Anaplan, Inc.
Q3 2021 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the Anaplan’s Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participant lines are on mute. I would now like to turn the call over to your speaker today, Edelita Tichepco, Vice President, Investor Relations. Please go ahead.

[Edelita Tichepco:]

Good morning. Thank you for joining us on today’s conference call to discuss Anaplan’s third quarter fiscal year 2021 financial results. Joining me on the call are Frank Calderoni, our Chief Executive Officer and Dave Morton, our Chief Financial Officer.

[Frank Calderoni:]

Good morning and thank you for joining us today. This quarter, we continue to execute as companies prioritize investments toward initiatives that drive incremental business value. While the economic backdrop remains challenging with the ongoing impact of the pandemic, we are at the forefront of helping our customers transform their business. As strategic partners to our customers, there isn’t a more urgent time to have connected planning across an enterprise. We are working closely with companies to understand that effective planning is critical to managing their business in a dynamic environment. We have the unique solution with our connected planning platform, which links strategy to execution and operations to financial metrics. Our third quarter’s performance is a testament to our focused execution and the exceptional value we drive for our customers. We now have 417 customers with ARR over $250,000. We are also meeting our customers’ expectations as a key strategic partner demonstrated by solid customer retention rates. Approximately, 60% of bookings this quarter came from existing customers, which is in line with the historical average. Growth in new enterprise logos, were also healthy this quarter, reflecting the focus on building a robust pipeline over the last several quarters. Our remaining performance obligations, or RPO balance, exiting the quarter was $740 million, up 25% over last year. Billings grew 27% year-over-year and subscription revenue was up 31% year-over-year.

[Dave Morton:]

Thank you, Frank and good morning everyone. Total revenue for the third quarter was $115 million, up 28% year-over-year. Within this, subscription revenues grew 31% and comprised 91% of total revenue. Service revenues were $10 million, roughly flat from the third quarter last year, as we continue to maintain our services contributions as a percentage of total revenue. Third quarter billings growth rate improved sequentially. Calculated billings for the third quarter were $145 million, up 27% year-over-year and represent a sequential improvement compared to last quarter’s year-over-year growth rate of 22%. RPO exiting the third quarter was $740 million, up 25% over last year. The current portion of RPO that is expected to be recognized as revenue over the next 12 months is $383 million, up 28% year-over-year. Turning to additional key metrics, we demonstrated healthy new enterprise growth and ended the quarter with over 1,500 customers. Our dollar based net expansion rate or NRR is 113% this quarter. We remain focused on driving higher volume in expand deals. However, NRR does continue to reflect a lower volume of expand deals as compared to this time last year, primarily due to the impact of COVID-19 on the timing and velocity of deals. There was no change in churn this quarter and our overall customer retention rate is in line with historical levels. Turning to our profitability metrics, total non-GAAP gross margin was 76%, roughly flat year-over-year. Within this, subscription gross margins were 83%, down approximately 167 basis points year-over-year and services gross margins were approximately 5%, down 4 percentage points year-over-year. For the third quarter, non-GAAP operating expenses were $93 million, up from $77 million in the prior year, primarily due to increases in go-to-market investments. We continue to drive leverage in Anaplan’s financial model, while investing in key areas within go-to-market and product development.

[Operator:]

Thank you. Your first question comes from the line of Alex Zukin with RBC. Alex, your line is open.

[Alex Zukin:]

Hey, guys. Thanks for taking the question and I hope you are all staying safe and well and have a great Thanksgiving. I wanted to ask just around the selling environment and what you are seeing the sequential kind of improvements from 2Q to 3Q and as you look at the pipeline for 4Q and beyond, it’s nice to see there is a preliminary guide that’s a nice surprise for next year that gives us a sense of increased confidence. But just walk us through what that demand environment feels like, how it’s changed where you sit today? And then I have got a quick follow-up on the delta between billings and ?

[Frank Calderoni:]

Thanks, Alex. Appreciate the question. The first thing I would say is, if you think about the selling cycle, we have continued to be focused as we have progressed through the last few quarters, really on the linear progression of our business, kind of recovering from Q1 into Q2 into Q3 and then also kind of how we look at Q4. And if you think about the overarching backdrop that we have here, it has to go with a lot of the digital transformation projects. And as we just mentioned, both Dave and I, we – that is becoming more and more top priority for either existing customers or new customers and we are seeing that more and more. I spend probably every week talking to, on average, 5 to 6, maybe even more executives at either existing customers and new customers and they are talking about some of the changes underway in their business, even when they are doing well and the importance of really kind of focusing on scenario based planning. So overall, we are seeing that continue and the trend is accelerating. With that backdrop, similar to what we said last quarter, we continue to build for a good pipeline both near term and long term. So that pipeline continues to improve based on that. As you saw, we had a good mix this quarter, a 60-40, 60% expand, 40% new. So, on the expand side which has been our focus over the past two quarters, we are seeing existing customers. We think new opportunity for them to leverage the platform that they have within Anaplan, which is great. On the other side, even our new business this quarter showed some strength, which is good to see. And so we are building both, we are focusing on expand we are focusing on new as we think about the pipeline. And that’s kind of, I would say, a similar type of trend that we are seeing as we now enter Q4 and also as we think about FY ‘22 and how that could play out and the continued momentum we see from that perspective. So I think that’s still about the same, from what we saw in Q2 as far as the importance of planning within businesses. And then secondly, for us it’s a matter of continuing the execution, within the backdrop of a pandemic, right and we all have to deal with that, still for some time. And that adds always some challenge, but I think the important aspect here is companies are looking at the longer term and where they need to position their business. So I think that’s important for us.

[Alex Zukin:]

That’s great. And then maybe just one for Dave, if I look at the calculated billings really strong this quarter, at 27% and then when I look at the CRPO, if we calculate the CRPO subscription bookings or a change in CRPO plus subscription revenue, it’s 20% growth. So that’s a – it’s a delta that’s last quarter it was the other way, it was 22% billings growth and 29% CRPO subscription bookings growth. Maybe me just remind us, why that tends to jump around and which one is the better forward-looking indicator?

[Dave Morton:]

Yes, for sure. Good morning, Alex. When you think about just year-over-year comps, it gets a little more difficult, because Q3 a year ago, we were coming off on just our all-time high performance pre-pandemic and so coming into this backdrop and our continued linear progression, as Frank had narrated on. I would tell you that, we are always going to have timing deltas within our billings from quarter-to-quarter, which makes it a little more difficult to provide an even repeatable scalable forecast that looks very clean in that manner. With that said, we still try to provide our best view at that time, with the known timing of renewals as well as the deals that we have within our pipe. And so we will continue to provide that baseline. When you think about kind of the context for forward-looking, I still tend to lean on the RPO, the current RPO, because I think that gives you a very clear persona of the true economic and commercial deal ahead of us versus timing of the actual transaction. So, hopefully that gives you a good sense of kind of what goes in and around our planning process.

[Alex Zukin:]

That’s right. Is there maybe just another way to ask it, is there any kind of timing or contractual differences that are important to just again the delta between the current RPO growth and the billings growth is actually very small. But if you look at the change in current RPO, that delta looks pretty meaningful. So just again, any color on, is there a contractual term duration element here, payment element, any other element that would kind of call – to call out?

[Dave Morton:]

No, everything was a pretty standard affair. When you – again to just remind everybody, our standard contracts are 3 years, we ask for 1 year upfront cash. So that’s typical, what generates our overall RPO. And there has been no change within that contractual duration of that, I’ll call it, cohort of RPOs.

[Alex Zukin:]

Perfect. Thank you.

[Operator:]

Our next question comes from the line of Raimo Lenschow with Barclays. Raimo, your line is open.

[Raimo Lenschow:]

Yes. Hey, thanks. The question I had was around the dollar net expansion that you saw there. Frank, you mentioned a little bit like customers are looking at it, but then the number that we addressed 113% seems a little bit lagging. Could you just talk to that a little bit in more detail to see like, okay, how does this play out through the model? Many thanks.

[Frank Calderoni:]

Yes Raimo. I would say that, the NRR reflects the overall volume of expand deals net of churn, as you know and although 113% is kind of below what we have normally seen pre-pandemic, the current NRR is really about the fact that the total volume of expand deals booked this past quarter is really not at the same level as it was pre-pandemic. So with a lower volume, that’s going to have an impact on the NRR as we did last quarter. So nothing different than what we said last – when we saw that – when we talked about the Q2 number. No large – Dave just mentioned, there were no large elevated amounts of churn this quarter. We continue to see churn in the single-digit. Overall customer retention rate is in line, which is very positive. So, nothing out of the ordinary.

[Raimo Lenschow:]

Okay, perfect. Congrats. Thank you.

[Operator:]

Your next question comes from the line of Kirk Materne with Evercore. Kirk, your line is open.

[Kirk Materne:]

Thanks very much. Congrats on the quarter. Frank, I was just wondering if you could talk a little bit about sort of just how you think about visibility in your pipeline today maybe versus 3 to 6 months ago. Obviously, you made some sale changes last year at this time without a pandemic. I mean, there has been a lot to sort of work through, but you guys are putting up good results. And I was just kind of curious about your sort of your confidence level on conversion rates against the quality of the pipeline being built and then the conversion rates against that pipeline? Thanks.

[Frank Calderoni:]

Kirk, good question. I think all of us can kind of reflect back on this past year and say it has been clearly a challenging one. But similar to what we said throughout the last few quarters, the focus for us kind of coming into COVID was really to kind of get down and focus on building pipeline and within that pipeline, was focusing on existing customers. And within those existing customers, those clearly that had perhaps some ability to invest in the current environment and I think that’s played out well for us, because our focus back towards the end of Q1 into Q2 and now in Q3, has been building both short-term and long-term pipeline. And that’s all based on transformation projects, and it’s also based on some of the solutions that we’ve been implementing in the last two quarters with our partners, around dealing with some of the immediate needs that businesses have had. In the finance area, focusing on cash flow, able to do more frequent scenario planning, and supply chain. It’s really trying to get more visibility on the sales. It has been primarily around forecasting. So we’ve seen opportunity in all of these functional parts of our business and we’ve been building. If I look at – you asked about the pipeline visibility. I feel good about the pipeline that we have at the moment, kind of going into Q4, and at the backdrop of providing the guidance that we just did. And then also, I see that pipeline continuing into FY ‘22. So as I said, we’re building more long-term pipeline, and that also gave us a bit more confidence, as we think about next year. As Dave mentioned earlier, we’ve just begun our FY ‘22 planning, and part of that planning kind of takes into consideration, the pipeline, the type of pipeline, the projects in the pipeline, both expand as well as new. And the other thing which I really want to highlight, which I think is important for us around the pipeline, is the partner ecosystem. And I know we’ve talked about this in the last two quarters, as far as the buildup of investments that partners have been making in their Anaplan consultants. We saw a continued increase in net investment this quarter again, by another couple of hundred, and we even had one customer, one partner, I should say, actually mentioned to us even within the last few weeks, that they’re pretty much at kind of a – I guess you can say a sold out capacity meaning that they have to do even more hiring, because the current consultants that they have are now either engaged in projects or about to be engaged in projects. So I think that’s also a good indication and I think many of you do tend to talk lot about partners and get some good insight. They’re seeing the transformation projects starting to build, and we are working along with them, making investment as well, not only for Q4, but going into FY ‘22.

[Kirk Materne:]

Great. Thanks, Frank.

[Operator:]

Your next question comes from the line of Stan Zlotsky with Morgan Stanley. Stan, your line is open.

[Stan Zlotsky:]

Hey, perfect. Thank you so much, guys and well done in Q3. So maybe from my end, how are you guys doing, as far as the deals that were pushed out of Q4 of last year, and then maybe from the beginning of this year. How are you doing as far as closing those deals? And then I have a quick follow-up.

[Frank Calderoni:]

So similar to what we had mentioned at – in the Q2 timeframe. We closed some of those deals in Q2. We closed some further deals in Q3, and then we even have some deals in Q4. So we felt at that time, based on where things were, with the mix of our customers, that some would be more near-term and some would take a little bit more time. And I think that continues to play out. I think the ones that have taken more time to close, happen to be projects that I would say, are larger, are more complex, and so they needed more time. One, to make sure that they had the right funding, but also more importantly than that, that they had the right skill and support for those projects. And I think as the time has progressed, the importance of those really hasn’t changed. But the ability for them now to fund, and also get the appropriate amount of resource, to cover them, have seen them play through. I can say as of today, we have them all close, because we’re still probably working with a couple of customers. And at the same time, similar to the last couple of questions in my response there, we continue to add additional projects within the pipeline.

[Stan Zlotsky:]

Got it. That’s very helpful. And then maybe just a follow-up for Dave, maybe just following up on Alex’s question to kick off the Q&A, is there anything that we need, that you would like to call out as far as Q3, a year ago? Because I do believe that there were some effects and a little bit of acquisition that went into your deferred, that we can see through, when we look at the cash flow statement. So when we calculate for example, subscription bookings or billings rather, based on cash flow, we can see a very nice inflection this quarter. But that obviously is looking at the cash flow statement, so we can control for some of the effects from a year ago. But maybe those same effects of FX and acquisition cannot really see in current RPO, and is that creating a really tough comp for this year?

[Dave Morton:]

Just stepping back when you look at just the performance for FQ3 of ‘20, when you look at where the billings and RPOs were at. Clearly, there was just a lot higher amount of activity. And so coming through in this period, a lot of our metrics have taken a hit. And so, we continue to work that back in a positive format. And so, that’s where it’s difficult just to look at the year-over-year comps, because of all those moving parts, just – where not only where our bookings were at a year ago, where NRR was at a year ago and our RPOs both current as well as the total. And so what I think we posted up, for this current FQ3, was fair, and continues on a linear progression, and we continue to strive for sequential quarter improvement.

[Stan Zlotsky:]

Got it. Alright. Thank you so much.

[Operator:]

Your next question comes from the line of Siti Panigrahi with Mizuho. Siti, your line is open.

[Siti Panigrahi:]

Thanks for taking my question. Frank, you talked about some new strategic initiative like partner developed solution, and bringing some kind of function and verticals. Could you elaborate little bit more on that? Is that something – is that how we should think about new products coming more driven by partners? Anything would be helpful?

[Frank Calderoni:]

The key thing and this is kind of what we mentioned even a couple of quarters ago. As we got into the pandemic, although we’ve been focused on different types of used cases, we wanted to focus in on areas where we felt it was most important for customers, especially customers or clients, and some of our partners. And so we looked at kind of four major categories; we looked at kind of in the office and CFO, financial health. Actually, we looked – second one was balancing disruption within the recovery. The third was predicting and protecting revenue and the fourth was supply chain resiliency. And so what we did over the last number of months, is we had more focused solutions, so that we can go to market faster, and also be able to – I would say, more quickly implement some of these solutions at customers, who were looking to alleviate some of the near-term pain points that they had. And so that has kind of played out well. The other thing I would say around the solutions, which I think has worked for us with partners, is the more direct focus on verticals as we mentioned earlier, even focusing around telecommunications, focusing around healthcare. So in some of the verticals, where there was a lot of either continued investment or there was changes going on within their businesses, to target some of these solutions around that was important.

[Siti Panigrahi:]

Okay. And then a follow-up to the announcement you did at CPX, where like PlanIQ had Amazon Forecast and then Google partnership. Should we – these are new products that you’re going to cross-sell? How should we think about this contributing any kind of revenue, going forward?

[Frank Calderoni:]

Yes. The key thing, and I love the opportunity back in September to have CPX, we tried a new format, with digital online, and it worked out well for us. As I said, we had great engagement, both from existing customers, prospects, as well as with partners. And the key thing here, which I would say around your question, is really the importance of our platform. And I think it has clearly been recognized both by Gartner and IDC and others, around the uniqueness of our platform, and how differentiated it is, and that truly is a platform that connects the business across the different functions. And when we announced new products, like we do with PlanIQ or CloudWorks and various other things that we were pleased to bring forward in the September timeframe, they all sit on the current platform, and they allow our customers to have much more capability. And we continue to have an ongoing dialog with a group of our customers, where they provide us ongoing feedback. It’s kind of back even a year, 2 years ago when we got feedback about our UX, and making enhancements around that. We are getting feedback about bringing more intelligence into the platform, that’s where PlanIQ came from, more interoperability within the platform, kind of, doing more things with open APIs. So all the product enhancements that we announced around the platform, is to continue to give our customers more capabilities on that platform, bringing data in, taking data from, and then allowing them to connect with many of the other digital platforms that they are using. And I mentioned earlier, what we doing also with partners, is what we call Anaplan Plus. So, we’re showing that we can connect to Adobe, we can connect to Salesforce, we can connect to ServiceNow, so that we have helped our customers through our partners expand their ecosystem, to enable the interaction of information among the different platforms that they have.

[Operator:]

Your next question comes from the line of Brent Thill with Jefferies. Brent, your line is open.

[Brent Thill:]

Good morning. Drilling into the new business this quarter, I’m curious if you could just compare perhaps to past period, the velocity of deals, deal sizes, any other color you could add on that side, that would be helpful? Thank you.

[Frank Calderoni:]

Good question. As I said, we had a good mix. We’re back to our historical mix of 60-40, which has kind of played out well for us. So both good execution with expands, but also good execution from a new customer standpoint. I would say some of the new customers, I mentioned some earlier, tend to be around some of the solutions that I just mentioned, with the previous question. We are seeing opportunities clearly within finance, around the office of the CFO. Some of those have been kind of finance transformation projects, but at the largest scale, we had some of those this quarter, and even some smaller ones, which may be more around scenario planning. The other two, I would highlight. One, of course, was sales; sales performance management. And that comes around that whole fleet, sales forecasting, territory and quota management, incentive compensation. We started to see an increase in that as companies are now focusing clearly on being more resilient within their business, and having more insights into how their business could play out. I think, that’s one that I would highlight. And another part of your question, which I think is important to note here too, and I was looking at some of this data yesterday. If you look at some of them this is a combination of both new and expand. If I look at the top 10 deals and the average size of those deals, we saw an increase this quarter, which I thought was positive. And the top 10 and also the top 25 customer ARRs also increased this quarter. So, we have seen kind of an increase from that perspective. So again, we are seeing, it goes back to what I said before about pipeline, it’s getting better. I will also say, and I think we said this earlier, we’re not at pre-pandemic levels, so still we have to continue to proceed with caution, as we look at a lot of this pipeline. But the strength of companies looking at transformational projects, looking at planning, the importance of planning is there, but the backdrop of the pandemic still plays a role in how quickly we can get these deals across the finish line, how long they take to kind of work through, which I think is also important to note.

[Brent Thill:]

Thank you.

[Operator:]

Your next question comes from the line of Terry Tillman with SunTrust Securities. Terry, your line is open.

[Terry Tillman:]

Yes. So, thank you. Can you hear me okay?

[Frank Calderoni:]

Yes.

[Terry Tillman:]

Frank, I had a question kind of product question and a follow-up. On the Master Anaplanner, kind of – is that a KPI, we should be looking at and with that, when you add more Master Anaplanners, does something happen with the usage with that account, kind of under the old honeycomb model they used to talk about? And then I had a follow-up?

[Frank Calderoni:]

So, the Master Anaplanners is the highest level of certification that you can get, using Anaplan. We have Master Anaplanners within Anaplan. We have Master Anaplanners within our partners. We have Master Anaplanners at customers. And we encourage customers to put – to have the skill available, especially if they are working on large projects, or they are further in there as you said their honeycomb transition, as far as multiple use cases. And so, I think that – one it is important, as it relates to the ecosystem, because not only do they handle some of the more technical requirements within the – wherever they are located. But they also tend to build that ecosystem, either with Anaplan or the partner or within the customer, as far as skill and talent. So the more that we see that increase, the more expansion around the knowledge and potentially the use of Anaplan. And so I mentioned that it was up 50% year-on-year. One of the things, and I mentioned this, I believe it was in the last quarter, the quarter before, that we’ve been doing this year, and I think it has worked out well for us, especially in the current environment, is to offer the Master Anaplan courses online. And as a result, we’re able to do more training and certification, and then we’re seeing a higher interest in taking that training. So one, I think the interest is there. And two, I think our ability to deliver the training and the certification has also been increased. So that bodes well for that.

[Terry Tillman:]

Got it. And just a follow-up related to PlanIQ and just more kind of adding value on top of just the core seats to your software. Are those monetization opportunities or still to be determined, or they just strengthen the underlying used cases? Just trying to understand, if there are monetizable things in PlanIQ? Thank you.

[Frank Calderoni:]

Some of the things are. I mean it’s all part of – as I said before, it’s all part of the platform to build some of the capabilities. We do have situations with some of the things that we announced, where we do monetize, in addition to the base license. Things like the hyper models, and potentially PlanIQ. PlanIQ is actually the example I gave earlier, that’s in early stage. So we will announce – I think we will roll out PlanIQ by the end of the year, beginning of the new calendar year. So we’re still working as far as how we monetize that. But there is a combination of both. Most, we kind of enhance the platform. But there are certain areas where we do get a chance to monetize differently.

[Operator:]

We have time for one final question. Your last question comes from the line of Joseph Vafi with Canaccord. Joseph, your line is open.

[Joseph Vafi:]

Hi guys. Thanks for squeezing me in here this morning. Just a question on the preliminary outlook for next year and the mix there, do you see that being kind of following your – kind of your historical 60-40 mix or is there anything to call out there, in terms of catch up or strong verticals or other things? And then just as a quick follow-up, Frank, I am interested in some of the most interesting use cases that perhaps you’ve seen, as a result of the pandemic that you may be able to share, that – where used cases clearly wouldn’t be the case if the pandemic happened? Thanks.

[Frank Calderoni:]

Yes, good question. So as far as – again we’re in early stages of planning for FY ‘22, and I would say, based on some of the comments I just mentioned about the pipeline that we’re seeing going in, and also kind of what we’re hearing from our partner ecosystem. I would say at this point, the 60-40 split should continue, at least that’s what our expectation would be for the next couple of quarters. And I think there is a reason why it has played out for us before, because we do have such a large install base of customers that are now seeing more opportunity to leverage the platform. And then also, there is a continued new interest, with some of the things that we’re doing around the solution, as I said before, and new areas that we’re trying to focus on, with our partner ecosystem. As part of the second question, there’s so many that I can probably mention. I think the one that I myself have been more personally involved in, which I found extremely interesting. And this goes back to – even go back in the April-May timeframe, is clinical trials. And many of our healthcare – existing customers and/or new customers, are seeing that Anaplan can be used to do a lot of the analysis, and keep track and plan for many of the efforts within the clinical trials. And as you know, clearly with the pandemic, there are so many companies that are doing with drugs, as well as with vaccines, and leveraging Anaplan to be able to do that, I think is super important with where we are overall, and to be able to kind of help some of these companies plan better around all the activity that they have within their companies. So that’s one. And like I said and I have been engaged in that one myself with senior levels within healthcare organization, as they think through. One, what they can do and also kind of look back and see some of the progress that they’ve achieved over the last couple of months, even leveraging Anaplan. And one last thing I’ll say on this before we close, what I love about Anaplan in that situation, is the ability for us to quickly implement right, it’s not like it’s going to take them a year to work on the planning platform, before they start to yield some results. They can put it in place within weeks, 8 weeks, 9 weeks, 12 weeks, and then start to see some of the benefits, which is well underway.

[Joseph Vafi:]

Thanks very much.

[Operator:]

This concludes our question-and-answer session. I will now turn the call back over to Frank Calderoni for closing remarks.

[Frank Calderoni:]

Thank you. I want to thank everyone for joining us today. Appreciate all your questions and your continued support of Anaplan. We wish you a good day and we look forward to talking to you again next quarter. Thank you.

[Operator:]

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