Capacit'e Infraprojects Limited (CAPACITE) Earnings Call Transcript & Summary

Good day. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to monday.com's Second Quarter Fiscal Year 2026 Earnings Conference Call. I would like to turn the call over to monday.com's Vice President of Investor Relations, Mr. Byron Stephen. Please go ahead.

Hello, everyone, and thank you for joining us on today's conference call to discuss the financial results for monday.com's Second Quarter fiscal year 2026. Joining me today are Roy Mann and Eran Zinman, co-CEOs of monday.com; Eliran Glazer, monday.com's CFO; and Casey George, monday.com's CRO. We released our results for the second quarter of fiscal year 2026 earlier today. You can find our quarterly shareholder letter, along with our investor presentation and a replay of today's webcast under the News and Events section of our IR website at ir.monday.com. Certain statements made on the call today will be forward-looking statements, which reflect management's best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and the earnings presentation for today's call, which are posted on our Investor Relations website. Now let me turn the call over to Roy.

Thank you, Byron, and thank you, everyone, for joining us today. Over the past 9 months, monday.com has undergone the most meaningful strategic shift in our history. We moved from building software that helps people manage work to building software that does the work with people and AI agents operating together in a single unified workspace. That shift changed our product, our strategy and how we serve our customers. It also required us to change ourselves. On July 22, we reduced our global workforce by approximately 20%. It was the hardest decision we have made since founding the company. The people who left were talented colleagues who built something we are proud of, and we are grateful for everything they contributed. We are also certain it was the right call. Our focus is not to protect where we are, but to position us for where we are going. Most of the savings will be reinvested in the people, products and AI. What changes is how we operate with fewer management layers, smaller teams and real decision-making authority and a go-to-market model built around the deeper customer partnership that AI deployment demands. Our Q2 results reflect the strength of the business we are building from. Q2 revenue grew 22% year-over-year, while Q2 non-GAAP operating margin expanded to 17%. The record net additions of $100,000-plus and $500,000-plus customers in Q2 reflects the continued strength of our upmarket motion. Larger customers continue to be an important driver of our business, and we remain focused on deepening these relationships as we expand our AI capabilities. In July, we crossed $1.5 billion in ARR, a milestone that reflects the durability of our core business even as we reshape the company around AI. More telling than any single metric is that AI products adoption continues to accelerate and customers' response to our new direction continue to exceed our expectations. I'll now turn it over to Eran to bring that progress to life.

Thank you Roy. The clearest evidence that our strategy is working is what we are seeing in AI adoption. AI ARR doubled from Q1 to Q2 and now represents 17% of net new ARR added in the quarter. This is a meaningful signal, not because the absolute number is large yet, but because the rate of change tells us customers are actively choosing our AI capabilities, not simply inheriting them. Equally encouraging is the early reception to our new seat and credit pricing model launched in May. The adoption has been strong out of the gate, and customers are engaging deeply enough with our AI products to invest beyond the digital package. Pricing models only work when customers see value worth paying for. We are beginning to see that. We are sharpening our focus on monday service and monday CRM, each addresses a distinct buyer, a distinct set of workflows and a distinct AI opportunity. Going forward, each will operate with its own dedicated product development, its own go-to-market motion and its own investment road map. We believe that given each product the focus and accountability is the fastest path to category leadership in both CRM and service management. Taken together, these moves reflect the same logic as our organizational restructuring, fewer things, more focus, done with greater conviction. We're not trying to win every category, but we are building an AI workspace for teams with focused products where we can generally lead and removing the complexity that was slowing us down. With that, I'll turn it over to Eliran to cover our financials and guidance.

Thank you, Eran, and thank you to everyone for joining our call. Today, I'll review our second quarter fiscal year 2026 results in detail and provide updated fiscal year 2026 guidance. As Roy mentioned, we have had a strong start to 2026. Total revenue in Q2 came in at $365 million, up 22% from the year ago quarter. Our overall NDR was 109% in Q2. As we move through the back half of fiscal year 2026, we may see some modest pressure on NDR as we lap prior pricing actions taken in fiscal years 2024 and 2025. As a reminder, our NDR is a trailing 4-quarter weighted average calculation. For the reminder of the financial metrics disclosed, unless otherwise noted, I'll be referencing non-GAAP financial measures. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Second quarter gross margin was 89% compared to 90% in the year ago quarter. Research and development expense was $83 million in Q2 or 23% of revenue, up from 20% in the year ago quarter. Sales and marketing expense was $149.4 million in Q2 or 41% of revenue compared to 47% in the year ago quarter. General and administrative expense was $30.7 million in Q2 or 8% of revenue compared to 9% in the year ago quarter. Operating income was $61.1 million in Q2, up from $45.1 million from the year ago quarter, and operating margin was 17%, up from 15% in the year ago quarter. Operating margin in Q2 had an approximately 210 basis points negative FX impact, mainly from the appreciation of the Israeli shekel compared to the U.S. dollars. Net income was $65.5 million in Q2 compared to $58.3 million from the year ago quarter. Diluted net income per share was $1.48 in Q2 based on 44.4 million fully diluted shares outstanding. Total employee headcount was 3,169, a decrease of 42 employees since Q1 2026. We expect headcount to be down approximately 20% at the end of fiscal year 2026. Moving on to the balance sheet and cash flow. We ended the quarter with $1.07 billion in cash, cash equivalents and marketable securities compared to $1.21 billion at the end of Q1 2026, reflecting $182 million of share repurchase executed during the quarter. As of the end of Q2, the entire $870 million authorization was utilized, and no shares are available for future share repurchase under the program. Adjusted free cash flow for Q2 was $52.3 million and adjusted free cash flow margin was 14%. Adjusted free cash flow is defined as net cash from operating activities, less cash used for property and equipment and capitalized software costs associated with the build-out of our corporate headquarters. Let's now turn to our updated outlook for fiscal year 2026. For the third quarter of fiscal year 2026, we expect our revenue to be in the range of $368 million to $370 million, representing growth of 16% to 17% year-over-year. We expect non-GAAP operating income of $57 million to $59 million with an operating margin of approximately 16%, assuming a negative FX impact of 100 to 200 basis points. For the full year 2026, we expect revenue to be in the range of $1.466 billion to $1.474 billion, representing growth of 19% to 20% year-over-year. We expect full year non-GAAP operating income of $230 million to $234 million with an operating margin of approximately 16%, which assumes a negative FX impact of 100 to 200 basis points. We expect full year adjusted free cash flow of $280 million to $290 million with adjusted free cash flow margin of 19% to 20%, which assume a negative FX impact of 100 to 200 basis points. Let me now turn it over to the operator for your questions.

[Operator Instructions] And our first question comes from the line of Ryan MacWilliams with Wells Fargo.

AI and upmarket seems to be doing well, but new ads down market seems to be less strong. How would you characterize overall what you're seeing in your current demand environment?

Yes. Ryan, this is Eran. So I would say those are 2 separate things. One, in terms of AI, we see very good adoption across all segments, down market and upmarket. We're very encouraged from the adoption, the reception of the new features that we added, the capabilities and also with our new pricing model. And when it comes to the overall differentiation maybe between the down market and the upmarket, it's pretty much the same since we started the year. We don't see any meaningful change in demand environment pretty much as we expected and guided for. Our teams continue to execute well, and we continue to see very strong growth in our upmarket motion. So overall, we're very encouraged from the AI adoption across all segments, and the rest is behaving as we expected at the beginning of the year.

Yes. Ryan, this is Casey. I'll add a couple of things. we are seeing record net adds in our $100,000 and $500,000 cohort of customers. So this is an affirming data point that all the things we're doing to move upmarket is working. We are also seeing where clients are looking for help to embrace some of these AI solutions. So this is where we're really leaning in with our best resources getting behind our highest value opportunities. And the other data point, I think that's very interesting, our gross retention is also at historical highs. So all these things together land for a very compelling enterprise upmarket motion.

And Eliran, I'd love to hear how you thought about guiding for the full year in this evolving environment. Did you take any additional conservatism in either the 3Q guide or the full year guide compared to last quarter's or previously?

Ryan, it's Eliran. So first, our guidance does not assume any rebound in performance marketing or top of funnel activity. This is in line with what we said in the past, and we planned the year based on the current condition with growth driven by main upmarket and enterprise customer expansion, as Casey mentioned, AI adoption, which is really encouraging and also disciplined investment and efficiency, taking advantage of some AI capabilities internally. We also mentioned that in the remarks that NDR is going to be around 108%. This we took into account and headcount growth is going to be down 20% when you compare to the end of 2025, the number. And these are the things that we took into account.

Our next question comes from the line of Arjun Bhatia with William Blair.

This is Alinda Li on for Arjun Bhatia. Customers with more than $100,000 ARR grew 37% and customers with more than $500,000 ARR grew 68%. What factors are driving the acceleration at the high end of the customer base? And what differentiates these customers from the broader customer cohort here?

So thank you for your question. This is Casey George. So what we were seeing upmarket, first of all, for monday, it's pretty fertile ground. We're still early in our upmarket motion. So we continue to grow and get into customers that were traditionally a part of. So that's one element. We obviously see expansion with our customers. So we land small and then grow pretty quickly. The other thing we see is around vendor rationalization. So more and more customers are looking to consolidate vendors, and we play pretty well there as well. And then the last thing is around AI. Most customers want to have context around their AI solutions. And so they're deploying on platforms. And obviously, we think we're well positioned for customers who want to embrace AI to deploy on our platform and get help where needed from our resources. So those are some of the things we're seeing as we move upmarket.

Awesome. And what trends are you seeing in the sales cycle? Are customers exhibiting any kind of increased budget sensitivity or taking longer to finalize purchasing decisions?

We haven't seen anything material as it relates to sales cycles. I would say, though, when you move upmarket, you get exposed to their buying cycles. And traditionally, they are a little bit elongated, but we're landing larger as well. So I'm pretty pleased with how the sales organization is executing at this point. So again, no real material change other than just being exposed to buying cycles to larger customers.

Next question comes from the line of Scott Berg with Needham.

I wanted to follow up on what you've seen in the demand environment and maybe ask the question a little bit more directly. I guess what's changed in your view on the demand environment for the last 90 days? Because your updated revenue guidance is a little weaker than what we saw 90 days ago. And I think that was probably the heart of probably Ryan's question there, but would love to understand what the smaller differences are here.

Scott, it's Eliran. So the thing that has changed that we announced in July of 2022, we announced the risk in the organization. And obviously, there is a short-term impact throughout the risk that we took into account when we did the guidance. It also reflects the lapping of a period of strong growth and some near-term NDR pressure that we have seen due to the pricing increase that is now lapping, and we are being responsible. We always try to be responsible, but we do have a strong conviction on the trajectory, and the moderation of the guidance reflects our discipline and a moment of transition in the organization as we continue to move upmarket and also restructuring the organization.

Understood. And then from a follow-up question, as I look at your model this quarter and the last couple of quarters, your R&D expenses as a percentage of revenue have ticked up. Obviously, you all are going through a pretty big investment phase to the platform and add more AI functionality. But how long do you think the elevated R&D levels last? I think one question some of us are trying to understand in some of the other companies you cover along with monday is, is this a level you feel like you have to continue to spend at? Or is this kind of a short-term dynamic you think just to, I guess, level set the platform to a new set of functionality?

Yes. Scott, this is Eran. So look, we invested heavily into R&D. Like Eran said, we're building into the future. We're making big changes to the platform. We don't see meaningful increase going forward, but definitely, this remains a big investment for us. As Eran said, we're in a moment of transition. We're building new motions, a lot of new capabilities. We're executing like never before. We'll continue to invest in R&D, but I don't think it will meaningfully going to go up significantly going forward.

Maybe Scott to add to what Eran said, by way of a percentage of revenue because the Israeli shekel has been getting very strong versus the U.S. dollar. You also see some of the cost of R&D because the bulk of the R&D people are based in Israel.

Next question comes from the line of Steve Enders with Citi.

Okay. Maybe just on the newly released plan and the rollout there, the AI functionality. Just maybe what have you seen so far in terms of how customers are adopting it and how their behavior is maybe changing as that rolls out?

Yes. It's Roy. So we see 2 patterns that we expected, like existing customers and new customers. Both are adopting nicely with slight difference between the 2. And we also see something that is encouraging to us that they top up and reach the end of their consumption bucket and then add more, which is, for me, like the best indication that they get value and want more of it and are not just using what they have on the original plan.

Yes. Maybe just to add to what Roy said, before the changes in the product and the pricing, the only way customers could expand was to add more people and more seats. This is the first time since we added the new agent that we see customers expand not only on the seats for humans, but on AI consumption. And for us, this represent a new vector of growth that didn't exist before, which is part of why we believe so much in our strategy and why we believe so much this is a fundamental change in how the company will be able to grow going forward.

Okay. That's good to hear. And then maybe just on the Work OS side and a bit of a slowdown in terms of -- I guess, the slowdown in terms of the expansion on that product set. Just I guess, what's maybe kind of happening within that product area across CRM or service or dev? And then like what impact do you kind of expect the new management structure to have on those -- on that adoption curve moving forward?

Yes. So look, part of the reason why we've done the reduction in force is just to change the structure and to allow our teams to move faster. We want to give our teams more autonomy, reduce management layers. And part of it was to also allow CRM and service to execute faster, to reduce dependencies with other teams, give them more autonomy. They're also adding a lot of the genic features to their own products. And work management essentially became the AI workspace for teams. So there, we're moving to a very high velocity, adding new capabilities for our customers. So overall, we feel more focused. We feel the teams are moving faster, making more significant changes to the product. And we feel this is extremely important now in the time of transition.

Next question comes from the line of Howard Ma with Guggenheim Securities.

Your AI ARR doubling quarter-on-quarter is encouraging, but I'm sure you guys have considered that there's still a lot of uncertainty out there and how monetization will ultimately play out. So my question is, as you look ahead, do you think that the new mandatory AI pricing model that, that will be an absolute benefit? Or does it come at the expense of lesser expansion? Is that something that you've baked in? I imagine it's also introducing more buyer uncertainty. I mean if it's working, it will force decision against other alternatives, right? And if I put some numbers to it, too, it should ultimately -- if you can monetize AI drive NRR stabilization. So if you can talk to -- I know there's a lot in there. But if you can talk to it ultimately will show up or when it should show up more in the -- in metrics like NRR.

This is Roy. So it's still early days, okay? We're still experimenting a lot, and I agree with you that like there are a lot of like new experiments also in the market with the pricing and how this behaves. Since we are in the early days, I can't tell you when this will stabilize or increase NRR. But what we do see from the very early numbers, what I mentioned, is that customers do reach the end of their allotted quota and then they increase it and top up, which is, like Eran said, a new vector for us that exists. Again, still small numbers, really encouraging results, and we can't like predict right now how it's going to play out in a year or so.

Okay. And I guess as a follow-up for Eliran. I also want to ask about your guidance philosophy. Can you walk us through the decision not to pass through any of the Q2 upside to the full year? I imagine that's probably one scenario you considered. And if you ultimately believe AI adoption will be net additive, why not flow through at least part of the beat just even as a positive signal?

Howard, so as I mentioned earlier, with regards to the philosophy, it hasn't changed. A few things we took into account, I said earlier, so we're observing the near-term cost of the 20% workforce, and this is something that we had to take into account because there is going to be a short-term impact. And we did not want to lay an aggressive top line raise on top of the execution risk that hasn't fully played out yet. We said that at the beginning of the year also with regards to the top of funnel that we took it into account. And we prefer to underpromise and overdeliver through a transition. This is a big transition for us and raise revenue guidance now and with some uncertainties that we still have throughout the year.

Next question comes from the line of Derrick Wood with TD Cowen.

I guess first on the go-to-market side, could you just give us a sense as to how much change you've made on the direct sales side of the house? How are the go-to-market playbooks going to change? And how do you think about any disruption risk or how long it will kind of take under any kind of new strategies?

Yes. Thank you for your question. So consistent with what we've been doing for the past year, we've been aligning our resources, our best resources upmarket to capture what we think is a significant opportunity. And this is playing out, as I mentioned, in some of the record net adds with $100,000 and $500,000 customers. As I mentioned earlier, we're also seeing where clients need help. They need help to deploy some of these purpose-built apps, AI apps, agents to go solve real business problems. So we're going to accelerate the 4 deployed engineer model we have to capture this opportunity and again, align our best resources behind our highest value opportunities. So as it relates to what we're doing upmarket, this is just a continuation with some acceleration. We're also training the sales team as we go. So there's not some big training event that has to happen. We've been training the sales team, and we think they're pretty fluent already with the AI story. So this is just incremental to what they're doing today. So we're well positioned, and we're going to continue to invest upmarket supported by our FTE motion.

Great. Helpful. And then just on the 20% headcount cut, you're raising operating margins a couple of hundred bps. You said you're going to reinvest in that. Can you just double-click on exactly where you want to reinvest, how we should think about the margin trajectory next year in light of all of this? And maybe any early thoughts on top line growth trends for next year as well?

So Derrick, it's Eliran. So we said that the annualized cost savings from a growth perspective is expected to be $100 million. We said we're going to invest the vast majority of it is going to be into talent, product, AI. Obviously, there is a lot of cost related to AI. So this is something that will reduce, obviously, the savings. With regards to operating margin, we expect it to expand next year. We already raised it for fiscal year 2026. This is only because we have partial year benefit of the restructuring, but we expect it to continue to grow going into 2027. And with regards to top line growth, once we complete the restructure, obviously, there is going to be together with the expansion of AI and the training of the salespeople, we expect it's also going to impact positively on our top line next year.