Asana, Inc. (ASAN) Earnings Call Transcript & Summary

Thank you all once again for attending the BofA Technology Forum Conference day number 2. I'm Mike Funk, one of the smid cap software analysts. And one of my subsectors is collaborative work management, and super happy to have Tim here today from Asana.

I know it's been a busy day for you guys. You had your product event earlier today where you announced your new AI teammate, I think, is the name of the new product. First of all, once again, thank you for being here. I wanted to give you a chance to maybe give some bullet points on the new product announcement and exactly what it means for Asana.

Yes. It's really an amalgamation of all the AI functionality that we've been talking about that we started rolling out and that we'll continue to roll out. One of the things that we -- it was really a customer-driven event, first of all. And it was really an opportunity to kind of showcase the power of AI within Asana and how we're helping customers with our AI functionality to not only coordinate the work but do the work. So a lot of the demos were really around how you can now use Asana, use the AI assistant to summarize projects. So in the past, where you may have to have to write a summary report, now we actually have an AI functionality that can read everything within a project and summarize the status of that project, identify areas of risk or things that aren't getting completed and how you may want to resource plan around that or how you may want to change course. So I think we're still in the early days of AI. So I think it was really just encouraging to see the level of attendance, the number of customers coming in to learn more about how they can leverage AI within Asana.

Great. And then just for more details here quickly. I think you said GA later in 2024. Is that the expectation for timing?

Yes. There are already some stuff, like smart summaries is already available. Smart status is already available, scalable workflows. Some of those will be rolled out in the back half of this year. Resource planning, that will be rolled out later in the back half of this year. And some of the stuff that we talked about on the earnings call, such as the consumption related to workflow, customizable workflows, will be later this year.

Okay. And I'm sure you're deep in the weeds on this, but it's a topic investors care deeply about, is pricing and how you're thinking about pricing. Or if you haven't settled yet, at least what different iterations of pricing you might be considering.

Yes. So maybe even stepping back, the -- we are a seat model, so essentially, we charge on a per seat basis. But I think what's -- we totally recognize what's been happening in the software space that investors are somewhat concerned about with AI, that oh, a seat model may not be scalable. But the fact is our penetration rate within our own customer base are only about 5% to 6%. So we know we still have a huge opportunity to just penetrate across an organization and bring more seats into the fold. So that's one. Two, the things that we're launching, the resource planning add-on will likely be a license type, where additional license on a per seat basis, but much more focused around power users or executives who want to do more resource planning. The customizable workflows will be really tailored to those individuals and users who are driving workflows across the company. And the way we'll price that it's very likely it will be consumption based. So you may buy x amount of tokens, and those tokens allow you to create x number of workflows depending on the complexity of those workflows.

Okay. That makes sense. And I'm sure also very kind of near and dear to your heart is thinking about managing the cost and the margin impact of rolling out AI and obviously, the compute required for that. So how are you thinking about balancing that then, Tim, the drive forward with obviously R&D, new development, new product, AI functionality versus continuing to improve margin?

Yes. No, no, it's a great question. So I think we've made some progress on our R&D as a percentage of revenue over the last couple of years, and we'll continue to make a bit of progress. But I would say we're probably much more in an investment stance right now. But one of the ways in which we are trying to offset or balance our cost structure from an R&D perspective is earlier this year, we opened up a development office in Poland. So we're shifting a bunch of our engineering work to Poland, while also staffing our Poland office. So just trying to balance the locations and the cost structure out a little bit better, where we can accelerate our road map in a much more cost effective way going forward.

Okay. And I want to shift the conversation a bit. I will leave some time at the end for any investors who weren't able to attend the event today who may have more questions about the release of AI teammate, but I wanted to shift -- it's common question we're asking across all of the presentations, but I think very topical for Asana, and that's on the macro. And one thing that I have noticed and investors have noticed is the uneven performance and commentary from CWM companies, when talking about the macro impact, and notably, I think Asana, you at least, said that you weren't necessarily seeing a lot of negative or pressure from the macro. Very positive results relative to some peers. So what is the macro environment today versus 6 or 12 months ago? And what do you think is differentiating Asana in that macro environment?

Yes. Let me try to address it kind of in a -- at the -- kind of from the demand perspective and then also kind of on the gross renewals, how our existing customers are kind of acting now. So I think on the demand side, if anything, like our pipeline actually grew year-over-year. A lot of people have asked, like, is -- the macro for us, I don't think it's gotten better, but it hasn't gotten worse. I do chalk up to the fact that our pipeline got improved and grew year-over-year due to better execution. We did have a reset of leadership on both our marketing side as well as our sales side. So I think the changes that they've made, those are starting to manifest and that our execution is improving. So that's one, at least on the -- so demand gen, like the fact that the pipeline is increasing, that we've increased our reps, those reps are performing better than they did than a year ago, like those things are all positive signs, at least 1 data point right now. Then I would say on our gross renewal rate and customers that are renewal, we're still working through some of our tech customers who are continuing to, I would say, have some -- essentially, they are -- if they had renewal or adjusted their seats or downgraded yet, they -- we expect them to in Q2. So that's kind of how we've talked about Q2 being a bit of a trough for our gross renewal rate and that things have started to stabilize, and we know coming out of Q2 that will lap most of the more difficult comps.

Did you say flat quarter-over-quarter though last quarter? I know you said this coming quarter will be troughed but relatively...

Relatively flat.

Okay, okay.

Yes, it's like plus or minus 1% or 2%, usually.

Okay. And just to kind of carry that conversation on, I think you also talked about an inflection in revenue growth by fourth quarter, correct?

Yes.

Okay. And I think a lot of questions that I receive are -- have to do with like what gives you that degree of confidence? And what breadcrumbs can we follow? What data points can we look at? How do we, as outsiders, not seeing the same granularity and data that you have internally to give you confidence, what can we look at to give us greater confidence in that inflection?

Yes. I mean I think -- unfortunately, it's probably more of a lagging indicator based on the way we report. But I think the net retention rate, so gross renewals rate, improving is going to be -- was going to be helpful because I do think we'll lap. We know the customers that are not utilizing or had layoffs. We know those customers, by the end of Q2, will mostly be out of the base or they will be on a new contract. So the comps coming out in Q3 and Q4 should be much easier. So that's one. Two, like when we look at the pipeline and we look at the conversion rates and the discipline and the rigor that our new sales leader have in place, the way they've been forecasting, the way they've been executing, is dramatically different or has improved dramatically from a year ago. So even when I look at rep productivity, there are [indiscernible] within especially in, I would say, Europe and Japan and Asia Pac that they have improved for us. And I expect that to carry through. Now Americas for us will take a little bit longer, primarily because our new leader in America just came on about 3 months ago and he's implementing some changes, but I expect to see the same level of pattern improvements that we saw in EMEA as well as in Japan happen in Amer.

And for a roadmap for us then, looking at EMEA and Japan and the improvement in rep productivity you saw over there, can you give us the indication of how that slope progressed with rep productivity that we can then overlay with the Americas to at least predict that rep productivity?

Yes. I would say the EMEA -- EMEA and Japan just -- 2 things. The reps' consistency to build pipeline as -- like every quarter was just kind of a slightly higher-than-the-prior on a sequential basis, and the fact that we're much more confident in terms of our hiring and making sure those reps are productive. So enablement has also improved in those geographies. So sequentially, those have -- there is a little bit of seasonality, even in EMEA for us, but sequentially, when we look year-over-year, the rep productivity has been, I would say, on a kind of a slope upwards. We're not back to -- honestly, we're not back to like '21 or even '22 levels, but it certainly looks like we're coming out of the trough or that things are much more on the uptake in those geographies.

Can you scale where we are today versus '21, '22 rep productivity? Are we 20% below that, 10% below that, all good indicators for us to get more confidence in that back half inflection?

Yes. I would say we are probably somewhere like about 25% below that.

But trending back to that level? Or is that a level that can't be reached, because '21-'22 was so unusual...

Yes, I do think '21 and '22 was very unusual. The interest rate environment was very different. Companies were hiring like crazy. Investors were generally rewarding companies for growth. So companies were just trying to hire as fast as possible and drive growth. I think companies are much more mindful. The landscape is somewhat different now as well. But I think we will -- I think there will be -- we will get back to a respectable productivity, but I do think like it's unreasonable to even have those type of expectations of '21, '22 levels of productivity.

Okay. Yes. And I think something we discussed after last quarter on the follow-up is we were talking about other differences maybe in purchasing of collaborative work management, [indiscernible] product versus other software solutions, and how you land in the price point, maybe also explaining some of the difference in what you're seeing versus other software companies that are talking about continued elongation of sales cycle and dips in spending. Can you just reiterate what you told me on that call back, which -- if you recall how you framed it?

Yes. I mean I think, one, our sales cycle historically has been generally shorter, primarily because it -- we're not always -- the way we sell doesn't have to be a wall to wall. It's -- I would say it's function by function or department by department. So the ability for a team or a function or department to get up and running is relatively quick. I think in areas where we highlighted a customer at the event, and they were actually sitting in the front row, Palo Alto Networks. In a consolidation deal like that where you have -- we're talking thousands of seats of deployment, and where they decide to consolidate across different work management tools, a deal like that generally does take longer, primarily because they are thinking about, "Hey, we're making a multiyear investment. We're going to roll this out wall-to-wall across the company." I think we're probably only 40% penetrated, even within that company, within Palo Alto. They'll continue to expand, we're fairly certain, just because of the investment in the partnership that we have now, but those types of deals, where a company is saying, "Hey, I'm going to go wall-to-wall over an extended -- a period of time." Those are the types of deals, I would say, generally take longer.

[indiscernible] tee up my next question because you also mentioned collaboration last quarter and -- not, sorry, collaboration, consolidation last quarter, which I -- which was new to me, at least, hearing you call it out so publicly. I guess, number one, what do you think is driving the increase in vendor consolidation of collaborative work management? And then second, do you think that consolidation is going to be a greater driver of growth in the future, not overtaking that new, but still be a more meaningful contributor.

Yes, I think so. I think what's happened over the last maybe 1.5 years is as budgets have tightened, and the budgets have moved from the business budgets, that's kind of where I would say our historical budget resided to kind of -- to the office of the CIO or the IT budget, where they're consolidating their work management spend, that's given us into an area where the RFPs are much more around consolidating across the company and that people want to either pick 1 platform to go with or 2 platforms to go with, at most. And I think generally, when we are able to demonstrate the work graph, which is much more powerful than the other players in the space and the cross-functional nature of Asana, that allows us to really shine. And even when I look at our win-loss data, the win rates are just extremely high when it comes out of consolidation. I think where things get -- are more moderated is where there are multiple vendors and it's not a necessary consolidation play across the company, where they're just looking to stay within one department. And I think those are the kind of deals that, I think, while important, much less important for us on a consolidation basis.

Okay. Yes. And any additional color on the consolidated, so for example, reasons that you're winning during consolidation, types of customers, size of customers, who you're displacing during consolidation?

Yes. I think generally, if you go feature by feature, it's kind of hard, but I would -- let me point to maybe two things, more recently. One, I think when we share our AI road map with our customers, they see the level of investment and the power of AI, like it's one of the reasons why we're doing -- why we are oversubscribed, essentially, at a lot of our Work Innovation Summit, that the team has done a really good job of just bringing customers into the fold. That's one, I would say, that's helping the pipeline, but also helping the higher-level conversations because every customer cares very much about, hey, how are you going to invest in the product, and what's your AI road map, and how is that going to bring efficiency and productivity to my knowledge workers? So that's one. Two, I think the other element that's like really been interesting that we've learned is also like when we can demonstrate how we can connect every piece of work to the goals of a company. So Goals is just one of the functionality or features that are -- the other players in the space don't have. And when we can demonstrate how every piece of work is connected to the goal, every piece of work is connected to those portfolios or projects and connected to the goals, we can essentially help them be much more efficient and be the navigation system now on how they can complete their work. It used to be like we can give you the map of the work, but I think what we demonstrated today was actually Asana can help you do some of the work, if not all of the work, going forward. So I think that's incredibly powerful. And I think like those are the types of moments where our customers are really like, "Oh, wow. This is really differentiated."

And just taking that AI road map comment and my first question about the product announcement today, how would you rank order AI road map and even talk evolution and the decision to displace a different provider? Just put another way, are you displacing companies because customers are uneasy or uncertain about their AI road map or product evolution? Because there are solutions out there that have announced new evolutions later this year, haven't really articulated what those are going to be. There's got to be some uncertainty.

Yes, I don't know. I wouldn't point to just like -- I think AI probably brings -- I don't know if -- I think AI certainly brings a level of differentiation and excitement to the conversation. I don't know if it's like a displacement-type of conversation. I think where it does come down to -- where the displacement comes to is like scalability is really important for our customers, especially for larger deployments. So our largest deployment is over 200,000 seats. When we can demonstrate that, generally, like the Fortune 500 company is like, "Oh, wow. Oh, okay. You have that customer at 200,000, and that's a Fortune 5 company? Okay, then yes, you are -- this is probably enterprise-ready." Like demonstrating that type of differentiation, I think, is important. How we think about Goals and connecting the pieces of work, I think, like that helps and helps us differentiate. Historically, I would say the things that we're replacing are email and spreadsheets. That's where most of the work was getting done. In a consolidation world, you may have an operations team that may be using another work management product, and we may be in the marketing team. And generally, when the RFP comes, we're like, "Hey, we have x amount of users already. They're looking to deploy across the company. They want scalability. They want enterprise readiness. They want flexibility in the data model." And I think like those are the things that we can demonstrate. And then I think when you layer on AI on top of that and our road map, I think that really highlights how far ahead we are thinking in terms of the work management category.

Yes. It's very clear. You rolled out new pricing and packaging last October, right? Can you give us an update on customer acceptance of the new packaging and pricing?

Yes. So we have, I want to say, almost 40,000 customers now on the new pricing and packaging. So about 40,000 has already -- more than 40,000 customers, because we've migrated -- about 40,000 -- actually 40,000 customers now have access to all the AI functionality. So I think that's going well. I that it's one of the reasons it's probably also helping with our pipeline growth year-on-year, just -- it's certainly helping us on some of our renewals in terms of legacy customers moving, because we put some limits on the lower SKUs. Like our old business SKU, you could have unlimited -- you can buy a limited number of seats. Now you can only go up to 500. It's also allowing the teams to have an upgrade conversations with those businesses that are on a particular SKU to move into an enterprise and enterprise plus SKU. And those have been very positive, I would say.

And then what is the internal debate in the plan on pricing in the future? Do you expect to have annual price increases? Is it more aligned with material product enhancements? What is that debate and decision?

Yes. I think the friction with price is actually less about increase, is actually more about should we -- the key to -- how we think about and how we measure the business long term is how many seats can we get deployed across an organization. That's probably the most important thing. Because we know with AI, if we have all the relevant data around how your company does work and the context around that work, we can really amplify the value that we'll be able to deliver for you. So I would say increasing price is actually less important and actually acquire more seats within an organization being much more important for us and then being able to add some of the consumption-based research and doing some of the add-ons on top as the way we will increase the ASP over time.

Okay. That makes sense. Can we talk SMB for a minute? There seems to be some mixed messaging about which companies are pulling back from SMB, who's leaning in more. Companies seem to be blaming each other or point to others, he's pulling back, or not pulling back. So can you just describe what is happening in SMB, and how you're performing there maybe where there is or is not more or less competition?

Yes. I mean it's kind of interesting. I mean, we pulled back on SMB about 1.5 years ago to focus much more on moving upmarket. Even when we made -- when we -- I would say when we did our [ RIF ], we were just much more cognizant around protecting the enterprise side of the business and making sure we were pulling back from the SMB because we wanted to move upmarket. We haven't shut down that side of the business, but I would say that business actually continues to be healthy. It's not -- I wouldn't say it's grown -- it's continuing to grow, but it's not the area that we're focused on. We don't have a lot of resources around it. Most of the resources are really around moving up enterprise, like the WIS, this event you just saw, essentially in the past -- maybe 3 years ago, you would have seen us spend much more money around getting end users to the event. If you talk to the folks at this event, most of those were like CIOs or directors of IT organizations.

Yes, I noticed.

And buyers of organization. So even the go-to-market and the folks that we're targeting to come to place -- to come to our events are very different than they were even 2, 3 years ago.

Okay. And you talked a bit about this, the headcount reductions impacting churn or growth. I think earlier, you attributed that in the past to technology industry exposure, which has been outsized. Layoffs at least were during 2023. On the flip side, can you talk about industries or verticals where you are seeing greater strength?

Yes. I would say probably like if I look at the last few quarters, professional services continues to be a very healthy sector for us. Manufacturing and retail continues to be like pretty healthy industry growth areas for us. Tech obviously is a slower -- is probably, I would say, more bottom of the list right now just because a lot of tech companies are still buttoned down, unless you're an AI. But generally, I would say more traditional industries actually have been very healthy for us. Health care has been another one, I think, that we've highlighted on our earnings call, the last 2 or 3 calls.

And then just looking at my notes, you said enterprise software demand stood out to us relative to a lot of the peers. And just kind of touching on my earlier question, why do you think that is?

The question?

The enterprise software demand, your comments stood out to be much more positive relative to a lot of your peers.

Yes. I mean it's -- even when we were kind of going through our own earnings and then reading everybody else's, I also wonder if we were -- our execution was just not very good maybe 1.5 years ago, and that having upgraded the talent, we brought Ed McDonnell from Salesforce, Shannon Duffy from Salesforce. Essentially, we brought on a bunch of Salesforce executive whose revamped their team, revamp the go-to-market, much more focused around field enablement, the discipline and the rigor. I do feel like it's a 180 degrees change in terms of both the discipline and rigor that they brought on. So it's hard for me to comment like when -- without knowing if those companies went through those types of changes, hard for me to like do apples-to-apples. But what I've seen at least from the team is the accountability is very high across the sales organization. They're very metrics-driven in terms of both pipeline and productivity. And those things give us much more comfort, kind of going into this year, around the team that we're operating with and versus the team that we had last year.

And then it's back to the focus on the enterprise versus the SMB. I mean it seems like a lot of the companies in the space are now focusing upmarket on the enterprise. We have seen uneven results last few quarters. Just curious of a company reporting tonight, and just love to hear your kind of quick thought into that print [indiscernible] long or short that stock into their [indiscernible].

Did they just print?

Yes.

They had okay numbers, right? They looked okay. And I think they had a -- but they also announced a repurchase, corporate repurchase. So I think -- so maybe that was a good news with bad news, or good news with good news. Who knows?

Okay. Do you see Smartsheet very often during the RFP process?

I would say they're -- especially in larger deals, we see them, and I think it depends. It's generally who we see are -- it's generally going to be a Smartsheet or monday in those deals. And then the occasional -- you see an occasional Jira or Trello, Atlassian.

Are the first 2 some of the companies you're displacing during consolidation? Or are they generally smaller vendors?

No, we'll displace -- like Palo Alto, like those were displacement of pretty big -- these players that we just talked about, yes.

Okay. We have about 1.5 minutes left. [indiscernible] if the audience have any questions about the AI release earlier, we have a mic in the back. If not, I can always relay them up here as well. Okay. I think we're all set then. Tim, thank you so much. Thank you, again.

Yes. Thank you. Look forward to seeing you.