Amplitude, Inc. (AMPL) Earnings Call Transcript & Summary

Hey there, good morning. Thanks again, everyone, for joining us for day 1 of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. We're really pleased with our next session this morning. We have Amplitude, Hoang Vuong, CFO of Amplitude with us here today, should provide a very fruitful conversation. I'll start off with some questions. If anyone does have anything you'd like for me to ask, you to shoot an e-mail over to [email protected]. Happy to sprinkle those into the conversation as well. Hoang, thank you for joining us here virtually. I appreciate the time.

Well, thank you, Michael, for having us.

Excellent. So I mean, there's a lot we could cover and attempt to in 30 minutes, but maybe we can start with just the process of going public. The company chose a direct list approach. It's a little unconventional, what we're seeing where technology companies use it. And so maybe in terms of how you describe the process, receptivity since then and just the journey towards the public markets and help them characterize?

Yes. I mean, I think as we kind of learn there's multiple different ways about public. I don't think there is actually like, call it, a right or wrong way. I think it just all really depends on the companies and what their goals are. For us, many who were surprised that we kind of took that route because the direct listing is more done for like your traditional kind of B2C or much more well-known names and that, but we felt that like what's going on with Software-as-a-Service and SaaS and the type of investments that are in there and the story that we had to tell that we would still have a really great outcome of doing a direct listing and I think we've shown that like you can actually execute a very successful direct listing doing that. And I think it was a great process because it allowed us to kind of get our story a lot sharper, go out, and we were still able to meet and talk with all the different investors that we wanted to meet and investors that ended up investing but also the ones that we wanted to get in, so it's been really great progress.

That's great. Just for the overview, for those who don't know, I mean, you sort of characterized a lot of times with the direct list, it's more of the B2C household name. Amplitude, I think many of us know the logo, but may not understand or appreciate under the cover all that's happening there. So just in terms of setting the stage and the overview, how would you characterize it for investors who haven't done all the work yet?

Yes. What Amplitude is? Yes. So we kind of [indiscernible] that we call digital optimization. So if you think about digital transformation, it's kind of what the last wave, the current wave is, we think digital optimization is the next wave. So now you've gone and you move your product to be digital or if you're already digital native, you have a digital product. Well, if you look at all the digital products, how have they really grown, whether that be think about Facebook, Amazon, Netflix, they've grown because they actually kept building a better and better product by understanding the users and that user experience. And our belief is that not every company is going to have the bandwidth or the core competency to make that platform so that you can understand their users and how the users are using their products. And that's what Amplitude provides. So Amplitude provides a platform that allows you to continuously optimize your digital experience and new digital apps.

You have some pretty impressive large customer logos as well even though you kind of gave the caveat that, hey, not everyone is Amazon and can spend that much time with optimization. So I mean, I would just ask what works in terms of upmarket that has helped the Amplitude land with some of the larger customers as a starting point and lead to evangelization here?

Yes. I think you go back to like when we started, so the thesis was true and that like a lot of companies didn't want to build it internally. They didn't want to have that be the core competency. And so companies that we -- today, are much larger. So you think about the Square, think about Peloton, think about DoorDash, Instacart and the list goes on. Even on those -- and those are some of the obviously B2C payments, but they also have B2B software. So whether it be Intuit or whether it be Atlassian, they chose our platform as a way to kind of really build out what we initially was calling product analytics, right? And as we've evolved and continue to add to that suite, it's expanded from product analytics to the digital optimization. And so I think that they saw that building out that platform and having that wasn't something that was their core competency, it became one of ours. We build basically the best platform out there for that. And those customers have grown with us. I mean a lot of our customers were very small back in 2014-2015. And now, they're household names. And because they are digital and product-led, they've grown dramatically over that. And then as those early adopters have shown how to use it and how to do digital optimization correctly, obviously, then you have additional companies that will follow on afterwards that aren't really your digital-first company, companies that like Ford and whether they be the Burger King and Parker & Gamble and other CPG, where they're like, "Hey, we also need to do a digital product." And so I think we're starting to see that it's not only your digital -- native digital-first company, but now you actually have new companies that are going -- making that migration. "Hey, we digitally transform, now we need to kind of continue to make that product better."

Yes, that's really interesting. I mean one of the things we've observed just from the software lens is that product-led growth got a big boost as a result of the pandemic. I think traditional sales cycles kind of broke down, and there was more autonomous buying behavior, product naturally leads as a part of that conversation. And so one of the questions I was going to ask you, and I'd just be curious to get more thoughts on is just the spectrum of where we're at in terms of product-led growth leading and where that's moving towards? It sounds like you're starting to see some of the more traditional businesses develop an appreciation for that motion, too. Is that right?

Absolutely. I think that we see that as an upcoming trend or wave that it's not only, let's say, folks are going, "Hey, we need to find a more efficient way than doing the traditional, call it, sales because you need to actually have that part of that growth," but even in marketing, right? If you think about marketing and how noisy that has to become, right? And you've got thousands of apps and thousands of them all trying to bid on the same key words or doing the same ads and then going on in the ad business today in terms of the privacies in the cookies and all that, like you actually just need to make sure you actually are building the best product out there and giving the users the best experience because that's what ultimately is going to get them to actually convert, engage and retain, et cetera, and spread the word. And so I think you're seeing that happen, like we gave some early example of companies that built real gigantic brands today. And I think more people are going, "Wow, that's what really is going to work in the next decade, not the next century," and so we're seeing that as just an early trend.

How do you size the TAM for what you're doing? Because it would seem like this would be one of those potentially imprecise exercises where if you size it based on spend today, it would look very small. But if you look forward in the future, it could prove equally vast. And so I'm wondering how you -- about how you assess the TAM and what you use as stats and form that?

Yes. I mean, I think we just recently reported kind of like our Q3. So we're over 1,400 paying customers, but our revenue grew 72% at $45.5 million. If you take a look at those numbers and then [indiscernible] say, "Hey, kind of the average ARR by different segment of enterprise, mid-market and SMB?" And we say, "Hey, we then assume --" like our product -- even if we got very little of the SMB because let's say, they're going to use our free product or they're not going to be like [indiscernible] a tire shop is not really as appropriate. But then you go into the mid-market and enterprise, and obviously, those companies will have a higher percentage penetration. So you [indiscernible] medium market because that 1,400 paying number of customers, that's still a very small number of customers. And so you take that. And then we also were pretty excited because we just went from a single product to multiproduct. We launched 2 new products in Q2 of this year, and so we kind of added a very conservative attach for those new products until when we did the analysis, we came up together with about a $37 billion TAM.

Okay. Substantial relative to where you're currently sitting?

Absolutely. Yes, we have a long way to go.

So just on the business model as well and how you monetize this, it's recurring, but what is pricing a function of? Is there a volume aspect at all? Maybe we can just talk through what the functions there?

Yes. So there's really basically, call it, now it's 3 different elements. There's the first, it's just a platform element in terms of are you buying an enterprise version or a growth version, what kind of function or modules are included in that platform? The big driver is what we call event volume. So think about it as an event as an customer activity that is being then ingested or pulled into Amplitude. And so like our free product, for instance, allowed you up to 10 million monthly event volume. And so which is quite a bit, by the way, right? And so -- but then you have companies that are clearly in the billions and tens of billions and hundreds of billions of events already. And so you basically are looking at what those events are. And so it's price based on platform and event volume. And then obviously, we're starting to sell multi-product, which also has its own platform and it's own event volume and drivers.

We -- so we're simple animals on the financial analyst side sometimes. So we hear a few different companies talking about events. We hear that on the CDP side. In terms of events, we also hear it on the events streaming side with businesses like Confluent. So is Amplitude complementary to some of those technologies? Can you just help us understand where you fit as part of that conversation?

Yes. I mean, it's a great question because you also hear that also with some of the, call it, application performance management, like the Datadogs of the world, too, right? And so I think that if you think about it from a CDP standpoint, which is customer data platform and think of Segment, Tealium, mParticle of the world. At Amplitude, we're kind of agnostic about how the data gets into us. If you want to use a CDP to bring that data [indiscernible] If you want to stream it from your data warehouse and your data warehouse maybe a Snowflake or a Redshift, great. If you wanted to use us and our SDK and use us like [indiscernible] CDP, that's also great. And so we're agnostic to have the data come in. We think that like different companies will have different needs, and that's fine. We always want to be the repository where if you're trying to understand your user behavior and try to understand that product usage and how it gets used, [indiscernible] for that? Where were your engineers or product managers, your growth marketers, your customer successful are coming in to really understand how are users really using our product, right? And so you bring the data in. And then obviously, there's still performance management. You still want to make sure the service [indiscernible]. That's kind of your APM of the world, right? You mentioned Confluent. Well, Confluent, obviously, they're moving data real-time. Now some people go, well, could use Confluent to move the data into Amplitude. You could, but that's not really the use case per se. That would be pretty expensive way of doing it. But they're really kind of trying to bring, obviously, data in motion as [indiscernible] would call it. So they kind of bring that data to real-time use cases. And then there's all kinds of different folks that are looking at also that event data from different use cases. But our main one is really focused around that user behavior and understanding how -- think of -- the best way to -- I really think is like in the old days when you're doing marketing, you're very much focused on page views and clicks. And today, people really want to focus around the users and what the activities that users are doing. And that's how we differentiate there.

That's great context. If it were to translate into a metric, it might translate into expansion rate. And so is there a typical way that you could describe the land and expand? What drives the expansion rates and the cadence of those expansion rates for the average customer?

Yes. So I mean, we were also [indiscernible] in Q3, we saw an increase in our net retention rate. We went from 119 to 121. And so how do those customers spend? Like we typically are very fine with starting small added customer. And what I mean by small as a customer, and say, "Hey, I want to test this," and if they only have 1 product, it may be only a certain segment of the customer journey or they may be even an [indiscernible] of a product. And then obviously, as they see the value from that, they're going, "Hey, we want to expand where we're using it." So you may do only to sign a portion. And then later on, you may say, "Hey, I want to see how someone is really using a certain functionality and feature." And for instance, like one of the examples we talk about all the time is Peloton, where they came in and they were trying to figure out how to build an on-demand product for workout that have the same kind of interaction as a live session? That's a lot of iteration and learning. And so you kind of want to expand from that new functionality to a new product you're looking at or like in the case where we were into -- we initially were in at Venmo and PayPal saw how -- what it did for Venmo and they're like, "Hey, we need to add this to another product line, another product line, another product line." And so you kind of add bulk in terms of good use cases and product lines.

So it's why we love software. It's just the pick and shovel for everything that everyone sees, but doesn't appreciate.

Yes, exactly.

Fantastic. A question in from the audience that I'll move into the conversation. So it's somewhat tied to some of the things that you've already touched on. But -- the question is, in day-to-day, how does Amplitude drive efficiency or help drive efficiency between developers, sales and marketing professionals and product managers? And does this help maybe quantify some processes that have historically been more iterative?

Yes. Absolutely, in terms of like if you -- so let's give an example of like com or the question that maybe -- that they're trying to figure out is like, hey, how do we increase the number of free customers to become paid customers? And so that becomes a question that you have [indiscernible]. And so there may be multiple people working on that, right? And so what Amplitude allows you to do is have multiple people, not just people who know SQL or not just your data science team, but multiple people accessing that information, looking at understanding those -- asking those questions, and then sharing their findings. So they can track it in a notebook. Like I think like one the more interesting feature that I kind of thought about is, let's say, you're doing this analysis, a lot of time, you're just playing around. And then at the end of it, you're like, "Gosh, I found something, but now I don't remember everything I did." Well, what actually happened is like everything [indiscernible] breadcrumbs. And so we basically just said, "Hey, now that you found something, let's create a notebook based on that breadcrumb that we have." And so you basically track all the things that you just did and then put a package to that and send it out, right? And so one of our key metrics internally that we use to track to understand how users are actually using Amplitude and whether or not they're successful or not, is what we call weekly learning users. And what we -- we define a weekly learning user that when a user of our product is asking a question, finding something and then sharing [indiscernible] to other people, right? And so while making those findings and then you're sharing [indiscernible] is online, and you can kind of take [indiscernible] because like how often do you actually ask the question, you get an answer and then it makes you think of another question. Is where do you like get the right yes, right, it's rarely you get like the right question at the first time. And so that content iteration, the [indiscernible] being able to play with the data, I think is what makes it -- this amazingly powerful.

That's great. How do you approach the go-to-market here? I mean we've talked about the large customers, there's a product element to all of your customers, too. So it would seem like you have to tackle both and are both complementary in some way? And I'm just wondering if partners are at all involved in that conversation currently, but maybe you can just walk through the various elements of the go-to-market structure?

Yes. I think there's -- like as a typical enterprise software company, you get to all 3 eventually, right? You basically will do some leverage of product-led growth on the lower end just to make it more efficient. And that portion is not a huge portion of our revenue. I think we reported like over 70% of our revenue comes from customers with over $100,000 of ARR more. But it's still an important element of group for us because those people are the one that are innovative. Those are the ones that are sometimes they will become your next DoorDash, Instacart, Square. And so we love having them, and we love having that product like both in terms of like signing on a lot of them, even if though they're not paying today and they can grow up. Then obviously, you have a traditional kind of enterprise sales model with your AEs, your STRs and your SDs a sales unit going out and landing new accounts. And then we actually break our sales organization between hunters and farmers. So landing new accounts and then expanding existing accounts. And I think that partnership is something that we started investing into probably late last year and really all this year. It's one of those that we're still early in that journey. We haven't gone to part where it's like yielding everything yet, but they take time because I think what you or what we expect is that there's going to be lots of company where they're like, "Woh, we can barely get ourself together to where our data is or define what our North Star metric is, let alone kind of start really optimized. We're just kind of like -- we're still in the middle of transformation. Like don't talk to us about optimization yet." And so I think partners can come in really handy to help that kind of evolution. It's not -- I started my career in early days of implementing SAP. And I remember a lot -- you're going to a lot of companies, right? And it wasn't like everyone is saying, "Yes, let's go ahead and tackle it." They're like, "Hey, bring in a partner, let's really identify what processes are we trying to make better and how do we improve those processes before we actually implement an ERP." It's not dissimilar here that is that same opportunity with partnership, right? Partners should come in and really help you understand what are your key drivers? What's your data situation look like? How do we set up for success when you're really ready to do this optimization? And so I think all 3 are really important to us. We have a pretty big vision. As we talk about the market size, we're very digitally [indiscernible]. So we want to do product-led growth. We obviously know we need to do the enterprise sales and partnerships are going to be critical to really going after certain specters or sectors where they need more help than we want to do from the professional services side.

Great. You printed earnings not too long ago, earlier this month. I don't know that everyone who's tuned in has full appreciation. So maybe I'll give you the opportunity to just walk through some of the highlights in terms of metrics, what you would highlight for investors that came out of Q3? And then I might have a few follow-on questions on the back of that as well.

Yes, sure. We reported really strong revenue growth of 72% year-over-year, hitting $45.5 million. We also showed accelerated new customer growth or [indiscernible] customer growth, we grew 54% year-over-year versus the prior quarter of 51%. So we were over 1,400 paying customers. And we also reported an increase in net retention rate from 119 to 121.

With that growth, the $37 billion TAM that you laid out, how do you, as CFO, think about margin progression and manage between those 2? I think there's often just focus on growth that -- as the first priority? And I think it's rightfully like with the first priority here as well. But you're showing margin progression, so how do you kind of balance those dynamics trample to?

Yes. So I'll break that into 2 pieces. One is on the gross side and one on operating margins, so we can talk a little bit about both. On the gross margin side, we -- when I first got into Amplitude, we're in like the low 60s, actually. And we've now gone up to like 70%, 71%. And we gave a long-term outlook on our Investor Day of kind of targeting 75% or more. And so I think that like we have that opportunity because obviously, as we grow and scale, we'll get some of that scale from being larger because our biggest cost is, call it, cloud hosting and stuff like that. But there's other piece which is obviously as we add on additional products, additional product, additional value, we'll be able to leverage that same data that's being ingested so that you actually have that synergy, too. On the operating margin side, actually, when we've looked at it, we feel like we've almost been too efficient. The reality is if you look back at 2020, we didn't really understand or know and I guess you can blame me for it, but we didn't know how COVID was going to be. And so we basically took a little bit of a pause in March of 2020 just because we wanted to understand how that was going to go on. And initially, there was obviously some headwinds from that as certain SMBs and certain sectors got hit, but then a nice tailwind. And so we basically -- we're a little behind on investing given our growth, our TAM and our opportunity. And so if anything on our last earnings call, we also provided guidance that we're looking to target like, call it, negative 20% or more operating loss next year, mainly because we really want to invest in all areas. We're investing in product development. We're investing in sales and marketing to make sure that we go after everything we just talked about. And G&A is an area just because now we're as a corporate company, which is still a relatively small size to other public companies, you would also have a lot of costs related to that. But we think it's all worth it, obviously. And so when you factor all those in, I think that given the market opportunity and kind of how efficient we've been, we feel like now is the right time to actually accelerate the investment and make sure that we're not sacrificing growth for that.

That makes sense. You hit on earlier something I want to go back to, which is just you mentioned 2 new product launches this year. And I'm just wondering if there are -- maybe you can provide some description of what those might look like. And I'm wondering if there are other use cases or tangential uses of your existing technology that you've seen that can also just kind of pull that conversation into other areas?

Yes. So obviously, like we initially started out with product analytics. We have your user event data, so you can understand how your product is being used by your users. We then launched 2 new complementary product, one we call Recommend and the other one is Experiment and to kind of shortly explain it. Recommend, think about it as almost like Netflix-style recommendations because we have those users and we understand what users are doing, pertaining to your financial institution like Wells Fargo. And Wells Fargo would be like, "Well, I want to serve different content to different users." Hoang may be very interested in 529 because his kids are getting close to that age, right? Jason is right now [indiscernible] and he's trying to figure out how he saves, so he can take a trip to [ Moak ]. And so like you may want to serve different content to different people. And we see that, obviously, you think about like what do you see on Netflix versus what I see are very different, maybe, I don't know, I'm going to assume. And then the other one is what we call Experiment and Experiment is just what it sounds like is A/B testing. It's actually fascinating when you think about how many companies out there today are still doing A/B testing using their own internal tool. Now in you want to do an A/B test or experiment, what do you want to do afterwards? Well, you want to analyze it. You want to understand whether it works or not work. And so it just seems like a really natural tie-in. In fact, it wasn't anything that brilliant on our side, it was more of our customers going, "Hey guys, this makes a lot of sense. Can you guys make it so that it's easier for us to experiment online and analyze these different use case of this user doing this versus that," and so we launched out the Experiment product, too. And so both of them got launched in Q2, and we're really excited about by both of them.

A couple of big-picture questions to close on with the final 5 minutes. I mean one that we've been just hearing more about is just the war for talent. Amplitude is clearly an engineering-focused company in a lot of ways. I'm wondering if the direct listing, the brand recognition has helped or how you would characterize your ability to stay on track and on target with hiring in this environment?

Actually, the things that they have halted because, I mean, prior to this year, I think Amplitude like -- you'd be hard pressed to find people that actually knew [indiscernible] myself to think about it only 2 years ago. I think that to myself like I stay pretty up to speed on technology companies in the Bay Area and [indiscernible] and like when I heard about it, I was like, what, and then also you dig in, you're like, "Wow, that's very amazing. That's very impressive." And so I think just getting the word out there and being able to articulate what we do and getting it out as a public company, definitely helps on that brand. But your totally right, I mean, there's such a war for talent when it comes to how much -- some of the software is definitely eating up the world, so there's always that. But I think that we -- there's also not many companies though that have kind of built their own proprietary database and then so that is also a challenge. So like when you're looking for engineers, obviously, brand is important, but they're also looking for challenges that are like pretty tough and pretty unique. And there's nothing like in my mind, thinking like building your own database or dealing with customers that have billions of events and trying to figure out how you leverage and utilize that to make part of that growth even better? And so I think our challenge is one that's also very fascinating to a lot of engineers.

Yes. I mean, that's great. That's consistent. We actually had our own Head of Investment, and he mentioned the same thing. Our Head of Internal Technology was saying the same thing just around you need to give engineers' problems to solve. That's what they're focused on. At a certain point, that's really what's going to make the decision easier for them. So it's amazing. It's amazing how consistent that is. I guess...

At least I'm [indiscernible]. So yes, if anyone is out there listening in, come on, let's help with the war, that'd be prudent thing. Yes, please let us know.

Well played. I guess, the final question is just the look forward, right, in terms of how you'll measure success over the next 3 years. What are some of the key metrics that you're focused on? And what drives success for Amplitude beyond this year, but further into the 2020s?

Well, I think it's the 3 metrics that we've been sharing, right? I mean, what's our revenue growth rate. We have a huge TAM and so we got to be able to continue to grow at a pretty fast to kind of make sure that you're the winner in that market. I think, obviously, customer -- and we still had a pretty small number of customer count and making sure that we continue to go outside of -- move into the early majority and thinking about other sectors and really becoming into some of those sectors and we're penetrating them to a number of customers for things going forward. And then lastly, it's a net retention rate. I think it's not only gaining customers, but how are they activating and adopting and then how are they adding new products that we're building? Because ultimately, we're trying to target after that Chief Product Officer and what are all the things that he or she needs to be super successful in a product-led world? And so they need experiment, great; they need recommendation, great. But they'll need more. And so I think that retention rate would be the third and last one. And so those 3 together will be how we measure our success.

Great. Then to close on, Hoang, I appreciate the time. Thanks for joining us. Very much appreciated.

Thank you, Michael. Fully appreciate it.

Yes. Take care all. Thanks for joining.