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

Yes. I have to think about going last minute, and I called my assistant. She was like, I'm booking this flight for you, there's no chance. Well, we just celebrated [Indiscernible] first birthday, and that was not his -- or not my first rodeo for the birthday party, and this is now my second fireside. So we're getting break it in here, but I want to say thanks again for the Asana team for being here today. I'm Ryan MacWilliams, SMID cap software analyst here at Barclays. With me from Asana is CFO, Sonalee Parekh and Chief Operating Officer, Head of Business, Anne Raimondi. For those who are in the room and on the webcast, we won't be taking questions directly. So you can e-mail me at [email protected], we can get those questions in. Sonalee, great to see you, how are things?

Really great, and it's wonderful to be here, and thank you for having us. And yes, I have been in the seat officially -- literally today, it's my 3-month adversary. I started September 11, it's December 11. So it's been a wild ride so far.

Yes. I mean you have the -- Asana luck charm. I could SMID Cap software is back, but you guys had a great earnings results, last earnings season, stock up 20% plus.

I mean, we love just to hear from your point of view, kind of what that last 3 months have been like.

Yes, sure. So as I said, it was -- it's been 3 months. And the first month, you're really getting to know the teams and getting to know the product. And what I really tried to do was immerse myself in that product and really see the value that it brings not only to my day to day work, but like speaking to customers. And funnily enough, one of our largest enterprise customers, the CTO happens to be a good friend of mine. So she helped me get up to speed as well. And to quote her, it doesn't -- if it doesn't happen in Asana, then it hasn't happened. And I think that's pretty compelling when you hear a customer say that. But I've really tried to spend time with customers. And the team broadly, Anne here, who is our COO, so all of revenue reports up into Anne, building strong relationships with her and our CRO and our CMO who are also not as new as I am, but fairly new to the business sort of in the last 18 months. But really, what I found is there is a huge amount of opportunity in a very fertile space to grow, a lot of greenfield opportunity and a category where we are in truly early innings of penetration. So I see an opportunity to both continue to grow and to hopefully accelerate growth, whilst at the same time, being a lot more judicious around driving efficient growth. And again, some pretty clear opportunities. As you can imagine, if you're a CFO, you come in and you benchmark everything, right? You benchmark against your collab peers, you benchmark against enterprise software. And within those bench marketing exercises, I found areas where myself and the team are double-clicking, and I found a team, my peers who are very, very open and willing to engage in those discussions, which just makes it so symbiotic. So it's been great. And hopefully, you saw in earnings, we've outlined the type of financial profile that we'll be targeting, and I think it resonated well with all of you. And we believe that there's an ability to create outsized value in this category and in this sector where we're so early in the opportunity.

Absolutely. I joined Barclays and launched [coverage] in October 2021. And we were supposed to do a lot of IPOs and it was much healthier time for software. And then I joke around [Indiscernible] joined my team a couple of months later and we entered a much different environment for software in 2022 and 2023. And as folks shifted to profitability suddenly that was one thing that investors kind of highlight that you did a great job at your last role of like really driving -- maintaining efficient growth during that rougher period, but improving operating margins like over 10% during that time. So as you look at your past experience relating to your new experience, like what do you think some things you think you could bring to the table? And some levers you could tweak at Asana.

Yes, sure. Great question. And I do -- it's funny, we did a shareholder perception study when I first arrived to Asana and that was something that came out loud and clear. So I do have a playbook. And it's a very different category, UCaaS versus collaborative work management, and a very different in many ways gross margin profile. So what I would say here is I actually think the opportunity to drive operating leverage here is significantly higher and better. We're -- I think it was 89.4% gross margin this past quarter. Areas where I'm double clicking right now, clearly, sales and marketing. We are pretty far off a benchmark, and I do see scope for us to start to move closer to benchmark. It's not something that happens overnight, though, because we do want preserved growth. And we value and the market values growth more than anything else. So we need to ensure that we continue to make the right investments to drive growth, but we see an opportunity to drive growth in a more productive fashion and that's both on the marketing side. And that's really around the efficacy of our marketing spend. And as you all probably know, we have a product-led growth side of the business, and we also have a sales-led growth side of the business. And I'm sure Anne will speak more to this. But we have a CRO now who's been in the seat for about 18 months and that operational cadence around driving that sales-led motion is really coming into its own. And we want to make sure that we have dollars to invest for him to be able to go and deliver on that strategy. And we've already seen great success there, and you probably saw in our earnings, but I'm going to say it again, our 100,000-plus customer cohort grew 18% year-over-year in dollar terms. So that's significantly above our corporate average. So again, it's about not just cutting the investment dollars, it's about reallocating them into areas where we see maximum potential for leverage. And you talked about the margin improvement or expansion of [Indiscernible], I would see at least as much scope to drive improvements here at Asana. And the other big bucket I would talk to is R&D. And one thing I think is really important to clarify is, yes, we have had fairly high R&D spend, but we have also now established ourselves as a multiproduct company. We launched AI Studio. And if you couldn't tell, we're pretty excited about it. Again, I think Anne is going to talk a lot more about. But AI studio was many years in the making. We've been working on this. Dustin have been working on this for several years. So when you think about that R&D spend, as I look ahead, we're amortizing that former spend over the last several years. Over the next couple of years where we're going to generate very high ROI from that spend. And you should now expect that we've launched this new product that our R&D spend is going to go up to be able to support it. A lot of the spend is behind us. And I think that's a really key point to make. The other point I really want to make is that innovation and product orientation and product leadership, it's one of the reasons I joined this company. Like I will never forget meeting Dustin for the first time. And he could barely stay in his chair when he was talking about AI Studio, and it was funny, he was sitting, and then he go to white board, and then he come back and sit down, and go to the white board. He was so excited. And that's probably the main reason I wanted to join Asana was because I feel like what we are doing in AI and also the advantage we have from building it on top of our work graph, just makes it such a compelling value proposition to our customer base. So I would say watch the sales and marketing and R&D spend buckets that you should see positive progress there. And then G&A, so I think across the board, we can drive significant, significant margin expansion and free cash flow.

It sounds like you definitely have a lot to work with. Yes, from your prepared remarks, it said financial efficiency while maintaining strong growth. And I was like -- that sounds like [Indiscernible]. So fingerprint is already on Asana. And before I go too far down the rabbit hole of AI Studio, your core and 100K-plus customers, like you mentioned, will be accelerated in the quarter. I guess like just for your core business growth, what's kind of driving better momentum at this point?

Yes. Well, one, I think we've shared -- we've worked through some of our large known contractions. We've been spending a lot of effort in really building out more discipline around vertical and vertical focus outside of tech. So manufacturing, energy, we are pursuing FedRAMP. So government and heavy heavily regulated industries. Retail in Europe has been really strong for us and then health care. So the diversification outside of tech, I think we're starting to see that across the board. I think as Sonalee mentioned, it's also just been great to finally have a full go-to-market team from a leadership perspective in every region. And that's not just all our sort of sales leaders and GM, but it's all the operational folks, enablement. And so really higher efficient, higher productivity team globally, and that we're starting to see pay off and a lot of focus on larger deal conversion and sort of all that discipline. I wanted to just follow up on what Sonalee said about marketing. Just to give some more perspective, which is our CMO is coming up on 2 years. And a lot of our spend historically is on Digital and demand gen, just given how Asana has grown up. And we needed to have a couple of cycles as she and her team built out revenue marketing so our events, our thought leadership and really look at the ROI of those investments compared to digital demand gen, which we had great history on and can sort of see that return and really be able to have a couple of cycles where we can compare the ROI on the investments, especially because enterprise sales and marketing can be more expensive. But it also lands in larger deals. And so that now we have more confidence around and more track record on. And so as she -- and looking at how she adjusts her portfolio to drive more efficiency, we can have confidence in that based on the data that we bought.

Excellent. So your go-to-market motions have more seasons and are in a better place. And your product investments that resulted AI Studio, which I've got a lot of buzz in most recent quarter. Love to hear from your view kind of like the strategy behind AI Studio? And what customers initially feedback you've gotten from them?

Yes. So as Sona mentioned, the way for us to think about sort of our AI investment is, it is built on top of what we've been building the Asana platform, to deliver for customers over the last number of years. So AI can only be reliable and useful if the data that it is based on is reliable and consistent. And so the architecture of Asana, which is a work craft, which allows our customers to understand who's doing what by when and how it ties to the company goal. That kind of content is really what AI -- AI studio is built on top of. And so what we're seeing with customers is, first and foremost I think customers see this as an opportunity to accelerate what they already wanted to do with Asana and make that sort of simpler and easier and faster and then what we're seeing with customers. And so we built this with a cohort of our top customers and really iterated with them. And what we saw that we are particularly excited about is not only were they accelerating what they were already doing with Asana, it sparked ideas of additional workflows to bring into Asana. I think that's what got us really excited about the opportunity to even just expand use cases. And then I think the other thing that we're -- early indicators that we're all excited about is, we really had originally designed this as it for enterprise customers, given that we're moving upmarket. We are seeing maybe even sort of faster excitement and adoption around mid-market and then also seeing the self-serve motion. So some of our hypotheses are like, "Oh, it's going to be a combination of platform and some services that may be true for enterprise customers that want that level of support, but we're seeing smaller customers are just as happy to do it on their own. So that means just from like a product and customer base standpoint, this product can reach all of our customers.

Sorry, I just want to follow up on that. Yes, I thought it was a really interesting point on your earnings, you talked about, this is not just agents. So like there's -- we can add more complex use cases as a part of that. So I guess as a part of that go-to-market, do you think there will be a little more hand holding as you go into the enterprise for AI studio, but that ultimately like result in like more expensive use cases and like maybe bigger ACB?

Yes. I do think that for some of our enterprise customers, they want the partnership on the services side so that they're implementing AI Studio and the and the workflows in a way that can really be scalable. I think what we're seeing with mid-market customers is if they have talent, and it's just even 1 or 2 people on the team, whether in IP or more technical, those folks can actually very quickly deliver value for much larger teams. Like so we talk about it as, we only need 1 or 2 builders who are in the product, and they're really building scalable workflows that can serve the entire company or certainly entire departments at scale. And that's a little bit of a different dynamic for Asana in a good way, right? In the past you think you really needed an entire team or as we scaled an entire department to be using it to increase value. And now just a few people within an organization can create that outsized value for a large mass of the organization. Maybe to make you more concrete, one of our financial services customers who is in the pilot program and we're iterating with us. Their IT team has built out a couple of intake workflow. So IT gets thousands and thousands of requests for enhancements, new technology, all of that, they had built in Asana, but it took the people triaging the request, prioritizing them, deciding what resources. Now AI is doing all of that based on their criteria. And so the speed to response as well as just the volume of intake that they can do has just accelerated. And then they brought in additional workflows that this spark where it's like; oh, if it works this well, a large part of their business is also making sure customer requests and feedback it routed to the right experts in the organization. They have a big portfolio of financial services products that require sort of subject matter experts much of the time to answer these questions. They've automated all of that using AI Studio. So those questions, it's also another type of intake process, all get routed through Asana that large [Indiscernible] of documentation that they've had that these experts have built up, take a first pass at answering the questions, harder questions do get routed. So we talk about having human in the loop -- but this is sort of transformed the speed to response to customers, which is core to their business. So the more we're -- and again, it only took a couple of people to build these entire teams.

And I mean, you explained that better than I could. But to get my soapbox real quick, like that's where we've been doing a lot of research on right now in the sense that like we published that if an enterprise themselves want to do AI, it would cost the like $75 million today, right? So they don't really have in-house expertise, so they're relying on their existing SaaS vendors to provide them AI tools. The problem is, if you go functional area by functional area, then you have all these different agents that are in different parts of your business, something like Asana, that lands across your entire business, right? Then you connect use cases across your different departments, different functions. So -- and that makes sense of like adding value beyond like individual department use cases to like a bigger scale. Does that make sense? Or do you...

It does. And then like peeling a layer deeper, what we hear from our customers, both in North America, and then we just spent a bunch of time with customers in Europe who have even higher sort of security and data and compliance. The other thing that enterprises are really dealing with is every software vendor has an AI solution, but not all software vendors are as transparent and open on which models are being used when and how, as well as not all vendors are using multiple models, and designed in a way where if an organization wants to bring their own model, they can. That is actually what they -- a lot of enterprises tell us they value about how we've built out AI. So customers can choose the models. It's a chance. If they don't want to choose models, they can still see which models they're being used. That helps them manage costs, but there's also transparency on data and security and privacy if their security team does not allow them to use, that can be configured and changed in Asana. And then ultimately, some of the larger enterprises will want the option to bring their own model for certain workflows and use cases. All that is possible. And so there are couple of customers in Europe that said, right now, of all their software partners, Asana actually is the only one that was approved for deployment.

Excellent. Well, certainly, we've been through a tougher environment for software, right? Hopefully, it sounds like the core business is stabilizing. It's a lot of new things from a product standpoint at Asana. Just on AI Studio, this is one of the first consumption-based pricing products for Asana. Can you just talk about what that means and love to kind of hear your view on the overall pricing strategy for AI Studio.

Sure. So it hasn't gone into GA yet. So we go GA at the end of Q1, just FYI. So right now, it's still very much a pilot. But the intention is to have both a platform fee, as well as a consumption fee. And the platform fee really, from my perspective, as a CFO, I think about it as way more than offsetting any potential gross margin degradation that could come as a result of that. And I'm sure that's a question that you have. Like you don't need to model in any degradation. It's way more than offsets it. I don't want to say the actual percentage because it's very high. But we expect in the early days for many of the customers to live within that platform fee. And we haven't disclosed the amount of the platform fee. But in the case of a mid-market customer, the platform fee itself, could be multiples of the ACV. But again, it's not a seat-based model. So you could have this customer paying the platform fee and having broad, broad applicability and benefits across the entire organization. And then in terms of the consumption fee, if you think about the ROI that customers who are using up all their credits because with the platform fee you get a certain amount of credit. And the reason I say most customers will live within that platform fee is, the amount of credits that we give you with that fee on a quarterly basis, which actually won't be -- you don't get to roll over your credit, it's kind of use them or lose them. It's sufficient to do thousands and thousands and thousands of workloads -- workflows. But over time, we would expect our larger enterprise customers to really enter into this consumption part of the model. But the amount that they would be paying on a per unit basis would be [Indiscernible]. It's not -- I think a lot of -- quite a few people have asked me about this sort of Agentic model that I think a Salesforce is talking about, which is like, I think, $2 of transaction, something like that. Ours is very, very different from that. And what we want to do first and foremost is like we really want to encourage adoption. We want as many of our customers to actually take this on and see the value from it. And then ultimately, I do think it will be something the type of product that will have pricing power.

Yes. Absolutely. So that's a great point. Like a lot of pain points we hear about initial AI adoption is how do I know if I don't turn this on. It's going to be 100,000 the first week or something, right? So it's like, look, here's a bulk of credit that you'll start with. And then you have a better sense when you get through those, what your spend would be like.

And that is -- that was exactly the feedback that we got when we were piloting with customers. So we're not only piloting the features and what value they could get out of it, but they were giving us input on just pricing compared to other offerings. And to follow up on what Sonalee said, a lot of customers are telling us predictability is really hard in this environment. And they understand it because the -- intellectually, they understand it because things are changing so quickly. And just from a pragmatic standpoint, they value budget predictability. So putting the offering together in a platform fee was really based on the customer insights that we got on how do we reduce that friction upfront on not knowing what workflows are going to be the most valuable and wanting to experiment. And so this is a really good way for customers to feel really confident they're not going to go above the budget that they have allocated right now. They have visibility into usage. They have cycles to see which are the most valuable, what else they want to bring in, and then they can grow accordingly.

Excellent. I definitely would love to continue to going down the rabbit hole, but certainly we've have you here. But I have to ask like I know it's early days, it will come out in the fiscal first quarter '26 next year. Should we think about it as being additive to growth next year or it will have to take time to deploy throughout your customers and get used to it? Like how do you think about the revenue contribution?

So without guiding -- because you're absolutely right. You'll have to wait until March for that. But we certainly see it as additive and incremental. Not to -- I mean, in Q4, it will be very, very, very small. And we're currently actually debating how we should disclose our progress because we do want to update you on key milestones because it's a new product. I think it's really important to be able to give you a way to judge the success of it. Internally, we'll be monitoring it. We have our own ARR targets for this new product, as well as a certain degree of adoption and penetration of the base. But it's small today, right? So -- and we're close to a $750 million ARR business. So in order to make a dent on that, it does take time, but we would view it certainly as incremental and incremental for next year.

Excellent. Yes. And the platform fee will help you give initial visibility. So from your seat, it will hopefully be a little easier than...

Exactly to predict.

And I think it's also something that is really straightforward for the field to sell.

Yes, that's actually a really important point.

And that's why I wanted to go next actually. And you've been at Asana or you've seen some competitors of Asana be taken out by private equity. There's -- one of your large competitors just saw a buyout as well. I mean, is there a strategy there to -- or what's the playbook you think going forward? Like, is there opportunities that you guys could maybe gain incremental share?

Yes. I think there definitely see opportunity with the changes in the competitive landscape, largely because customers are also telling us -- both customers and prospects are telling us that they are looking for opportunities to consolidate. Some of that is driven by AI, wanting -- some of it was driven even previous to AI sort of in this buying environment, not wanting different departments using to rent tools, ultimately, if they're trying to collaborate cross-functionally and so valuing Asana's ability to scale the size of the deployments that we have compared to competitors, the integrations that we have with their core technology stack. And so now with some shifts in the environment, I think that, in some cases, accelerates customers looking to consolidate just so they can be working more closely with one partner and then also confidently deploy AI because they -- what they said is like, hey, we're -- if we continue to have sort of multiple tools within our organization, we're not going to get the benefit of AI on top of the collaboration stack.

Excellent. Sonalee, I just have to ask, you hear about companies and then you start working there and everything might not be exactly how it seems or like you're surprised by how things work. Like, as you're probably still in the honeymoon stage for sure. But is there anything that has been exciting or even surprised you from before you took the role at Asana?

Yes. So AI Studio has surprised me. Like just in terms of how quickly our customers started engaging with it. And again, Dustin is jumping out of the seat. But -- so that's been a really positive surprise. I had the opportunity during the interview process, meeting my team, including Anne. And what I have to say is like it's been amazing in terms of collaborating with this team. They've just been so open-minded and really keen to lean into thinking about doing things differently, which I love because you never quite know as you say, but I've seen a real openness. And the other thing I would say is like specifically on Dustin is I came in and then of course, you meet directors and Board members as well. And people -- and I saw this with the shareholder perception study have a view on how Asana has been run. And what I will say is I've been very pleasantly surprised and hopefully, you saw this in the earnings call, when I dig in or make suggestions around doing things where we might be either reallocating investments or looking even at the geo mix of where our people sit, which is another big opportunity. At a company of our size and scale, ultimately, as we continue to grow, it would make sense for more people to be in lower cost geos. And like, again, he -- and hopefully, you saw this on the earnings call when I talked about productivity and efficiency. He came over the top saying like, I'm aligned. This is what I want to. So that's been a really pleasant surprise. And as you say, you never quite know because when you're in the interview process, it's also like a little bit of coding, but what I've been very, very pleasantly surprised there.

Yes. And I'm sure you're also just looking at the 89% gross margin -- there's a lot we can do here. And I want to wrap up, just one of your points you made that like, the AI studios like really activated your go-to-market. I think it's like that's maybe not -- I don't want to go too far like -- it's a natural upsell. So there is an existing customer base and the key stakeholders at the clients that they're familiar with, like you see them like, okay, now we can have a new thing like sell on top and you're seeing like a more motivated salesforce.

Salesforce is really excited. Because if you think about it, prior to having an AI Studio, we have had packages. It's like packages and seats. And the team obviously has been changed on that and excited about being able to deliver value, move people into the right packages, expand. But now this is something that they can bring to all existing customers, even if we are already wall-to-wall with a customer, this is another thing to sell even if someone has already up tiered, this is another thing to sell. That also -- both addresses existing players and people that are already champions, but then also opens opportunities for like new departments and new champions, especially with IT. And so I think that puts out in the field really excited, so which gets us even more excited about bringing it to customers faster.

More to come. Well, certainly, it's been a great start to Sonalee and great start to this conference. So thanks so much, guys. I appreciate it.

Thank you. Thank you everyone.

Thank you.