We believe revenue growth, customer growth, and NDR are the best indicators of the health of the business. Calculated billings were definitely impacted by the FX. If you think about the fact that 30% of our ARR is in currencies that are not U.S. dollars, namely 10% Euro, about 5% British pounds, and other currencies definitely it has an impact on the calculated billings overall.

Okay, thank you.

Thank you. Our next question comes from Brent Bracelin from Piper Sandler. Brent, your line is now open.

Good morning and great to see the momentum of the business and return to positive free cash flow. I want to double click into the CRM product, what's resonating with customers here on the product? Is the profile of new customers changing? Is it a larger customer willing to spend more from a user perspective, is it a smaller customer? Any color you could provide around the type of customer and what's resonating with that type of customer for the new CRM product would be great? Thanks.

Hi, this is Roy. We have entered a new market and are attracting a new type of customer. We notice that these customers are comparing us to products from other companies that we weren't compared to before. As Eran mentioned, the customers joining us are completely new, not existing ones. They start with different expectations and needs, which is very encouraging as it shows that monday is a versatile platform with a variety of products. The CRM requirements differ significantly from those of our existing customers. One major advantage we see is that customers appreciate the customizability of monday's CRM, allowing them to customize it fully without limitations. This provides us with a substantial competitive edge in relation to other platforms they are considering. I hope this addresses your question.

Helpful color there, for sure. And then I guess Eliran, if you just think about sales and marketing efficiency, pretty dramatic improvement in just a two or three-quarter period here. Can we just double click into kind of the drivers of it? Was there an element of lower CPM pricing that's helping here? Just walk through how you were able to drive such impressive improvement in sales and marketing efficiency? Thanks.

Hey, Brent. So in prior quarters and I think throughout the time that we gave the earnings calls, we are operating in accordance with our playbook. And we said that we have the ability due to BigBrain and efficiency metrics that we're operating. We have the ability to measure and optimize our marketing spend. So what happened in the last few days is that because the market environment has become more challenging across the board, the cost per click or the cost per sign-up is much lower today. Therefore, we are benefiting from that as we mentioned in the beginning of the call. We have the ability to measure every campaign and competitor that we engage with to evaluate the return. Therefore, we were able to relatively quickly adjust the spend. In addition, in H2, we also said that we are going to be more prudent on hiring and look at other discretionary costs that relate to marketing. So altogether, this helped us to reduce the cost of marketing and sales.

Great to see. Appreciate the color. Thank you.

Thank you. Our next question comes from Jackson Ader from SVB Securities. Jackson, your line is now open.

Great. Good morning. Thanks for taking our questions, guys. The first one actually, if we can just follow up on that comment on hiring. You've been rolling out a few more offices in the U.S. and I'm just curious what you're seeing in the labor market, whether it's a little bit maybe easier to hire some of the talent that you're looking for these days than it was say six or twelve months ago?

Hi Jackson, it is Eliran. Yeah, we don't see much of a change. Obviously, now when companies are having some reductions in force, it's easier to hire people but I don't want to tell you that this is a dramatic move, because I think the good people are still tied up with their companies. So overall, I would say it is a slightly easier environment, but not dramatically changed.

Okay, alright, that makes sense. And then the follow up is on the European market. You kind of called out the struggles there. But I'm curious whether you're seeing any competitive impacts just in terms of a tough environment, maybe seeing some of the younger, smaller startups retreat from the European market as it looks like it's going to be a tougher environment in the coming months?

Hey Jackson, this is Roy. So yeah, we definitely see less competition and it's easier for us compared to others because of the stability of the platform, and the fact that we are still out there, actively pushing the product. So all in all, for us because of the stability of the company and the platform, we see it as a positive. I can add that a lot of times we were always like, as Eliran said, with our playbook while other companies spend way more, offering different discounts and such, and we don't see that anymore. So you can say that it's now easier for us to gain more market share.

Okay, alright. Thank you very much.

Thank you. Our next question comes from Ittai Kidron from Oppenheimer. Your line is now open, please go ahead.

Thanks for the positive results. Eliran, in your prepared remarks, you mentioned the drop in the dollar retention rate and attributed it to initial lands growing larger. Could you provide more details on what constitutes an initial land at this point and how it has evolved over the last year?

As a reminder, our retention rate is the highest in the industry. Over time, we expect to see a range for our customers with $50,000 in ARR between 145% and 150%. For customers with more than 10 users, we anticipate remaining around 135%, and for all customers, the range will be between 120% and 125%. It's important to note that 30% of our ARR comes from customers paying in various currencies, which affects our starting and ending points and has impacted the overall retention rate slightly. Additionally, in Europe, some customers are delaying decisions about expanding their usage of our products due to the macroeconomic environment. The combination of these factors is influencing our overall retention rate. While we do not expect any significant changes, this is the range we are comfortable with.

Okay, and then can you talk about the competitive landscape? Has anything changed in the past quarter and maybe you could tie it into churn; has anything in churn changed? Thank you.

Thank you, this is Eran. I'll begin with the second part of your questions. We haven't observed any significant churn or downgrades, which I believe reflects the stability of our existing customer base, aside from foreign exchange fluctuations. As for usage, there have been no notable changes. Overall, could you please remind me of the first part of your question?

The competitive landscape, anything on that front, any changes?

Yeah, I appreciate that. So in terms of marketing, we see that we're able to grab a larger market share. Some of the other competitors are reducing their marketing spend, which has allowed us to grab a larger percentage. This translates into the actual deals. Of the deals that we do see competition, which is only 30%, we still see 70% without any competition. Of the 30% that we do, we see fewer competitors and also some of the competitors that were very aggressive in terms of discounts have become less aggressive. So definitely, we see momentum here where we're able to win more deals with fewer competitors.

Got it, cool, thank you.

Thank you. Our next question comes from DJ Hynes of Canaccord. Your line is now open, please go ahead.

Hey, good morning, guys. Congrats on the nice results. So at the Elevate event, you guys spent some time talking about infrastructure upgrades that should improve scalability. I'm wondering if you could just unpack that a bit, like what were the big changes, what should that enable you to do, or any color on that front would be helpful?

Yeah, thanks for the question, DJ, this is Eran. So yeah, definitely this is something that I've worked really hard on within the last six months and we continue to heavily invest in. I think part of our scale as a company we attracted larger customers. Our existing customers are really scaling their operations on monday. Part of it presents some challenges in terms of handling large data sets, improving performance, and keeping improving on what they are using. So definitely it's a very positive trend that we're seeing but at the same time we need to constantly improve performance and scalability. So definitely something we're putting a lot of focus on.

My apologies we are having some audio issues. Please hold as I find a solution. Can you hear us? Thank you for your patience. We have reestablished connection with the speaker team. DJ, if you could just repeat your question. Your line is now open. Hi DJ, your line is now open. Please go ahead.

Hey guys, can you hear me now?

Oh, yeah, we can hear you. Thank you.

Awesome. Alright. So I think Eran you were talking about some of the infrastructure upgrades, kind of the improved scalability, what the big changes were, what that enabled you to do, any color along those lines would be helpful?

Yeah, thanks, DJ. Hopefully, you can hear me fine now. So as I've said, what changed was that our customers grew larger into our operation with monday scale and their usage data sets, and as part of that we also need to scale our own infrastructure because we want to deliver an optimal experience for our customers. So definitely, we put in a lot of efforts over there. We see our customers using monday more and more over time, which is very encouraging. But we wanted to have a seamless experience doing that without suffering from any performance or scalability issues. So we've done a lot of changes and improvements, and we're committed to continue that in the upcoming quarters.

Got it. And then maybe a follow-up Eliran, just on the sales and marketing line, can you remind me how much of that line item is people-based versus maybe more discretionary spend that you can flex up and down and on the latter kind of what's the strategy in the current environment?

Hey DJ, sure. Around 30% to 35% is performance marketing, and about 65% is payroll and related for sales, customer success, partners, headcount and related. So all in all, if we would like to adjust sales and marketing costs, we would relatively adjust the performance marketing and therefore we are able to do quick wins if needed based on our efficiency metrics.

Yeah, perfect. Thank you guys.

Thank you.

Thank you. Our next question comes from Derrick Wood of Cowen & Company. Derrick, your line is now open. Please go ahead.

Hey guys. Thanks, it is Andrew on for Derrick. Just one for me actually, when are you planning to open up the suite to existing customers? And can that be an incremental growth lever early next year? Thanks.

Yeah, thanks for the question. This is Eran. So we're definitely going to do that in the upcoming future. But right now we're focused on continuing to iterate on the product and improving it. We get a lot of interest from existing customers about the new products. And once we feel they're mature enough, we'll definitely open them up for our existing customers. We see a great opportunity for a cross-sell and upsell for existing customers. Many of them are using templates already. So there's a lot of upside baked into that opportunity. But we want to do it in a proper way. As I mentioned, we have already seen great momentum from new customers so we keep improving and iterating on those products.

Right, thanks. Congrats on the quarter.

Thank you. Our next question comes from Fred Lee of Credit Suisse. Fred, your line is now open.

Hi, very nice quarter, particularly the enterprise customer adds and margin improvement. You've already touched on parts of this but I was wondering if you could talk more deeply about your how your go-to-market strategy is changing as companies are going to cut costs? And also how is the focus of the conversation changing at your larger customers? Thank you.

Yeah, so the first part of the question regarding cost-cutting, a lot of companies, as you mentioned, are now going through their SaaS stack or reevaluating the tools that they're using. For us, we mentioned this in the previous quarter, and definitely we see this trend increasing. This presents a great opportunity. A lot of companies are looking into consolidation of tools that they're using. monday is really built from the bottom up for that purpose because every customer uses monday for many use cases. Some of them are reevaluating the tools they're using and thinking about moving their operation to monday; some of them already did. We also did an operation within the company where we guided our entire customer success team and sales team to offer this proactively for our new customers. We also see success momentum there. It's hard to tell how much this will scale over time, but definitely we've seen customers doing that. And monday, as I mentioned, is a great platform to do that. So there's definitely an opportunity there.

And hi, it is Roy. I would add that on the churn side, we see a lot of stability within our customer base. So we talked about the platform and how it benefits many of our customers.

And I think we missed your second part of the question, Fred, if you can repeat that?

Sure. The second part was just how the focus of conversations is changing at your larger customers, if at all? Thank you.

Yeah, hi, it's Roy. So it's definitely a different conversation in terms of the length it takes to close a deal, the number of people involved and those kinds of things are happening now. I think for a lot of companies around the world, there are a lot of shifts happening. We see that definitely as something that companies are looking into and changing how they acquire new tools.

Thank you very much.

Thank you. Our next question comes from Andrew DeGasperi from Berenberg. Andrew, your line is now open.

Thanks for fitting me in. I guess my first question and a follow-up to DJ's earlier on performance marketing versus sales headcount. I was just wondering the 35% number; what has it typically been historically, and I guess how should we expect it going forward? Would it be at this level or do you think it will ramp up?

Hey Andrew, it is Eliran. So historically if you look at monday, five years ago, it was around 80% to 90% performance marketing, but over time, we introduced a sales-led organization that included salespeople, partners, customer success managers, and obviously the marketplace. Over time, I think we care a lot about performance marketing. It generates leads, gets us new audiences, and brings healthy traffic. If we continue to operate in accordance with our playbook, I would say that 30% will continue as the average. It can fluctuate between 25% to 35%, depending on efficiency criteria. In addition to that, we'll continue to invest in bringing headcount for our enterprise accounts, mid-tier and SMB.

That's helpful. And then in terms of your referral partners, I saw that jumped sequentially. I just wondered, are you doing anything different there? Should we expect that continued momentum?

Yeah, so we do invest in our partner ecosystem that is definitely growing and expanding. I would say departments are a little bit more affected by the headwinds that we see in Europe, as most of them are not based in the U.S. So our partner region is of course affected. But for us, as we mentioned, it’s a strategic part of growing our business. It's a great way to enter markets and territories. We will continue to scale and grow there. Also not just with referrals, but with larger more strategic partners that we partner with over time. So for us, it's a great opportunity to expand our markets and audience across the globe, and we will continue to invest in that.

That's helpful. Thank you.

Thank you. Our next question comes from Scott Berg of Needham. Scott, your line is now open.

Hi everyone, congrats on the great quarter. And thanks for taking my questions. I guess I had two quick questions here. The first one, how are your top of funnel activities today in the current macro versus maybe what you saw three months ago to start Q3 or even six months ago to start Q2?

Hi, Scott, it is Roy. So you broke up for a second; like you were talking about the customer funnel?

Yeah, just a type of customer funnel activities in terms of maybe the size or complexity today versus the last two quarters?

Yeah, so like we mentioned, it's very healthy. We still see the same volume and we keep with our efficiency metrics; we gain market share by adding more customers. The sales cycles have been longer in that respect but we see a lot of quality customers, still strong demand for the platform across the board. It is very stable.

Maybe, Scott, this is Eran. Already, you can see in our shareholder letter we attached the graph that shows the growth in new accounts and also shows the performance marketing. Our top funnel remains stable even though we are managing to spend less in order to acquire those customers. It's important for us to convey that we are achieving greater efficiency in acquiring a fair amount of customers.

Great, the last question for me is your enterprise growth was very strong again in the quarter. How much of that growth is coming from new initial lands versus expansions from those types of customers today? And how do you expect that to trend over the next couple of quarters as a result?

Hi Scott, it is Eliran again. I think it's both; we're lending with the new products that we have, the CRM and multiple use cases that are being part of our platform. So we landed customers, so it's a combination of both new customers and the expansion of existing customers.

Great, thanks for taking my questions.

Thank you. Our next question comes from Jason Celino of KeyBanc Capital Markets. Jason, your line is now open.

Great, thanks for fitting me in. Really great results here. When you mentioned in a prior response, September and October, you started to see some softness spread. It looks like you're managing through this quite well, but to what magnitude can you clarify, and is it more SMB or if any regions are worth calling out? Thanks.

Yeah, Jason, this is Eran. Yes. So as we mentioned about the headwinds and all this that we saw in Europe, I wouldn’t say it has any significant impact on one particular group, neither SMB nor larger enterprise. I would say it's across the board. But definitely, enterprise customers are a bit more stable or not seeing any kind of more major impact compared to SMBs. But overall, we're very diverse in terms of our customer base; many industries as a reminder, only 30% of our customers are tech companies, while 70% are non-tech. We have over 200 different business verticals. But all in all, given our existing customer base, we don't see any kind of major group that's been affected more than any other group.

Great, thanks.

Thank you. Our next question comes from Robert Simmons of D.A. Davidson. Robert, your line is now open.

Yeah, thanks for taking the question. So I was looking at the marketplace, you now have 100 ASIC apps there, and I think about 20% are monetized. I guess, what's a reasonable expectation for the boost in revenue you are going to see from that next year? Are we getting closer to 1% or could it be more meaningful than that?

We are not basing our models for next year on marketplace revenue. It's a recent development, and while we see strong momentum and interest from developers, we did not incorporate the marketplace into our projections for next year. We are optimistic about the future of our platform as an open space for third-party developers to create innovative solutions.

Got it. Okay. And then the decline of net retention, how much of that is purely from FX and how much is it from other factors like longer and slower sales cycles?

So hi, Robert, it is Eliran. I would say 2% to 3% by and large is coming from FX and the rest is the macroeconomic environment. I would also add the increasing deal size initially, like as we ramp up the sales team, and we got better, the initial deal size grew. They started with self-serve motion; they started very small, and so then they ended somewhere. As the brand grew and customer demand grew, they want initial deal sizes that are bigger, and that also has an effect on NDR.

Thank you. Our next question comes from a Shebly Seyrafi from FBN Securities. Your line is now open.

Yes, thank you very much. So I noticed that your headcount growth slowed to like 53 from over 200 the past two quarters. I want to know whether there has been a deliberate decision to slow down headcount growth? And separately or related maybe, if your expense growth for Q4 seems to, relative to your guidance, imply an acceleration in year-over-year growth versus Q3 and it seems to me that your R&D line is going to accelerate. Is that true and if so, why is it accelerating so much?

Hi Shebly, it's Eliran. Welcome aboard. Regarding your first question, we previously stated that we planned to hire most of our staff in the first half of the year, accepting higher expenses, as we believe this would drive revenue growth into 2022 and beyond. We also indicated a more cautious hiring approach in the second half of the year. We are still hiring in critical areas for our innovation and research and development, which increased from 17% to 19% of revenue. Our focus will remain on generating revenue through our hiring efforts. As for your second question, I wasn't sure if you were asking about accelerating top-line growth, so I just wanted to clarify that.

No, I am getting in my model that your R&D expense growth is going to be something like 100% in Q4 versus 84% in Q3, is that right? Is directionally that correct, and if so, why are you going to be accelerating your R&D expense growth?

R&D, so I think if I understood you, we continue to invest as I mentioned in R&D. Bear in mind that there is also most of the hiring of R&D is in Israel. So there is the FX impact which also impacts our results. But it is a bulk of significant part of our costs. To clarify, I believe this will cover your question.

Okay, thank you.

Thank you. Our next question comes from Jake Roberge from William Blair. Jake, your line is now open.

Hey, thanks for taking my questions and congrats on the quarter. Following up on the product side solutions; it's great to see the strong adoption here and appreciate the color on CRM. But once you open those solutions to the existing base, how do you think that monetization path will work since a number of those customers may already be using some type of CRM template that you released a year or two ago?

Yeah, Jake, thanks for the question. This is Eran. So the new product that we released provides much more value than a template. Basically, what we've done regarding those products is to go very deep feature-wise in each of those products. We added a lot of functionality, much of which is proprietary to CRM or developer tools. So it's not just templates or boards or dashboards packaged for that purpose, but a lot of R&D effort has gone into that. New customers are getting a lot of value from that and I'm sure that already existing customers will too. Part of that is that we will help them; for those who want to move, we’ll build migration tools that will help them try the new products. Given our existing products, we see a lot of potential there.

Great. That's really helpful. And then it seems like growth in the partner channel is really starting to accelerate for both referral partners and the apps marketplace. Are there any specific product type solutions that you've seen partners prioritize in the sales process or really build more tailored solutions on top of the platform?

Yeah, this is Eran again. Apart from extending our global workforce in terms of offering more opportunities for sales of our products worldwide, our partners also offer the ability to customers to customize their product, help them onboard, help them build more workflows and processes. So they add a lot of value, and definitely that also drives the growth in each of those territories. We're continuing to invest heavily into those partners, and over time I think it will continue to grow.

Great. Thanks for taking my questions and congrats on a great quarter.

Thank you. Our final question for today comes from Brent Thill of Jeffries. Brent, your line is now open.

Thanks. Just a question on some of your deployments. I think in the past you've talked about one of your larger customers pushing over 7,000 seats. Are you starting to see the 10,000 plus seat deals open up, or is that 7,000 seats still the largest deployment you have right now?

Yeah. This is Eran. So definitely over time we're increasing the average enterprise deal size. Up until a year ago it was around 2,000 seats; we increased it to 5,000. That means that we're able to close those deals quicker and quicker. We continue to improve the product as the offers do scale the operation, and we expect this number to increase. We see this more as a way for us to create an organic sales motion within our sales team as opposed to a specific customer that we had before in terms of landing a very large deal.

Thank you. We have no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect.