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

Jobs to keep things on time today. Once again, Mike Funk, Bank of America, SMIDCAP Software Analysts joined on the stage by Matt Bullock, who also works in the software team. He'll be asking some questions today as well. Very grateful once again to have Asana and Sonalee and Aziz here with us at the Bank of America conference. So thank you.

Thank you. We are really delighted to be here.

And really great timing, my perspective, at least. You reported earnings last night, and so kind of hot off and press.

I wanted to kick off with a few points, maybe some clarification, I think maybe some investors were confused on last evening. And on the FX first certainly. Last quarter, I think you talked about kind of 100 basis point headwind, but that was rounded to me was really 80 basis points last quarter and what you guided to for the year, a lot change in FX. And investors were thinking that it should have been a much larger help, how you framed it last. I think last time, you framed it now as a 50 basis point tailwind, right? So can you just, I guess, correct me if I'm wrong on that, and then kind of give us the like-for-like back to how you talked about 80 basis points last quarter to where we are today?

Sure. Okay. Starting with a very tactical -- specific tactical question. I love it.

I just want to address the kind of biggest question.

Yes, absolutely. So I think, firstly, I'm going to go back to when we guided Q4, which was in March, where I'm just going to repeat what I said on the call yesterday. That was a really different time in terms of the macro than where we find ourselves today. So when we guided in March, we guided 8% to 9%, 8.5% midpoint. And we said that currency was about 1 percentage point headwind to that, it was about 0.7%. So yes, that was around.

I was closed with the point.

Exactly. It was about -- actually probably 0.75%, something like that. But you're there or thereabouts. And last night, we guided 7% to 9%, so 8% midpoint. And we didn't specifically call out the tailwind from FX in that new guide. So in that new guide, there is a tailwind from FX, and it's about $5 million.

Yes. Is the right way to think about it Aziz or something else?

Yes. And I think one of the -- we framed the 9% to 10% comparison in Q4 versus the guide of 8% to 9%. It was really to say, in our Q4, the change of currency devalued our ARR base by about $5.5 million. So if that wouldn't have happened, the guide would have been more like 8.7% to 9.7% and rounded to 9% to 10%. And that was our basis of comparison because analyst models had not taken that into account. They were at 11%, but that didn't take into account currency coming down. So that was just a frame of reference, not meant to be a guide.

Really more to helping analysts in their modeling where you felt that people they were out of balance with how they were modeling?

Exactly. This act is now the headwind that we had faced over the course of Q4. Now fast forward, we did have a tailwind over the course of Q1. That's driving about 50 basis points to the full year. It wasn't felt that pronounced in Q1. It was only about 20 basis points to our Q1 growth but 50 basis points to the full year. So that's about -- if you want a like-for-like, it would be 8.9% -- would have been -- 8% to 9% would have been the constant currency guide. And then the new guide would be on a constant currency, 6.5% to 8.5%.

Okay. Thank you for answering that. I know it's got more tactical. Maybe you wanted to address first.

Just to add there is like we don't intend every quarter to guide in 2 separate ways. And like we really -- exactly. And we really called it out in Q4 because it was such a big impact in a single quarter. So that was why we called it out. So...

And I think there were 2 other points, I think, last night that are important. There was also the offsetting of a factor in the guidance from the renegotiated contract with a large customer. I don't think you need the customer on the call, but...

No, we didn't. But it's a large enterprise tech customer and our largest customer.

Yes, exactly. And that was an offset to the FX help in the guidance as well. And then you also had, I think, what you characterized as unseen but possible macro headwinds that you're now incorporating where last quarter, I think you said the guidance incorporated, no change in the macro. So did I capture everything that was...

Perfectly. And so just to be clear, on the 7% to 9% that we guided last night, the low end of that guide incorporates a worsening of the macro in terms of what we're seeing today. And we did call out some trends that we began to see really around April, and I think we're not alone there. I've seen others call out post-liberation day. And some of those trends that we've seen are slightly more elongated sales cycles, slightly smaller lands. Just a bit more buyer scrutiny. And by the way, I'm becoming -- I'm scrutinizing things more like as because he's like things that come to my desk, I'm like, no, like the first response is no. But to get to that lower end of the guide, we would need to see things change for the worse in a meaningful way. But I wanted to give ourselves that room in that space because I feel like, as I started with my opening remarks, the macro that the world we're operating in today is more uncertain than it was when I last guided, which was in March. It's just a more uncertain.

Would you characterize the low end of your guide as being derisked?

I would say it's prudent.

Okay. But not derisked, you wouldn't go that far.

I mean, again, we don't know, right? But I would say, it incorporates a degree of conservatism and prudence.

Okay. Fair enough. I want to let Matt jump in now with some questions. Aziz, I think, is going to answer a lot on AI studio. We've spent a lot of time and obviously, Sonalee, everything else.

Thanks, Mike. And Sonalee, before we get into the AI studio, I wanted to touch on that $100 million-plus TCV deal over 3 years. Obviously, a huge deal for the company, speaks to the strategic nature of Asana. But I know there were some puts and takes in terms of the ACV there. I believe seats did expand, but there was some incremental discounting because of the 3-year deal. Maybe you could help us better understand kind of how that renewal process went and kind of the financial impact of it?

Sure. Absolutely. So you're right. It's a $100 million TCV deal over 3 years, largest deal in our company's history. We feel a real testament to not just our leadership in the category, but our ability to scale, to be able to serve a customer at that level. And we didn't disclose the actual number of seats, but you are indeed right, it was an expansion. And the expansion covers up to a certain number of seats, but we actually see room for it to expand even beyond that. So we actually think that it could expand from a financial point of view as well. And the deal, the $100 million TCV doesn't cover add-ons, things like AI studio, which we think we feel excited could be an add-on. And then also things like services, foundational service plans, which we talked about, again, that could be incremental. But when we -- we're -- and Aziz were and I were part of the deal team, like there's some commercial sensitivity here. And I'm sure that partner will listen to these remarks. Like there are always puts and takes, and it's not unusual for a deal of that size and scale for you to be willing to afford a slightly higher discount than the last time around, because the last time we negotiated with that counterpart, it was for a 1-year renewal. So I was willing to trade off a bit on price in order to get the visibility. And like CFO loves visibility. And now fiscal year '27 and fiscal year '28 is significantly derisked. We don't have to go back to that negotiating table again. And in the meantime, we'll -- if you think about our road map, which Aziz will touch on, there's a lot of new stuff that's going to be coming out between now and then. AI teammates, Dustin talked about on the call, AI -- sorry, resource management and AI Studio Plus. So all of these things, we believe, could be add-on. And we are nowhere close to going wall-to-wall with this customer.

Right.

It's a significant customer, obviously, if the ACV is $100 million divided by 3, but the ACV did incorporate a modest downgrade, compared to where we were a year ago. And you asked how all the negotiation went, some of the things that we are going to do with this customer is partner with them on innovation. And actually, they are one of the greatest innovators in the world. So we see upside from that, too. They have a huge marketplace. We see upside from that, too. So there's more to go for.

Interesting. And maybe if you could touch on the impact to NRR, that's certainly been topical for the Asana debate. How is NRR going to be influenced by that renewal, maybe 2Q throughout the remainder of fiscal...

Yes, really good question, and thank you for asking it. So as you know, we have been seeing like let me start firstly by saying net retention is not where we want it to be. It is a huge priority we need to fix it. And we have a lot of strategies, including a new chief customer officer in place to drive that. In the current quarter, our in-quarter net retention was actually stable. But as we look ahead, as the renewal comes into our numbers from Q2 and into the rest of the year, that downgrade to ACV will pressure our in-quarter NRR. So you should expect that to go down. I don't think we quantified it by, I would say, at least 1 percentage point. That being said, a lot of the strategies that we have in place now, things like better coverage of our small business base, which actually had not really been covered and it tends to be a churnier part of our overall customer base. We have a much better coverage model in place now. That should start to bear fruit as we exit this year. We also have -- we've become a multiproduct company. So we have AI studio that we can introduce into renewals conversations. That has been really helpful. That should continue to help and offset. And what I would say is if it weren't for this live mark deal, which specifically impacts our tech vertical, our enterprise tech vertical, we would have seen a continued stabilization in our net retention. And our goal as a management team is not just stabilization. Once we get into fiscal year '27 and the impact of this ACV downgrade makes its way through, we would -- we should expect stable to improving NRR again. So we sort of see it as like stabilization interrupted, but interrupted by this like very specific deal. And then the only other thing I would call out, an AI studio is a big mitigant to this. We have since April, seen slightly more cautious behavior, particularly in our renewals book from certain customers in the enterprise side. And there, what I would say is whilst we're seeing some downgrade activity there, we're retaining the logos, and that's really important because that means when the macro comes back, you have an opportunity to expand again with those customers. And in fact, our logo churn this past quarter has improved and I expect that trend to continue. So it's not all bad news on NRR, it's just we felt it was really important to give you a view because we had talked about the stabilization on what was likely to happen over the next couple of quarters.

Absolutely. And it's a good segue into some more questions for Aziz on AI studio because we had the very exciting $1 million in ARR threshold crossed last night. Maybe Aziz, could you help us think about what's driving the success of AI studio so far? How are customers utilizing it? How quickly do they get comfortable with it? And maybe walk us through some of the upside cases for the remainder of the year in terms of adoption and revenue contribution?

Yes, sure. Thanks. Yes, it was a huge milestone over the quarter in just a couple of months since going GA of generating $1 million plus ARR and the pipeline is really strong going into Q2. So strong demand, stronger uptake. It's really cross vertically, cross regionally. And our AEs and our sales apparatus have really embraced that. In this last quarter, we had 90% of the AEs have generated pipeline and a high degree of that's late stage. So really strong enablement efforts to drive that pipeline and our whole field is kind of participating in that. The value that it drives is what's driving the demand. So I think we talked about like this first layer that we were targeting is really the builders within our base, those who have built automations with Asana. And we're seeing really strong uptake of those. Those tend to be some of our larger customers. So of our top 100, I think about 40-plus are enabled on AI Studio. So we're seeing really strong adoption amongst builders, those have built automations and they're driving a ton of value. I mean, we've seen some really large customers drove significant ROI that's like many, many multiples of what they're spending. So it's really encouraging. And from a usage basis, that cohort that had started in our kind of early trial preview-type phase, the growth of that cohort in terms of usage has grown and grown and grown. And we've seen a handful plus that have actually graduated to consumption base and are buying top-up credits and moving on and so forth. So that's super encouraging. What will drive the kind of continued strength is really bringing AI studio from kind of those who build who have built automations to more of our general base, and that's really in 2 ways. One, we introduced the smart workflow gallery, which is a gallery of templated use cases like HR onboarding, building a marketing campaign, agile product development, project management, ticketing, amongst others, that customers can adopt extremely quickly and start realizing the value of AI studio in a matter of hours and less than days. So this has really targeted those who are not builders. We aren't going to build custom rules but want things that have worked for others that drive value very quickly. And it's early, but we're seeing strong adoption. That's driving and fueling the funnel because you can imagine like our sales force now is really coming with here's solutions you can adopt today to common outcomes and the business outcomes that our customers want to drive. I think the second thing is bringing this capability to our full base. So self-service will be available in Q3, and that will open this up to the whole base. And then also in Q3, we're introducing a new kind of add on to AI studio, AI teammates, which allows work to be done in a multistep way with basically agents or teammates that are doing the work that are executing the tasks complementing the humans that are teamed with those agents. So that's super excited. And that's, again, targeted non-builders and driving more value from Asana from the work they do.

So it sounds like there's multiple catalysts to really even further accelerate the AI studio momentum in the back half of the year, which is exciting. Maybe if you could talk about the monetization strategy over the medium term. I think it's fair to say we're certainly still in the proliferation phase. But right now, most of the ARR is platform fees, hopefully, down the line, we start to see more consumption-based contribution from those large power users. But help us think about, is there a critical mass you're targeting before you flip a switch to more monetization from proliferation. Or how should we think about the business model?

Yes. So we think there's a huge opportunity just in the platform fee. And we've seen in cases of the customers the platform fee actually eclipsing the ARR for that customer because a few users can drive a tremendous amount of value from AI studio. And so that's really encouraging and it's key to the monetization strategy. Because -- we designed this where the platform fee would allow the customer to do a lot with AI studio and not have to worry about overages or top-ups because just the credit allotment provides ample ability to execute workflows cross functionally and no barriers to proliferating this within the organization. And that's been really well received. So we do think there's a huge opportunity just in the platform fee. And as Dustin has said on many of our last earnings calls, there are the emergence of these whales who are going to eclipse the platform fee go into consumption in a very big way. We're seeing those emerge, right? How many, how quickly still TBD, but that's kind of an opportunity to expand and accelerate on top of the platform fee. And then the real beta is bringing this to the base, of bringing this to non-builders, to bringing this in a templated use case by function by vertical, that's the real opportunity to create the beta. And that's what's happening in the second half with self-serve, what's happening now with smart workflow galleries with teammates and that really will drive that beta. So it's both the consumption element, but then bringing this to a more broader set of our customers.

That's helpful. And I wanted to switch gears here to Sonalee. Mike and I know you from your days at RingCentral when you were phenomenal in driving profitability improvements. And certainly...

I've been phenomenal at Asana too.

You have. I was getting to that. So huge outperformance in 1Q on the margin side. It seems like you're making a ton of progress on go-to-market efficiency as well. So I guess what I'd like to ask you is, what have you had -- what has been the low-hanging fruit that you focused on in your 10 months at Asana? Are there anything -- other initiatives that you're looking at to drive continued margin expansion and how do you balance that with this incredible growth opportunity you have?

Yes. No, great question, and I'm glad you asked about the balance because it is a balance. And just for everyone in the room here, I seem to have a reputation as being the person who drives profitability and efficiency. And I do believe we should be as efficient as possible. But like I love growth too. So...

You want to be changed also unlike.

Nobody repeat that. Just started, so yes, look, we're super proud of what we've accomplished at Asana in the last 10 months. And the 1,300 basis point year-over-year improvement in OP that we posted this quarter. What I would say is like, don't model that for next year because that's -- it's not linear. What I can say for certain is that you will continue to see sequential margin improvement and you will continue, I can guarantee this to see continued annual multiyear margin expansion from where we are today. And you saw that we increased the guide to at least 5.5% for this year. And if you think about where we were in Q1, that implies that at Q4 where we're exiting, it's going to be significantly above where we were in Q1, which was 4.3%. So I think that story is very much intact and there's lots more to do there and just from the actions that we took from when I first arrived, that continues to help actually every quarter this year because the savings ramp. And we made a very difficult decision to let go of about 5% of our FTE workforce. That again, it works its way through the P&L all year. The other thing I would say here, and this is really different from other companies. I'm not going to say RingCentral specific, but other companies that I worked at, which there have been several, like our gross margin here, we start from a very enviable position. Like we have a 90% gross margins.

Right.

Like it's a beautiful thing. And so everything and anything we do below that line, just with our growth drives significant, significant operating leverage. And I think there's more for us to do on the sales and marketing side. Hopefully, you've seen good progress. I think as we exit when we get to Q4, you'll look at where we were a year ago as a percentage of sales. I'll say, wow. It's never like you talked about like the easy stuff. It's never easy. But one of the things that I would say we're really excited about is we cut back our performance marketing dollars significantly. And we have seen very minimal change to pipe. And if anything, we've seen the quality of the pipe increase. So really paying attention to those marketing channels and where we're getting the highest ROI has been like a winning strategy and an area where I think we can go even deeper and segment even more and as these works really closely with the marketing team and with the data science team. So I think like more to go for there. The other thing I would say is like the R&D spend, like if you look at the last couple of years, we've spent a lot as a percentage of revenue compared to our peer group. But a lot of that was the investments we are making in AI studio. So AI studio, that investment has been many, many years in the making. You shouldn't expect now, even though our road map sounds super sexy and cool. We're excited about it with teammates and AI Studios Plus and self-serve. That's a reallocation of R&D dollars. So you shouldn't expect R&D dollars to suddenly balloon or explode on the contrary. You should expect them as a percentage of revenue to continue coming down. And what I would say there is when I arrived, if you look at our employee mix kind of where the headcount sits, high cost versus low-cost geos, it was off benchmark. And that's an area where we've been able to partly through attrition and partly through a little bit of the FTE action that we took last year. We've been able to get that more in line to industry benchmarks. And I think as we continue to see just normal attrition, we will do that. And the beauty of that is when you lose R&D people in San Francisco or New York, you can often go to a lower cost and replace them with not just 1 head, but 1.5 or 2. So you actually end up getting a lot more productivity for those dollars. And we don't always do that, and we're always looking for opportunities to optimize. Again, you're not like slashing and burning, you're optimizing your R&D spend. And I think we're doing a really good job there. The other thing I would say, like I sit in this category, as does my salary, like G&A, like it's too high. And this quarter, actually, it was a little bit elevated partly because of taxes go into G&A, but I think that there's more we can do there just by being more disciplined. And I like to think that the discipline that we can show in those areas will free up dollars to reinvest in things like AI studio and all the exciting initiatives that Aziz was talking about. And I think you should -- when you think about the margin potential of this business, keep in mind that like we want to grow and we want to reaccelerate growth. And we feel that once we stabilize net retention and as that deal works its way through, once we stabilize net retention, that alone is a huge tailwind to grow. You add to that AI studio starting to become a more meaningful. Today, it's a more meaningful percentage of our bookings, our net bookings, but when it actually starts to be a more meaningful contributor to revenue and then you combine that with some of the things we're doing on channel, which we think truly lends its -- AI studio truly lends itself to selling with the channel more, and we think we can really accelerate that. You get to a point where you're looking beyond this year and you reaccelerate growth. So I want to make sure that people realize that some of the savings we want to reinvest in the business. And this category has like this amazing greenfield opportunity. My enthusiasm and you asked -- you've asked me before, like why did you join Asana? I remember you asked me, Mike. And the category and the structural growth and you combine that with the AI opportunity, like my enthusiasm is so much higher today, 10 months on. And like I feel like there's almost no limit to where it can go. And like all the adjacencies and, at the same time, becoming more efficient. The financial profile we can drive, I just think there's a huge amount of value creation that can come from that.

It's fantastic. And I wanted to wrap up. We have a few minutes here left. I wanted to wrap up on by touching on SMB because that's been, I would say, given all the noise, a really nice upside case for Asana, believe growing well above the corporate average in SMB, very topical. I used the opportunity to plug our SMB primer as well and check it out. We published them last week. Can you talk about what's driving that strength in the SMB segment? You mentioned you're even spending less dollars. Are you benefiting from lower CPMs? Are you just more efficiently allocating dollars to different channels? Anything would be helpful there.

Yes, I think it's both. We're -- from a channel and a geo mix really have optimized on that to understand and a lot of this is the models, and things that we've built behind this to be able to be a lot more precise, but understanding dollar and ROI and kind of cost curves. And so we've been able to, as Sonalee said, to drive healthier pipeline, more pipeline, higher converting pipeline with less dollars. And that's -- a lot of that paid media is going towards SMB. I think the second is on the product side, like there's been some great new features and focus on SMB onboarding and how do we not only convert them from the trials, but once they're here, keep them for longer because that SMB base, especially those are monthly, they churn at a higher rate, and it's a disproportionate amount of our churn. So the SMB strength has not been -- not only the -- on the booking side because of the efficiency of the marketing spend and driving better pipe and conversion, but there's now a conservative effort. Well, now we have them, how do we keep them for longer? We're starting to see early signs of success there, but it's a huge opportunity because a basis point 2, 3 goes a long way in terms of our net retention and our growth. So it continues to be a strength and you're right, it's growing above the corporate average, and we expect that to continue.

That's great, guys. Thank you guys so much, Sonalee and Aziz. Thank you for coming in. I appreciate it. And thank you all for attending.

Thank you.

Sonalee, thank you so much.