Medallia, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Sep 2019

Operator:

Good afternoon and welcome to Medallia's second quarter of fiscal 2020 earnings conference call. Joining us today for today's call are Medallia's CEO, Leslie Stretch and CFO, Roxanne Oulman. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. . Thank you. With that, I would like to turn the call over to Roxanne Oulman for introductory remarks. Roxanne?
Roxanne Oulman:

Thank you Chris. Welcome to Medallia's second quarter of fiscal 2020 earnings conference call. We issued an earnings release a short time ago and furnished the related Form 8-K to the SEC. To access the press release, please see the Investor Relations section of our website. With me on the call today is Leslie Stretch, President and CEO of Medallia. The primary purpose of today's call is to discuss our second quarter fiscal 2020 financial results. Before we begin, please remember, during the course of this call, we will make forward looking statements about the operations and future results of Medallia that may vary and involve many assumptions, risks and uncertainties. In any of these risks or uncertainties develop or any of these assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward looking statements. For a discussion of our risk factors associated with the forward looking statements, please refer to the text in the company's press release issued today and through our periodic reports filed with the Securities and Exchange Commission including our prospectus dated July 18, 2019. We disclaim any obligation to update any forward looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed are non-GAAP, unless stated that the measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Additionally, in conjunction with the release of our earnings report, we have posted on our website at medallia.com under the Investor Relations section additional charts that will identify trended metrics, performance that we believe will aid in understanding and evaluating our performance over time. Now, I will turn the call over to Leslie.
Leslie Stretch:

Thanks Roxanne. Good afternoon and welcome to the first Medallia earnings call. Before I begin my prepared remarks, I would like to thank all of our employees, our customers, our partners and our investors for the hard work and dedication in helping us reach the important milestone of becoming a public company. I believe that as a New York Stock Exchange listed company, we have already seen increased awareness and interest in customer experience generally and specifically in what Medallia can do to help improve businesses of all sizes. I was very pleased with our performance in Q2, accelerating year-over-year revenue growth, off of a higher base and signing new banner customers. Roxanne will discuss the details of the quarter's financial performance in a few moments. But first, for those of you are new to the Medallia story, I would like to give a quick recap of our business, our platform and our market opportunity.
Roxanne Oulman:

Thank you Leslie and good afternoon everyone. I would like to express how pleased we are with the level of interest we have received from our analysts and investors. We look forward to getting to know you and keeping you updated on our performance. Today, I will provide a brief overview of our second quarter 2020 financial results and discuss guidance for our third quarter and full year of fiscal 2020. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results in today's press release.
Operator:

. And your first question comes from Kash Rangan with Bank of America. Your line is open.
Kash Rangan:

Hi guys. Congratulations on your first quarter as a public company. Superb results. Leslie, a question for you. With respect to the new customer count, that comes in very, very strongly. And Roxanne, you talked about RPO growing also very, very strongly. So relative to when the company went public and certainly the message was it, look, this is an accelerating growth story, how much more confidence do you have in that overall hypothesis based on the customer add trends and what seems to be really very, very solid RPO add in the quarter? Does that leave you feeling just about on par with the confidence that you had at the time of the road-show? Are there certain things in the quarter as they unfolded with respect to these two counts that make you even more confident than you were at that point? And thank you so much. Congrats.
Leslie Stretch:

Great. Thanks Kash. Great questions. So I think there are several aspects to that. The partner business is really new. The mid-market business is really new and we see traction. I have just come back from a tour of Latin America where out of 20 odd meetings, I had CEO meetings with some of the biggest companies in Latin America. And we are clearly seen as the platform story as the modern machine learning customer experience transformational story and it's exciting. I am more confident, I feel great about our prospects. We have been adding sales people at a decent clip rate. It's getting the add and having more sales people and not leverage the channel. And I am quite pleased with the mid-market progress. It's pretty clear that our product has applicability across the range of spectrum, strata, size, customers. So I am very pleased in the new leadership in APAC and EMEA. It is new. We need to see that unfold. Those are strong businesses for us, but we are expecting some improvements on turbocharging from that leadership side. We feel even more confident. I am very pleased to be back at work and I am taking the opportunities. I think competitively, the distinction between us and the survey players is becoming very marked. That's very clear to me. So I think I will stop there.
Roxanne Oulman:

So Kash, I wanted to comment on RPO. So RPO was very strong in the quarter and we are at 52% as current. But one of the things I do want to highlight for you from an RPO perspective is we have some very large long term contracts and when we renew multi-year contracts that are several million dollars, you will see fluctuations in our RPO on a quarterly basis. But with that said, I am extremely pleased with our performance and we are very focused on a 25% to 30% SaaS revenue growth rate on a long term basis. And we think that is something that is achievable and we are executing towards.
Kash Rangan:

Wonderful. And one follow-up for you, Roxanne. The professional services revenues came in better than expected. Just curious what drove that? And when do you get through the investment and recoup the margins in a couple of quarters out? That's it from me. Thank you.
Leslie Stretch:

Now that just reflects the increased number of implementations. We still expect our partners to take a heavy load there. But that reflects the increased activity in the prior quarter as well.
Roxanne Oulman:

And from a margin perspective, as I shared in our prepared remarks, we are very focused on building out our partner ecosystem. And so that includes multiple things which includes our partners doing more on their paper and also as we introduce new partners working with them in a subcontracting capacity. And so you will see a downtick in our gross margin in the back half of the year.
Operator:

And your next question is from Walter Pritchard with Citi. Your line is open.
Walter Pritchard:

Thanks. First question. Just wonder if you could update us on the mid-market investments that you have been making around trying to get customers to be able to enter your product portfolio at a lower entry level?
Leslie Stretch:

Yes. So I think I mentioned in the prepared remarks, we have a business that is addressing very small businesses. There is a number of intermediaries that are signing up individual businesses onto the platform and that has great growth. But also there is a product dimension to the mid-market. Our digital product can be sold standalone. Some of our other products can be sold standalone. And we added some, I mention a few logos, but we added Anaplan, Boston Pizza and Sonos. They don't think of themselves as mid-market. But those size of deals, those type of deals are becoming more common for us, because the survey players just fall short. People want the forward-looking platform. They want the messaging capabilities, the live time capabilities that we have talked about. Still early days with the mid-market business. And Rory has only been with us for two quarters, but I am very excited about our potential there.
Walter Pritchard:

And then, Roxanne, just I understood what you said on the billings and the fluctuations there. I guess that was just probably a bigger fluctuation in deferred revenue than we were expecting, especially given the performance in RPO. Is it just as simple as you expected some of the billings and collections to come in on those large signings in the subsequent quarter? Or is some of the trend there in terms of volatility that's new?
Roxanne Oulman:

No. The RPO portrays the level of confidence. Our customers have an extremely high level of confidence in us. And as a result, they are signing large multi-year renewals or expansion deals with us. So you will see that as our customers continue to sign multi-year renewals, that we will see fluctuations in our RPOs. So we are very pleased with the RPO for the quarter.
Walter Pritchard:

Okay. Thanks.
Operator:

Your next question is from Phil Winslow with Wells Fargo. Your line is open.
Phil Winslow:

Yes. Thanks guys for taking my question and congrats on the first quarter out of the box. I just wanted to focus in on cross-sell, upsell. Why don't you give us some color and just what momentum you are seeing in any of the specific add-on modules, just maybe your expectations? And also just at the experience conference, you launched a lot more. Obviously it's still early days on those. But what's been sort of the early feedback on some of those newly launched add-ons? Thanks.
Leslie Stretch:

Yes. Great. So I mentioned the conversations products in the prepared remarks, which is really taking-off. It's early days with the promoter technology. That's brand new. Customer success actually we did a number of new deals in the course of the customer success margin. Strikedeck that we announced at the conference, I am really pleased with the progress there. And those deal sizes are getting quite interesting for us as well. So a good first quarter out of the gate with the new products. And our roadmap is dynamic and we expect to be bringing some more to market in the upcoming quarters, before the end of this year.
Phil Winslow:

Yes. Got it. And then one of the conferences you mentioned was Workday Rising coming up. Wondering if you also just give us an update on employee experience?
Leslie Stretch:

Yes. Employee experience, I am very happy with, I could classify that as a new solution. It's been run a little bit longer than some of the others we just talked about. But I am very pleased with the reception of our proposition there which is that employees and teams should be on the same platform as customers. They should have the same level of sophistication, the same communication capabilities and that's really resonating with our customers of all sizes. And some of our customers, actually new customers have actually started with team first and employee first, so getting great traction there.
Phil Winslow:

Great. Thanks guys.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Brad Zelnick with Credit Suisse. Your line is open.
Brad Zelnick:

Great. Thanks so much. Leslie and Roxanne, congrats to you and the team and all the success. Great quarter. First question I just have for Leslie. The volume of mobile messaging you talked about in your prepared remarks is simply staggering. Can you maybe expand on the value prop for messaging and the type of engagement and outcomes your customers are seeing when they engage via this channel?
Leslie Stretch:

Yes. I mean it's a new channel for us. And so we have no predictions about those volumes and we were prepared for scale. So technically we are prepared, which is important. I think this is an unfolding story for us and it backs up our whole thesis that the world is moving way beyond the survey. And as I said, the post-experience survey is very important, it's critical. But the world is moving to live time messaging in every dimension. I went through some of the channels, WhatsApp, WeChat, Facebook conversations and so on and we expect to continually expand those channels. And the appetite in our customers for those signals is incredible. You think about that number of message that I quoted, they are data elements, that's information about our customers that they never had. It's very powerful. And all of the benefits that flow from our traditional capabilities flow from the messaging signal. So we can understand sentiment. We can use that data to analyze themes just as we could traditional survey data. And so that's very powerful. Still very early days in the journey. And actually, we expect to talk about some more product enhancements around messaging in the coming quarters. They are going to be just as exciting. Early days, let's see how it unfolds and understand fully the implications. But I don't see why any of our customers, I don't see how actually they can really live without the conversations technology. It's pretty clear. There is nobody, there is no domain, no business, no division within a company that we won't see benefit from a live time communication capability.
Phil Winslow:

It sounds very exciting. And maybe just for Roxanne to perhaps put a finer point on Kash's question and Walter's questions. How much of the customer growth that you saw this quarter is coming from mid-market versus enterprise customers?
Roxanne Oulman:

So it's early days from a mid-market perspective. So we have seen a handful of customers come from the mid-market in the quarter. They are still primarily enterprise. As Leslie commented, Rory has been on-board and we have been focused on this mid-market initiative for a couple of quarters. We are really optimistic. In Leslie's prepared remarks, one of the things he talked about is the broader ecosystem that uses our product for smaller hotels, venues, sports venues and other things like that and those customers are not in our customer count at this point in time. But that represents another opportunity we have to continue to expand our customer base.
Phil Winslow:

Great. It still sounds like a great opportunity. Thank you so much.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Brian Schwartz with Oppenheimer & Co. Your line is open.
Brian Schwartz:

Great. Thank you and congratulations on a great first quarter of results here. I had a couple of questions for you. Leslie, first I want to talk about the acceleration in the business here, maybe look at it from a different angle. I was wondering if you could share with us a little bit about the ramp of the quota-carrying sales reps? I know you have obviously made big investments there over the last year and this year. But can you talk about how the growth in the ramp sales headcount, how that's trending? And if you have any thoughts on how we should think about the growth for the entire year versus say last year? Even if you can't give us a specific number, maybe if you could just talk about the magnitude? And then I have a follow-up question. Thanks.
Leslie Stretch:

Yes. That's a great question. I think that my big issue is getting the add backs. When we get the add backs, particularly in the large enterprises, we win. There is just nobody that offers our proposition and our value at this level or the technology, just no one. So it's getting to add back. So we have added, we are about 33% up in terms of quota-bearing sales capacity at the moment. And we said during the road-show that we would add 40% productive sales capacity this year. We are at least going to meet that. The opportunities there is within our financial envelope that Roxanne is managing pretty tightly. So we are going to continue the investment through the rest of the year and we are on pace and quality. We are getting quality sales talent from other cloud companies. We had somebody recently come on-board and in the first six weeks of coming on-board did their number for the year with a brand new business cloud transactions. So we are very happy with that. It's a real number. So that type of thing is there for us. So we are going to continue to invest and do that 40% growth that we committed to.
Brian Schwartz:

Thank you. And then the follow-up question I had, Leslie, I just wanted to ask about the overall market adoption trend. So when we look back at the business, clearly the business is focused on the end-user experience. You have done it with consumerization. You have the real-time behavioral analytics and prediction engine and mobility is very front and center in the platform. And I noticed and you did mention in your commentary that Medallia is unrivaled by the competitors for really proficiency and scale. And so the question I wanted to just ask you from your vantage point, are the survey vendors, the legacy software vendors or any of the incumbents in this space, are they still stuck on focusing on a single data source or focusing on power users which really hasn't worked for them in other categories? And just wanted to kind of get a broader update on the adoption trends as you are adding these new logos and what you are hearing within your install base? Thanks.
Leslie Stretch:

Yes. I think the survey vendors, whenever we see survey vendors present in an account it's always a good sign because at least the customer has made a first step. And they can kind of pave the way for us to come in and then offer the fully-fledged platform and capture all the modern live time signals and that takes big investment and Medallia had already made that, huge investment in the platform and that's beginning to pay-off. And the other thing that I see is, I see them following us, I see them following our language and talking about some of our innovations. But actually these innovations are deep technical innovations that take time to season and work effectively at scale preserving privacy and security and I don't think they really understand the cost or dimension of that. But some of them do a good job in market research and that brings those customers to us. So I am always happy to see a successful survey implementation in a customer whether it's our survey technology or somebody else, because then that leads people to the platform. But look at the messaging growth that we talked about, that's where the whole story is going. It's live time communication, taking all of that data, putting into the platform and then running our theme exploration technology across it to surface themes and intents of customers. That's where the heat of this business is today.
Brian Schwartz:

Thank you very much.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Terry Tillman with SunTrust. Your line is open.
Terry Tillman:

Yes. Thanks and congrats from me as well. Hi Leslie and Roxanne and thanks for taking my questions. The first question, just maybe for you, Leslie. You talked about and we know historically hotels and hospitality is where the company got started and had it's early momentum. But I think you mentioned healthcare and insurance. So I would like to maybe hone-in on that. You called those two segments out. What was kind of the tipping point there or kind of why emphasizing that in terms of maybe those are some newer emerging verticals where the businesses are ramping? And then I had a follow-up.
Leslie Stretch:

Yes. Okay. So I think having a solid geographic coverage is important for us, but the vertical model which is relatively new is really beginning to yield great dividends. Healthcare, I called out for several reasons. One that it's new and we had several really good size transactions, head-to-head transactions in the quarter, new business deals that we were very happy with, proving our proposition there. But the second reason is that some verticals, I would say hospitality and healthcare, have a disproportionate network effect. And that is to say that when people use healthcare services, when they see the powered by Medallia feedback technologies, that branding in the hands of those consumers has a particularly potent effect is what we are seeing. So the network effect in hospitality, the promotions, the review sites and so on is very pronounced. The network effect in healthcare also, because you think of some of the healthcare consumers, executives, corporate leaders, you see your branding and understand the impact that your technology would have in their business. That network effect for this category is something that, I think, is unique. I think we will see the same eventually in financial services and retail and transportation and travel. In travel, the network effect, we see is where certain partnerships take place. Loyalty partnerships take place between airlines, car rental companies, hotels and so on. And surely they want to enjoy the same levels of feedback and so having the confidence to move around those areas and to offer our proposition to those linked companies, you can name some of them, the obvious ones that have clear partnerships with different businesses, all lining up the customer journey. That's where the network effect can be really potent for us. So that's why I called out healthcare.
Terry Tillman:

Got it. Thanks for that. And I guess, Roxanne, the follow-up question relates to subscription billings. You pointed out while earlier in terms of just one quarter at a time gets you a lot of volatility. So TTM is equally important, if not more important. I am curious, so it does look like we have a tough comp for 3Q? I guess that's more of just an observation. But then as you see the business, does it still feel like there is the seasonality is most pronounced in the fourth quarter on billings? Thank you and nice job.
Roxanne Oulman:

Yes. Thank you Terry. So as I highlighted from a SaaS billings perspective, one of the reasons that we do look at the trailing 12-months, as I just think that's a better indicator of SaaS revenue growth rate. And yes, we do have tougher comps in the back half of the year. So thank you for highlighting that. And what was the last part of your question, Terry? I apologize.
Terry Tillman:

Yes. No worries. You will get used to me. I usually have a three or four part question. But it is just related to that. You all are putting in and instituting a lot of like go-to-market best practices plus expanding sales capacity. But until some of those kind of irons in the fire really play out, should we think about the billings progression typically still being more back-end loaded where it's a big fourth quarter seasonal surge? Thank you.
Roxanne Oulman:

Yes. So that's a great point, Terry. Because 40% of our billings occur in the last quarter and that's based on our historical performance. As we become more effective in the mid-market and as we ramp up the productivity of our sales force, you will see over time and it will take a while to do this, that we will hope we see less seasonability around our billings.
Terry Tillman:

Great. Thanks.
Operator:

Your next question is from Bhavan Suri with William Blair. Your line is open.
Bhavan Suri:

Hi guys. Thanks for taking my question and I will add my congratulations here. I guess I wanted to touch a little bit on the managed services business in conjunction with the partner strategy. I understand it's early but Leslie, as you think about how that plays out, do you think that the partners, there is set of partners that end up doing sort of managed services? You alluded there is a little bit in terms of the mid-market, but I wonder if it plays on the enterprise too for some guys that want to sort of manage and deal with the whole process as this transition from just basic sort of initial customer experience to post-activity, post-actionable intelligence happens. I would love to get your thoughts on sort of like, is there a managed service play for these guys, because obviously that then enhances their ability and their willingness to go sort of sell and propagate and drive reach for the solution?
Leslie Stretch:

Yes. Bhavan, I think that's a key to our growth. I think already we have several key partners directly on our sub-contract basis doing some of those managed services. I think we have to shine a light on the potential there. And our customer momentum is such that we can't possibly cover all the opportunities. So we are tooling up with Accenture, with Deloitte and with a number of boutique partners that can help us that are really superb and regional partners, I was just with our partner CX team down in Latin America, fantastic partner down there. We couldn't cover anything like the territory that we do without our partnership. So I expect that to continue to grow over time, yes.
Bhavan Suri:

Great. And I just wanted to, I know, there's a couple of questions asked on the sales force. You obviously made some changes there, brought all the talent, realigned territories, et cetera. You are adding quota-carrying capacity. I guess as you look at and you mentioned you had one salesperson sort of ramp really quickly, are you seeing a speed in general of time which they are ramping? Or if you were to look at deal velocity, do you think sort of given you re-jiggered sort of the size of the deals and sort of the bite-size pieces that potentially deal velocity has changed at all? Love to get some color on how you think about that?
Leslie Stretch:

I think it's early days. I think definitely in the last couple of quarters, we have seen that. I mentioned that example we brought up. It's early days. But just intuitively, the fact that we are prepared to meet the customers where they are and I think I have done a fairly detailed analysis, I should tell you in the last year of win/loss data for the company which we always do very rigorously. And there are very, very few situations where it's been a feature function of technology loss. It's typically been a purely handled commercial negotiation or kind of just in the sales risk faction and we are just helping our sales people, coaching them get better, stay at the table and negotiate effectively and don't lose for silly commercial reasons, be sensible with customers, meet them where they are. That's definitely changed the velocity. There was no doubt about that. And the fact that we have modulized the products, I can sell individual products is really changing the trajectory, the timing of deals. Again, let's keep our feet on the ground. Early days. I am very pleased with the progress, yes.
Bhavan Suri:

Yes. Absolutely. Great progress and thanks for taking my questions, guys.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Scott Berg with Needham & Company. Your line is open.
Scott Berg:

Hi Leslie and Roxanne. Congrats on a good quarter. I have two questions. I guess, Leslie, to start off on the international side. Roxanne mentioned 25% of your revenues are coming internationally, outside of the U.S. year-to-date. But are you seeing the use cases in those international customers be the same here as you do your domestic customers? Or do they use the technologies differently today?
Leslie Stretch:

I think we are seeing very similar use cases now across industries. We did some great telco transactions in the first half of the year in Europe and in Germany, in particular and we are seeing the same use cases that we see here. It's really important that we have and if you look at the deck that was issued today, slides, you will see the category leaders that we have as customers. It's much, I mean it's never easy, but it's much easier to have the category leaders as real customers. I don't mean just tiny little deals, but real customers, who are really using the platform and signals. It's much easier than to go into the other, if you have the top three or four banks and top three or four insurance companies, that story is much stronger for sales people than having the bottom three or four, right? And then so I think that just helps us in Europe in particular. But also I mentioned in Latin America, we have got great traction with some of the best brands in Latin America. That's great opportunities there, very underserved by this category. And then with our new leadership in APAC, we have been doing some great business. We are doing some of our first decent deals in Japan. Very excited about the progress that we are making there.
Scott Berg:

Okay. Got it. And then just a follow-up on the net dollar retention rate in the quarter. I know, Roxanne, you had mentioned it was 119% which is above last year's number, at least for the annual number. But is there any difference in composition of the upsells maybe today versus a year ago? Does it purely just speaks on the same customer experience module? Or are you seeing customers may be more frequently being able expand their offerings in the other suites that you have? Thanks.
Roxanne Oulman:

So historically, we were more focused on expanding across the channels or the business within our current customer base. And as we put some of our new go-to-market initiatives in place and we have expanded additional product offerings, as Leslie talked about, our conversations product or CX360 product, so on and so forth, this has really opened the opportunities for us to go beyond the current, go beyond just cross-selling to the divisions, but also selling some additional products. So we have seen a nice blend of both during the quarter.
Scott Berg:

Great. Very helpful. I will jump back in the queue. Thank you.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Chad Bennett with Craig-Hallum. Your line is open.
Chad Bennett:

Great. Thanks for taking my questions. So it looks like Jimmy is working his magic in the service business, which is good to see. I guess maybe I think a few analysts have took a stab at this. Just I know you don't want to get into, Roxanne, you don't want to get into kind of quarterly billings and stuff like that. But just from a seasonal standpoint, if we look at the deferred revenue line, both overall and then the SaaS portion, I think typically in the third quarter, it's kind of flattish to down. I guess, would you expect the same this year directionally?
Roxanne Oulman:

So, yes, as I highlighted, I would expect that our third quarter SaaS deferred will be down slightly and then in Q4, we will see an uptick because I shared previously about 40% of our billings occurs in Q4.
Chad Bennett:

Okay. And then if we look at, maybe a question for Leslie, if you look at over 50% of your customer base north of a 1,000 employees or users, can you give us an idea where today they are in terms of either kind of average number of signals that customer base uses or products? And then maybe give us a glimpse of where that could be in the next couple of years or where you at least kind of target that to be in the next couple of years? Thanks.
Leslie Stretch:

Yes. So it's a great question. So I think we mentioned on the road-show, two to three products on average across the customer base. Intuitively, that's expanding. I think we have nine, 10 useful products that everyone should have, in our view. So our marketing campaigns through to our sales motion are about and cross-sell are about adding those products. I mentioned some really, everybody should have digital combined with the basic survey capability. Everybody should have the conversations technology, in my view. But the whole thesis that we talk about with customers of platform and signal and why would you have somebody providing you with a survey technology, somebody else with a digital technology, it doesn't make any sense, because you still are going to capture those signals and run the theme exploration technology and analysis technology over them. And so it's very compelling for our customers. We just had one very large customer actually send a notice to a number of other providers including a survey provider and a text messaging provider and asked them to ensure that those signals, those data elements are incorporated into the value platform that they use as their core customer experience platform. And I think that that's going to happen again and again and again. It's an important part of our proposition with our customers. So our ambition is to get everybody at full boat, everything, 10 modules. But right now, we are making steady progress adding tons of cross-sell opportunity.
Chad Bennett:

Very interesting on that customer. Great job on the quarter. Thanks.
Leslie Stretch:

Thank you.
Operator:

Your next question is from Richard Baldry with ROTH Capital. Your line is open.
Richard Baldry:

Thanks. I got a little challenge joining. So I hope this wasn't covered before. But sort of curious your thoughts on going beyond 10 products. You have brought in someone to work in biz development that you had a lot of experience buying companies with. You have got a lot more resources, both in terms of an equity market cap that's pretty strong and post-IPO cash. So any thoughts on the pace to expect on acquisition, size, scale, strategic, other customer bases? Just some things that we should kind of be looking for milestones ahead? Thanks.
Leslie Stretch:

Yes. Great. So we have added I think three tuck-ins already this year. You should expect, I think, two or three more before the end of the year. They have to be right. They has to be relevant. Our criteria is they have to be solid financially. They have to have decent growth. They have to have customer traction. And hopefully customers that we know. But we have a nice pipeline. And then one of the things strategically to point out is that we see other companies that are really aggregations of survey vendors. In many cases, many, many survey companies, all lumped together into one thing. That's not, we don't believe in that. Our GP is to innovate. We have already got that technology down pat. We are the best of it. Our duty is to innovate beyond that and give our customers more value through live time messaging, better machine learning. These are the types of technologies without giving too much away that we are really interested in. So you should expect a couple more before the end of the year, maybe more. And we are not transformational acquirers. Never say never to anything. But you are right, we have a very strong balance sheet. We have got plenty of firepower to get the things that we really want.
Richard Baldry:

Okay. And just sort of curious for Roxanne side maybe. If customers come back and are adding modules and things and re-contracting sort of mid-contract, does that become a renewal on a different time frame then? Or does it stay with the original? The reason I am asking is sort of curious at this fourth quarter surge in renewals that really hits the receivables in deferred and then it amortizes off the first half of the next year. If that pattern would change at all under a scenario in which there is a lot of people doing add-on modules? Thanks.
Roxanne Oulman:

Yes. That's a great question, Rich, because we see customers who will come in and because they already have a large presence with us and now they are adding on to it, they may want to take what they are buying and they may want to co-term that to their contract or they may want to go the other way and co-term their entire contract rather than just a new purchase. So that does create some variability and when you are working with enterprise companies of this size, it's important that we are flexible around that. So that's one of the things. And then specifically back to the RPO piece is that when we have large multi-year renewals, we will see fluctuations because we could have had three months left on that RPO and then the customer comes and does a five-year renewal so that we will see some ups and downs. The other thing that ties to the RPO and the billings that I would like to highlight is, as I shared we do have a 12-month trailing billings growth rate of 33%. But our go-to-market initiatives that we put in place, we really started putting those in place in the back half of last year. So as a result, our comps do get tougher. So I do expect that this overall 12-months trailing SaaS billings growth rate will decline somewhat as we go into the back half of the year, just because of these tougher comps. But with that said, as I have shared previously, we are very focused on this being an accelerated SaaS revenue growth rate. You can see that in the guidance that we have given you of 23% to 24% for the year. And we think that the natural growth rate on a longer term basis is 25% and above.
Richard Baldry:

Great. Thanks.
Roxanne Oulman:

Thank you.
Operator:

Your next question is from Tom Roderick with Stifel. Your line is open.
Tom Roderick:

Yes. Hi guys. Thank you for taking my questions and I will echo the sentiments here by offering up congratulations on a very nice first quarter out of the gate. I wanted for my first question here to you Leslie and you have got a number of questions regarding the cross-sell and up-sell path. But I am very curious as to how customers are adopting and reacting to the artificial intelligence you put into the platform over the years and noticed you have now included a churn prediction and improvement suggestions that has rolled into the platform just more recently. Can you talk about how customers are asking you to include that? How they are embracing AI? And to the extent that it's having an impact on pricing and ARPU in the products that they are buying, would love to hear about that as well.
Leslie Stretch:

So the overall machine learning capability, we should talk about is Athena. And Athena gives us the ability to analyze all of signals as we have said beyond the survey. And I think we are getting real traction in our customer base. There is also a major part of differentiation in new business head-to-head. And I would argue that a couple of the deals we talked about, we are actually brought to fruition at our experience event and that was a big reason for them understanding of how machine learning can process all of that data quickly in live time and create predictive offers, predictive outcomes, predict churn and so on. It is a very powerful proposition and it's not easy to do. We can do it now. I would say, we put a lot of time and money into the technology and we are continually refining it. I think the other dimension that they realize is, the sooner they acquire it, the sooner the learning models become mature and more effective. So the longer that you deploy that technology across the data sets that we now consume, the more powerful it becomes. That's really an important point here and it's important for our sales people in their selling motions communicate that effectively to our customers. I can't see a single series customer that can really do without the technology. And the rate of new innovation is to take it from beyond just looking at unstructured survey responses to look at text messages, WeChat, WhatsApp, whatever the signal maybe that we are bringing into the platform.
Tom Roderick:

Really helpful. Thank you for that. Roxanne, my second question is for you. And I don't mean to beat this RPO deferred revenue topic to death, but it certainly seems that you are getting a lot of questions here around seasonality of deferred and that will build nicely into the fourth quarter. As you take a step back and I think all software investors are sort of learning the importance of RPO, but it differs by company. Do you have a preference for which metric you think is more indicative of the business trends? Would you rather us emphasize RPO? Would you rather us emphasize the longer term deferred trends? And to the extent that RPO is important, how should we think about how that builds throughout the rest of the year as well? Thank you guys.
Roxanne Oulman:

So Tom, that's a great question. Our particular case, we only have three data points from an RPO perspective. And I think you have to look at both items together. Because when I look at RPO, you see two things. One, you see the current portion, but more importantly, you see the longer term piece and you see essentially what our committed book-of-business is. Now when you look at our trailing 12-months SaaS billings growth rate, that is more indicative of the shorter term and the current portion. So I think you have to look at both of those. And as time goes on and more companies and us specifically have more RPO data and we are able to look at things over a year-over-year basis, we will be able to evaluate which metric we think you should look at. But at this point in time, my recommendation from Medallia is that you consider both metrics.
Tom Roderick:

Excellent. Thank you guys. I appreciate it. Nice job.
Roxanne Oulman:

Thank you.
Operator:

We have time for one more question. Our last question is from James Rutherford with Stephens, Inc. Your line is open.
James Rutherford:

Hi. Thanks. Good afternoon, Leslie and Roxanne and appreciate you squeezing me in here. A couple from me. First, Leslie for you. You talked about your investments in growth prospects on the international front. You sounded really positive there. I was just curious what you are seeing in terms of your oUS pipeline. Is there anything in those forward-looking metrics in terms of the macro that would give you any pause? Or if the secular trends and kind of your go-to-market efforts are strong enough to propel the business despite some of the things that we all hear in the headlines every day?
Leslie Stretch:

Well, I know, I think the size that we are, there is no excuse in the macro. We are relatively small today with a massive addressable market. And actually, people are more acute about their existing customers, how to understand them, retain them and cross-sell to them than ever before. And also customer loyalty is at an all-time low out there in the B2C world, because people have more choices and they can act quickly, digitally in the palm of their hand on their mobile. So it's more acute to have a technology that really understands and informs you about your customers. In fact, some companies are, well, I didn't name any of them, but some companies that we do business with are companies that are recovering positions. They are beginning to turn to growth. They are beginning to look acutely at their existing customer base. So I don't worry about that. So I don't worry about the European situation. We are just too small of the addressable opportunity impact at this stage. There is a ton. My biggest concern is being of having more of that and having the right quality coverage through our partner model and through our direct sales people, that's the key. That's what we are focusing our building investments on at the moment. We need more high-quality sales people around the world. We need more vertical knowledge. We need more solutions engineers. We need more of everything. The opportunity is huge. And so I think, we are in good shape there. I am going to spend some time in Q4 in Europe. We just put new leadership there. EMEA is a very strong business for us. The potential gets just better. I mentioned my Latin American tour. I just returned from there. And then in APAC, we did our first kind of really significant transactions in Japan. We have great growth opportunity in APAC. So we are of a size of company where we are growing, we are investing and we are not kind of ignoring all of the things that happen, but it's going to happen all the time. At the size we are, ton of opportunity.
James Rutherford:

Okay. That's helpful. And then Roxanne, a follow-up for you. I know this is clearly a growth story. I do want to touch on margins, just kind of to help get the long term model right. You are guiding, I see, for around negative 2%, negative 3% op margins in fiscal 2020. That's really nice improvement year-over-year. Can you just talk a little bit about the few of the drivers for that expansion? And just how you think about the tenor of that sort of long term march up to your margin framework of 20%-plus over the long term? Thank you very much.
Roxanne Oulman:

Absolutely. So when you look at the improvements from a year-over-year perspective, we have been very focused on how to redirect the funds that we are spending while becoming much more efficient from a cost perspective. And some of the things that we have done is we did in the first quarter, we did some facility termination of our headquarters and you will see that and we saw that in our prospectus and you will see some of that still in our 10-Q when it's filed. And that has had significant savings and it also has allowed us to redirect and go-to-market. And I have a very prudent financial approach. And when I look at things and when I assess things, what I am looking at it is, does it enhance our product or does it improve our ability to sell? And those are the things that we are focused on. And we are very focused and we believe that it is important that we become self-sufficient and that means that we are profitable and we generate cash. And as I shared in our remarks that for fiscal 2021, we intend to be cash flow positive. And so those are the things that we are focused on in aligning. Now as you look at longer term basis, at our long term model. In our long term model, we have projected it over five years from now. This will be a gradual uptick to the 20% or above from an operating margin perspective. But when I look at the growth opportunities that we have in this large TAM and our ability to invest in go-to-market while continuing to show operational efficiencies and leverage, I feel that we will be able to make this gradual uptick. And to that point, I am highly confident in that.
James Rutherford:

Excellent. Thanks and congrats again.
Roxanne Oulman:

Thank you very much.
Operator:

Ladies and gentlemen, this does conclude the Q&A period. I will now turn it back over to Leslie for any closing remarks.'
Leslie Stretch:

Sure. Thanks everyone for joining us today on our first public earnings call and we have just begun. We got a great runway ahead of us. It's very exciting to talk with you all. We look forward to seeing you in the coming quarters at conferences in face-to-face and carrying the Medallia message. Great stuff. Thank you.
Operator:

This concludes today's conference call. You may now disconnect.

Medallia, Inc. Q2 2020 Earnings Call Transcript

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Medallia, Inc.
Q2 2020 Earnings Call Transcript