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

Amplitude, we have Spenser, who's the CEO; and then we also have Chris, who's the CFO. Thank you guys again for attending. And thank you to everyone in the audience. If you don't know me, my name is Taylor McGinnis, and I am on the Software Equity Research team here. So with that, let's dive in.

So very topical, the macro. So maybe we start there. I'd love to hear what you guys saw in terms of demand trajectories through 3Q and into 4Q. Any incremental weakness in specific verticals? Maybe you can just talk about how customer conversations are trending more broadly.

Macro's continuing to be a headwind. We actually haven't seen things get worse and so there continues good demand for Amplitude as a product, which is fantastic to see. I think the biggest thing that we're working through is, there's a number of spend reductions from our existing customer base who are on multiyear contracts that we expect to continue to be a headwind now as we go into the first half of next year. The good thing is there's a number of plays available to us that are continuing to evidence the strength of the category overall. So, first is consolidation. We've seen Amplitude do very well against a number of players in the space. So, if you look at either other competitors on the analytics side for companies in experimentation or ever session replay, we see a lot of desire to consolidate off of this point solution on to Amplitude as a platform. And so the fact that we are the first company in the space to offer this full suite of products, there's a huge advantage to us in the sort of environment when there is desire consolidation of team. The other big thing that we saw in Q3 was that our demand was more broad-based. So there wasn't any single large expansion that was driving the success of all the revenue that we brought in, there was a good mix of larger companies, smaller companies. There's a good mix of traditional companies versus digital natives. I mentioned a large sports gaming customer that decided to go low-to-low with Amplitude in Q3, so it was fantastic to see. And while we're only partway through Q4, we see the same trend will continue in Q4.

So there's a lot of things that you can't control in the macro, right? But in terms of what you guys are doing to make sure that you're well positioned coming out of this, maybe you can talk a little bit about there, what changes have you made within the organization off the back of this? I know you guys have been having a bigger push to expand beyond the tech vertical into some of these other areas that you just mentioned, but would love to hear what you've done on that front.

So, first is actually, just taking a step back, first is actually continued product innovation. So we've been very, very aggressive on product innovation. This year has the year that we've done the most by far. We launched our Plus Self-Service plant, which was a big deal. Last month, we launched Amplitude AI. We launched work. We announced early access of warehouse needed. We're going to be launching session replay very shortly. And so we've done a whole bunch of marketing analytics in the core. And so we just continue to keep that muscle up and that will serve us well coming out as there are opportunities to sell in parts of the platform into our customer base. I think the second thing is making sure we're very control of our business. We've never been a growth at all cost business. And we've been very conscious of how we allocate capital. So very happy with where we ended up this year and being free cash flow positive, which is a big deal. And so with our strength of our balance sheet, that puts us in a great position in the years to come. And then the last thing is just continuing to improve execution, particularly that transition, as you mentioned, from digital natives to more traditional companies. And though I've been very focused on up-leveling the executive team and maturing our go-to-market motion of the business. So I brought in Thomas, as our President last year to drive that on the go-to-market front. I brought Chris earlier this year as CFO. And we actually recently announced this morning that we've added Francois, our new Chief Product Officer, who is the former Chief Product Officer and just led half little. So it's fantastic to have him as part of the team as well. And I really built out the team to help Amplitude grow from where we are at today to $1 million plus in revenue in the category.

And then when we think about that longer-term revenue growth trajectory, so when you think about all the different opportunities that you talked about, I'd love to hear where you guys think of more as a steady state like growth rate potential of this business? Because I think what happened is you saw this explosion of digital activity during the pandemic, followed by macro headwinds and you saw a lot of contraction on event volume. And I think it's fair to say something like the explosion in digital activity is probably not going to happen again, unless there's another big event like we saw with COVID. But as you think about some of the opportunities that you're putting the seeds in place and where we could get back up to from an expansion opportunity, I would love to hear how you guys think about the longer-term steady-state growth of this business.

Yes. So this is a multibillion dollar question for both us and everyone else in the category. What I'll say is that, I think we saw both sides of it. So we saw an incredible acceleration in 2021. We were at 60% year-on-year growth. Obviously seeing a lot of contraction today where we're in the teens, and we expect that to continue as we go through next year. And the first thing I'd say is those are the extremes not going to be either of those 2. I've said before and I'll say again, that Amplitude will accelerate in terms of the growth rate long term. This is a very large category and so excited about our ability to do that. What I'm thinking about is how do we set up Amplitude in this current environment so that coming out the other side, we're a beneficiary of fewer players in a larger market. The other thing that I would say is that, more specifically, as we look at 2024, one of the things that we're seeing is that in the first half of the year, that's what we finally expect the last of the pandemic fuel growth contracts to be coming up for regional. And so as we get past those, that will make reacceleration structurally a lot year for us as a business in terms of ARR, which will then translate to revenue.

And maybe, Chris, a question for you then off the back of that. So I know you made the comment that you expect the renewal base in 4Q and the first half of next year to be roughly similar. Could you just provide a little bit more color on what you meant by that? Did you mean in terms of composition, the volume of renewals? Would love to get your thoughts there in terms of how we think about the trajectory of revenue growth.

I appreciate that. What I want to convey is that, the absolute dollar churn levels will be consistent from what we saw in Q2 '23, and what we saw in Q3, what we expect for Q4 in Q1 and Q2. The absolute dollars of churn rather Amplitude for churn, it's both down-sells and lost customers that we're measuring. So when we talk about our GDR being in the mid-80s, we're capturing both of those and that the role that plays as a percent, the absolute numbers that drive that will be consistent across those 5 quarters. That's what I was trying to convey. Exclusive of the renewal base that was up for renewal in any specific quarter.

And then when we think about [indiscernible] fell to 99%. And just to think about where that could go? I know that there's been some contraction that's been driving that. But maybe you can break down what has been the bigger drivers of that metric coming in? And then as we look over the next couple of quarters, should we start to see that metric bottom given that you're still working through these renewals because there still be additional pressure there and maybe in the second half, if when we can start to see that trend up. I guess how are you thinking about that trajectory?

So anchored on that consistent churn number, it's really a function of what the new ARR in that quarter, what is the mix between land and expand. So I'll just take Q2 of 2023, where we have large expansion. So that NRR number was not over 100%. Some of those expand dollars were upside for us in terms of our expectation, but they exceeded the churn, and we stayed in the low hundreds, whereas in Q3, we had a more balanced new ARR between land and expand. And then in that case, the churn eclipsed the new ARR from expand. As we look forward, I actually think Q3 is going to be reflective of what we see Q4, Q1 and Q2 because the way we're profiling the deals in the funnel is a fairly balanced mix between land and expand. That obviously then gets mechanically easier in Q3 where we don't have that same headwind from that absolute churn number that we're expecting to come to fruition. And if we continue to produce the same new ARR level, we've alluded to, mechanically, it will just be easier to have an accelerating ARR even if we just continue to perform the new ARR the way we have been performing.

So maybe let's move to the introduction of the 49 user per month Plus Plan and also some of the initiatives that you're talking about to focus on bigger accounts. So one, I guess, what led to some of these decisions? And how should we think about those growth opportunities materializing? The first part, Spenser and then for Chris, I'd love to hear how you think about the impact to margins from that. As you make some of those ships being more efficient at the lower end, putting dollars at the higher end, could you actually start to see more leverage and upside to margins as we get into next year?

The whole goal of the Plus plan was to meet customers where they're at. One of the most common complaints we got from our customer base was the jump from the free to the first pay plan which is really big. So you'd often start out using us for free, getting to a certain level and then wanting to upgrade, but it having to talk go through a full sales process, spend $30,000, $40,000, $50,000 right out of the gate. And so they go from 0 to 50,000 that's a really big leap. And so what we wanted to do was say, okay, how can we make that journey through there so that customers can get started paying with a small amount and then potentially growing to a larger and larger amount. And it all ties back to the theme of winning simple. So how do we win with our customers as an easy way as possible for them. A number of other benefits that price transparency also allows customers to be more confident starting out on the free plan because they know how much they're going to pay when they grow. The last big change that we drove as part of it was offering a free version of our non-analytics products was insignificant. So we offered a free version of experimentation. We offered a free version of CDP and we're going to be offering a version of session replay when we launch that early next year. And so that's a really big deal. We get able to get started with the full suite right out of the gate from free then to credit card and then eventually talk to the sales portion. We've already seen conversions from that Plus Plan to our growth in enterprise annual contracted plans. And so, although it's only been out for a little over a month right now, it's a really promising channel in terms of new acquisitions. So that's the biggest by far. The other part of it, and Chris will talk a little bit more to this, is that it allows us to be much more efficient on the motion. So obviously, we talked a lot about product line growth and Amplitudes and so being able to drive that instead of having to have a sales team, a salesperson that is coming in to sell 30,000 contract is much more efficient at the low end of the market, particularly if the long-term potential, those accounts is not very large. And that allows us to take those dollars then we deploy it to the enterprise segment. But no more than that.

One of the things that we've really been focused on building over the last couple of quarters is to differentiate that prospect that is going to land at 30,000. But it's going to land at 30,000 and it's only going to get to 35,000, we shouldn't be in a people selling motion to that customer. It should be a product-led self-serve motion. That's an effective, efficient, customer acquisition model for it. But if that prospect is going to land at 30,000, it can go to 200,000 or 500,000 or 1 million. That's worth being a people selling motion, even if the first transaction is only 30,000. We put a lot of effort into how we profile to differentiate between those 2 prospects. And having done that, now we've been realigning, what Thomas has been realigning his team and a much more named account structure, to go after that second one. It's worth prioritizing because we recognize their digital footprint and how meaningful they can be for us. So that obviously, should unlock a lot of leverage within our sales and marketing spend directly as a function of being much more effective, much more efficient in that customer acquisition obviously, customer retention profile that we have. So with that, and I'm going to say anchored in being free cash flow positive and that nothing I'm about to say should signify anything of grow at all costs, anchored any free cash flow positive. Spenser and I recognize that this is still a very early market. We're still early in the potential that's ahead of us. And our ability to reinvest for growth will best serve us for the long term that we recognize that there's always needs to be a balance between growth and profitability. But again, anchored on being free cash flow positive. We look forward to being able to take that overachievement, take that over the effectiveness that we're drawing out of the go-to-market motions and reinvest both into it as well as into product. On G&A, very much expect to drive economies and scale.

And Chris, on your comment about realignment in the sales force, could you maybe talk about -- and Spenser there is also a question for you, too. But just the overhaul or the magnitude, I guess, of the changes that you're making within the sales force, how much needed to be done in order to get the sales force in a position to really go after those big opportunities? And the reason why I ask this is because any time a software company tinkers with the sales force, there's always risk of near-term disruption. So, I would just love to hear how you guys are working through some of those changes?

Yes. What I'd say is this is a natural part of maturing as a company, from a company that's been focused on digital natives where customers have pulled you in. And now we're going to traditional companies where you need to go out and actually sell the software and figure out and navigate the organization figure out to get to the right executive buyer. And so, we have some folks like that today, but there's a lot where we need to bring in the right talent. And so as part of bringing in Thomas last year and then Nate, our new CRO in April, that really what we are focused on. And I think that's just a very natural part of transitioning from $100 million to trying to get to that multi-hundred and to $1 billion part. And so I think of it, the core motion is still the same. It's sales motion is, how do we convince a digital leader to adopt Amplitude to drive self-service in their organization. So all of that, it's not like the motion is radically different, but you're looking to mature and improve the caliber of the go-to-market so that is executing to that.

So I think this segmentation helps if I'm an investor and I hear sales changes, right? The enterprise motion hasn't changed. It is our account executives selling in a cross-functional way, both in the digital native enterprise and a traditional company. We're just maturing how we do that and getting more effective in communicating value and others. Not really changes, maturation. But below that, what we would have called commercial or SMB, it's called emerging enterprises for now because there are customers with less than 100 employees that are $1 million-plus accounts for us. It's us being able to allow our sales reps, our account executives to go pursue those in motions that they do really well, but we've been able to then to enable taking the noise away for them back to that 30,000 accounts that can only get to 35,000, that's noise. We shouldn't be putting that shiny object out there for them to chase. We should be going, no, go pursue the other ones that can start at 30 and grow and grow and grow, run the motion, you know how, run the motion you how to differentiate. So, so much of the change is maturation and just been about taking the noise out of the system. Moving the noise, and I hate that derogatory term, but I'm just trying to convey a sentiment, that's a great audience for our Starter Plan and or Plus Plan and our self-serve PLG and us being more enabling of a go-to-market to focus on those differences, that's the big change.

Maybe moving to AI. So I know this past summer, you introduced Amplitude AI. You have products out there like data assistance and more. I would love to hear about how you guys approach Gen AI. How do you think about the impact that could have the Amplitude over the next several years? And then as you think about the ways that Amplitude can monetize AI, I would love to hear your high-level thoughts there, too.

Yes. First is, the Amplitude has always been a beneficiary of new ways of disruption. And so, we got our start to focus on the shift from desktop to mobile, we grew a lot with the group of SaaS, the way you got crypto, AR/VR, a lot of the largest and those leading companies in those spaces customers, and we've seen that with AI as well. So we just announced the mid journey of the customer. It's fantastic to see they're going big with Amplitude using both analytics and experimentation. Before that, they weren't using anything to understand the user journey. They were really looking at feedback in their discord channel, and that's how they decided to prioritize what to work on. And so new ways and we've seen a lot of other AI companies in addition to the Part AI and Character AI among others, come on and become easier for customer services. So new ways of technology disruption always fantastic for us because we are in a lot of ways, like a concentrated bet on digital as a new revenue channel. And so whenever you get a new set of companies coming on to that, that's great for us. The second part of AI is that, I think it has the ability to make workflows around the data, but order of magnitude of more straightforward. And so one of the biggest challenges with operationalizing self-service data across an organization is how do you source with what is on? How do I know what's the right chart to look at? How do I know among the millions of data points that I have access to, which is the most important. And this is where AI can play huge leverage for Amplitude in particular. The thing that we have is, we have one of the largest data sets of customer behavior out there. And so we have all this context of the chart and insights you're going to want to look at if you're a retail app or if you're a media app or if you're a financial services application, here's the set of insights that you need. And so one of the things we've done is deploy automated suggestions for different charts you should look at, for how you should name your charts for taxonomy changes you should make for suggested formulas, and that really helped speed up the process that was very manual before. So you have to understand the interface, you don't click on a few different drop down. Now we're just suggesting that we're out of the box. And we've already seen hundreds of customers early, but we've seen hundreds of customers adopted. We're now experimenting with more advanced ways to use AI. So we have as Amplitude assistance. So a lot of people have asked me, "Hey, our Chatbot just going to replace you and all these other tools in the data stack and because you can just have the right before you come out with all these insights for you." It's actually not the other way around. Chatbot, by default, don't have any context on the meaning behind that data, and so that's a huge advantage for us because we can then take that context and serve you a bunch of insights directly to the platform. And so I think the advantage is actually accrue to the vertically specific players like an Amplitude that are focused on solving a particular problem because we have a lot more context to knowledge on how to do that. And AI is an accelerating allowing many more customers to tops.

And then on some of your other products, you also have experiments and recommend. I love an update in terms of the traction and the adoption that you're seeing there. I don't know if there's any statistics or any high-level color you can provide in terms of how those are trending or deal sizes related to the analytics offering, but would love to hear your thoughts on that.

Yes, quick point of clarification, Recommend is now part of CDP product. And so our products are analytics, CDP and experimentation and then we'll soon have a session replay. What we all share back in, 3Q, yes, third quarter of last year, those 2 new products represented just over $10 million in ARR as of the second quarter of this year, so 9 months later, they now represent over $20 million ARR. So very fast growth doubling in 9 months, particularly in the sort of macro environment. And so still small relative to the $370 million plus revenue base that Amplitude is overall still less than 10%, but growing quite quickly. I'm very, very excited, I've been and polishing both experiment and CDP, and we think session replay is going to perform really well in sometime.

And then, unlike Bango growth opportunities, I know that you've flagged this earlier, but just in terms of the traction that you're seeing outside of digital natives, can you comment on that a little bit more? What is the level of growth? I don't know if you can comment on maybe to the extent that you've looked at this, how NRR could compare with the tech vertical versus the non-tech vertical and how some of those trends are materializing. I think it's interesting to hear where you guys are in terms of penetrating that other part of the market.

So doing it from memory a little bit. The spread between NRR is about 5 to 7 points. With the traditional company is higher than 2, reflective of the pressure that the digital natives have had. And then from a growth rate perspective, we called it out in the last earnings call that 11 of the last 12 quarters, the traditional company grew at 24% plus or greater on a year-over-year basis. It was only this last quarter where they dropped below that. And yes, they've been still relatively greater than 10%, less than 50% of our ARR base. But yes, we've been moving along at a nice pace in that space. Yes. My expectation is that will make up, we'll continue to grow. So digital native tech companies, those will continue to grow, but that will grow faster, and we'll make up more of our revenue growth as we continue to get towards $1 billion. I think we just see it where you get every year, there's like a new set of verticals that adopt Amplitude. So like one of the really interesting ones this year has been a lot of sports leads. So we got one of the largest sports leads in the U.S. and we lost other legacy provider and standardize a bunch of analytics and other products on the Amplitude. So that was a huge win. We've also seen a few other players in adjacent categories, makes the same move. And so, I think we've done well at media, we've done all quick service restaurants. We're going to continue to add more verticals within traditional companies over time.

And then I know historically, when you guys, just given the early nature of the category, I know part of the hurdle was wanting to make sure that all the integration points, in order to seamlessly get the data into the platform. And I think that was described in the past as the reason why NRR might not be higher than it is today. Now I know you guys have done tons of initiatives to like ease a lot of those integration. And given the macro, the NRR is obviously muddled by some of the headwinds on that front. So can you just talk about, now that you have those initiatives in place, what are you seeing in terms of seamless expansion opportunity? How that has been trending with customers just because it's a little bit hard for us to tell given the pressures that we've seen on NRR from the macro.

Yes, for sure. I think there's obviously been a big uptick in resizing and downgrading where customers aren't getting as far along and using the capacity they have bought. And so that headwind is hard to tell with this other stuff. I think it's been much more straightforward than we'd expected to be able to cross-sell new products into the existing customer base. So experiment has been very, very successful, as I talked about and then session replay in our product, price name even told me if she will go yet, I think it could be easier ramp into the customer facing experimentation. And so I think, yes, that's going to be a significant contributor to NRR. And then as more, secondly, as we work our way through the macro cross-sell and thirdly, as more of our customer base is those larger companies and more traditional companies that display trajectory space over time.

And then maybe in the last like 1.5 minutes or so, we can touch on margins quickly. I know we commented a little bit earlier on the sales side. But maybe starting on the gross margin side, you've seen nice improvements there and getting well into the high 70s. So when you think about the trajectory from here, I know this is more of a compute-intensive business, is it possible that you could be more durable in the '80s? I guess, how do you guys think about the levers on the gross margin side and what that could look like over time?

As we've guided for people's model to continue with the 77% to 78%. Reflective of the fact that we have technical account managers to services and customer successes, obviously, those people intend to or drag on our overall margin, very advanced usage. We did, obviously, in Q3, outperform that range, and it was a function we can have swings in any quarter reflecting the compute and events that happen relative to the subscription, but we're driving everybody back in the models to the 77% to 78%. Now with that said, yes, we're going to continue to try to be more efficient in how we utilize our services teams. We're going to continue to drive unit hosting costs margin out of our solution set with Amazon, but we haven't provided anything beyond staying in that 77% to 78%.

And then one last one for you, Chris. So tremendous margin improvement this year, right? You talked about this is a big opportunity. You guys want to make sure you're investing for that. How should we think about the gross to profitability balance as we look ahead? I would imagine once you start to see signs of inflection in the environment, so probably be incremental investments on that front. But I would love to hear about how you think about the framework in the medium term.

Well, again, anchored and free cash flow all over too. Spenser and I are going to continue to default back too. We recognize what's ahead of us. Maybe our current report card doesn't. There's a meaningful gap between how we're reporting on that card versus what we know we're putting that motion to achieve. As that stuff starts to come to fruition, which we know it will, we're going to lean back into investing for growth. That's where we are philosophically aligned.

Yes. I think we're early in the market. There's a huge amount of opportunity ahead of us. We want to make sure to capture that and do really well. And so I think, yes, it's very much focused on how do you the nature of the way.

Spenser, Chris, thank you guys so much for your time. And thank you to everyone in the audience for listening in.