monday.com Ltd. Q4 FY2023 Earnings Call

Hello, everyone, and thank you for joining us on today's conference call to discuss the financial results for monday.com's fourth quarter and fiscal year 2023. 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 fourth quarter and fiscal year 2023 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.

Thank you, Byron, and thank you, everyone, for joining us today. As we reflect on our recent Elevate World Tour, including our first-ever Investor Day, we are filled with an incredible sense of energy and purpose as we embark on 2024. The events were a resounding success, bringing together customers, analysts and investors from around the world. Our Elevate World Tour provided us with an opportunity to connect with our users, demo our latest AI and CRM product advancements, and gather valuable feedback. The enthusiasm and engagement displayed in our attendance were truly inspiring, reaffirming our commitment to delivering innovative products that empower teams to achieve their full potential. Furthermore, the addition of our first-ever Investor Day was a significant milestone. It allowed us to showcase our progress, present our vision for the future, and highlight our expected financial performance in the coming years. The positive response we received from the investment community fuels our motivation and drives us to reach new heights in the years ahead. Now, turning to our business results for the year. 2023 was a year of incredible growth and progress at monday.com. Despite the prevailing global economic and geopolitical uncertainties, we exceeded all expectations. Revenue for fiscal year 2023 grew a remarkable 41%, driven by strong customer acquisition and expansion, especially with our larger accounts. In addition to a strong top line, we continue to see improving efficiency and reported record annual non-GAAP operating margin and free cash flow. Our commitment to innovation played a key role in the success of 2023. Over the past year, we launched new capabilities and delivered hundreds of new features, including mondayAI and monday.com workflows. We also elevated our mobile experience and enhanced our security, data protection and permission settings. Let me now turn it over to Eran to walk you through some additional product highlights.

Thank you, Roy. In 2023, we upgraded our infrastructure with mondayDB, which boosted board performance by 5x. mondayDB continues to exceed expectations and remains on schedule. We are now entering phase 2.0 with a focus on the most complex work scenarios, allowing customers to build and manage workflows at scale without being limited by performance constraints. This quarter, we're excited to announce the launch of monday code. Monday code provides a secure, serverless environment within the Work OS platform where developers can host and run apps with monday's security and compliance standards built in. With monday code, developers can now avoid the heavy lifting associated with setting up and managing production servers and more easily create apps for our marketplace. Let me now turn to pricing. Following several months of extensive testing, we recently introduced an updated pricing model ahead of schedule. As part of the rollout, we notified our customers that we'll be updating these prices across our product suite. Our customers are at the heart of everything we do and we've heavily invested in providing the best-in-class Work OS platforms and products. We believe that our products have evolved to provide even greater benefits and meet the ever-changing needs of our end customers. The updated pricing model reflects the value and quality that our products deliver, ensuring that our customers receive the best possible return on their investment. As we enter 2024, we are more energized than ever to continue innovating and pushing the boundaries of what is possible. Our focus remains on enhancing our Work OS platform and product suite, expanding our enterprise presence and delivering unparalleled value to our customers. Looking ahead, we are well positioned to build our achievements and continue our upward trajectory. With a strong customer base, a focus on innovation, and a resilient business model, monday.com is poised for sustained growth and success in the coming years. With that, I'll now turn over to Eliran to cover our financial and guidance.

Thank you, Eran, and thank you to everyone for joining our call. Today, I'll review our fourth quarter and fiscal 2023 results in detail and provide initial 2024 guidance. As Roy highlighted, Q4 '23 was a strong finish to an exceptional year. Total revenue in Q4 '23 came in at $202.6 million, up 35% from a year ago quarter. Revenue for fiscal year '23 was $729.7 million, up 41% from the prior year. Our overall net dollar retention rate declined slightly in Q4 '23 to 110%, reflecting continued macroeconomic headwinds. We currently anticipate reported NDR to begin to recover in the second half of fiscal year '24. As a reminder, our net dollar retention rate is a trailing four-quarter weighted average calculation. As Eran mentioned, we have recently revised our lease prices to accurately reflect the enhanced value of our Work Operating System platform and product suite for our customers. We expect that this price adjustment will contribute an estimate of $15 million to $20 million of revenue in fiscal year '24. For the remainder of the financial metrics disclosed, unless otherwise noted, I will be referencing non-GAAP financial measures. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Fourth quarter gross margin was 90%. In the medium to long term, we continue to expect gross margin to remain in the high 80s range. Research and development expense was $33.3 million in Q4 '23, or 16% of revenue in line with the year-ago quarter, and $117.8 million in fiscal year '23, or 16% of revenue, down from 18% in the prior year. We plan to increase investment in R&D for the foreseeable future as we build out our product suite and scale our work operating system platform both horizontally and vertically. Sales and marketing expense was $110 million in Q4 '23, or 54% of revenue, in line with the year-ago quarter, and $413 million in fiscal year '23, or 57% of revenue compared to 69% in the prior year. G&A expense was $17.3 million in Q4 '23, or 9% of revenue compared to 10% in the year-ago quarter, and $63 million in fiscal year '23, or 9% of revenue compared to 11% in the prior year. Net income was $33.7 million in Q4 '23, up from $22.2 million in Q4 '22, and $94.9 million in fiscal year '23, up from a loss of $33.4 million in fiscal year '22. Diluted net income per share was $0.65 in Q4 '23 and $1.85 in fiscal year '23, based on $51.6 million and $51.2 million fully diluted shares outstanding, respectively. Total employee headcount was 1,854, an increase of 110 employees since Q3 '23. We expect to ramp hiring in fiscal year '24 with a continued focus on our R&D product and sales teams as we build out our platform and product suites. Moving on to the balance sheet and cash flow. We ended the quarter with $1.12 billion in cash and cash equivalents, up from $1.05 billion at the end of Q3 '23. In Q4 '23, free cash flow was $55.4 million and free cash flow margin, as defined as free cash flow as a percentage of revenue, was 27%. In fiscal year '23, free cash flow was $204.9 million and free cash flow margin was 28%. Free cash flow is defined as net cash from operating activities, less cash used for property and equipment, and capitalized software cost, excluding non-recurring items. Now let's turn to our outlook for fiscal year 2024. For the first quarter of fiscal year 2024, we expect our revenue to be in the range of $207 million to $211 million, representing growth of 28% to 30% year-over-year. We expect non-GAAP operating income of $8 million to $12 million and an operating margin of 4% to 6%. We expect free cash flow of $56 million to $60 million and free cash flow margin of 27% to 29%. For the full year 2024, we expect revenue to be in the range of $926 million to $932 million, representing growth of 27% to 28% year-over-year. We expect full-year non-GAAP operating income of $58 million to $64 million and an operating margin of 6% to 7%. We expect full-year free cash flow of $200 million to $206 million, and free cash flow margin of approximately 22%. I'll now turn it over to the operator for your questions.

Hi, guys. Thank you so much, Roy, Eran and Eliran for giving us all the details. Two quick ones. One is when you look at the growth algorithm. We talked about 27 points of growth. But I look at customers with 10-plus usage as a general proxy, that's grown about 20% and then you have net expansion rate 110%. So just that base logic alone should give you a pretty decent level of growth. And then, when I dig underneath the numbers, as everybody did, the 50k plus in our customers, it's growing faster, 56%, and 100k is growing even faster. So help us understand how you constructed the guidance in light of this queue in the metrics that suggest that the underlying business is healthier than the guidance seems to suggest. And also net expansion rates you said second half of '24, you expect an improvement. I'm wondering if you can add a little bit more commentary on what you saw in the quarter that gives you the confidence that you can see some improvement. Thank you so much once again.

Hi, Kash, it's Eliran. So thank you for the question. So with regards to our guidance philosophy, this has not materially changed. We're focused on providing always prudent, achievable and responsible guidance based on the latest data that we have. You know, we mentioned the price increase. So it's still early days, and it's going to be staged throughout the year. And then we would like to make sure that we understand what would be the impact throughout the year. With regard to the demand that we already took into account, nothing has changed much from what we saw in Q4 of last year. Still some headwinds in the macroeconomic environment and we assume this will continue also in Q1 and Q2. So this is with regard to guidance. With regards to your question on NDR, so, you know, when thinking about NDR, we are looking at the trailing 12 months as well as the weighted average just as a reminder. We report weighted average. So as I mentioned with regards to guidance, we are still seeing lingering macro headwinds, where customers are still cautious in their spend. We said that we expect it to stabilize in the second quarter of 2024. However, it's important to mention that overall growth retention has had even a small improvement. And, you know, longer term, we remain optimistic with an updated pricing model and further scaling mondayDB and the product suite that is going to be showing an uptick at the second half of the year.

Great. Hi, thank you for taking the questions. Eliran, maybe digging in a little bit more on the pricing side. You said 15 to 20 in the Analyst Day, you were talking about 10. And you've materially changed the timing of the price increase release. So maybe help us understand what are the assumptions that you're making to get to that 15 to 20 in terms of churn, maybe you're assuming more of the existing to come in the second half of the year. Maybe dig in a little bit more.

Yes, Pinjalim. Hi. It's Eran. I'll start with regarding to what are the price changes and then I'll leave over to Eliran to talk about the assumptions for the rest of the year. So overall, our initial plan also, when we presented during the Investor Day, was to roll out the new updated pricing model around June towards H2 - beginning of H2. And we actually managed to finish our AB testing sooner than that and we were ready in terms of our technical stack. So we decided to make it, I would say, three or four months earlier than we initially thought. So we thought kind of mid-June. And it's now starting to roll out to existing customers. So it's like three or four months head start in terms of the process. Again, this is the first time we've ever done a price increase to our existing base. We - in the past, we've done it to new customers. So we also try to be cautious here and we're still learning. I would say that so far from what we see, reactions from customers were good. We didn't see anything we didn't expect. Everything was in line with our model. So we remain very optimistic.

Yes. And maybe to continue on what Eran is saying with regards to his assumption on the numbers, because we advance it in a quarter, we assume that there's going to be an impact of around 15% to 75% on what we said on the Investor Day. So if you take the 10 million, this is roughly between 15% to 20%. And I think one of the things that you even mentioned, I believe, in your coverage when we introduced it in the Investor Day, we don't know to anticipate the churn. So just as a reminder, 80% of our customers are annual subscribers, 20% are monthly. And we assume - we took into account certain assumptions. Currently, you know, it's going to be something that we are going to see effectively in 16th of January, sorry, February, when it kicked in. So we took some assumptions with regard to possible scenarios. And that is what we baked into the numbers.

Hi, it's Roy. So thank you for the question. Yes, that's part of how we see the platform. We worked a lot into creating the workflow tool and integrations and automation. So definitely we see cross-company workflows, handling also orchestration between many other tools. But we also see monday as a platform that kind of trickles through areas that you don't have software or you couldn't have specific software and completes any workflow you want. So other than us creating products for core needs of the organization that they do know, okay, we want it to also fit into areas where you just need an extra input or another process in place and then obviously connect any other tool you want in your stack to work together.

Thank you. I had two quick ones if I could. Number one, if I look at the number of monday dev net new ads that actually accelerated on a quarter-to-quarter basis in Q4. Could you talk a little bit about kind of what drove the momentum there, a little surprise in acceleration at this point. But - and then I have one quick follow-up. Thanks.

Hi, Brent. This is Eran. So overall, we continue to improve the product and also improve our go-to-market. As I've mentioned, over time, we open our multiproduct suite to more and more customers and we're now finalizing the final batch of it. It should be over by the end of Q1. So as more of our users are exposed to our multi-products and we improve the acquisition engine and improve the features, we've seen the acceleration. We shared some of the data during the Investor Day, but, overall, we continue to see good momentum with all products. Hi, Brent, it's Eran again. So definitely, we continue to see good momentum in our pipelines. So during the Investor Day, we mentioned - accounted over 25,000 feet, but we continue to see other opportunities like that, some are smaller, some are larger, but, definitely, a very good momentum in the pipeline. So we expect it to be throughout the year, not just concentrated in Q4.

Hi, thanks for taking the question. Maybe just to start on the Elevate World Tour, I guess. What has been the feedback that you had from customers on some of the newer products, newer initiatives? And what was kind of the most excitement around for some of those newer solutions that you have coming out?

Yes, Steven. This is Eran. So overall, the feedback from customers was really good. There was a mixture of customers that used monday for work management, NCRM and dev. And I think the places where we saw the best feedback was around going deep on our platform, both in terms of scale and performance, but also a lot of nuanced features that we have in the roadmap and definitely around security that allow them to increase the usage. Overall, the feedback was good. And also we got great feedback on other customer testimonials. I think just seeing the variety of use cases really opened the mind of our customers of what they can achieve more out of Elevate. And we continue to plan to continue and do this event annually going forward and scale the event as well.

Hi, good morning guys. Maybe just building on the thread around go-to-market strategy. Can you talk about how you're thinking through the strategy with product bundles? I'm just curious, as the portfolio continues to expand, where do you see the most linkage between solutions? What might that look like? When could you do something on this front? Any color there would be interesting.

Yes. Hi, DJ. It's Eran. So right now, we don't offer any bundles yet to our customers. They can buy each product individually and then over time purchase other products as well. But going forward, we're definitely going to offer bundles to our customers. Bear in mind that we also have Monday work canvas and work forms in addition to CRM, dev, and work management. So going forward, we're going to offer bundles maybe with a little bit of discount if you take two or three products and maybe offer that as like one solution. So for example, for companies focused on dev, we might offer monday dev. And in addition to that monday work management to manage the projects as part of managing just a dev team. So that's something we're probably going to start rolling out this year again. We'll AB test that and we'll get feedback from our sales team, but definitely something that we're going to roll out in the next year.

Great. Thanks for fitting me in, and all the color so far. You know, one question on linearity. You know, curious what you saw in terms of top-of-funnel demand and conversion, you know, exiting the quarter. And then, anything in the first few weeks if you're willing to provide? Thanks.

Yes. Hi. It's Roy. So, we see very healthy top-of-funnel activity, like, we increased marketing, we saw more leads, more pipeline generated. So it's all in line with what we expected.

Hi, good morning. Thank you for taking my question. What do you see the functionality as being the biggest driver of new customer adoption or customer increase use?

Yes, Ivan. This is Eran. So I wouldn't say it's much of, you know, a specific product functionality. I think it's a combination of our efficient performance marketing engine and also our products becoming more and more dominant. So our products would allow us to acquire customers from different parts within companies. So the VP of Sales, the VP of R&D Work Management, obviously, so that in addition to our existing performance marketing engine just allow us to have a very healthy customer acquisition engine.

Hi, it's Roy again. So AI is a core part of the way we see the platform evolve, like, we've introduced like at Investor Day, a few areas we're launching AI in. And currently, we launched some of the few - one building block in the automation segment and we see great enthusiasm around it because we really allow our customers to build and kind of use AI on their own, how they want it in their workflows. And we are also thinking about and we're doing - adding AI into the core of service when we launched it and other products. So we're putting a lot of emphasis there as we think this will allow us to grow a lot and again like democratize AI and give it to our customers.

Hi, everyone. Two questions for me. Thank you. First of all, with more proof points on the AI side with mondayAI, I guess, how much more confident are you in the company's ability to actually monetize some of the functionality in there just now that you've had, you know, more of a chance to get some feedback from customers?

Yes. Hi, Brent. It's Eliran. Yes, I would say it's the latter. It's the macroeconomic headwinds that are still - do still exist. They didn't change from what we've seen in the past. I think our customers are still cautious with their spend. And that is why probably there was an impact on our Q4 results. Also going into this macroeconomic situation also going into the beginning of this year.

So I think it's behind us as well as, always bringing more value to the platform. So we see wide acceptance of the new price.

We'll take our first question from Kash Rangan at Goldman Sachs. We'll move to our next question from Pinjalim Bora at JPMorgan. We'll go next to Brent Bracelin at Piper Sandler. We'll move next to Steve Enders at Citi. We'll go next to DJ Hynes at Canaccord. We'll go next to Arjun Bhatia at William Blair. We'll go next to Derrick Wood at TD Cowen. We'll go next to Brent Thill at Jefferies. And that concludes the question-and-answer session and today's conference call. Thank you for your participation. You may now disconnect.