Anaplan, Inc.
Q3 2019 Earnings Call Transcript

Published: 28 Nov 2018

[Operator:]

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Anaplan Inc. Q3 Fiscal Year 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Edelita Tichepco, Investor Relations. Please go ahead.

[Edelita Tichepco:]

Good morning, and thank you for joining us on today’s conference call to discuss Anaplan’s fiscal third quarter 2019 financial results. Joining on the call are Frank Calderoni, Anaplan’s Chief Executive Officer; and Dave Morton, our Chief Financial Officer. During the course of today’s call, we may make forward-looking statements such as statements regarding our guidance and future financial performance, market demand, product development, growth prospects, business strategies and plans, ability to attract and retain customers and ability to compete effectively. These forward-looking statements are based on management’s current views and assumptions and should not be relied upon as of any subsequent date and we disclaim any obligation to update any forward-looking statements. Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in the company’s SEC filings, earnings press release and supplemental information posted on the Investor section of the company’s website. During this call, we’ll discuss non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, or in isolation from our GAAP financial information. We’ve not reconciled our non-GAAP guidance to the most directly comparable GAAP measures because material items that impact these measures are out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP guidance to the corresponding GAAP measures is not available without unreasonable effort. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings release and in the supplemental materials posted on the Investor section of the company’s website. We also find more detailed information in our supplemental materials, which includes current financial statements and key metrics posted on the Investor section of the company’s website. Now I would like to turn the call over to Frank Calderoni.

[Frank Calderoni:]

Thank you, Edelita. Good morning, and welcome to our first earnings call as a public company. I want to welcome many of you who met - who we met during the IPO roadshow. It was a great time to be able to share Anaplan’s story and our market opportunity. And as we hoped, being a public company, has increased awareness and interest in Connected Planning from all kinds of companies and what Anaplan can do to help improve their business. We’re looking forward to continuing our dialogue with our customers and with our new public investors. We’re very pleased with our first quarter performance as a public company. We delivered a great Q3, and we believe we are leading in the category of enterprise-wide Connected Planning. For those new to our story, I’d like to give a quick recap of our market opportunity, our platform and our business model. We know that digital transformation is accelerating every aspect of the business landscape, and virtually every knowledge worker needs to be empowered to drive faster decisions with the most reliable information to stay competitive. Now cloud-based SaaS platform allows everyone in the organization to connect and collaborate using a single unified interface that gives them consistent data across the enterprise for better alignment with their peers. The ability to connect data, people and plans within all departments is extremely powerful. People who plan better, execute better and we are seeing it all with our customers. It only makes sense that Connected Planning is gaining momentum everywhere. Our innovative platform is powered by our proprietary Hyperblock technology, which enables thousands of users to access a centralized single source of information for planning. This ensures the consistency, quality and integrity of the data when running multiple scenarios. This is the essence of Connected Planning. We have a powerful business model, which is a land and expand sales strategy to capitalize on the potential of the platform to address many different planning challenges. Our platform has initially adopted within a specific function for one or more planning use cases, for example, in sales, supply chain, finance or other corporate functions, such as marketing, HR and operations. Once customers see the benefit of our platform, they often increase the number of users and expand to additional lines of business divisions, as well as geographies, which generate a natural network effect as the value of our platform increases. This momentum is evident in our third quarter results. We achieved record revenue of $62 million, up 40% year-over-year. Within our customer base, we continue to land large enterprise deals and have also seen some significant expense. At the end of the third quarter, we have over 1,000 customers. Of this total, 228 customers are over $250,000 in annual recurring revenue, up from 159 a year ago. Once our customers start using Anaplan, they expand across their business, as they see how dynamic, collaborative and intelligent our platform can be. This is demonstrated by our dollar-based net expansion rate, which was 124% in Q3, and has been consistently above 120% for the six consecutive quarters. As an example of an exceptional customer within this quarter, a Fortune 50 technology company chose Anaplan to run their complex, global, customer support and operational planning. Like many organizations, this customer wanted to effectively run better planning with their integrated performance management. They wanted to forecast monthly customer incident across multiple businesses, each with many different product lines. We were chosen because of our ability to facilitate faster, smarter, data-driven decision-making. Our platform provides scenario modeling to help focus valuable time on optimizing operations and significantly reducing planning cycle time from many months to just a few weeks. Another key customer win this quarter was a Fortune 500 electric utility company, who serves over 9 million customers and over 35,000 employees. We were chosen for a collaborative supply chain planning solutions to help automate the majority of their planning process. We offer time to value, agility and the ability to support robust supplier collaboration. In addition to our new customer wins this quarter, we also had several existing customer expansion deals over $500,000. This includes a Fortune 500 services company with over 100,000 employees and over 350 offices globally. Having seen strong ROI with their earlier Anaplan investment, our customers now rolling out financial planning globally, enabling them to move to a single integrated platform for consistent forecasting across the entire organization. These customer highlights demonstrate how Connected Planning is breaking down silos between functions in order to simplify the way organizations make better decisions. We know that we have a major market opportunity ahead of us, as more companies look to overhaul their planning processes to better integrate changes into their business plans. According to IDC, the worldwide performance management and analytical application software market is forecasted to be approximately $17 billion in 2018, and to grow to $21 billion by 2021. Based on our experience with customers, we believe we addressed a greater opportunity. We commissioned a third-party survey that identified over 70 million knowledge workers globally, who are involved in their company’s planning processes as potential uses of our platform. From a go-to-market perspective, we continue to grow our partner ecosystem, which is strategically important as we expand our reach to our Global 2000 customers. We work with strategic consulting firms, global systems integrators and regional consulting partners, who provide subject matter expertise in specific use cases, build planning solutions and also act as an extension of our direct sales team. They accelerate the broad enterprise adoption of Connected Planning using Anaplan. One example of the many, where our partners are developing solutions on our platform as the new release of an application developed in partnership with Deloitte. The IFRS 17 application is designed to help insurance companies evaluate and report their business. The application will enable comprehensive data management and collaboration that will be required across finance, actuarial, risk management and IT teams. This is just one example of a partner using Anaplan’s platform to configure new application for specific customers or industry needs, extending the reach of Anaplan across the enterprise. We also announced an exciting partnership with Wipro earlier this quarter. They are building innovative tools like an Enterprise Cloud Accelerator, which allows our customers to easily transition from legacy on-premise plannings to solutions on our cloud platform. We think this is going to jumpstart a number of organizations who want better, more effective Connected Planning. These are a few examples of the leverage we’re seeing from my partner ecosystem, as they invest in the practices they’ve built around Anaplan. We have several global partners that are continuing to build substantial practices on the platform. In summary, we’re very pleased with our results this quarter. We are well-positioned to continue to lead in the Connected Planning category. Our momentum is generating great results, so that we can continue to drive innovative innovation and invest in our go-to-market. Our customers are choosing us because of the rapid and substantial value they’re seeing from a single platform that aligns across functions. Finally, I want to thank our employees and partners who helped us achieve these great results this quarter. I also want to thank our customers who are our biggest advocates, and I want to also thank our investors for your support. Now let me turn over to Dave, who’s going to discuss our third quarter financials in more detail and provide our outlook for the fourth quarter and fiscal year. Dave?

[David Morton:]

Thanks, Frank, and good morning, everyone. As Frank mentioned, our total revenues for the third quarter grew 40% year-over-year to $62 million. Subscription revenues were $54.4 million, up 42% year-over-year and comprised 88% of the total revenue. Our Q3 calculated billings were $72 million and grew 43% from the previous year. Total deferred revenue at quarter-end was $119 million, up 45% from the previous year. And as a reminder, quarterly calculated billings and deferred revenue results will fluctuate quarter-to-quarter impacted by timing of renewals and annual contracted billings. Non-GAAP gross margin was 73%, compared to 66% in the same period last year. Margin improvement was driven by the increase in subscription revenue as a percentage of the total revenue and an improvement in our services gross margin. In addition, beginning Q4 of last year, as part of our overall strategy to transition more services to our partners, we redeployed employees from our customer support to sales and marketing. For the third quarter, non-GAAP gross margin from subscriptions was 83%. The non-GAAP gross margins from professional services was break-even. Before I move on to operating expenses, I’d like to touch on our business model and more detail, including our unit economics. We believe we have a large opportunity ahead of us in defining a new category for planning. As Frank mentioned, we have a net expands of TAM. Our platform is broad and can address many use cases across the enterprise, as more and more companies adopt the Connected Planning approach. This is evident in the growing size of our initial upfront deals and the number of customers with over 250,000 in annual recurring revenue. With that context, beginning in the second-half of fiscal 2018, we saw an opportunity to accelerate investments in our go-to-market strategy, customer success and technology. We are seeing the fruits of these investments increasingly in our financial performance. We continuously monitor our progress towards our financial objectives of productivity and profitability using several measures that I’d like to spend a few minutes explain. While we do not plan to disclose or reiterate these calculations on a regular basis, we believe they are helpful guideposts for investors to understand how we think about and balance our investment levels to drive long-term growth and profitability for Anaplan. For LTV to CAC, we understood that there are multiple views on how to calculate this metric. For purpose of level setting, Anaplan has always defined LTV as the increase in subscription gross profit comparing the last 12 months of subscription gross profit to the 12 months a year prior divided by an assumed churn rate. For CAC, we define this as the last 12 months of total sales and marketing expense a year prior. Our results in LTV to CAC has remained consistently above 5x, which we believe is an appropriate return for the investments we’re making. Our customer contribution margin is also strong over 60% in year two. Our dollar-based net expansion rate is consistently over 120% and our payback period over the last four quarters has been approximately 22 months. Based on the strong unit economics and visibility to our pipeline, we’re going to continue to invest in key strategic areas and our go-to-market functions and R&D, which will then drive leverage over time as the business reaches scale. We are in the early stages and continue to see returns from investments, both in the business unit economics and market penetration. Having set the context for our growth and investment mindset, I’ll now review our operating expenses. For the quarter, total operating expenses were $64 million, up from $37 million in the prior year. Our third quarter loss from operations measured on a non-GAAP basis was $18 million, compared to an operating loss of $8 million from the same quarter last year. Non-GAAP operating margin for the third quarter was negative 29.5%, compared to negative 18.7% in the same period last year. Non-GAAP net loss per share in the third quarter was $0.18 based on $105.4 million weighted average shares Just as a reference, the ending share count on a fully diluted treasuring method basis if we were profitable as of the close of the third quarter was 153.6 million shares. Moving on to the balance sheet and cash flow. Ending cash and cash equivalents was $374 million, up from $87 million at the end of Q2, reflecting the capital raised in our initial public offering in October, which netted $302 million. Free cash flow for the third quarter was negative $17 million. Looking ahead for the fourth quarter, we expect total revenues to be between $63 million and $64 million, and we expect non-GAAP operating margin to be between negative 33% to 35%. We also expect weighted average share count for Q4 to be 122.6 million shares. For the full fiscal year ending January 31, we expect total revenues to be between $234.5 million to $235.5 million, and we expect non-GAAP operating margin to be approximately negative 34%. To summarize, we are very pleased with our third quarter performance. We have a long runway for meaningful growth and we continue to make investments in sales, marketing and R&D. We’re confident we can continue to drive growth in scale with strong gross margins and impressive customer economics. With that, Frank and I’ll be happy to take your questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Raimo Lenschow from Barclays. Please go ahead. Your line is open.

[Raimo Lenschow:]

Thank you. Congratulations from me for the first great quarter. And Frank, can you - first - the question I had was, can you talk a little bit about the competitive dynamic you’re seeing. Over the last few months, you saw changes to the industry with SAP buying Qualtrics [ph] and so they’re doing more around sales planning side, Workday with adaptive, but then you also had your idea when you commented on the positive effect thereon there. Can you just talk a little bit what you’re seeing in the field? Thank you.

[Frank Calderoni:]

Sure, Raimo. Thanks. So, so much of what we had talked about on the roadshow, we have a tremendous opportunity when we think about Connected Planning, as I mentioned on the call, if you look at the IDC numbers as far as 2021 and the $21 billion. And then if you look at the survey of even taking greenfield opportunities like 70 million workers, there’s a tremendous amount of opportunity, and we’re seeing a significant amount of traction with the customers that we’ve had that are transitioning to Connected Planning for all the reasons I stated. So we feel that from an Anaplan standpoint, we have a unique platform for which to go after this opportunity, and that’s why we’re seeing the attractive attention that’s been coming to Anaplan prior to the IPO. And then since the IPO based on just the publicity around the company, we’re getting a tremendous amount of additional interest. I mean, I didn’t go into this, but if you look at various conferences that have occurred, different events that go on around supply chain, specialist, the amount of, let’s say, traffic that has come through and is focused on Anaplan and looking at what we do in reaching out to a customer who has started to accelerate. So from a competitive standpoint, we feel that we have a unique offering. So when I look at the landscape when we talked about three categories of competition, we talked about the legacy providers, we talked about point solutions, and then we also talked about just kind of the greenfield applications that tend to be within organizations. We don’t see anyone that actually compete against us. So for us, the environment has not changed and it’s a great opportunity for us to continue to see traction.

[Operator:]

Your next question comes from the line of Heather Bellini from Goldman Sachs. Please go ahead. Your line is open.

[Heather Bellini:]

Great. Thank you. And yes, congratulations, Frank, on the first quarter out of the gate. Just wanted to know, you touched on this a little bit in your prepared remarks. But I was wondering if you could share a little bit more about the lands and expands? And how customers might start with the financial planning? But how soon after that do you typically - does the typical customers start to embrace the much broader foot plan in their Connected Planning experience that you’re talking about? Is it the six months, 12 months, 18 months, like is there a sense that you could give us for how those - how you see those roll outs occurring?

[Frank Calderoni:]

Yes. Thanks, Heather, I really appreciate that. So one of the things I’ll say before I go into this. If you think about the opportunity for Anaplan, in addition to what I just mentioned about the market, we have - we look at use cases with our customers and we’ve seen hundreds of potential use cases that customers are looking at. So again, the platform that we have is so - has so much opportunity within enterprises, which is very suitable for them to start in any part of the organization, 40% of our business today has been outside of finance. So if you look at how we’ve been growing the business, we have had a larger traction in finance, but we’re seeing a significant amount of the increase in sales as far as sales planning, territory management, as well as in supply chain, I mentioned particular Fortune company that just came on to our platform this quarter. So we’re continuing to see additional amount of growth in sales and supply chain. So the uses are very pervasive and a customer can start anywhere. The beauty of the platform is that, we actually go to customers and we look for the - what they’re trying to solve, any challenge, any problem they’re trying to solve, and we work with them as far as solutions. And the key thing about Anaplan is we’re easily able to within a short period of time in a matter of weeks demonstrate value, and whether that’s reduction in cycle time, improvement in productivity, reduction in cost. And so as a result, they quickly then once they realize that start to think about all the uses of Anaplan. And that’s what we start getting a lot of our expansions. I mean, one of the good fact that we have this quarter is, we had a large number of expansion transactions, like if you look at the average size of the top 10 new initial lands deals this quarter and expand deals, they were both over 500,000. So that’s the top 10 land and the top 10 expand, we’re all over 500,000. So it’s showing that we’re starting to see good traction, larger transaction sizes, because again, our customers are seeing the benefit and the value that they’re getting from Anaplan and they’re looking to do more and really start on their journey as Connected Planning.

[Operator:]

Your next question comes from the line of Scott Berg from Needham. Please go ahead. Your line is open.

[Scott Berg:]

Hi, Frank and Dave, congrats on a great quarter, and thanks for taking my questions. I guess, first question Frank is, could you comment on some traction you’re getting with the partners a little bit more. You highlighted some of the prepackaged, we’ll call them, modules or applications that they’re building. But is that improving maybe what their sales cycles look like, or size of the deals? Trying to help understand what that opportunity looks like?

[Frank Calderoni:]

Yes. So, one of the things that we’ve seen, especially over the last couple of quarters is that, as we’ve been working with customers, they on their own with us have been looking at solutions, right, goes back to what I just responding to have this question. And so the more that we can work with partners now like some of the ones I mentioned on the call that we can go out with a solution that tends to provide value to, not only just one customer, but maybe multiple customers like the IFRS 17. It allows us to go to a broader set of customers with those partners and yes, it does start to increase, or let’s say, make it more effective in our go-to-market. And so the last few quarters as we’ve been increasing the percentage of engagements with partners, it’s helped us as far as the go-to-market. And I mentioned before, the number of the large strategic partners that we are looking on a global basis has been increasing, not only in the number of consultants, but also in the number of individual Anaplan consultants that they are hiring within their teams to go out and work with us in our partners on some of these solutions.

[Operator:]

Your next question comes from the line of Alex Zukin from Piper Jaffray. Please go ahead. Your line is open.

[Alex Zukin:]

Hey, guys, thanks for taking my question. Congrats on a really strong first quarter. You’re seeing some really nice acceleration on both kind of the enterprise customer ads, as well as the billings accelerating at 44% year-over-year. Maybe are you starting to see some significant benefits around that sales productivity that you mentioned? And any color on how we should think about those metrics with respect to seasonality in the fourth quarter, would be helpful?

[Frank Calderoni:]

As far as the land and expand, we do have a go-to-market and that’s where we talked about, both on the roadshow, as well as early on the call as far as the investments that we’re making in the go-to-market. And investments, I would say have been in three areas. It’s been in to make sure that we just talked about the partners, expand our engagement with partners. It helps us from a productivity and efficiency and also from a scale perspective. Secondly, we’re investing in Anaplan account executives that are aligned to our customers. And third, we’re investing in the customer support, because one of the key things and I know I mentioned this many times that is important with Anaplan. And our customers is that, we are not just engaging with the customer at the start and then leaving them. Our engagement with customers goes over multiple years. So as we continue to provide ongoing support with Anaplan, as well as the partners, it’s really critical. So that continues to play out well for us. We have both ramped account executives, which are showing some very great productivity and then we’re also because of the investment phase, we’re in a ramping period as well. And the ramping continues, that’s the investment that we’ve made over the last two quarters, including Q3 and that will continue to make in Q4, as we think about not only the opportunity for Q4 as we start getting into thinking about pipeline for FY 2020.

[David Morton:]

Yes, I mean, seasonality and items of that. I mean, yes, we’re seeing great results and yes, we’re continue to see some strong momentum as we’ve indicated in some of our prepared remarks. But again, I can’t stress this enough that you just can’t look at billings on a standalone quarterly basis, because you could end up with - on variably with variability in and around timing of transactions such as renewals. And so since that’s a key portion of ours as we look at continued expansions that at times you can get some elongated swings in and around that.

[Frank Calderoni:]

One more thing, I just want to throw out there, because I think this is important just to kind of show that the investment that we’re making is really starting to show payback. If I look at the top 25 customers, we’ve had an average of $2.5 million ARR. So it’s showing that when we make - we have a situation where we have ramped AEs, when we have a partner engagement with those, when we have the ability to look at with - work with them on a Connected Planning journey, we’re talking about substantial revenue that we generate or work with our customers on over an extended period of time.

[Operator:]

Your next question comes from the line of Brent Bracelin from KeyBanc. Please go ahead. Your line is open.

[Brent Bracelin:]

Thank you and good morning. Yes, Frank, I want to dive into this discussion around kind of the trends a little bit more. Obviously, you talked about the larger lands, you talked about larger expands. I know you don’t want to focus on billings, but billings did accelerate pretty healthfully here this quarter. Would you say that the industry appetite for planning is increasing, or do you think your share gain is starting to kind of improve here? Just trying to understand as you think about the industry, the appetite for planning and then obviously looks like an acceleration and the size of lands that you have, the size of expands that you have and then obviously the acceleration in billings, just trying to parse out how much of it is the industry growing faster, or how much is actually better execution in share gains?

[Frank Calderoni:]

Oh, Brent, I can talk about this for the next couple of hours. So I’ll try to be brief, but it’s a great question. And I come at it from my experience in all the companies I’ve been working with before and the roles that I’ve had as CFO and kind of working with operations. Planning has been around in companies on my own talk about financial planning for decades. And there really hasn’t been any change in the technology around planning, in the processes around planning. And I think companies are at a point where they can’t continue to operate, especially with all the efforts that’s going on with digitization and so forth. They can continue to operate with the processes and the tools they’ve had in the past, and so they’re really eager to look for change. And when they hear more about what we offer in Connected Planning, they’re very interested and again, goes back to what I said before. They’re interested, because they see value and they can get that value realized pretty quickly and it’s very compelling. And I think as a result of that, we’re seeing a significant transition within the existing that they spend that’s going on moving more towards Connected Planning. And that’s why we’re seeing the larger lands, the larger expands and that whole journey. But I would also say this to - about this question through the IPO, and I just want to fill this out here. And if I look at the customers that we have, even the larger ones, the global ones that have been with us for a while, we’re still in the early stages. So it’s not like we’ve been able to fully penetrate all the opportunity in even some of the large accounts, because they’re early in their journey in Connected Planning. They’re starting to realize the value and they want to continue that over an extended period of time.

[Operator:]

And that is all the time we have for questions today. I will now turn the call back to the presenters for closing comments.

[Frank Calderoni:]

Thank you, operator. I appreciate it. I want to thank everyone for your support for joining us in our first earnings call as a public company. We’re excited about the opportunity ahead of us, and we look forward to speaking with you next quarter.

[Operator:]

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