Samsara Inc. (IOT) Earnings Call Transcript & Summary

This is our afternoon session with Alex Zukin, your host. I cover enterprise software at Wolfe Research. I am thrilled to be joined by Dominic Phillips and Mike Chang from Samsara, a very cool, recent, interesting IPO. Dom, thank you for joining us.

Thanks for having me.

As I've been saying to everybody, I'm going to ask 4 the same questions before we get into the thick of it. We'll promise to throw some spice. But if that's not enough, you guys should feel free to queue up in the question bank. Just remember, your space will be known because the companies can see who ask what questions. So be respectful and I will ask it if you put it in there. With that, Dom, maybe just give kind of a 90-second intro to the business and what made you want to join the company and take it public.

Yes. So Samsara is connecting the world of physical operations to the cloud. We are collecting and organizing a bunch of data off of operational assets, so things like commercial vehicles, field equipment, heavy machinery, physical sites like factories and warehouses, taking all of this data into the Samsara cloud, and we are providing insights and analytics that customers ultimately use to run their businesses more safely, more efficiently and more sustainably. We are operating in -- this role of physical operations is about 40% of GDP. These are industries like transportation, logistics, manufacturing, construction, field services, industries that have been super underserved by technology in the past. And our products that we're providing to these customers address a TAM that is $55 billion today and is, and expected to be close to $100 billion over the next few years.

Perfect. I was timing it. It was 90 seconds flat.

I timed it, too.

Let me ask -- so now getting into the boring questions. The demand environment, the current demand environment specifically -- and just how the health in general, how it compares to a year ago, obviously, 2 years ago?

Yes. So Q4 -- We just finished Q4, reported our first quarter as a public company, best quarter ever. And then in terms of things like net new ACV, net new ARR added operating leverage. We improved our operating margin by 44 percentage points year-over-year. So just across the board, a lot of strength. A year ago, in Q4, we were coming out of the end of the COVID year. And that, at the time, was actually our best quarter ever. I'm sure we'll get into a little bit of what the dynamics were doing COVID. But over the last year, FY '22, calendar year '21, we saw a lot of demand, and there's a lot of tailwinds the business right now, and we're seeing some really good customer demand.

Well, since you mentioned COVID, let's go to my second question, which is -- what was the impact? And I actually want to get into it a little deeper with you, because you guys made some adjustments from a hiring perspective. What was the impact that you saw from COVID on the business? When did it show up? When did it abate, like when did it go away? And now that you're coming out of it, like just talk to us about -- or hopefully, we're coming out of it -- talk to us about the tailwinds and headwinds on the business [ at the end of ] the year.

It was interesting. So I joined from ServiceNow in December of '19, and I was on board for a couple of months, and then obviously COVID hit in March of 2020, so kind of early in my tenure. And the business was 1,600 employees, 1,600, and we were about $150 million of ARR. We were pretty extended into a lot of different new product opportunities and new geographies and really in this kind of split-scaling mode. And then COVID hit. And we saw halfway through Q1, so we're an April quarter end. Halfway through the quarter, COVID really hit, this is kind of mid-March. And we definitely started to see some not -- not lost deals, but we definitely saw a pause. So we saw customers start pushing some deals out into later quarters. And at the time, we said, "We've got to get healthy. We've got to make sure that we've got a financial model that can withstand potentially a multiyear recession, and we need to go raise more capital." So we did a targeted reduction in force and at the same time, we raised capital, and we created an operating plan that would allow us to get to breakeven without needing to raise additional capital kind of on our own terms, and make sure that we could survive if this was going to be a multiyear recession. It turned out to be a 2-quarter recession. And then by Q3, we were kind of back to our best quarter ever. In Q4, as I just mentioned, Q4 of calendar 2020, our best quarter ever. And what we learned is that in a recessionary environment, customers look to Samsara. We are -- this is an ROI play. We allow them to save money and reduce their costs. So driver wages, insurance premiums, fuel costs, maintenance safety, these are all extremely large expenses for our customers, and they use our technology to reduce these expenses. And then in a recessionary environment where our customers are essential services, we saw a lot of good momentum as we started to kind of get into this normal COVID environment.

So as we -- you mentioned the recessionary environment, as we think of -- as we take a step kind of into 2022, we've got a war in Eastern Europe. We've got, obviously, commodity prices spiking, likely causing meaningful impacts on businesses that are weighted on fuel costs. Similarly, you have logistics and transportation impacts. These are thematic -- this introduces massive amounts of complexity into supply chains, into various areas of many businesses across many verticals. If there is a recession that comes out of this, and most people generally think that's probably in the cards, at least in Europe, if not domestically, a, how are you positioning for this, how does this impact -- is it thematic, is it a tailwind because of what you just said? Where would the pressure points be on the business? Where would the headwinds come from? Just frame it up as investors think about, I guess, Samsara, a kind of not recession-proof, but where is it insulated and where is it exposed?

Yes. Maybe I'll just start on the first point. So like our exposure to international and Europe is relatively small. 10% of our ARR is outside of the United States. We don't have infrastructure, employer or customer exposure to Ukraine or Russia. And so we've been pretty insulated from those impacts. Frankly, we've gone through a recession. I mean it was a very short recession, but we did do that. And what we saw was, again, as people digested what was happening, there was a little bit of a slowdown in our business. But these are businesses that, again, were deemed essential services really operated through a recessionary environment and increasingly are looking for new ways to save money and operate more efficiently and more safely. And so as the recessionary environment was kind of digested, we saw, again, deals push into later in the year. But again, we had a really, really strong Q3 and by Q4, kind of our best quarter ever. And so I think that -- it would be interesting to see what happens if that's the environment we went into. I don't know what the near-term shock would be, but I do believe that medium term and definitely longer term, if this was an environment that persisted, I do expect that we would continue to see strong customer demand. These are industries, again, that have that are just in the early innings of digital transformation, they are increasingly looking for ways to use technology to lower their costs. And we saw it in consumer. We've seen it in enterprise IT. Now we're seeing it in the world of physical operations. And so again, I talked about the cost stack for these customers using technology like Samsara to reduce those costs into operating more efficiently and safely, are definitely ways for them to operate better through a recessionary environment.

So again, I want to simplify this as much as possible for people. But like just in the nature of massively spiking fuel costs, how -- like are you -- I mean, that is something you might even be able to see that in kind of the pipeline for deal activity being created. But I'm curious like just walk us through how that either drives increasing usage for Samsara or makes it harder [ to define ] budget?

I was at our President's Club or sales club event a couple of weekends ago, and I was talking to a bunch of the sales reps, and they were using that playbook today with customers because we have technology that can help customers lower their fuel cost. We can understand how many miles vehicles are being driven and how much fuel they're using and how much time they're idling, and we can show them reports and data and pinpoint on certain vehicles or drivers that allow them to go back and coach them up and find ways to save money and reduce those costs. So that is one of the key drivers of our technology and definitely a use case that our sales team is leaning into.

I guess -- so anecdotally, it sounds like that's coming up. If I think about thematic growth drivers for the business over the course of the next year, where does that -- what are the stack -- like stack rank them, because you're growing pretty fast.

I think -- yes, I would say there's a number of secular tailwinds that are driving the business and driving a lot of our growth. There could be some acceleration to it based on some of these broader macro trends like driver wages and inflation and fuel costs, things that are increasing their cost stack and increasingly pushing them to find technology to operate more efficiently. But I think some of the catalysts of growth for us have been large customer momentum. So we've been making a lot of investments in our enterprise, our field motion. We talk about the customers that pay us more than $100,000. Those customers now drive 45% of our ARR, and that's trended up. We now have 806 customers paying more than $100,000, and we added 91 in Q4. So that's been a big driver. Multiproduct transactions, more than 70% of our customers are subscribing to multiple products. So within the vehicle opportunity, they're licensing both telematics and safety, and then they're extending outside of the vehicle as well. Our largest customers, 90% of them are subscribing to 2 or more products, and almost half of them 3 or more products. So that is a big growth driver, this platform opportunity. And then expansions. I talked about Q4 was the first quarter that more than 50% of our net new ACV came from our existing customer base, and that marries up well with this trend of larger customers. Those customers have broader and more complex operations. They're rolling out solutions over time. They're adding more products, and they want more visibility into their operations.

Perfect. The last of the boring questions is, again, if you think about like you've now interacted with a lot of investors, you've sat back, you've gotten feedback, you've digested, you've analyzed, you've metricized. What is the biggest misunderstanding investors have about Samsara?

I think it's something not misunderstood, but maybe underappreciated, especially in an environment where profitability and free cash flow are more important today than they were a year ago. This is a business that has 98% subscription revenue. This is an ARR business, almost like seat-based licensing, but it's asset-based licensing. And so from a revenue and ARR perspective, it looks like the other 140 public software companies on the top line. On the expense side, we have a unique dynamic in that we provide an IoT device that is a part of the service that is used to take the data from the assets to the cloud, and that is very different. And so we spend money upfront to get these devices and deliver them to customers, which means that our working capital, we have negative net working capital, where we do have the benefit of change in deferred revenue, but that's more than offset by the dollars that we spend upfront on IoT devices. And so our free cash flow margin trails our operating margin. In the long term, if you're thinking about like your DCF model, these things will converge, as they will in other SaaS software businesses. As growth slows, we will not need to provide IoT devices to drive more revenue. So the long-term model, these things will both be over 20%. But in the short term, we're more likely to get to operating margin breakeven before we will for cash flow breakeven. So if you're thinking about efficiencies in the business and comparing us to other software businesses, we think that looking at operating margin in the near term is a better indicator of kind of efficiency.

That's a really important point, and one I think that we'll try to stress.

Sorry, just one other point that I want to call out. Last year, in FY '22, 70% to 75% of our negative cash flow were dollars going out for inventory. In FY '23, the year that we're in, more than 100% of our negative cash flow will be tied in to inventory, meaning if we did not have an IoT device, we would be free cash flow positive this year.

That makes sense. So one of the questions, Dom, I always get when I start pitching Samsara is, just like what's the tangible competitive differentiation that you have versus the competitors, both modern and legacy? Who are those? And what is like the moat? Meaning what is going to prevent this from being like work management, where there's like 15 new firms created every other week?

Yes. It's interesting. Across different products, across different customer segments, across different geographies, it's a different competitor. It's super fragmented. And a big reason we win is because we address all of these points. I think the key competitive differentiator and moat for us is this -- we're the IoT data leader. So we collected almost 5 trillion IoT data points last year, up more than 2x from the year before. We have 85 billion minutes of video-based data. That's up more than 2x year-over-year. We had 2.5 billion AI inferences last year, up more than 10x from where we were the year before. So we are collecting so much data across different products and different use cases. And with that data, we can provide more insights, more holistic insights to our customers, and that's a compounding benefit. The more data we collect, the more analysis and ways that we can help customers save money, and that's very difficult to do. I think the second thing is we are taking a platform approach to this problem. So we're collecting telematic data and video-based data and equipment utilization data and video-based data out of sites in physical locations, and we're allowing customers to get full visibility into all of these assets and use cases, all on one platform, which allows us to elevate it into a much more strategic conversation. And then this is a solution which is very easy to use, you can get up and running very, very quickly. We ship a lot of free trials. We let customers get their hands on this. They can install a device in 10 or 15 minutes, turn it on, send it into the cloud, start getting some real-time kind of visibility into their operations. And it just works. And for a buyer that does not have an army of IT employees and developers to build a bunch of integration, it just needs to work out of the box for them. And we have solved that in a way that even though it's very complex on the back end, we obfuscate a lot of that for our customers.

And when you think about the competitive environment specifically, I realize it's completely -- it's very fragmented to your point. But if you had to just group the competitors in terms of the amount of time that you are seeing one or replacing versus greenfield and who that would be, how would you kind of lay that out?

I'll start with our leading product, which is our video-based Safety. I think that's another misnomer we talked about the free cash flow dynamics. A lot of people think that we're a telematics company. We are much more of a video-based safety AI dash camera company. That's a market that is much more of a greenfield opportunity. If you look at -- there's like 35 million to 40 million commercial vehicles in the United States, less than 5% of them have this solution today. It's like driving around the road. I do this a lot. I'm like looking in vehicles as I'm passing them. Very few of them have a camera solution today. So that's a lot of greenfield opportunity. When we do displace an incumbent at the enterprise space, it's like Linux or SmartDrive, Omnitracs acquired. On the telematics side, it's very different. It is -- 40% to 50% of those vehicles have a solution today. So there's still a lot of opportunity, greenfield about half of those vehicles, but 40% to 50% of them are replacements. And these are vendors that have been around for decades. So Geotab and Omnitracs and PeopleNet from Trimble, Verizon bought Fleetmatics and Telogis. So it's a much more fragmented space. And those vendors are focused on different end markets or different customer segments or different geographies. But again, 70% of our customers are using 2 or more products, and so a big reason we're winning is because we're going in with multiple products on the same platform.

So I'm going to ask the question again because I think I want to hear your answer to it this way. It sounds like video-based safety, again, the biggest greenfield opportunity, the least penetrated. Even thematically, I can imagine a world where if you're a commercial driver of professional fleet in any capacity, you have to have a video -- a dash cam collecting data for -- whether it's for safety, for regulatory, for whatever. What is the -- like I understand the platform approach. I understand that you have multiple products and you get data in multiple systems. But what is better about your video-based safety solution than your competitors' in that market?

So it's the technology. The big reason this market is so new is because these -- this available -- this technology was not available more than 5 years ago. And the people that we're competing with in this market were founded well before this. So if you think about the camera technology and real-time HD high-quality video, the AI, the chips that are available today just didn't exist a few years ago. So the underlying technology is just superior. The amount of data that we're collecting is larger, which allows us to run better models and provide better insights because we have so much of the United States of the roads covered through video that we can provide different levels of insights than other competitors can ultimately provide.

Got it. Let's talk about your headcount. This was another impact of COVID, you did make some cost reductions. I guess, a, where are we in terms of headcount, particularly go-to-market headcount versus where you were pre-COVID, a. And b, how does that playbook -- like what did you do right and what did you do wrong, inform you for if we get into another, call it, recessionary environment. Every time I talk with a late-stage VC right now, it's cut your burn in half and come back to [ the ] -- your existing plan doesn't work.

What we did well this time that we didn't do last time is that we waited for the recession to start and then we raised capital, which is why we had to do -- why we decided to do a layoff and then go raise capital and really tighten it up. And what we did differently this time is we just raised capital, and now we've got $1 billion of cash on the balance sheet, and it allows us a lot more flexibility. We control our own destiny. We can get to breakeven. We never have to raise more capital. We've got more than enough cash to support this business in growth [ and ] customer demand. And so that is a much different position to be in today than we were in March of 2020. But as I said, we were overextended. We had 1,600 employees, and we were trying a lot of new things all at the same time. We went from 1,600 to 1,250 right after COVID hit, and we basically flatlined for the rest of 2020. And then because we had such a strong Q4 in 2020 and productivity started to improve, we said we need to get back and start rebuilding this capacity. And so we did a lot of rebuilding in calendar year '21. Our headcount grew 30%, 29%. And we basically got back to 1,600 by the end of the year. So over a 2-year span, we went from 1,600 to 1,250 back to 1,600. A lot of the capacity that we added in 2021 happened at the very end of the year. On the Q4 earnings call, I said more than 40% of our sales and marketing additions in 2021 happened at the end of Q4. That capacity will take 4 quarters to really come online and add real productivity, and we're going to continue to grow headcount and add more sales capacity this year. I said we're going to accelerate even faster. So headcount growth will be more than 30% in calendar year '22. But again, these are investments that we're making that won't have as much impact on our top line this year but are going to pay a lot of dividends in calendar '23, '24 and beyond.

Got it. I'm going to shift gears completely and talk about the device. So if you think about your working capital, you talked about where the headwinds to free cash flow for a prolonged period of time about the device, and we've talked about the supply chain bottlenecks, which actually I'll ask you to comment about, easing or not easing or seeing an end in sight. But the 1b -- like that's kind of like a prologue question to the main question of like, is this a company where you wake up -- we wake up one day and there's no device associated with it, because vehicles of all shapes and sizes have built in, like Tesla, like cameras in the operation of the vehicles. And now it's more of a getting data out of fragmented disparate set of platforms? Or is that just not a realistic vision of the world?

I think it could definitely -- I think it is increasingly going to happen. I think it will continue to trend in that direction. And what that end state and when that end state happens, I think is anyone's guess. Similar to like autonomous vehicles, like it's clearly happening, but when that happens, unclear. We love that world. We have no -- we are not in any way wedded to these devices. They are commodity hardware devices. It's why we have more than 70% plus gross margins. We would much prefer to just pull the data directly in from a third-party cloud, and we do that today. So we have integrations with all of the major OEMs, and we do have customers that are just transferring the data from the OEM cloud to Samsara in the same way that we would collect the data directly off the asset. It's a much better customer experience, and frankly is potential tailwind to our gross margins longer term. But the reality is that most of these physical operations assets today are not connected to the Internet. And as a result of that, that is why we have to provide this gateway to untrap the data and get it to the cloud. It's not special about our solution. Customers are buying enterprise-grade software and data and workflows and analytics. That is what they're subscribing to. The IoT device is simply just a means to an end to get the data in the cloud, and we don't need it for the future success of the business.

I'm going to drop a metaphor bomb on you, and you tell me if this makes any sense. It's basically Netflix, but you're shipping DVDs right now.

I love it. That's exactly right. Yes. I mean, so long run, that's where things are going. But it's going to be driven by OEMs. So you see a lot of assets have embedded SIM cards now. So the telematics and location data is available. But you're not seeing a lot of vehicles, commercial vehicles with cameras, dash cams built in. And so these things may continue to roll out over time. But in the interim, we provide it simply because we need to get the data into our cloud.

Are there any like relationships with Tesla or any of these other -- not just OEMs, but like large vehicle manufacturers that you've talked through -- that you've thought through or working on or in process or on the road map that could, let's call it, accelerate this path in the future?

A lot of it's going to need to come from customers helping to kind of push this. You go to the OEMs and I need this data to be in Samsara because I have 20 different vehicle brands, and I want visibility across my mixed fleet. Or all of my assets, nonvehicle assets, I want all of that in one platform. Similar to what you see out of the data warehousing vendors or the observability vendors, where you've got workloads in AWS and Azure and Google and private cloud, and you just want visibility across the board. It's very similar for us. And so we're going to need customers to continue to help push those integrations. And you can look on our app marketplace and you can see all the integrations that we have, but I expect that, that will only continue to grow.

And the ecosystem of partners, like I'm assuming Intel, Mobileye, others, like as autonomous becomes more, I want to say, like real -- does that -- does this -- like do you become kind of like a vital part of this ecosystem?

We are the software layer. We have the extraction layer on top of all of this data. And we think that autonomous vehicles and having all of this data come into an OEM cloud is only going to increase the value that we can provide, because customers are ultimately going to need to manage these assets regardless of how they're operated. They're going to need visibility into them. They're going to want to make sure that they're operating safely. They're going to want to lower the cost of them. And so they're still going to want to use an enterprise platform like Samsara to kind of manage all of the workflows related to the data that is being pulled off of these assets. And so I think there's a very large enterprise software opportunity on top of all of this data.

Last question. Outside of your telematics and video safety products, which of the 3 other products do you expect to continue to become a much more impactful part of the growth story over the course of the next...

Yes. The third product is connected equipment. And so GPS and location and visibility and utilization around heavy equipment, field equipment, yellow iron within construction trailers. There's a lot of different assets that we're connecting to. And then sites I think is still very, very new, but taking that camera technology that we use in vehicles and putting it into physical sites: factories, warehouses, and using AI to do alerts and notifications and smart searches for security incidents. And so we think that's another big opportunity for us.

Perfect. Dom, see you at dinner.

See you at dinner. All right. Thank you.

Thanks, everybody.

See you.