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

All right. Welcome back to post lunch session at the Citi Tech Conference. For those who don't know, I'm Steve Enders as part of the software research team here at Citi. And with us for this session, we've got a full team here from monday.com, Gentlemen, I appreciate you all being here.

Thank you.

I guess, Roy, maybe we just since you've been here from the beginning. Just -- maybe for those who might not know, maybe you can just talk about how monday.com has evolved from pre-IPO to now and what that journey has looked like for you all?

Well, yes. So monday is like -- the concept this monday was to bring power to our customers to build their own work software to build whatever they want. So essentially, we build a platform. We call it Work OS, and it allows everyone to build whatever they want. And we've been really successful in the work management space now CRM, Dev and we're like kind of expanding now to a suite of products, whereas before we were kind of like a platform with like project management go to market, if you will. And I think we are growing. It's a growing company. We're having a very nice evolution of going up market, moving or adding more enterprise direction. And that's like -- it's a path, it's a marathon. It's not a step function.

Okay. That's great to hear. Maybe we can talk about just where demand is today and what customers are interested in. I guess, how would you kind of characterize how that's going and maybe how it's changed over the past couple of quarters?

Yes. So demand is very strong, like top of funnel is very strong, like we saw that like even during the -- 1.5 years ago when the economic situation happened, we saw very stable demand and we, obviously, with our ability to go to market and really manage our expenses well with the big brand measuring our performance marketing well. We kind of were able to capture a larger part of the market because others had to cut spending, we could keep the same because we know exactly where to put it. So the top of funnel is great. And I think there were like even better cohorts because who is looking for solutions in the situation, the ones we're really looking in them. So like we've got really good customers.

Does it feel like the types of customers that you're getting now that they've really changed? Like is it more mid-market focused because you're seeing the scale of the platform? Or I guess any differences in terms of the pockets of what customers look like today versus maybe a year ago?

Yes. So we always care about the low entry points like a team can penetrate whether they're in a small company or a team in a large company. And that has not changed. We're like adamant about keeping the platform simple and easy to start with. But we are getting better and better. I would call it the sweet spot, like our sweet spot of like the size of customers is always growing. Now we can do thousands very easily. And that's how we like to do it and go across the market and kind of like cookie cutting process. So like we're always growing, always improving our ability to go upmarket, but keeping the penetration point low and simple.

Okay. So I think one of the things you mentioned last call, net new still seems like it's really well. Upmarket seems like it's really going well. You talked a little bit about that there. What is it that's leading to those segments in particular being well? Like is it something that they're doing in the marketplace? Or is it something that you're doing where maybe the go-to-market and the product side is a little bit better aligned for those markets today?

For the segments?

For the mid-market and also the net new opportunities you're seeing coming in?

Yes. So I think we see some growth in CRM in the mid-market, but we also see it generally in our ability to grow and cater to larger customers being able to deploy to them to larger sets of users and also build solutions that are more suitable for them. This is like a part of our growing motion to grow. And monday is a platform that you can build any kind of work application to, you can connect it to existing tools that you have with integrations, and I think our partner ecosystem really ties into that and kind of helps customers adopted to their own bespoke software or other tools they're using. And so we're ever evolving that and growing.

I do want to keep this interactive. So if there are questions in the room, we will make sure to get there and take those. I do want to ask a question though on, you talked about stabilization in July. And I guess what is exactly does it mean when it stabilize? Like what part of the business has stabilized? And I guess, how should we be thinking about the trends of stabilization here?

So when we spoke about NRR, what we said is basically that we said that by the end of the year, we're going to be for all customers, slightly below 110%. and we report in increments of 5%. So even if we're going to be 109% in terms of percentage, it's going to be slightly below. So we started to see on a trailing 12-month basis in the quarter that basically starting to getting flat, the decline that we saw in the past in NRR. Reason of the decline was obviously because of less of expansion. Gross churn remained very stable. Churn pattern remained very stable. So we started to see this kind of flattening. And it's not yet something we can call the trend, but it's a positive sign.

Okay. Okay. That makes sense. I do want to ask a little bit about the competitive environment today. I mean I think if we look at how fast you are going compared to some of the peers, I think a pretty market outperformance is there. So what is it about monday that is? Like what are you doing right in the market compared to maybe some of your peers?

So I think when you look at our market, it evolved throughout the last years from project work management because we are a platform and build a lot on change and now we have CRM. We have that. So first of all, we were able to get to other areas where the work management platforms can because they are more rigid than the platform that we've built. So that's one thing. The other thing is we didn't have to cut spend. We were always very efficient and also over a year ago when the downtrend of the economy started because we measure every cent that we spend, and we see the return very effectively through the BigBrain system that we've developed. We kept the marketing spend that we had, we actually saw a decline in prices, and we got more market share. So that was a big advantage for us. And I think the other thing is that we are constantly growing upmarket. And I think we are doing that in a very good way, right? Like we are improving the platform, which is a huge advantage for us. We are easy to adopt we can get easily into customers, then we have the account management teams that can expand within those accounts to multiple use cases as well. It's more limited for some of the competitors. So I think those are our advantages and that's what we play on.

Okay. All right. That makes sense. If we could maybe talk about consolidation opportunities at this point. It seems like that has been a trend that's been happening quite a bit across the space. How has the pace of those opportunities changed maybe over the past year? And what tends to be the factors that leads to monday winning in those opportunities or potentially losing? And how should we think about the win rates and how they've trended?

Yes. So I think we've seen a case of play in SMB mid-market and enterprise. So I think that on the SME front, we've seen a lot of consolidation that's actually was a surprising factor for us during the economy downturn. SMB kept very stable and a lot of them consolidated on monday. Again, because we can cover most parts of their business on the same platform. So we saw them replacing a lot of other vendors. Again, it's not necessarily work management direct competitors. It's many other companies. So that's what really well for us. We are seeing that also happening in the mid-market and enterprise front, but I think it's not as strong as it was in the in the SMB. And again, the main reason we are winning is because customers are looking for platforms that they can check to their own use cases. They want to walk the way they walk by. They don't want to do just a project, they want to connect it to the sales team. They want to connect it to procurement, legal to many other areas we can step into in a pretty fast way to see the return. So we have very strong win rates against competitors there and it's a very good one for us.

That's great. Great to hear. Maybe shifting gears to the product side a little bit more, monday DB, now just kind of getting deployed in the past couple of quarters. How does it change the underlying architecture and maybe what was missing before that this really helps kind of solve for? So.

Good question. So monday is built like all the infrastructure was. It's very -- it's timeless. It allows you to do anything you want. So in that sense, it's the same. And we just had to replace the data infrastructure, if you like. And I think like -- this will open the door to a lot of other use cases like use cases of scale and it's functionality and it allows us to do a lot of things better in that respect. And already, it was deployed to 100% of the customers way ahead of time, really 0 glitches. It was amazing. And what customers see that like the largest customers with the biggest amount of like the progress accounts. So a 5-week takes improvement in speed. And that's like the first version. We're planning like consecutive versions over time. that will add more and more scale, and it's really a new platform for us to be able to scale all the time. And I think that's key for us to go more enterprise, more deep use cases and more core -- to be more core for our customers in certain areas.

I guess how did the use cases potentially change in the multiproduct strategy change with the addition of monday DB?

So let's take an example for CRM. So now monday CRM is not able to hold like millions of records, yes. Why? Because we're doing a lot of magic in there, like you can connect things, it's very dynamic. You can see reports from everywhere. It's like magic. You can do anything you want. But that magic doesn't scale to millions of records yet. It's like not an easy undertaking. But with monday DB and future versions, we'll get there. And I think that's tremendous for CRM and will allow us to go to ever larger deployments all the time.

And I do want to touch on CRM and some of the other multi-products you have, I mean, developers also getting really good traction. How should we think about what is it that's driving this growth? And -- at what point should we kind of view it as becoming a real contributor to the revenue model?

That's a good question. So I think like we've opened those products until now just for new customers because we wanted to see how it works now. We started rolling it out to existing customers, again, gradually over time to measure things that see that everything is stable. And so once it's rolled out to existing customers and we start like training the sales team and improving our ability to kind of cross-sell those products. I think it will start being an ever increasing factor in our revenue. I think like a few years down the line, like let's say 2 years, I think it's going to be very significant. I think next year, it's going to be good, but still the vast majority will be like work management, and we're still investing a lot there.

Okay. And maybe, Yoni, as you think about the go-to-market for the multiproduct specifically, does it change how you think about going after a CRM use case or a developer use case compared to selling the broader kind of platform opportunities?

Yes. I think, again, it's sort of an evolution for us, right? Where we -- it's a new product that the reps need to understand the sales team, the CSM partners. So it's changing the structure of the organization, both in the -- I think in all of the go-to-market functions. So in sales, we are building teams that specialize in CRM, for example, in teams that specialize in them and they to new customers, but they also do overlay to the existing base through the account management group that we have in the partnered ecosystem. We are adding more and more partners at our CRM partners, and we need to train the more generic ones, the work management ones on CRM. So it's evolving the way we sell it as overlay functions that we never had before. So that's the main thing.

Was it this aspect that was maybe holding back the broader rollout to 100% of the customer base? Because I think last quarter, you only talked about 50% being deployed. So I guess what was the limiter to that being driven to 100%?

Yes. I think it's something more fundamental to how we think about the product. So we don't develop a product for 2 years, and then we roll it out. We want to learn very fast. So we started by building something more basic, listening it to a small population. We get a lot of feedback through that cycle, but it allows us to move extremely fast. And the end result is that you get to 100% much faster and much better than working on it, making it like perfect before you start to release it. So I think it's part of the way we think about how we build the products, and that's the main reason.

An important note to make is that if any customer on the touch on like with the consulting group want one in the CRM, we can open it up for them. So it's not a problem of that sort. Just like the AB tests and all the stuff we're doing to measure it.

Got you. Okay. That's helpful. I do want to ask one last question on kind of the multiproduct side before moving on to AI. But how do you think about the use cases that could potentially be productized and turn into a stand-alone solution like you have with CRM and Dev and I think there was a discussion about marketer and projects as well before. But -- how do you think about what could be the next thing to be essentially a stand-alone solution in the marketplace.

So AI is one good example, okay, like we opened up the marketplace for AI solutions on top of our AI assistant. And already, we had like a hackathon with a lot of apps developed and customers will be able to buy them. Like we're now like improving them from hackathon to production stage. Those developers are working on it. So I think that's one thing we're doing, both with AI and its monetization and like an improvement to the marketplace. But we're also going to see customers like the marketplace, sorry, and our partner ecosystem being able to build complete products and package them. That's also something we're looking into that they can really -- like we are packaging our -- the workforce platform as products like a CRM, they will be able to do it. And for example, like if you want to build your own CRM, like a new one on top of monday, you have the same capabilities as a developer to do it like we have internally. Like we really opened up the platform and allow third parties and developers to do it. We really believe in that. And like thinking ourselves as a platform first and like really taking that seriously.

So do you want to shift to the AI. The AI angle here because I think very top of mind for what's going on in software now. I guess how should investors be thinking about what your AI strategy is and the key product points that you're looking to monetize going forward?

So I think when we look at AI, we need to think short term and long term, okay? And on the short term, it's very clear. It's like the capabilities we have now with AI are great at improving existing products and like, let's say, kind of influencing a lot of what we do in the current go-to-market. So for that, we're adding -- added the AI layer, our AI assistant, which essentially is embedded in every part of the platform. And like we've developed a lot of add-ons and our ecosystem will develop way more add-ons. And those will be charged by the developers themselves. So if you have like, let's say, an example, you want an AI bot that automatically responds to email, someone can develop it like latch on top of our e-mail solution and solve that problem. We can have a bunch of them and with ratings and some will be better than others. So that's the short term. I think the midterm will be what we already started seeing and working on is the ability to connect like AI right now is really good at doing specific things and not seeing a complete whole picture like a human does. And so breaking it down to parts on the midterm will really be important, and we see that as a new no-code building block, like that you can take a task, break it down to other tasks, but it's on the platform and then from that, from one operation, you can yourself turn it into another operation. Like someone who is an email understand what it is and break it down to column. On that column, you can build an automation and have like a no-code building rock, let's say, that writes an e-mail according to what it sees on the board, okay? So -- and then the human essentially can dive into the middle of how it works and kind of orchestrate it but using smart AI building blocks that can do things that we couldn't do before. And longer term, we're also looking into that and working on that is like actually having that AI that sees a complete picture that can actually do work that you talk with. It comes trained. It knows monday, you can talk with it. It has a job to do, and it does it well. And like AI can't, I don't know, like interact with 2,000 customers you have in a minute. So I think there's like a huge potential for productivity. And I think we are, as monday in a great place to kind of bring that to the nontech segment, 70% of our customers are non-tech and they come for us to digitize and improve. And I think we're in a great spot to kind of give them that ability and kind of bridge the gap for building operatable AI applications for work, yes.

Okay. That's great. I think one of the questions that we kind of continue to get as we think about AI and the monetization angle, especially in this space is what becomes table stakes in the market and -- or versus what is potentially novel that could show further differentiation and monetization. So how does monday think about what's just going to become table stakes versus what you can actually show a real differentiation on and show a difference out there?

Yes. So I think like there are the things that you just used to or to complete things, then, let's say, we have a great solution for building formulas which is not an easy thing to do. It's like you build like complex formulas and you might not know the syntax. So now you can just like type whatever you want in English, and it creates a former line, it works and it explains you what it did. That's awesome. I think this type of things that kind of improves the product itself and is part of the product might become table stakes, okay? We did open it up to the marketplace and if someone has a better formula builder, the customer can go and buy it. But when you think about actually, giving you value in saving you time, not improving the product itself, improving you. I think this is something you can charge for, and this is where we're aiming at, okay? And this is already what we see. Like if you can send 2,000 e-mail in a minute or understand like and validate, let's say, attends for an event or do SDR in sorts or like those kind of stuff. This saves you time and money and improve your business. This is something you can charge for a lot, I think, for everyone. And I think what we'll see is that like not all AIs will be cut out of the same class. It still requires you to be good at doing that. And to productize, to make it available for people to actually use it and -- but they themselves do a good job at those kind of things.

Sure. I do want to ask, I guess, similarly, I mean, how do you -- how should we be thinking about the AI opportunity today versus some of the macro pressures? And as you think about the opportunity for how big AI could be, how do you balance that with also trying to show margin in the business and trying to show future margin potential? Like is there been any change in the math around growth versus profitability at this point?

So from our perspective, we have a long-term plan that we presented in IPO by 2025 to be around 25% profitability and 25% to 30% free cash flow. We are obviously advanced significantly 2 years in advance. We are cash flow positive since IPO. We also performed with operating -- positive operating margin in Q2. And by the end of the year, we said that we are going to be profitable. So from our perspective, this is something that could contribute to our longer-term plan. But our #1 priority is to invest in what we call sustainable growth, not growth at telco. So I think it can complement. It can be complemented to our improvement and continue to be efficient. It's not going to change at least in our thinking for now dramatically the numbers in terms of profitability or margins. Maybe some positive contribution, but nothing that we currently consider as a dramatic change.

I guess if -- what would need to, I guess, change in the marketplace to maybe put your foot on the accelerator more and decide that there is more time to either -- or more -- yes, this is the right time to put more cash to work either invest in marketing, go to market or something more on the product side. Like what would be the proof points that we should be looking at that might make sense for that to happen?

We have BigBrain in monday. And BigBrain is the BigBrain that calculates everything. Everything that we do is we are a very data-oriented company. Everything that we do, we measure. We look at returns. So this is why we are very efficient. So from our perspective, there is no -- nothing that prevents us from investing more. Actually, we are now at inflection point. We believe that while the last 18 months were kind of challenging from macro-economy perspective. We didn't do any -- we didn't do any reduction in force. We actually continue to invest. And we think we need to do it to continue with this investment in order to be ready for 2024, 2025, we're thinking longer term. So from our perspective, if the opportunity is there, and we see the returns and it's efficient investment, then we are doing it. And the plan is to continue to hire people. We said that we are going to hire 15% from where we were at the beginning of the year. So we started with 1,500. We plan to finish around 1,800 and then to continue next year. So if we see the opportunity, we invest, there is nothing to prevent us. We have close to $1 billion in the bank. We have no debt from -- it's a huge opportunity, and we have to definitely take advantage of it.

Sure. Okay. That makes sense. Just any questions in the audience here? Okay. Maybe sort of thing gears a little bit to how you're thinking about go-to-market today. I mean on you became CRO a year ago. I know it's -- I know you're already on board before that. But I guess what's been your biggest area of focus in the key changes that you've made in the go-to-market since becoming CRO?

Yes. So I think there were a few. One of them is basically consolidating all of the client-facing functions under one umbrella, so significantly -- internally looking like significantly improving collaboration between the growth and kind of a more seamless customer life cycle journey, which in return improves the customer experience. So that's been one more on the internal front on the more external go-to-market front. We've been doing a lot of things. So one of them is getting ready to continued upmarket motion. We -- in the last year, we've changed the mix of the sales force. We are here from more kind of mature B2B organization, people with over 5 years of experience selling to enterprises. So that's one thing we've been going on with -- in parallel to continuing the ELG motion that works really well for us. We've started to add a more top-down motion that will augmented to be able to talk to more senior level person close at the first get-go bigger deals. So that means that you need to start to think about persona, more value-based selling, which is a different motion, it's a different lead acquisition, but also when you do customer marketing, it's a different way that you need to train their reps to talk to customers to be able to instead of going small steps to be able to go to a VP or a C level in the company and kind of try to close a much bigger deal. So those are the things that we've been working on.

So as we think about the enterprise go-to-market, I know there's a bigger push a year, 1.5 years ago that that's been happening. How should we be thinking about the ROI on those investments? And maybe how the productivity rates kind of trended in the enterprise versus maybe what you were expecting when you first made that investment.

I don't think that they changed dramatically. I think it's -- and we did it as an evolution. It was not like throwing a huge investment that we don't know what we get because we measure everything. We make sure that every rep -- of course, there is like longer onboarding for the reps, but -- and the sales cycles are longer, but it's not tremendous. We don't have sales cycles of bigger than that, [indiscernible] most sales cycles also for an enterprise would be would be 3 to 9 month long. So you see the return pretty quickly. And I think we've grown it in a good way, like we didn't make like a huge jump at one go. We constantly make sure that we see the return before we make the next landscape.

Obviously, our larger customers are better. They're like growing faster. Their retention is higher. So that investment kind of made a shift in the cocktail of the ARR and that makes a change over time.

Yes. I mean I know there was a record quarter for enterprise ads at 200-plus. As we think about that strength, how much of that is being driven by the account management and the real focus go-to-market that's led to that versus maybe the product being in a bit more mature of a place and things like monday DB coming in to help augment that approach?

Yes. So I think look, going off market is kind of like we're going to always talk about that. It's always improving, going to larger customers. And you have to do a lot across the board to go there. It's permission, governance, security, putting data in regions and improving the product in many ways and also the scale. So we are doing a lot of effort across the board and that always opens up new deals and new opportunities. So that's like ever going. And where we see it happening is that the sweet spot that we can sell in that is easy for us to do it is always going on.

I know you mentioned marketplace early on in this, but how should we think about what the marketplace opportunity could look like for monday. I mean I know that Atlassian's had a lot of success within their own marketplace and how that has kind of augmented their approach in the market. But how are you kind of viewing what marketplace could do for you and how it potentially changes either the customer acquisition or the importance of certain customers? How should we -- how do you think about what marketplace could do?

Yes, it's a great question. So like we think of ourselves as a platform. And thinking like that, you want to have developers and partners actually building on the marketplace feel that they are building their own business, okay, that they can control their own destiny. And for that, we kind of opened up the whole platform. And like I told you before, like if you want to build something, it will be -- you have pretty much the same capabilities that we have. And we really are supporting our -- the developers who are building on top of us. The reason we're doing it is because I think like multiplicity solves more problems, and we have a huge long tail of business verticals, we're like catering to more than 200 different business verticals. We probably have a super wide opportunity for everyone, and we're not going to get all of it. We're not going to have the best solutions for all the long tail, okay? We're going after the very large horizontals like CRM, the work management and so on. And so we see a huge opportunity for partners to come and add more value to those horizontals or even go after other verticals and improve them. And so like we see this as a huge growth revenue for us in the coming years. We're making a lot of investment there.

So do you view the marketplace as kind of your main partner channel strategy? Or what is like a more traditional channel opportunity look like for monday?

So it's part of it. So we have a lot of partners that are developing stuff. If you need an integration to other systems, then partners would go in and help you do that or figure out a solution that is specifically to you, that's on the marketplace. But we partner with partners, maybe Yoni can expand on other issues as well, like selling and services and other things.

Yes, sure. So we have, I think, pretty big reseller network. We have roughly 200 resellers. We have around 2,000 referral partners, all of the more small boutique ones, consultants. And we have GSI partnerships, right, like Accenture, McKinsey, TCS and Deloitte and others. So I think we invest a lot in those partnerships. They do a few things. One, they echo the brand significantly. So that's like a very significant part for us. All of the top-ups in the marketplace were developed by existing partners. I think it's like, I don't know, 8 out of the top 10 or part of those were developed by partners. And they allow you, when you go to significant opportunities, if you can bring one of the big GSIs into the deal. They have a lot of relationship. It helps you navigate within the organization. So they also help us to close a bigger deals. So we have all sorts of partnerships, and we use them in different ways.

That makes sense. We only have a few minutes left here. I just want to survey to see if there's any questions in the room here? And we have a mic coming. So, yes.

Do you think the customers really understand what kind of applications or features they are looking for when it's certainly on your platform? And if we have to talk about some revenue flow that are -- like significant revenue flows on AI, do you expect going to be 2024, 2025? Or we completely have no idea right now?

Yes. So I think no one really knows what to expect from AI and not even customers, and we're -- like when I see that technology and what we can build with it like every day, we're discovering new things and new way things and I think the world is doing it together kind of like new best practices and such. It's hard for me to say if it's going to be something significant next year. I think it won't like money-wise. I cannot look at AI kind of like the Internet when it came. The Internet is an infrastructure and like AI, but like it took a while to figure out what are the best companies, what are the best solutions, if you remember, the dot-com era. We didn't really figure it out, and it took us a while. So I think like if you look at like 20 years from now, everything is going to be completely different. If you look at like a year or 2, I think we'll have a lot of breakthroughs like we did back then. But there's like a huge long tail of like change and improvement that is coming with AI, and we'll figure it out together, like I think a lot of it will be able to -- like it's moving so fast. So with someone doing something great. And now others will duplicate really quickly. It's not that hard because it's super fast. So I think we're going to see a lot of those step changes mainly to products and how people interact with them. And if you're not there, if you're not like putting the energy and effort behind it, you're going to be left behind. But I don't think we really know and anyone really knows what to expect in the coming years that this will change.

We saw pretty strong billings growth for the last quarter. So maybe I -- maybe management could give some outlook for us maybe what about the second half outlook for the billings growth? Is it going to be better? Because you mentioned some fly bird positive signs in July and the third quarter.

Yes. You asked about billings, right?

Yes, business growth.

So the model of monday is annual subscribers and monthly ones, 80% of our ARR is paid on an annual basis. And this is what contributes to the healthy kind of cash flow that we have as well as billing. I don't want to tell you that H2 is going to be better. It can also be fluctuating due to seasonality like summer and things like that. But I would say that we're pretty much in the same trend. I don't know to tell you that it's going to be better or worse.

Okay. And another question is about net retention rate, net dollar retention rate. So we saw it continues to going down. I don't know if you have any like bond bar for the market like when or which kind of level that you think maybe the core are -- like they are for the recurring revenue, more than 50,000. I don't know, maybe whether it's going to be like less than 110% or maybe it's going to stable at that level.

So for entire population, we said it's going to be slightly below 110%. For the big accounts, it's going to be above 110% by the end of the year and hopefully, next year with everything that we are doing, we're going to see it'll stop there.

Okay. Great. I think we're running up on time here. But thanks, everyone, for the questions and I want to thank the monday team for being here. So greatly appreciate it.

Thanks for having us.

Thank you.