monday.com Ltd. (MNDY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the monday.com Q2 Fiscal 2021 Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Keenan Zopf. You may begin.

Certain statements made on the call today may be forward-looking statements, which reflect management's best judgment based on currently available information. These statements involve risks and uncertainties that may cause actual 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 may 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 is posted on our Investor Relations web page at ir.monday.com. With that, I will turn the call over to Roy Mann, Co-CEO of monday.com.

Thank you. And thank you, everyone, for joining us today. We are very excited to have completed a successful IPO and to announce very strong results for our first quarter as a public company. As you've seen from our press release, our business continues to accelerate across revenues, paying customers and customer expansions. We generated $70.6 million in revenue, up 94% year-over-year. Eliran, our CFO, will provide you with more financial details and commentary on what drove Q2 results. He'll also provide our guidance for the rest of the year. Since this is our first earnings call as a public company, I'd like to take a few minutes to tell you a bit about monday.com. We've also posted a slide deck on our IR website that provides you with additional color on our business and a review for our Q2 financials. When we first started monday.com, we started it with a mission to give our customers the power to create their own work software. To do that, we revolutionized the way people use software, giving them the same low-code/no-code capabilities once reserved for software creators and designers. Today, more than 9 years later, our customers use monday.com in ways we could have never imagined, across virtually limitless use cases and an in organizations of all sizes. With that mission, we are leading in a new category called Work OS. Eran?

Thank you, Roy. Before we dive deeper into our platform, we'd like to highlight our market opportunity. Our Work OS is broadly applicable for any organization and team across a growing number of use cases. According to estimates from IDC, our total addressable market was $56.1 billion in 2020 and will grow to $87.6 billion in 2024. Further, we believe our Work OS platform is applicable across the 1.25 billion information workers that industry analysts estimate exist globally. Now let's dive deeper into our platform. Our cloud-based platform is a no-code/low-code framework. It consists of modular building blocks that allow our customers to create their own software applications and work management tools. By using our platform, our customers can simplify and accelerate their digital transformation, create a unified workspace across departments and increase operational efficiency and productivity. Our software is simple enough for anyone to use, yet it's powerful enough to drive core functionality within any organization. Our platform also integrates with other systems and applications, creating a new connective layer for organization that links departments and bridges information silos. We believe this makes our Work OS a core solution that customers can rely on to run their business. Our customers are our partners. We are continuously molding our platform future together. We distinguish customers with more than 10 users from our broader customer base, and they are the core focus of our sales and marketing efforts. The revenue growth rate of our customers with more than 10 users has outpaced the rest of the business in each of our previous fiscal years, and our expectation is that such customers will continue to grow in the future. Moreover, our ability to successfully move up market is demonstrated by the consistent growth in the number of our enterprise customers, which we define as customers with more than $50,000 in ARR. We ended the quarter with 470 enterprise customers compared to only 144 in the year ago quarter, an increase of 226%. We employ an efficient go-to-market model, combining our extensive self-service funnel and a direct sales approach, which consists primarily of our sales team, our customer success and partner teams as well as our apps marketplace. I want to share some of our product solution go-to-market approach. Product Solutions are complete products, horizontal or vertical, built on top of the Work OS platform. This allows a customer with different intents to find and adopt monday. Now I will turn this over to Roy to discuss our apps and apps marketplace.

Thank you, Eran. We took our no-limits approach to new heights to allow any developer to build on top of monday.com with monday apps. We added even more freedom with our app marketplace where each customer can extend the platform on their own. This no-limits approach leads to happy customers that not only love our product, but also feel they're part of our journey. As the number of our customers grew, we heard more and more stories on how we changed their business, and, for some, their lives. We began to feel an ever-growing sense of responsibility, a responsibility to be there for our customers with a world-class support and an ever-improving platform that allows them to do anything their business demands or their imagination takes them towards. This responsibility extends towards the communities we live in as well. We saw the amazing impact monday.com has on nonprofit organizations. From work we have done together, we see that many nonprofit organizations have a massive technological divide, a divide that prevents them from making the impact that they seek. Our Equal Impact initiative aims to close that digital divide with long-term, ambitious goals of making a lasting impact on nonprofit organizations. With our knowledge and resources in digital transformation, running businesses and scaling teams, we aim to be a partner for the world's nonprofit organizations who want to make a positive change for all of us. I want to give a quick shout-out for our employees. monday.com's success happened only because of our amazing employees and the strong culture of transparency, ownership and trust we have built together. All of us at monday feel we share the same goal and walk on the same path forward. We believe that we are on the cusp of a massive change in work software. If the last 10 years were defined by the SaaS cloud, then the next 10 years will be focused on giving people the power to create software that fits their own needs. We believe that we are best positioned to be the leaders in this change. We have built the company to take such an opportunity head on while keeping our culture, our values and the love we still have towards creating beautiful, powerful digital products. Today, we are thrilled to introduce a completely new capability to monday.com's Work OS platform, monday workdocs. Workdocs represent the next step in our Work OS platform. Documents provide a great canvas for people to start their work in. We see this as a massive opportunity to expand how monday is adopted so our customers could create no-code/low-code work software. With monday workdocs, our customers now have the ability to manage their work, ideas and data in a completely unstructured way. Our workdocs include 2 powerful technologies embedded in them: our real-time engine and document connectivity. We believe document-based collaboration is crucial for many work processes. That's why we've built our real-time engine from scratch. It's a completely new technology that allows for hundreds of people to work together on the same document. It's a strong foundation that will allow us to take document collaboration to unchartered territories. Another critical part of our workdocs is that they are connected to other applications. We see this as part of our connectivity layer that the Work OS provides. We allowed any monday object such as widgets, charts and views to be embedded into documents. This means that our workdocs have live objects that update in real time whenever their source of data changes. So monday workdocs are never stale because they are connected documents. This makes workdocs another no-code way for our customers to build work applications on top of monday.com Work OS. Traditional documents were never designed to be used in the way many teams use them today. Teams use documents to start work processes and collaborate together, but the documents themselves were never created to support this. We see this as an opportunity to turn these beginnings of documents into real work tools that people can use to work together better. Workdocs represent the next step in our journey to give our customers the ability to create their own work software no matter how they begin or continue their work. Until now, boards were the sole entry point to our platform. Workdocs are an additional, unstructured, more flexible way to onboard and deepen adoption in companies. Workdocs are now live and working on monday's Work OS and are available to all our plans. Eran?

Thank you, Roy. In Q2, we officially launched a free tier of monday.com Work OS. This is geared to small teams and limited only to 2 users. We believe that this is an excellent way to drive awareness and broader adoption among a new set of audiences. We're encouraged by the earlier response to the free offering and see this as a way to seed monday usage and ultimately drive conversion to enterprise customers. We had a great quarter in terms of customer wins and expansions. These were broad-based across industry verticals, with major companies including Headspace, Mintel, Adyen and Wellington-Altus. Let's talk about Headspace as an example. Headspace is a very well-known mindfulness and meditation app dedicated to improving the health and happiness of the world. Headspace has begun to use monday.com Work OS to increase collaboration and efficiency for all of their marketing and creative processes across the globe. In order to win, subscription-based companies like Headspace must operate in real time, adjusting to changes in each of their markets every day, which is why they chose our platform. This win is another example of how monday can help high-growth global companies, and we're very happy to be part of their growth and success. During Q2, we continued to expand our partnership ecosystem. To that end, we kick off new strategic alliances with global system integrators across key industries, such as manufacturing and real estate, including Hitachi Solutions and NTT-Data. We accelerated our growth and expansion into the Latin American market with new channel partners, customer deals, increasing our ARR in this region. As part of our expansion into new markets, we also added Polish as an additional language available on our platform, increasing the total number of languages to 14. One of the things that we are most excited about is that we are truly developing a monday.com ecosystem of third parties, interfaces, partners and developers that collectively drive usage and multiple monetization opportunities. You will be hearing more -- much more from us on this front in the coming quarters and years. As I hope has come through in our presentation and our comments today, monday.com is a highly differentiated company with a strong and unique point of view about the future of work and collaboration. We are capturing a massive market opportunity that is expected to reach over $85 billion in the next few years. monday.com can help drive results for almost every business of every size around the world. We're very excited to speak with analysts covering the company and the investors who are joining us on this journey today. I'll turn it over to Eliran to cover our financials and guidance.

Thank you, Roy and Eran, and thank you to everyone for joining our call today. We are very excited about the opportunities we see for the company to continue to grow and evolve. I will go to our second quarter results, then discuss in more detail the business and close with guidance. We were pleased with the results for the quarter, which demonstrated continued high growth at scale. Revenue in the second quarter came in at $70.6 million, up 94% year-over-year, led by large expansion within our existing customer base. Our net dollar retention rate for customers with more than 10 users was over 125%, and our net dollar retention rate for all customers was over 111%. As a reminder, our net dollar retention rate is a trailing 4-quarter weighted average calculation. Also, our focus on moving upmarket is working. We ended the quarter with 470 enterprise customers, up 226% from 144% in the year ago quarter. On the hiring front, during the last 2 quarters, we added more than 170 employees to monday.com, particularly focusing on R&D and sales and marketing. These new hires accounts for more than 70% of the new talent added during this period. We ended Q2 with more than 850 employees globally, and we plan to continue investing aggressively in adding new talent with a focus on R&D and our enterprise sales force. Next, I'll provide more detail on the second quarter financial results. Before turning to expense items and profitability, I would like to point out that unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross margin came in at 89.7%, up from 88.3% in the year ago quarter. Research and development expense was $11.2 million or 16% compared to 20% in the year ago quarter. We continue to invest significantly in R&D, including high growth in our engineering headcount, but the pace of our revenue growth has outpaced the investment growth. Sales and marketing expenses were $55.5 million or 79% of revenue compared to 101% in the year ago quarter. The improvement was driven primarily by lower marketing investment as we are becoming more efficient, allocating our marketing spend to focus on customers with 10-plus users and enterprise customers. We continued to make substantial investment in our sales organization and have significantly expanded our sales team over the last year. Similar to R&D, the pace of our revenue growth has outpaced the investment growth. G&A expense was $6.5 million or 9% of revenue compared to 8% in the year ago quarter, reflecting increased cost of being a public company. Operating loss was $9.9 million, and operating loss margin came in at 14%. Net loss was $11.3 million and loss per share was negative $0.26. Moving on to the balance sheet and cash flow. We ended the quarter with approximately $878 million in cash, cash equivalents, short-term deposits and restricted cash. Net cash used in operating activities was $0.4 million in the quarter. Adjusted free cash flow was negative $1.5 million, and was driven by strong collections stemming from our strong billings in Q4 and Q1. Adjusted free cash flow is defined as net cash from operating activities, less cash used property and equipment and capitalized software costs, excluding nonrecurring items, such as costs related to the buildup of our corporate headquarter in Tel Aviv. Now turning to our outlook for the third quarter and the full year of 2021. We believe we can deliver high growth for the foreseeable future as we are addressing a large and growing market, and we believe we are well positioned to be one of the long-term winners in this space. There are more than 1 billion global knowledge workers today that could potentially use monday. We're introducing Q3 and full year guidance as follows. For the third quarter of fiscal year 2021, we expect our revenue to be in the range of $74 million to $75 million, representing growth of 74% to 76% year-over-year. We expect non-GAAP operating loss of $26 million to $25 million. For the full year 2021, revenues are expected to be in the range of $280 million to $282 million, representing growth of 74% to 75% year-over-year. We expect full year non-GAAP operating loss of $93 million to $91 million and negative operating margin of between 33% and 32% compared to negative operating loss of $86.2 million in 2020 and negative operating margin of 53%. We believe we can deliver high growth for the foreseeable future as we are addressing a large and growing market that is still very early in its maturity. As a result, we will continue to prioritize investments in the business over near-term profitability, and we'll continue to make progress against our growth phase target margins. I'll also note that we intend to be active with regard to Investor Relations, and we'll be conducting a number of non-deal road shows and starting to present at investor conferences in September. With that, I'll turn it over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from Kash Rangan with Goldman Sachs.

Fantastic results, and congratulations on the first quarter as a public company. Got a great start. Roy, one question for you. You talked about sales and marketing investments. Can you talk about how should we think about how productive the shift towards more selling and a little bit less marketing as it pertains to sales and marketing is likely to drive traction in the enterprise going forward? Because it certainly seems that you had a great quarter, but you're just getting started building out and scaling your sales effort for the enterprise. And one for you, Eliran. It does look like you made significant progress with operating margins and free cash flow, yet your guidance still calls for snap back to [ previous ] in terms of losses. Just wondering if there's any specific investment you're making in the second half or just trying to keep things conservative and wait until the quarters prove themselves.

Kash, thank you. It's Roy. So yes, it's -- we're putting a lot of emphasis on growing. Like we mentioned before in our -- during the IPO, we have a funnel that is driven by no touch, like we do marketing that we get leads. Those leads become paying customers. And our sales force are addressing those customers after they pay and help them scale. So while we invest a lot in marketing, we see that we're doing that in a more efficient way, okay? This is what you can see with the results this quarter. Our approach to new customers is becoming more efficient while we scale the sales team and its approach to grow our customers way more. So you see both of these working really well. And I think we're, as we mentioned before, seeing our sales team that have been growing in the last 2 years, reach more maturity and it's like working better and better.

And Kash, this is Eliran. With regard to your question on guidance. So first of all, we are very confident on our guidance, and we feel comfortable with the plan that we have to continue to invest aggressively. One of the things that is important for us to say that while we did very good results in Q2, we are going to continue to invest aggressively in the second half of the year in order to generate additional hypergrowth at scale. Just in terms of numbers, our capital efficiency is well above 2.5%. Just as a reminder, for every dollar that we invested since inception, we basically generate more than $2.5 in terms of ARR. So there is a huge opportunity. It's a greenfield market. Therefore, we would like to make sure that we don't pass this opportunity and continue to invest. And there are going to be additional costs. We're going to continue to hire aggressively in sales and marketing, R&D. We're going to have the full impact of our new headquarter in Tel Aviv. We're going to continue to invest across other places in the organization. Hopefully, we're going to see some continued growth as we continue to go forward. Does this answer your question, Kash?

Absolutely. Great start. Congratulations. Thank you so much.

Our next question comes from Mark Murphy with JPMorgan.

This is Matt Coss, on behalf of Mark Murphy. I'll have my congratulations on the quarter. Can you talk to us about the distribution of new use cases by prepackaged solutions versus someone using monday to build something completely from the ground up? And then maybe you can help us understand how many of your customers who have adopted prepackaged solutions are using sort of the low-code/no-code advantages of the platform to really customize their application?

Sure. Can you -- this is, Eran. Can you just repeat the first part of the question, please?

Yes. So if you have a sense of your customers using monday.com, new customers buy a prepackaged solution versus sort of just using monday to build their own application from the ground up.

Yes. Okay. So this is Eran. So basically, the majority of our customers usually start with one use case and then over time, expand to more use cases. I would say the vast majority started with a prepackaged solution just because usually the way it works is that users search for a very specific problem they're trying to solve, and this is kind of how we led them through the onboarding process. But I think the interesting part of that, over time, we see 2 trends. One is further customizing their existing solution, meaning matching that to their need. But then finding more and more product solutions that they can use and expanding the usage within the organization and also building their own kind of solutions on their own, their own templates and use cases. In terms of the low-code/no-code, so basically, everybody using monday essentially is using no-code capabilities. Using the -- building the board itself and customizing the [ comms ] is essentially, if you think about it, building a database to capture data. And as we disclosed during the IPO process, over 90% of our customers use automation and integration. So it's pretty popular within our enterprise accounts. So every -- I would say, broadly speaking, every customer of monday is leveraging our no-code [ enterprise ] capabilities.

Our next question comes from Brent Thill with Jefferies.

I was curious if you could spend a little more time on the enterprise traction and maybe provide some examples of where you're seeing great traction. I think maybe if you could also talk about your largest deployment and give us a little more color in terms of how that bill load is going.

Yes. So this is Eran. So we see very high growth in the customers over 50,000, over 226% year-on-year growth. From our side of the company, this is a strategic part of our business going forward. We do invest heavily into the no-touch and bringing new paying customers into our funnel. But at the same time, as we mentioned in the beginning of the call, we invest heavily into making the product better for our customers. We keep adding features and capabilities. And this part of the business is growing significantly faster than the whole of the business. Those customers demonstrate very high natural retention numbers, they expand more, and we are keeping and launching new features to that part of the business going forward.

Yes. It's Roy. I can add that we're -- in enterprise, we're focusing on security, control features and governance. And that's basically enabling us to get into larger customers. They want it, and we need to just open the door right now with enabling all those things, and that's where our biggest focus is, product-wise.

Great. And I'm just curious if there were any geographic trends that you're seeing that are different between the U.S., EMEA and APAC. Anything stand out? And there's been a lot of questions as it relates to kind of the return to the office as some people have been coming back in. Have you seen any noticeable differential in customer behavior? Obviously, the numbers suggest that it doesn't really matter what environment we're in for you guys right now given the great growth, but any color on that would be helpful.

Brent, this is Eliran. So as a reminder, we enjoyed hyper growth before COVID, and we expect to continue to grow -- growth at hyperscale also post COVID. Hopefully, it will come soon. As a reminder, we see the breakdown -- geographical breakdown, 52% of our revenue is outside of the U.S., 48% is in the U.S., 70% of our customers are non-tech. And we even added another Polish -- another language to our platform, which is Polish. Now we have 14 languages. So what you see is basically we are expanding with an existing customer base in the geographies we already operate in. But as a reminder, we also have our partner channel that in places where we don't have the sales force, we expand within usability of our partner's ecosystem. And this helps us to gain additional markets where we don't operate holistically through this channel.

Our next question comes from Bhavan Suri with William Blair.

Let me echo my congrats. It's a great quarter out of the gate. I guess I want to touch on the enterprise traction. You've added more than 100 customers to the 50,000-plus ARR. I guess I'm trying to understand how much of this do you attribute to the product getting more sophisticated, its ability to handle complex workflows? Or do you think it's more driven by the fact that direct sales motion and customer adoption is maturing, like how would you balance those 2?

Yes. This is Eran. So my short answer will be both. I think we've seen the combination of 2 forces. One is obviously the fact that we -- maturing our sales team. We have no sales reps on our company, and they're going to become more experienced. So definitely, this is one part of this effect. The second part is that we invested heavily into the product for enterprise accounts, and we're keeping to do that. So we're doing a lot on that front just to make the product more scalable. And we see that as we progress, larger and larger accounts are able to adopt monday. And another very huge trend that we see is that every sales cycle that we close with an existing account is for another sales cycle. So it's like a never-ending process of signing new use cases, new department that can use monday. So it's not like a onetime deal that you sign up, but more of a process. So therefore, we get larger and larger accounts using us.

Got you. Got you. Got you. And then I want to touch a little bit on the premium offering. I guess I'd love to understand, and you gave some great color, but just in terms -- what impact have you seen on the top of the funnel because of freemium? And then it makes sense to me that they'll grow, but have you seen any customers downgrade at all saying, "Hey, I've only got a small handful, maybe over freemium. Have you seen that motion at all, the reverse of what we would like to happen?

Sure. So this is Eran again. So this is very exciting for us. So as we launch the free tier, we see that it just add more customers that use monday. It didn't hurt or cannibalize our existing conversion to payment in terms of acquiring new customers, but increase the top of the funnel for the company. And we didn't see any impact on our existing customers. So customers are not kind of reducing their plans or anything like that. One thing that's super [ exciting ]. Again, this is still very early days. But in -- we've now seen a need to have a funnel being created of a freemium account that over time -- and again, we see early signs of this convert into paying companies. So I think this will increase the exposure of monday as a tool, what we offer and the amount of people that are exposed to its capabilities and how they can use it.

It's Roy. I would just add that our free tier is now limited to only 2 users, okay? So it's not really impacting the larger customers. It's just a way to keep on using us and use us for those type of like 2-user plan. So...

Our next question comes from Brent Bracelin with Piper Sandler.

I want to go back to the growth drivers of the business. Growth accelerated here to 94%. You're taking your full year outlook up to 75% growth for the year. I think we were at 60% kind of going into the quarter. So as you look at the -- just the overall business, what's performing better? It sounds like enterprise is strong, existing customers is strong. Is that the main driver here giving you optimism, just stronger adoption and expansion than you expected? Is it broad-based? Is there a particular region or segment of the business that's outperforming? It just seems like the business here is much stronger. Your optimism is much higher, trying to understand what the primary kind of rank order drivers here of the business are.