Tech Earnings Roundup: Mixed Results and Future Outlooks

Earnings call: Microchip anticipates growth despite Q1 revenue dip By Investing.com

Microchip Technology Incorporated (NASDAQ:MCHP) has released its financial results for the first quarter of fiscal year 2025, revealing a decrease in net sales and outlining strategies for future growth. The company reported a 6.4% drop in net sales from the previous quarter, totaling $1.241 billion. Despite this, non-GAAP net income remained robust at $289.9 million, with earnings per diluted share of $0.53. Microchip also announced its foray into the 64-bit embedded microprocessor market and provided guidance for the September quarter, with expected net sales ranging from $1.12 billion to $1.18 billion. Microchip's executives remain confident in the company's growth trajectory, profitability, and cash generation capabilities. They emphasized the importance of design win momentum for long-term growth and discussed their cash return strategy, which includes increasing dividends and stock buybacks. The company also highlighted its ability to provide short lead times and maintain strategic pricing without immediate pressure. As Microchip navigates through market fluctuations and customer ordering patterns, the company's leadership transition and strategic entries into new markets such as the 64-bit embedded microprocessor sector signal its readiness to adapt and capitalize on emerging opportunities. Microchip Technology Incorporated (MCHP) has demonstrated resilience in the face of market fluctuations, as evidenced by their latest financial results. To provide a deeper understanding of the company's financial health and stock performance, InvestingPro offers some key metrics and insights. InvestingPro Data shows that Microchip has a market capitalization of $40.35 billion, highlighting its significant presence in the semiconductor industry. Its Price to Earnings (P/E) ratio stands at 29.91, suggesting that investors are willing to pay a premium for the company's earnings, possibly due to its established track record and market position. Additionally, the company's Price to Book (P/B) ratio is 6.8, which may indicate that the market values the company's assets highly or expects future growth. One of the InvestingPro Tips for Microchip is its notable dividend track record, having raised its dividend for 12 consecutive years and maintained dividend payments for 23 consecutive years. This consistency is a testament to Microchip's commitment to returning value to shareholders and may be particularly appealing to income-focused investors. Another tip points out that while analysts anticipate a sales decline in the current year, Microchip is still expected to be profitable, as evidenced by its robust non-GAAP net income in the latest quarter. The company's entry into the 64-bit embedded microprocessor market could be a strategic move to diversify its product offerings and drive future growth. For investors looking for more in-depth analysis, InvestingPro offers additional tips on Microchip Technology Incorporated, which can be found at https://www.investing.com/pro/MCHP. These insights can help investors make more informed decisions when considering Microchip as part of their investment portfolio. Operator: Greetings and welcome to the Microchip First Quarter Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Bjornholt, CFO. Please go ahead. Eric Bjornholt: Good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Moorthy, Microchip's President and CEO; Steve Sanghi, Microchip's Executive Chair; Rich Simoncic, Microchip's COO; and Sajid Daudi, Microchip's Head of Investor Relations. I will comment on our first quarter fiscal year 2025 financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com and included reconciliation information in our earnings press release which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis which is based on expenses prior to the effects of our acquisition activities, share-based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website. Net sales in the June quarter were $1.241 billion which was down 6.4% sequentially. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were just below the midpoint of our guidance at 59.9%, including capacity underutilization charges of $36 million as we continue to manage production activities to adjust to the challenging business conditions. Operating expenses were at 28.4% of net sales and operating income was 31.5%. Non-GAAP net income was $289.9 million and non-GAAP earnings per diluted share was $0.53 which was $0.01 ahead of the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were 59.4%. Total operating expenses were $517.8 million and included acquisition intangible amortization of $123 million, special charges of $2.6 million, share-based compensation of $37.4 million and $1.8 million of other expenses. GAAP net income was $129.3 million, resulting in $0.24 in earnings per diluted share. Our non-GAAP cash tax rate was 13% in the June quarter which was in line with our guidance. Our non-GAAP tax rate in fiscal year '25 is expected to be about 13% which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 200 basis point favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at June 30, 2024, was $1.308 billion which was down $8 million from the end of the March 2024 quarter. We had 237 days of inventory at the end of the June quarter which was up 13 days from the prior quarter's levels as a result of a lower dollar value of quarterly cost of goods sold from lower sequential revenue. At the midpoint of our September 2024 quarter guidance, we would expect inventory dollars to be up modestly and days of inventory to increase. We also continue to invest in building inventory for long-lived, high-margin products whose manufacturing capacity is being end-of-life by our supply chain partners and these last-time buys represented 19 days of inventory at the end of June. Inventory at our distributors in the June quarter was at 43 days which was up 2 days from the prior quarter's level. Distribution took down their inventory holdings in the June quarter as distribution sell-through was about $85 million higher than distribution sell in. Our cash flow from operating activities was $377.1 million in the June quarter; adjusted free cash flow was $301.3 million in the June quarter. As of June 30, our consolidated cash and total investment position was $315.1 million. Our total debt increased by $179 million in the June quarter and our net debt increased by $183.6 million. The increase in debt was impacted by our refinancing activities in the quarter which included issuing a 0.75% 6-year convertible bond, for which we paid $105 million for a 75% cap call to provide some protection from future equity dilution from stock price appreciation. Our adjusted EBITDA in the June quarter was $456.2 million and 36.8% of net sales, Our trailing 12-month adjusted EBITDA was $2.908 billion. Our net debt-to-adjusted EBITDA was 2.02x as of June 30, 2024, up from 1.29x at June 30, 2023. Capital expenditures were $72.9 million in the June quarter. Our expectations for capital expenditures for fiscal year 2025 is about $175 million and is more heavily weighted in the first quarter of fiscal year 2025 as we had worked with our suppliers to push out capital that was originally planned for delivery last fiscal year. Depreciation expense in the June quarter was $43 million. I will now turn it over to Ganesh to give his comments on the performance of the business in the June quarter as well as our guidance for the September quarter. Ganesh? Ganesh Moorthy: Thank you, Eric and good afternoon, everyone. Our June quarter results were consistent with our guidance, with net sales down 6.4% sequentially as we continue to navigate through a major inventory correction. Non-GAAP gross margin came in just under the midpoint of our guidance of 59.9%, while non-GAAP operating margin was at the midpoint of our guidance at 31.5% as we continued our strong expense control programs. Our consolidated non-GAAP diluted earnings per share came in $0.01 ahead of guidance at $0.53 per share. Our sequential revenue decline resulted in June quarter adjusted EBITDA dropping. And as a result, our net leverage rose to 2.02x. We expect our net leverage to rise modestly for a few more quarters as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters with weaker current year quarters. However, our cash generation continues to be solid and we remain committed to our capital return plan. Our capital return to shareholders in the September quarter will increase to 92.5% of our June quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. My thanks to our worldwide team for their support, hard work and diligence as we continue to navigate a difficult environment and focus on actions that we believe position us well to thrive in the long term. In early July, we announced our entry into the 64-bit embedded microprocessor market with a suite of products, developments to address high-performance embedded processing applications, including AI-enabled edge solutions. This extends our strong 32-bit embedded microprocessor portfolio to higher performance and increased capabilities while preserving Microchip's historically strong ecosystem of leading development tools to make adoption easy for embedded system design engineers. Microchip is the only company to offer the widest embedded control and processing platform from 8 to 64 bit as well as FPGAs with a common development to ecosystem, that's empowering customers to innovate and reuse their work across a wide spectrum of markets and applications. Now for some color on the June quarter and the general business environment. All regions of the world and most of our end markets exhibited varying degrees of weakness. The exceptions were Aerospace and Defense which was stable and the artificial intelligence subset of data centers which continue to be strong. Our business in Europe and America which are dominated by industrial and automotive markets were particularly weak on the heels of a very weak March quarter. Our broad base of customers continue to manage their inventory tightly and adjust their business plans in the midst of a weak macro environment for manufacturing, high interest rates, very short lead times and an uncertain business outlook. This combination of factors we believe is driving inventory destocking as well as reductions in target inventory levels in multiple areas. At our direct customers, at contract manufacturers and distributors who buy from us at our indirect customers who buy through our distributors and in many cases, at our customers' customers. The early signs of green shoots in our business we saw in February, March and April have continued to progress, although at an uneven pace, with bookings up sequentially in some months and relatively flat sequentially in other months. Although quarterly bookings grew close to 50% in the June quarter as compared to the March quarter, overall bookings were still below where we would like to see them. Bookings, however, continue to age over a shorter period of time. And we continue to see many requests for expedites of new orders and shipment date pull-ins for previously placed orders request for cancellations and pushouts continue to subside. Our average lead time continue to be about 8 weeks or less, while the short lead times are resulting in reduced near-term visibility as customers delay placing orders since they have high confidence that supply is readily available. We also believe short lead times during a period of business uncertainty are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us. We have adjusted our operational systems to adapt to this uncertain environment and preposition semi-finished and finished goods inventory as best as we can to accept and ship the turns orders we need this quarter. Given the severity of the down cycle, our factories around the world are continuing to run at lower utilization rates in order to help control inventory levels. Our internal capacity expansion actions remain paused. We expect our capital investments in fiscal '25 and likely in fiscal '26 as well, will be low as we will use the inventory we have invested in as well as our underutilized capacity to support the next up cycle. We're also prepared for the long-term growth of our business. On the 1 hand, in partnership with our foundry and outsourced assembly and test partners. And on the other hand, for our internal factories, with the optionality of deploying capital which we have purchased but not yet placed into service. While neither we, nor our customers know the shape of the recovery in the coming months, we do expect it to arrive advertise in all prior semiconductor cycle. And we believe we are well prepared for the things we can control to exploit whatever the market recovery looks like. On the chip stack front, we continue to work through a number of challenges with the chips office and other government departments in regards to the grants. While the investment tax credit process has been relatively straightforward and we are greatly appreciative of this benefit. The journey to receive grants has taken much longer and been more complicated than we expected. Recall, we announced a preliminary memorandum of terms in early January 2024 and supported the completion of diligence by March. Given that we align extremely well with the U.S. government's goals of shoring up semiconductor supply for national security and industrial security, it would be unfortunate if a pragmatic agreement on the conditions attached to the grants cannot be reached. We continue to persevere through the challenges by collaborating with the chip's office while remaining resolute that whatever agreement we reach must also be consistent with our business values. Before we get into our guidance, I note about the strength of our design in activity. After 2-plus years of dealing with shortages and redeploying their innovation resources towards mitigating the impact of shortages, our customers over the last year plus have returned to prioritizing their innovation projects. The result is a strong design-in pipeline for us across all end markets, mega trends and key customers amplified by our total system solutions approach to take advantage of our broad portfolio of solutions. The impact of this growing design pipeline is muted in the current environment where excess inventory gets most of the attention and design-in activity takes time to gestate into production. But design win momentum is the engine of long-term growth that we have always focused on and which we expect will drive above-market long-term growth. Now let's get into our guidance for the September quarter. While we continue to see a number of green shoots in our business indicators, we do need turns orders within the quarter to meet our guidance, operating in a high turns environment has historically been normal for Microchip but it's challenging to predict during abnormal times as we're in today. We are, however, forecasting strong signs of growth in our data center business beyond the artificial intelligence subset after several quarters of weakness. This is effectively another green shoot. Taking all the factors we have discussed on the call today into consideration, especially the very low backlog visibility we are faced with. We expect our net sales for the September quarter to be between $1.12 billion and $1.18 billion. We expect our non-GAAP gross margin to be between 58.5% and 59.5% of sales. We expect non-GAAP operating expenses to be between 30% and 31% of sales. We expect non-GAAP operating profit to be between 27.5% and 29.5% of sales and we expect our non-GAAP diluted earnings per share to be between $0.40 and $0.46. This multiyear semiconductor cycle for Microchip and for the overall semiconductor industry has been like none other we had seen. It started with coveted supply and demand disruptions in the March quarter of 2020 which then continued for many months. This was followed by extreme product shortages and result in supply chain challenges later that year and for several quarters thereafter. And finally, a substantial inventory correction over the last several quarters. We recognize that on a peak to trough basis, our revenue decline has been sharper than many of our competitors. Some of this variance reflects the differences in end market exposure as this cycle has impacted different end markets at different times. Some of the variance is due to differences in noncancer gold, nonreschedulable programs implemented by us and our competitors. And finally, some of the variance is driven by differences in the relative size of business transacted either directly or through the channel. While peak across revenue performance is relevant, we believe a better longer-term indicator is a comparison of the cumulative revenue generated through the entire cycle. Assuming the December quarter of 2019 was the last unaffected or normal quarter, Microchip's cumulative revenue over the next 19 quarters, inclusive of our guidance from -- for the September 2024 quarter when indexed to the December quarter shows very comparable performance between us and our competitors. This is, of course, excluding the impact of acquisitions for everyone. The revenue peaks and trucks were different for each company. We believe for the factors that we mentioned earlier. However, when we're looking -- when looking at the cumulative 19-quarter revenue, essentially the area under the revenue curve is what that would represent. While the journey for each company was different that destination was very similar after 19 quarters. This would suggest that Microchip may be positioned for a sharper growth in the coming quarters, although we're not ready to predict the shape of that recovery at this time. My point is that rather than be focused on peak the trust performance alone, it seems prudent to consider the area under the curve of cumulative revenue performance as well. We believe the fundamental characteristics of growth, profitability and cash generation of our business remain intact. We are confident that our solutions remain the engine of innovation for the application of end markets we serve. We remain committed to executing our strategic imperatives which we believe will deliver sustained results and substantial shareholder value. And finally, at a time of macro uncertainty, we remain focused on the things we can control to create long-term shareholder value. With that, let me baton to Steve to talk more about our cash generation to shareholders. Steve? Steve Sanghi: Thank you, Ganesh and good afternoon, everyone. I would like to provide you with a further update on our cash return strategy. The Board of Directors approved an increase in the dividend of 10.7% from the year ago quarter to a record $0.454 per share. During the last quarter, we purchased $72.7 million of our stock in the open market. We also paid out $242.6 million in dividends. Thus, the total cash return was $315.3 million. This quarter, our total cash return was reduced by the cash outlays for the recent acquisition of BSI and Euronics. When you combine the dividend buyback and acquisition-related cash outlays, this amount was 87.5% of our actual adjusted free cash flow of $389.9 million during the March 2024 quarter. Our net leverage at the end of June 2024 quarter was 2.02x. Ever since we achieved an investment-grade rating for our debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned a total of $4.6 billion to shareholders through June 30, 2024, by a combination of dividends and share buybacks. During this period, our share buyback in the open market was approximately 31.2 million shares representing approximately 5.8% of our shares outstanding. In the current September quarter, we will use the adjusted free cash flow level from the June quarter to target the amount of cash returned to shareholders. Our adjusted free cash flow for the June quarter was $301.3 million. So our target return to shareholders would be 92.5% of that amount, minus a small payment made for acquisitions. Our resulting cash return to shareholders will be approximately $261 million. Out of that amount, dividends are expected to be approximately $243.8 million and our expected stock buyback will be approximately $17.2 million. Going forward, we plan to continue to increase our adjusted free cash flow return to shareholders by 500 basis points every quarter until we reach 100% of our adjusted free cash flow returned to shareholders through dividends and share buybacks. That will take 2 more quarters and we expect that dividend over the long run will represent approximately 50% of our cash returned. We also announced today that effective at the close of business on August 20 which is the date of our Annual Shareholders' Meeting, I will transition from Executive Chair to being the Non-Executive Chair of the Board. In this role, I will continue to be a resource to Ganesh and to all of Microchip. I want to thank our investors and our employees. It was my highest honor to have served you for 34 years. Let me now turn it back to Ganesh. Ganesh Moorthy: Thank you, Steve. On behalf of the Microchip leadership team and all of our employees worldwide, thank you so much from the bottom of our hearts. We have 34 years of service to Microchip. In your Nonexecutive Chair role, you will continue to be an important resource for me personally and for other Microchip team members as well. With that, Stacy, will you please pull for questions? Operator: [Operator Instructions] Your first question comes from Tim Arcuri with UBS. Timothy Arcuri: Ganesh, you talked about orders being up 50% sequentially but you said that they're still weak. Can you talk about that a little more? Is that -- are you just saying that book-to-bill is still well below 1? Is that the point there? Ganesh Moorthy: Yes. I wouldn't say well below 1 book-to-bill is below 1. It has bookings have been growing. They've been growing unevenly between the months. So it's on the right track, just not as fast as we would like it to. And coming in they're aging faster. So that also helps. Timothy Arcuri: Got it. And then can you talk a little bit more about -- you had talked about the green shoots and it sounds like they kind of stalled out a little bit. Can you talk about maybe when that happened in the quarter? Was it like the last month of the quarter? And has it continued through the first month of this quarter, just -- and maybe the end markets where that's actually happened. Ganesh Moorthy: So at the end of May, I think we were at a public conference where we had said, "Hey, bookings are flattish for May versus April, June got a little bit better. I think it's just through the quarter week to week. I think these are short-term indicators. We have to look at it kind of on a longer-term basis, how is it evolving? So -- but yes, June did not have the same momentum that we would have expected. If this was continuing at a consistent pace. And so that's the difference between what we saw in April versus May versus June. It just didn't have a consistency throughout the quarter. And there's no particular end market thing. The 2 end markets I referred to, stability in aerospace and defense, strengthen the data center market. And of course, we're indicating that it's not only the AI subset but going forward for September and December, we're seeing strength across the data center markets that we're in. Operator: Next question, Christopher Rolland with Susquehanna International Group. Christopher Rolland: Mine is around utilizations and where we go from here. So I think you guys had some shutdowns in June? Are you expecting to continue those into September? And then you also talked about external wafer supply agreements, would you expect those negotiations to go well and to push those out? Or might those effect as well? Eric Bjornholt: So I'll start with internal utilization. So we are not planning on having another 2-week shutdown for our wafer fabs in the September quarter. We do not expect production value out of the fabs to be much different quarter-on-quarter. We continue to have attrition and had to lower starts because of that but we'll not be having another 2-week shutdown. And in our assembly and test areas, we will continue to have days off for those activities to manage our finished goods assembly and test out appropriately. Ganesh, do you want to comment on foundry? Ganesh Moorthy: Yes. We have continued to work with our foundry partners on how to match the wafers coming in to the demand picture as it changes the degree of how we have worked that out has a different results at different semi -- foundry partners. But by and large, we are working through those with business arrangements to make sure that we are not receiving substantially more wafers than what we can use with the exception of the last time buy that Eric referred to, where factories are either closing down or processes are being end of life where we are buying because those products often have extremely high gross margins and it behoves us to be able to take the inventory and over many years, I realize very high gross margin on those parts. Christopher Rolland: And then you didn't call out China as a source of additional weakness. I was wondering if we could maybe get an update there, what you're seeing out of China and/or Asia. Ganesh Moorthy: Sure. So in the breakout that we provide that's on our website, Asia. We don't usually break out China but Asia was flattish. The declines were largely in the Americas and to a larger extent, in Europe. And I think China and Asia on current basis is more constructive. The weakness is predominantly in the Americas and Europe. And I think that is, to some extent, consistent with if you look at some of the PMI reports and where the manufacturing economy is that just this morning, the U.S. PMI came out last month, the European PMI came out. This is not the first month, there's been many, many months over which that weakness has been playing out. And I think China was there earlier on as were other parts of Asia. Some of that they have worked out. So, more stability and strength on a relative basis than the Europe and Americas regions. Operator: Next question, Tore Svanberg with Stifel. Tore Svanberg: Ganesh, one of your peers last week talked about customers sort of ordering hand to mouth and potentially even holding too low inventory due to working capital constraints and so on and so forth. Are you seeing that with some of your customers and maybe especially on the industrial side because that's certainly a concerning thing and it certainly may reflect the very low terms orders that you are getting or the very low backlog visibility that you are getting? Ganesh Moorthy: No, that is absolutely happening at many, many customers. And I think they have, in some cases, low visibility into their own business as well. So they're reflecting that. Given that there's plenty of capacity and short lead times, right? There's really no reason for them to try to get backlog ahead of time. At some point, that will change and it will correct itself. But yes, the -- what is reflected in the green shoots we talked about when we said we're getting expedite orders where new orders are being placed with short cycle expectation and prior orders that were placed are being pulled in. Those are all reflective of people who are more conservative in how they place orders and then recognizing they need it parts sooner. At some point, that will catch up on itself. It's still early but that's how these things usually correct is people tend to go too low and run out of inventory, any strengthening in the business starts to create some urgency for orders that becomes the whole expedite chase. We saw that back in other cycles as well. But that is something we're watching. We're still in the early innings of how that up cycle will play out. Tore Svanberg: Yes. And related to that, I mean, can you comment on how much terms you need at this point and maybe compare that with previous cycle? Ganesh Moorthy: So we don't typically break that out. I think maybe you want to give some historical perspective on where they're at. Eric Bjornholt: So I mean, it is not unusual for us to enter a quarter needing 30%, 40% turns. And with short lead times, we've been able to do that historically now. We're coming off a period up to the last couple of quarters where we were fully booked entering a quarter. So it's definitely a large change for us from what we've seen over the last 2.5 years. But there's a significant amount of terms that we need to take and we've kind of been signaling that to the marketplace that with short lead times that is not out of outside of what we would expect it to be. And customers are managing their balance sheet and know that we can get them inventory quickly. Operator: [Operator Instructions] Next question comes from Joshua Buchalter with TD Cowen. Joshua Buchalter: Congratulations to Steve in the next step in an incredible career. To start, I was hoping maybe you provide some more color on what's baked into your assumptions for the September quarter guidance. I know it's difficult but is there any way maybe you can give us on a relative basis. Do you -- how much do you expect to be under-shipping demand in the September quarter? Is that level going down versus June. Do you feel like you're close to shipping to end demand and demand just weak? I'd just be curious to hear any granularity you can give us on what you're seeing at inventory levels, both in the channel what your downstream -- and at your downstream customers. Ganesh Moorthy: So a lot of questions there and I think there's a lot of information that is really not readily available. Clearly, as Eric mentioned, the distribution inventory in absolute terms has been coming down. It's the third consecutive quarter where we brought down distribution. So that is draining. Where is true consumption at - I think that's a $64 million question that I'm not completely sure we know where that is. Anecdotally, when I visit customers and I try to understand where is their business and I try to compare it to where is our business, right? Where is our business. Customer business is down more in the 5%, 10%, 15% year-over-year kind of that level. We're obviously down in the mid-40s, maybe high 40s with the guidance and. So that delta is what you should expect that in time, as inventory drains will get closed with a recovery in our business even when the macro is still weak. But the customers don't really report out inventory to us. We can glean information based on are they placing orders? Are they expediting orders? What are they seeing? And in those patterns, you can begin to form conclusions for a given customer. We have 100,000 customers. It's awfully hard to integrate that. And then from an end market perspective, as we mentioned, both industrial and automotive are both large pieces of our business and where we see the largest weaknesses as well. Joshua Buchalter: Understood. And I mean, it doesn't really seem like it from the gross margin numbers you're putting up. But anything changed as a digestion extends on the pricing front? And in particular, like one of your larger peers, I think, called out some pricing pressure and weakness in general purpose microcontrollers. Are you observing any of that? Ganesh Moorthy: So there's no pricing pressure on the immediate products we are shipping last quarter or this quarter. And there's always the fringes some of that. But what really takes place is our new designs, all participants who are trying to win a design are going to put their best foot forward which often is their newest and most cost-effective products and are going to be as aggressive as they can be with consistent within their model for that. That is, in fact, happening. And -- but that is always how business has been conducted. And I'm sure there may be a little extra of that when people see the environment is weak. But pricing, in general, is a more strategic exercise both for us and for customers for whom they're making decisions on a platform for multi-years. And price is not the only reason someone makes a decision. It's really value. And it's what else do we bring besides price that brings the overall value equation to match what the customer is willing to accept. Operator: Next question Harlan Sur with JPMorgan (NYSE:JPM). Harlan Sur: As you guys mentioned other of your peers in the embedded market, MCU and analog have seen sort of this broad pickup in China back in May, at our conference. I think you did talk about seeing improvements in sell-through by your China [ph] customers. It looks like, again, as you guys mentioned, this was reflected in your Asia sales which were flat sequentially. Did Asia [ph] sell-through actually grow sequentially in June? And during the September quarter, would you anticipate China and the Asia region revenues this quarter to outperform Europe and North America again? Eric Bjornholt: We don't break out the details of sell-through any longer, right. We provided some information over the last couple of quarters of the amount that sell-through exceeded sell-in. That amount was $85 million roughly in the June quarter and about $125 million in the March quarter. I will just say that China was really the first to go into this. This is similar to Ganesh's comments earlier. And we wouldn't be surprised if they were the first to come out. The June quarter is a little bit hard to judge because the March quarter has a Chinese New Year. So there's just more shipping days, right? And so you kind of have to look effectively what's happening on a daily basis. But I would say China is our least weak market at this point in time. And I know that doesn't sound great but Americas and Europe are definitely hurting more so at this point in time than what we're seeing out of the Far East. Ganesh Moorthy: One of the difference in this cycle is we have typically viewed sell-through as a measure of the consumption, the economic conditions have changed. What we're also seeing is there is inventory sometimes downstream. So a great example, if you take automotive, right, if you look at automotive showrooms, particularly in the U.S. where they have inventory, have substantially more inventory today than they did a year ago or 2 years ago. So inventory sometimes is not just what the channel has but also what is downstream from them. And all those play into the final equation of how does the destocking take place. And I think that has been one of the reasons why it has been slower than what most of us have expected. But as every month goes by, it continues to lower the level of water. And I think that just sets the conditions up for when this will revert back and change to those direction. Harlan Sur: I appreciate the color there. Obviously, in this kind of environment that you just described, there is a lot of in orders. I appreciate that. But is the team seeing a pickup in cancellations pushouts and rescheduling or is that still at relatively low levels. Ganesh Moorthy: No, that has been on a decline continues to be -- that's one of the green shoots that continues is that new bookings are continuing not as fast as we would like and the cancellations and pushouts are decreasing. So those are good signs. Operator: Next question, Chris Danely with Citibank. Chris Danely: I guess just from a broader perspective, so you're seeing some green shoots but the revenue decline is getting incrementally worse. So exactly how is that happening? And then when the customers come to you guys, are they saying that it's more their demand trends are a little worse than expected? Or are they just like found too much inventory? Or is it some combination of both? Maybe just take us into the machinations of the quarter of the business? Ganesh Moorthy: If you look at the end markets, we have a large exposure to industrial and automotive. And clearly, there is more clean-up there. That's also where when you look at broader macro trends, what is happening with the PMI, what is being reflected in that. I mean I think U.S. has had of 21 months in a row where the PMI has been weak. Europe, I think, is closer to 24 months. So all of that is just playing itself out into lack of confidence in knowing what and when their business will change, lack of confidence in placing orders soon enough. And so at some point, this will all reverse. We just don't have enough visibility to be able to say, "Hey, here's how it is and here's when it is. And -- but I don't have more than that. We call it the way we're seeing it. And right now, I think there's lack of confidence reflected in the backlog being low and the orders being placed on shorter cycles than what they would historically have done. And you add all that up, is what we have in our guidance. Chris Danely: Sure. And then before I ask my follow-up, I just want to say that Steve, you are a true icon in the industry, especially for those of us that have been around for a long time. And we really appreciated your candor and your honesty over the years; I really mean that. And as my follow-up, just in terms of your 2 bigger end markets, automotive versus industrial, any qualitative or quantitative comments on which is worse or which is better and why on a relative basis? Ganesh Moorthy: Yes. I don't know about the why but I can tell you, I think in general, anecdotally, I would say industrial feels worse and it's just been consistent with -- I think automotive has a bit of it which is inventory but also a bit of it which is people are still buying cars and it's just flowing through that inventory. But I would say on a relative basis that would be my best guess. Operator: Next question, Harsh Kumar with Piper Sandler. Harsh Kumar: Yes. Let me start off. Steve, congratulations. I've enjoyed working with you for all these, I guess, over a decade now. And hopefully, we'll still get to hear your voice on at least some of the calls. Appreciate it. Steve, all the holes that we put in with you and you're honestly as somebody else said earlier. I had a question. Let me start off with the product question. Could you just help us understand what kind of end markets you might be able to address with a 64-bit microcontroller -- and I think you mentioned that the software that will be used on 64 bit is also the same over 8 to 64 and also your FPGA line. Is that actually correct? And how important is that? Ganesh Moorthy: So firstly, it isn't the software that is common. It's all the development tools and the related ecosystem of what we need to do. But yes, so they all come under what is a Microchip branded set of ecosystem and tools. We call it MP lab. And all of that is set up in such a way that once you get used to that environment, you can easily move around, you can port things between the different products and you can start on a bit processor and move to a 64-bit processor or vice versa as the case might be. The -- there is a significant expansion that is at the higher performance end of where this processing takes place. And so this is more compute intensive. It's in places which can be in factory automation, it's envision. That machine vision. It's an AI at the edge. And so it's a continuum of where we were on microprocessors with 32-bit but now higher end from there where we couldn't reach before with the products that we had and also, in some cases, opening up some places where perhaps people would not have considered us because they didn't see a common road map that they could get to from starting at one end of what we had in 32-bit and moving into the other end of 64 bit. So this is going to be done over multiple years, we'll have a broad set of portfolio of products, a family of products that are going to be needed. But clearly, it opens up a meaningful amount of new total available market to us. And by our estimates, there's about $3 billion to $4 billion of total available market on the 32-bit loan. By the time you add the 64 bits, it almost doubled that to about $6 billion. Harsh Kumar: Got it. And maybe for my follow-up, I wanted to ask you sort of talked about industrial versus automotive but maybe you could give us some more color on which other end markets outside of data center are acting better. And perhaps some that are not acting so well outside of industrial. Ganesh Moorthy: There's nothing that is acting better so to speak. Aerospace and defense for various reasons. It's stable. There are pockets of commercial aviation that for the well-known issues are there space tends to be a very lumpy business for us quarter-to-quarter. Defense is strong for reasons that you can read in the news as well. But I don't have any other end market out as being particularly noteworthy. Operator: Next question, Quinn Bolton with Needham & Company. Unidentified Analyst: Nick Doyle [ph] on for Quinn. Just one question kind of talking about the other side of -- the only place that's positive, you talked about a broadening of data center growth in the September quarter. Can you just elaborate what's coming from? Is it from the general purpose side, the power connectivity, anything specific you can call out? Ganesh Moorthy: Yes. So the data center infrastructure which is kind of where a lot of the business was before the AI wave and the accelerated computing way I came about as that happened, there was some amount of CapEx at many places that moved primarily to the accelerated computing. And we had our share of that with where we were designed in. Now what we're seeing is some of that a and it can be in the back plane, the citing the power supplies, it can be in the storage networks, a number of different areas that all need at some point, the data center investment as well. And all of that plays into the data center solutions that we bring. So the AI or the accelerated computing piece is going well. It's just other parts of data center are doing better at this point. Yes. And some of that, you can see also reflected in the CapEx announcements that have been made by some of the data center players out there. Operator: Next question, Craig Ellis with B. Riley Securities. Craig Ellis: Steve, let me just start off by saying thanks for all the insights over the years, I learned a tremendous amount from you and really appreciate all your help. Moving on to questions, Ganesh, I wanted to go back to the point you made in prepared commentary about the significant reengagement from customers and design in activity as we got through the supply chain crisis. As you look at how that's manifested across Microchip's business, can you comment a little bit for the unnotable trends? And from when those engagements result in design or a design win that's going to go to protect production, how should investors think about the gestation period. So when do we begin to see the benefit of this renewed more vibrant engagement that you're seeing from your customers? Ganesh Moorthy: So our historical design cycles have been in the 12 to 24 months range. Some of them are a little longer, so maybe it shorter. But for the most part, it's in that 12 to 24 months range. And so you would begin to see a lot of this in the next 12 months because we are about 12 months into that process. Now keep in mind that there are a couple of other forces that will make certain adjustments to it. One is when customers have inventory, they will also look to use their inventory and perhaps be a little more of the older generation until they can burn through that inventory before they shift to the newer generation of whatever they build. Second, if the slowdown in the macro persists for some time, historically, what we mean is customers tend to want to delay some of the launch because there's upfront costs associated with the marketing activities there, building of inventory, stocking of channels and all of that. And so there are many things at play here. But it should, in the next 1, 2, 3 years, create a surge of activity from all the work that has been started since about a year ago and it's continuing and will continue. And that surge has the benefit of both Microchip's approach on maximizing the total system solutions. And we do measure that internally, how we look at how many products for Microchip are getting attached to these new designs and how well it attaches to the fastest growing parts of the market. So I think there's a lot coming in the next 1, 2, 3 years from design in activity over the last year, plus the design-in activities that are still continuing over the next 1 or 2 years. Craig Ellis: That's really helpful. And then for the follow-up 1 for Eric. Eric, it's clear you're able to keep CapEx pretty low over the next 2 to 4 quarters. I wanted to understand the interplay of that with low foundry utilization that we're seeing in potentially attractive pricing. At the margin, does the current foundry environment with low utilization give you an opportunity to do a little bit more externally or as you look at the mix of internal and external production, are you interested in continuing with the mix that you've had in driving that forward. Eric Bjornholt: I would say the mix that we have is pretty fixed, right? Typically, a product is either designed on a process technology in one of our own factories or an outsourced partners process. There are limited cases where we have capabilities to do something both externally and internally on the fab side. So I think that mix is going to stay about where it's at. We continue to do some things with technologies that we own to bring them in-house but we've got this roughly 40% in rental 60% external split for foundry. And I think that will likely stay about that for the coming years. Ganesh Moorthy: And where we have opportunities of technologies that can run both inside and outside. And we have done some of the work over the last 2, 3 years towards that. It is far more favorable to load an underloaded internal factory for almost all cases that I can think of, than it is to say, let's continue to underload the internal factory and load more at the foundry. Operator: Next question, Janet Ramkissoon with Quadra Capital. Janet Ramkissoon: First, Steve, thanks very much for a nice ride. All these decades and for all you've done for Microchip long-term shareholders. A lot of my questions have been asked. Steve Sanghi: Janet, I met you 34 years ago when I was raising private financing at a $10 million market cap. Fast-forward 34 years with a $45 billion market cap, you're still there [ph]. So staying there I'm ready to go kick four of my grandkids. Kick them around [ph]. Janet Ramkissoon: I still hold some of that stock, Steve. Thank you for convincing me then to -- with this. So just a couple of little ones, if I may. 64-bit marketplace. Can you give us a sense or any color on what the early design win activity is looking like? And the second question is that you said that June, May was fattish June was weak. Any additional color on how July progressed relative to June and May. Ganesh Moorthy: So, I think the -- I said May was flattish. June actually was -- is -- in terms of plans was up from there. The July numbers are just coming together, I would say, is flattish where it was. So month-to-month, these things don't matter as much. We just need to look at it kind of on a quarterly bucket in terms of where it's at. And in a stutter step, it is heading in the right direction, just not consistent month-to-month and not at the pace that we want to on a quarter-to-quarter basis. On your 64-bit question, it's early days. So it's too early to have design wins but we have lots of early adopters. These would be customers who are interested, want to have the product samples and the tools have an idea of a design that they want to pursue are in detailed discussions with our field and technical teams because they see an opportunity to take advantage of what the 64-bit product lines have. And so it's optimistic early days but still early days. Janet Ramkissoon: Just one little thing. If history repeats itself, once you start producing the 64-bit chips, the margins on those new products should really move up the ramp quite a bit faster. Well, they would certainly be faster than the 32-bit would assume given the markets that you're targeting. Is that a fair assumption? Ganesh Moorthy: It's a little early for that. Typically, the processor or controller margins have all been within a narrow range between them. I think to some extent, as we find the specific applications we'll look at that. And we want to look at margin not just on that 1 chip alone. We want to look at how is it with the entire portfolio that attached to that 64 bed. And so the value for us is not just the 1 chip but it's really the entire total system solutions that we can bring to that customer. Operator: I would like to turn the floor over to Ganesh for closing remarks. Ganesh Moorthy: Okay. Well, thank you, everybody, for coming in and spending some time with us. And we look forward to meeting many of you in the coming weeks through the conferences and other meetings that are being set up. So thank you. This concludes this call. Operator: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Earnings call: Twilio announced revenues of $1.1 billion By Investing.com

Twilio Inc. (NYSE: NYSE:TWLO), a leading cloud communications platform, has reported a robust second-quarter performance for 2024, surpassing market expectations. The company announced revenues of $1.1 billion and a non-GAAP income from operations of $175 million. Twilio's Communications business, which includes messaging and email services, was a significant growth driver, contributing $1.01 billion to the revenue. The company also highlighted a strong free cash flow of nearly $200 million and a record non-GAAP gross profit of $577 million. With a focus on innovation and customer engagement through AI and machine learning, Twilio has maintained a positive outlook for the upcoming quarters, despite modest headwinds. Twilio's strong performance in the second quarter of 2024 reflects the company's strategic focus on product innovation and customer engagement. The company's resilience in the face of modest market headwinds and its commitment to shareholder returns through an aggressive share repurchase program demonstrate confidence in its growth trajectory. With a prudent outlook for the coming quarters, Twilio is positioned to continue its momentum in the cloud communications industry. Twilio Inc.'s (NYSE: TWLO) latest financial performance reflects a company that is not only growing but also managing its finances with strategic precision. An InvestingPro Tip points out that the company holds more cash than debt on its balance sheet, indicating a robust financial position that can support its aggressive growth strategies. This is particularly relevant as Twilio continues to innovate and expand within the competitive cloud communications sector. Additionally, Twilio's management has been actively repurchasing shares, a move that underscores their confidence in the company's future prospects. This aligns with the company's announcement of nearing the completion of its $3 billion share repurchase program. Such buybacks can potentially benefit shareholders by increasing the value of the remaining shares. InvestingPro Data also reveals some compelling metrics: Twilio's market capitalization stands at $9.04 billion, and while the company's P/E ratio is currently negative at -18.76, indicating it is not profitable as of the last twelve months, analysts have a positive outlook, predicting profitability within this year. This forward-looking optimism is bolstered by the fact that 20 analysts have revised their earnings upwards for the upcoming period, according to another InvestingPro Tip. Twilio's revenue growth remains steady, with the last twelve months as of Q1 2024 showing a 5.99% increase, and gross profit margins are strong at 50.02%. These figures are a testament to Twilio's ability to monetize its offerings effectively amidst the dynamic market conditions. For investors seeking more detailed analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/TWLO, which can provide deeper insights into Twilio's performance and potential investment opportunities. Operator: Good day, and thank you for standing by. Welcome to Twilio, Inc., Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vaniman, SVP, Investor Relations. Please go ahead, sir. Bryan Vaniman: Good afternoon everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, Chief Executive Officer; and Aidan Viggiano, Chief Financial Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release, and our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of these risks and uncertainties are described in our SEC filings, including our most recent Form 10-K in our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A. Khozema Shipchandler: Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio delivered a good second quarter. We are driving durable profitable growth, as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels. We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation. We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage over time. The communications business is performing very well. And in our Segment business, we're focused on executing on our commitments. While reducing non-GAAP operating losses, in Q2, we saw continued signs that Communications growth is stabilizing, including quarter-over-quarter improvement in international trends. And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement. What's true across the board is that in the world of AI, contextual data is paramount. According to Twilio's Annual State of Customer Engagement Report, we found 84% of businesses said they provide good or excellent customer engagement, yet only 54% of consumers agree. That disconnect is because brands need help contextualizing the data they have. By combining our leading communications capabilities, our rich and contextual data and the power of AI, we are uniquely positioned to unlock smarter, and more personalized interactions for brands that enable them to reimagine customer engagement and drive more revenue at a lower cost. Let's turn to our business highlights. Our Twilio Communications business had a strong quarter, with revenue of $1.01 billion, up 7% on an organic basis year-over-year on the back of solid performance in messaging, acceleration in e-mail growth and strong ISV contributions. During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time. In the near-term, we expect our growth to be fueled by our expanded network of partners and ISVs, self-service enhancements and cross-sell opportunities. While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISVs. During the quarter, we achieved an eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solution. Additionally, we signed a new partnership with Omnisend, an omnichannel marketing platform targeting the SMB retail market, who will help Twilio expand its footprint into new geographies. We also extended our co-sell partnerships with Airship, BloomReach, Braze, Insider and Klaviyo (NYSE:KVYO) into new geographical territories to power a data-enriched end-to-end marketing experience. During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2023, and we continue to make enhancements to simplify the onboarding experience for customers. For example, we introduced a new console experience that helps make recommendations, guiding customers to which products they should be using based on their desired use cases and outcomes. And our new one sign-up streamlines the log-in process by having one log-in for a customer to access all of their Twilio accounts and products. In the medium-term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands. In the quarter, we started to see success with our newer higher-margin software products. These are products that leverage AI such as Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as traffic optimization engine and engagement suite to drive greater deliverability and better customer engagement. These products are rapidly gaining adoption and can become meaningful growth drivers over time. One customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded their messaging usage. Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console with both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers. Since deploying Twilio, the company is already seeing a 38% increase in SMS response rates and a 20% increase in banker productivity. More importantly, these products are gaining adoption because they are simple to use, trusted and intelligent. Verify is a great example. Not only is it growing quickly, it is saving our customers millions of dollars by mitigating fraud at the source and to continue deliver better outcomes for our customers leveraging AI, our SMS pumping protection product went GA during the quarter, which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets. We're continuing to deliver on our promise of natively integrating segment capabilities into our Communications business. This quarter, we released personalized virtual agent into private beta, marking Twilio's second product that natively embeds Segment into Communications. With personalized virtual agent, our customers receive a truly personalized interactive voice response. Each caller receives a custom menu of options based on the recent interactions with company, purchase history, recent support inquiries and responses to marketing e-mails, among others. The product combines voice, virtual agent with Google (NASDAQ:GOOGL) Dialogflow agent, studio and unified profiles into one simple product that is guided with this wizard setup. We're excited with this release as it marks the next chapter for how IVR is evolving in the world of AI. And lastly, Twilio's Communications products continue to receive recognition as we were named a leader in the Gartner (NYSE:IT) Magic Quadrant for CPaaS for the second year in a row, positioned highest for ability to execute and ranked number one in four of six use cases in the Gartner Critical Capabilities Report. Twilio is also named a leader in IDC's Marketscape Worldwide Contact Center as a Service. Turning to our Twilio Segment business. Segment delivered revenue of $75 million, up 3% year-over-year, as we continue to focus on delivering against the priorities that we outlined in our operational review March. We made solid progress in improving customer time to value and executing on data warehouse interoperability. We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter-over-quarter. We also continue to focus on driving efficiencies in our go-to-market, which yielded an increase in sales productivity, and in Q2, over 40% of our new bookings were multiyear deals versus 17% in the prior year period. A key win for Segment included our largest deal of the quarter, a seven-figure deal with IBM (NYSE:IBM). On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses. In Q2, we released Data Graph and linked audiences into public beta, which seamlessly integrate with data warehouses, including Databricks and Snowflake (NYSE:SNOW). With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events and predictive AI traits to generate unified customer profiles and audience cohorts to deliver targeted, personalized experiences. We've gotten a great response, and we're excited to have customers like LegalZoom and Trade Me deploy and realize the benefits and efficiencies. We are also improving time to value for customers. During the quarter, our use case in-product onboarding went live, guiding customers through a customized onboarding experience, focused on their specific business goal. Additionally, our CDP co-pilot is reducing instrumentation and development time. Customers can now deploy and get value from segment four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers. Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable, profitable growth while driving strong free cash flow, and we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over time. I'm incredibly energized about our opportunity to become the leading customer engagement platform combining communications, contextual data and AI to deliver intelligent engagement and outsized outcomes for our customers. And I remain very confident in our ability to deliver accelerated growth and continued improvements in our free cash flow profile over the coming quarters. And with that, I'll turn it over to Aidan. Aidan Viggiano: Thank you, Khozema, and good afternoon, everyone. Jumping into our results. Total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year-over-year. Communications revenue was $1.007 billion, up 4% reported and 7% organically year-over-year. And segment revenue was $75 million, up 3% year-over-year. Our Q2 revenue growth was driven by solid performance in messaging, acceleration in e-mail growth as well as continued strength in our IFC business. We continue to see signs of growth stabilization in our Communications business, and we saw modest sequential improvements in international as well. Company organic revenue growth and communications organic revenue growth were both roughly 100 basis points lower due to the sun setting of the software component of our Zipwood business. We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year. Our Q2 dollar-based net expansion rate was 102%. Our dollar-based net expansion rate for Communications was 102% and 103% when excluding Zipwhip software customers. Our dollar-based net expansion rate for segment was 93%, driven by elevated churn and contraction. Mitigating churn and contraction remains a focus for segment, and we're encouraged by the progress we made in Q2. As Khozema discussed, we are improving time to value and customers are deploying use cases four times faster as a result. We are also pushing for more multiyear deals with customers. And in Q2, over 40% of Segment's new bookings were multiyear deals versus 17% a year ago. We delivered record non-GAAP gross profit of $577 million, up 7% year-over-year. This represented a non-GAAP gross margin of 53.3%, up 110 basis points year-over-year and down 70 basis points quarter-over-quarter. As we noted in our Q1 call, we recognized elevated cloud hosting credits that benefited Q1 gross margins by roughly 80 basis points, and those credits did not recur in Q2. Non-GAAP gross margins for our Communications and Segment business units were 51.8% and 73.4%, respectively. As we noted in Q1, we are migrating part of segments architecture to new infrastructure providers this year to recognize greater efficiencies. We began migrating data to our new provider in Q2, and during this transition, we will incur some overlapping vendor expenses. As a result, we expect reduced segment gross margins until the migration is complete, which is expected to occur by the end of 2024. Non-GAAP income from operations came in well ahead of expectations at $175 million, up 46% year-over-year even after including $20 million of incremental expenses associated with our new employee cash bonus program. As a reminder, we initiated this program at the start of the year to reduce stock-based compensation expenses over time. The outperformance was driven by our revenue beat, improvements in Segment's expense profile and ongoing cost discipline. Our non-GAAP operating margin of 16.2% was up 460 basis points basis points year-over-year and 100 sequentially. Non-GAAP income from operations for our Communications business was $250 million and non-GAAP loss from operations for our Segment business was [$16] million, a $5 million improvement quarter-over-quarter. GAAP loss from operations was $19 million, as we continue to make solid progress on our path towards GAAP profitability. Stock-based compensation as a percentage of revenue was 13.6% excluding restructuring costs, down 130 basis points quarter-over-quarter and 110 year-over-year. We generated free cash flow of $198 million, driven by continued operating efficiency and ongoing collection strength. This was up $126 million year-over-year. And over the last 12 months, we generated free cash flow of $781 million. We're making good progress on free cash flow, and we believe there are significant opportunities to drive more leverage over time. Finally, we're continuing to execute on our $3 billion share repurchase program and have repurchased over $700 million since our last earnings call in May. This brings our total repurchases to date over $2.2 billion. We intend to complete the remaining $800 million of authorized repurchases by year-end, which should meaningfully reduce our outstanding share count over the next two quarters. Our total shares outstanding as of June 30 was $164 million, down 10% year-to-date. Moving to guidance. For Q3, we're initiating a revenue target of $1.085 billion to $1.095 billion, representing year-over-year growth of 5% to 6% on both a reported and organic basis. We've now lapped our two divestitures from last year, so starting in Q3, reported and organic quarterly revenue will be equivalent. Given year-to-date performance, we're narrowing our full year organic revenue growth guidance range to 6% 7%. Turning to our profit outlook. For Q3, we expect non-GAAP income from operations of $160 million to $170 million. Given our outperformance in Q2, we're raising our full year non-GAAP income from operations guidance to $650 million to $675 million. Finally, we remain focused on improving our free cash flow profile, and we continue to expect that full year free cash flow generation will be in line with our full year non-GAAP income from operations. We're encouraged by the performance we delivered in the first half as we stabilized revenue growth and delivered strong profitability and free cash flow. As we look ahead, we're investing in initiatives to reaccelerate growth, but we continue to plan and guide prudently. We are progressing towards GAAP profitability, and we continue to see significant opportunities for margin expansion and improve free cash flow over time. I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters. And with that, we'll now open it up to questions. Operator: [Operator Instructions] And our first question is going to come from the line of James Fish with Piper Sandler. Your line is open. Please go ahead. Quinton Gabrielli: Hi guys. This is Quinton on for Jim Fish. Thanks for taking our question. Maybe first on the margin side. You've talked about a fair amount of incremental leverage opportunity coming from automation of back-office activities like contract management or that product activation. What inning are we in for those operational improvements across the business? And as we think about the upside you've shown relative to guide so far this year, how much of the cost savings is coming from these process improvements versus just better rigor around managing spend? Aidan Viggiano: Great. Why don't I start and then Khozema can jump in. Listen, I think we've done a lot on margins. If you just take a step back and think about the expansion that we got last year, and then coming into this year, our initial guide assumes very little operating margin leverage. If you look at our current guide for the year at the midpoint, it's about -- I'd say 250-ish basis points of margin expansion. So we continue to find opportunities to get expansion on both the OpEx line as well as the stock-based compensation line. And we don't think we're done. So we've talked about fact that we're going to get the Segment business to break even by the second quarter of next year. That business lost $16 million in the second quarter, $21 million in the first quarter. So you can see that there's an opportunity to get leverage there. And then in addition, in the broader business, I'd say in communications and the G&A functions, there's a lot of work that we're doing around, you mentioned automation. We are a remote-first company, so we do have the opportunity to leverage lower-cost geographies as a way to continue to get efficiencies. And so we're doing all of these things and continue to do them. I would say, I'm not going to give you an exact inning, but I would say we have a lot of opportunity to continue to expand margins both on the non-GAAP side as well as the GAAP side, including stock-based compensation. In terms of the profit, in terms of what's coming from improvements in process versus cost discipline, I think it's a little bit of both. It's largely cost discipline though. We continue to believe that we can run this company without having to add a lot of incremental costs. You've seen us do that now for 6 quarters in a row. And so we're really just much more disciplined in terms of how we're running the company, and that's something Khozema drives pretty regularly with the team. Quinton Gabrielli: That's helpful. And then on the revenue front, it sounds like we found stabilization here and actually quarter-over-quarter things sound a little bit better, which is great. But we also tightened the kind of revenue targets for the full year down slightly. Can you talk about what's embedded into the guide here? What assumptions or incremental prudence that you've incorporated relative to the kind of last guide that we got last quarter? Thank you. Aidan Viggiano: Yes. Thanks for the question. I'll take it again. So we grew year-to-date through the first half 7%. We're guiding to 5% to 6% in Q3. We think the 6% to 7% that we gave for the year is a reasonable range based on what we're seeing today. I will say that, in the second quarter, we did see a number of very encouraging trends in the business. In particular, we saw strength in messaging, as you know, that's our biggest business. Solid performance, both in the U.S., which we've seen for the majority of this year, but also, we saw modestly improving trends internationally. We also saw growth in our e-mail business accelerate and really -- and Khozema kind of talked about it in his prepared remarks as well, really strong performance in both our ISV and self-serve businesses. So we saw a number of encouraging trends. We guided to 5% to 6% in the third quarter. I mean if you think about how we guided in Q1 and Q2, that was 4% to 5%. So you are seeing some of these trends kind of flow through to the guidance. But we are still a usage-based business. So there is inherent variability that comes along with that. And so we'll continue to plan, we'll continue to guide prudently just given that and given the dynamic market that we're operating in. Khozema Shipchandler: I'll just add one thing maybe, which is, we're not really planning for any kind of like macroeconomic environment like whether it's good or bad. I think we're just planning to run the company well. As we've alluded to a number of times, running it with better discipline, better rigor, and it's obviously a dynamic global market with a lot of different kind of geo things going on, macro things going on. I think irrespective of however any of that plays, we feel really good about the guidance that we've given. And as Aidan said, we'll continue to be prudent about the way that we guide. Operator: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Mark Murphy with JPMorgan (NYSE:JPM). Your line is open. Please go ahead. Mark Murphy: Thank you very much. So Khozema, you mentioned an acceleration in e-mail. And I'm curious to what you might attribute to that, whether it's more marketing e-mails, transactional e-mails, notification e-mails, is there anything there that makes you think companies are finally starting to lean back in to outbound marketing activities or on customer engagement initiatives in a way that maybe they weren't a couple of quarters ago? And then I have a quick follow-up. Khozema Shipchandler: Yes. Hi, Mark, thanks for the question. I wouldn't say that it necessarily breaks down exactly the way that you said it. I think, in general, we are seeing just kind of elevated trends in that product, in that part of the business. I think maybe to just sort of build on your question through the Twilio lens a little bit more. I think where we continue to see a lot of opportunity, and I think e-mail and the other channels to be beneficiaries is, as Communications become more targeted, as they start to leverage more contextual data as we kind of talked about, especially through vis-à-vis Segment, I think there is an opportunity to grow the e-mail channel. And because what you and I will receive as consumers will be much more specified, much more targeted, much richer communication. And I think we're seeing a little bit of that. And I think a lot of that is kind of really more on the comm. But in the quarter, I wouldn't necessarily point to one thing or the other. I'd just say kind of elevated trends on the product. Mark Murphy: Okay. Thank you for the color. And then Aidan, I wanted to ask you -- I want to try to combine two quick thoughts. But you generated, I think, $1.25 a share of free cash flow in Q2, right? So it arguably puts you on a $5 per share run rate, which is a lot. And just -- is anything one-time in nature? Or could we roll that kind of free cash flow margin into 2025? And then I did just -- relating back to that question of the narrowing of the range, we're trying -- I think we're trying to reconcile there's a lot of positive comments and then that got narrowed just a hair below the midpoint. And I'm just wondering, we've had a Starbucks (NASDAQ:SBUX), Nike (NYSE:NKE), McDonald's (NYSE:MCD), Tesla (NASDAQ:TSLA), there's been a lot of consumer slowdown. Is there anything there factoring in maybe to how you're thinking about the holiday season? Khozema Shipchandler: Yes. So Mark, let me start on the back end of the question, and then I'll let Aidan pick up on the cash flow side. So I think from an industry perspective, I mean, I mean, kind of the good news for Twilio is, you know the company really well. You've been following us for a long time. Like we have a very, very distributed consumer -- or customer base, right? So over 300,000 customers, we're spread across a wide variety of industries. And so we're always, quite frankly, looking at like some up, some down in a variety of these different areas. I would say as it relates to some of the kind of areas that you pointed to, like let's maybe just categorize those as retail, e-commerce. I would say that, that was an area that was particularly good for us. I wouldn't necessarily point to a seasonal or holiday trend. I'm not necessarily forecasting like a strong like Thanksgiving or Christmas season. Like again, we're kind of planning for like whatever the period is, we just want to run the company well, and guide prudently through all that. So that's kind of how we're thinking about the way that we're running the company, first and foremost, and then how that ends up translating into some of our revenue guidance. And then on cash, Aidan, do you want to take that? Aidan Viggiano: Yes. So thanks, Mark. And if you look at our cash performance kind of through the first half or at least in the second quarter, you can see that cash is kind of outpacing our non-GAAP profit. It was about 18% free cash flow margin in the second quarter. What we saw there is largely a function of the profit generation and the continued leverage that we're getting on OpEx, but we did see collections improvement in the quarter by about two days. Now on the flip side, AP kind of went the other way. So net-net, working capital really wasn't a help. So I wouldn't call out anything specifically. What we said for the year is you should expect free cash flow generation to be in line with non-GAAP profit. I think that's a good framework in terms of how to think about it for the time. Mark Murphy: Thank you very much. Operator: [Operator Instructions] And our next question is going to come from the line of Arjun Bhatia with William Blair. Your line is open. Please go ahead. Unidentified Analyst: Great. Thank you. This is Chris on for Arjun. I was hoping to get a little extra color on segment NRR in the quarter. It was great to see the improvement there. And I was wondering if you think that we're starting to stabilize and kind of found the bottom and how we should think about the trends going forward. Aidan Viggiano: Yes. I think as it relates to segments dollar-based net expansion was 93% this quarter was 92% last quarter. The business grew 3%. What we said for this year is you should expect that business to -- the growth in that business to be muted. I think that continues to be our expectation for the year. I'd say 93% DBNE per segment was kind of in line with what we were expecting. And really there, we're focused on a number of different initiatives that we laid out in March kind of at our operational review readout. And we're focused on a couple of things. number one, we're improving our customers' onboarding experience. Historically, it took way too long for customers to get to value. And now Thomas and the team have implemented a number of different things that get customers to value on their first use case in a matter of weeks versus historically in a matter of months. In addition to that, we're making a concerted effort to sign more multiyear deals, and that will help with churn and contraction. That will help with dollar-based net expansion as a result. And this quarter of the bookings that we signed, 40% of them were multiyear deals versus just 17% a year ago. And then the last thing we committed to at the Investor Day or one of the other things I should say, it's not the only thing, we are making progress on our data warehouse interoperability, which is important for our customers. And in Q2, we introduced linked audiences. And what that does is it allows customers to combine their Segment CDP data with data in their warehouses. And that's, again, an important thing for our customer base. So all of those things combined, we think, over time, help DBNE. It won't be immediate. DBNE is a trailing 12-month metric. So it's not going to reflect immediately. But as these things start to get traction, we think that it will send that metric in the right direction kind of over time. Unidentified Analyst: Great. Thank you. That's very helpful color. And the second question for me was, the personalized agent sounds like an interesting way to kind of combine the Communications platform with segment. I was curious what kind of reception is getting from customers so far? And what other kinds of products are on the road map that incorporate Segment into Communications? Thanks. Khozema Shipchandler: Yes, I don't want to get too far ahead of the roadmap. So maybe I'll park that for an upcoming period when we report. I think in terms of the launch that we just did, I think it's pretty early. I mean we just launched the thing a few weeks ago. I think based on the customer conversations that I've had, people are really, really excited about it. I think the whole notion of being able to leverage like a detailed profile about a customer in the context of a conversation is incredibly important. And I think it also has the benefit of like creating a feedback loop. So, the customers that I've spoken with are very, very excited. I know our team is very excited based on the customers they've spoken with as well. But in terms of financials, it's just early days, and we'll have to kind of report back on that later. Unidentified Analyst: Got it. Thanks and congrats on the quarter. Operator: Thank you. Our next question is going to come from the line of Taylor McGinnis with UBS. Your line is open. Please go ahead. Taylor McGinnis: Yes, hi. Thanks so much for taking my question. So, maybe going back to the full year revenue outlook and some of the assumptions, you talked about an improvement in trends with international and e-mail. Segment growth improved slightly, and then you talked about some of the ISC and co-sell opportunities. So, I know you have some initiatives in place to accelerate growth that could be additive to a stabilization in the macro in the second half. So when you think about like those playing out and what might be embedded into the guide, it looks like the revenue guide just assumes trends remain status quo and maybe doesn't assume much upside from some of these initiatives that you have in place. So, could you just provide a little bit more color there and what those opportunities could look like? Thanks. Aidan Viggiano: Yes, I think we -- I'll start. I think we believe that the Q4 implied math gets you to kind of a reasonable range of outcomes based on kind of what we're seeing in the business today. As we said, you kind of call them out, a number of different trends that we're seeing that have been encouraging over the last three months. I think the thing to remember is Twilio is very dynamic, and we are usage-based. And so we continue to just plan prudently in that light. And so we just want to make sure that we're not getting ahead of ourselves. We're not reading into too much in terms of what we're seeing over three months, and that's just the right thing to do, just given how dynamic the market is. Khozema Shipchandler: Yes, Taylor, the only thing I'd add is, I mean, again, just to maybe reinforce a few points that Aidan made, I think we see encouraging signs like we feel good about the guidance that we provided today. I think as these things start to materialize, like we'll feel better, obviously, but there are a number of things that are happening inside the business today that certainly feel like they could be juice for growth down the road, and we're optimistic about it. But we're going to continue guiding prudently just given that it's a dynamic environment. Taylor McGinnis: Perfect. And then just maybe as a follow-up. So, when you talked about some of the improvement in trends that you saw in 2Q, maybe you could just talk about like linearity a little bit in the quarter. And as we start 3Q, would you say that a lot of those trends have remained similar or any notable changes to flag? Thanks. Khozema Shipchandler: Yes, I mean we're not going to get ahead of that, obviously, Taylor. I think orders don't have sort of the linearity dynamics maybe of what you see in some other companies. I think, again, we saw pretty positive trends as a result of the three-month period that we're talking about today. I certainly don't want to get into July or anything like that, but based on what we've seen, we're encouraged, and we'll play through Q3. Meta Marshall: Great. Thanks. I just wanted to kind of confirm on political traffic. I know in the past, you guys have kind of kind of said that, that was going to be an area that you weren't going to invest in. But just as we head into a political season, just should we still be thinking about kind of political traffic either to e-mail or text message is something that's kind of more limited contribution to Twilio. Thanks. Aidan Viggiano: Yes. I think as it relates to political. We always have some political traffic kind of rolling through our business. But I wouldn't expect outsized revenue impact as a result of the upcoming election. We have registration requirements. We talked about before with you in an acceptable use policy. And if customers don't meet those policies, we won't take the traffic. So it ensures a level of quality on our networks and on our platform, and it protects consumers. We think that's the right thing to do. So there might be a little bit of a bump, but it won't be anything outsized as we get closer to the U.S. elections. Meta Marshall: Great. Thanks. And then just -- I noted you guys said international improvement. Is that some end-market improvement? Or do you kind of attribute that to some of the ISV relationships growing? Just how do you think about kind of some of that improvement that you're seeing or ISV traction? Thanks. Aidan Viggiano: Yes. So we did see this kind of improving trend with the international. It's international -- when we say international, just to be clear, it's internationally terminating messaging traffic. And I would say it was a bit broad-based. It wasn't 1 group of customers or the other. So that was encouraging in a way to see that it was a bit broader versus just an ISV group or another group of customers. But beyond that, I wouldn't call out anything specific. It wasn't a certain industry. It wasn't a certain market where traffic was terminating that spiked or jumped out to us. It was broader. Meta Marshall: Great. Thanks. Operator: Thank you, One moment for our next question. Our next question is going to come from the line of Ryan Koontz with Needham & Co. Your line is open. Please go ahead. Ryan Koontz: Hi. Thanks for the question. I wanted to ask about, any of the changes you're making in go-to-market? And these sorts of changes that are driving the strength you're able to reduce costs? And any progress in automation that you've had on the Comm side of the business? Khozema Shipchandler: Yes. I mean, just to maybe go back a little bit, like we made a number of changes, obviously, that unfortunately resulted in a whole series of layoffs towards the earlier part of last year. So now we're kind of back into 2023. And starting to see some of those -- well, a lot of those changes, frankly, especially in our cost profile, rippled through the business. In terms of some of the rationale behind what we did at the time and what we were kind of expecting going forward, like we did want to orient many more of our customers towards self-serve. And I think we pointed to a couple of things in the quarter around self-serve like it was definitely one of the better quarters for that kind of cohort and segment of customers. It's a very, very kind broad set like you can have customer spending small amounts of money up to kind decently large sized amounts of money. And so it's a kind of broad category that has seen strength. There's a number of things that we did from a technology perspective as well to make sure that we were able to onboard, onramp customers in a way that they could kind of activate with Twilio fairly quickly as well. So I'd say very good progress, quite frankly, in terms of self-serve as it relates to communications. Maybe just the other thing that you didn't ask, but just to kind of touch on is also with -- as Aidan talked about in some of her comments, also good progress, I wouldn't call it per se self-serve, but in terms of just accelerating customers to value on the Segment side as well, like we have done a lot of work from a technology perspective there, too, to increase just the velocity with, which customers get value. And then I think more broadly, there is work that we're doing on automation. But we still think that our ability to drive cost leverage here that there is a lot of opportunity going forward and we'll continue doing that. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Alex Zukin with Wolfe. Your line is open. Please go ahead. Rich Magnus: This is Rich Magnus on for Alex Zukin. I just wanted to double-click again on that Segment onboarding process you've been speaking about. I know in the past, you mentioned leveraging AI to produce friction in that process and drive that faster TTV through the self-serve process. But can you help us think through any impacts there that might drive Segment growth this year and next year? Thanks. Khozema Shipchandler: Yes. Maybe I'll just touch on the technology, and I think Aidan kind of answered the growth dynamics earlier. Like just to reiterate that last point, I think growth will continue to be muted for the foreseeable future. We've been saying that for a while. And I think while there are improvements in the business, like just given the nature of it, that will take a little bit of time to show up in growth. That said, I'd say there's a handful of things that have been really encouraging for us in the Segment business. I think one is that time to value work. It's a combination of AI work that we've done to help customers get through the process faster. There's also use case onboarding wizard that's also allowed customers to kind of get to their specified use case a lot faster. And then I'd say also a really concerted effort by our customer success team. And so the combination of those things, I think, has been pretty powerful, frankly, in really accelerating what Aidan characterized as what was months in the past, down to weeks, and what we've kind of quantified as a 4x improvement from where we were. Operator: Thank you. And we'll move on to our next question. One moment please. Our next question is going to come from the line of Pat Walravens with Citizens JMP. Your line is open. Please go ahead. Austin Cole: Great. Thanks for taking my question. This is Austin Cole on for Pat. You touched on a eight-figure renewal during the quarter and Twilio Voice being a part of that. Can you just talk about how you view your opportunity with respect to AI at this point and the opportunity with these products? Thank you. Khozema Shipchandler: Yes. I mean, I think that our opportunity around AI is everything to do with data. And I think as it relates to data, in particular, contextual data, and I think the reason that we feel such deep conviction about that that is, is all of our customers are sitting on proprietary data sets that will never be turned over to an LLM, right? Like that is the part of their business, and our ability to work with them vis-à-vis Segment and ingest that data, use it as part of an overall profile that we have for every single unique consumer to be able to drive a personalization experience back to them, I think that is like a really, really significant unlock that's going to be able to drive business more -- drive growth, excuse me, more broadly for the overall business. But it's that combination of communications plus contextual data, plus AI and the mix as well. Now just to go back to voice for a second since that's where you started, I think what's interesting about voice as it relates to all of that is, is that AI the most natural in voice, right? Like in the same way that you and I are interacting right now, like it's just very normal to kind of have a conversation in that that way. And I think the AI capabilities are becoming so sophisticated in their ability to process natural language in this way that, when paired with contextual data, I think that is going to be a heck of an opportunity. And I think a lot of that value will end up accruing, not just a messaging and e-mail, which we feel optimistic about, but certainly voice as well. Austin Cole: Great. Thanks. Thank you. Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Nick Altmann with Scotiabank. Your line is open. Please go ahead. Nick Altmann: Awesome. Thanks, guys. You guys sort of have a reenergized focus on your ISVs. You named a handful of new partnerships in the prepared remarks. I guess when you look at sort of the other potential ISV partnerships out there, how much runway is there left in terms of acquiring new ISVs? And then just any sense of what percentage of the business is coming from those partners and any goalposts in terms of how fast that part of the business is growing? Khozema Shipchandler: Yes. We're not going to break out the kind of percentage of revenue per se, but I'll just maybe provide a little bit of color based on your question. Obviously, there's been strong growth there, and we feel very positive about it, as you probably ascertained from our remarks. It is a sizable portion of the Communications revenue today, and it's also growing faster than our total organic growth rate, and it's got, quite frankly, compelling gross margins as well. So that all feels pretty good. As you alluded to, we did sign a number of large ISV deals in the quarter, including wins with payment processors, customer experience companies, marketing automation platforms and more. I'd say those businesses have been growing pretty well, too. And so I think we'll accrue some benefits as a result of their growth. I think, two, it's not just domestic, which kind of speaks to like how much runway is there here. We're also seeing good growth in EMEA and APJ as well. And I think what's kind of important from our standpoint is, is that these relationships are evolving beyond just being like software providers using our channels to kind of real relationships where we have an opportunity to kind of deepen what we do with the likes of a Braze, Klaviyo, Insider, Bloomreach, Airship, because we've got like these strong integrations within the ecosystem. We're engaged in co-sell and re-sell with a lot of these partners. And I think that also allows us to get some go-to-market leverage in terms of expanding our own go-to-market footprint. So yes, I mean, we do feel pretty good about where we are. We do feel pretty good about the growth trajectory and we're excited. Nick Altmann: Awesome. Thanks, guys. Operator: Thank you And one moment for our next question. And our next question is going to come from the line of William Power with Baird. Your line is open. Please go ahead. Yanni Samoilis: Great. Thanks for taking the question. This is Yanni Samoilis on for Will. I know you mentioned earlier in the call that retail and retail and e-commerce was pretty good this past quarter, and it seems like things are pretty stable overall across the business. But I guess, outside of retain on e-commerce, are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection? Aidan Viggiano: When we look at our top industries, I'd say most of them are actually up and growing. I'd say for us, social and messaging continues to be one that's a little bit softer, though it's a relatively smaller portion of our business right now, so financial services is one that has been strong. You called out retail, e-commerce and a couple of others that have been pretty strong as well. But broadly, I'd say most of the industries that we operate in, our top industries are growing. Yanni Samoilis: And just to be clear, growing, but not necessarily growing above the company average or... Aidan Viggiano: In some cases, they are, in some cases, it's more in line with the company average. Yanni Samoilis: Okay. Thank you. Operator: [Operator Instructions] And our next question is going to come from the line of Derrick Wood with TD Cowen. Your line is open. Please go ahead. Derrick Wood: Great. Thanks. Just on AI, I guess, stepping back a bit from a high level, Khozema, how would you describe the generative AI monetization strategy for Twilio, whether via direct modernization or just indirect implications? Khozema Shipchandler: Yes. I think there's a couple of angles there. So let me just -- I'll spend a moment on it. So I think, first of all, where we kind of started with AI some of the earliest use cases was really around fraud and trust, right? So we embedded AI capabilities to help protect the consumer just given that we want to, at all costs, protect the vitality of the ecosystem. And so there were a number of things that we introduced to basically protect the consumer, like Fraud Guard, Verify, these are different products we've announced over course of the last year. So as we talked about in the remarks today, like we're seeing good activity there. I think as we go, it's really going to be maybe AI-centered predominantly around contextual data. I think where we see the big unlock here, certainly for our business and as it relates to what we've referred to for a long time and others do, too, is customer engagement like the real unlock there like through personalization at scale. And so the way that you get there is having this like really rich contextual data about every single one of us as consumers that comes through segment. Being able to relay that back to a consumer vis-à-vis some sort of communication channel and then obviously using AI to supercharge that. So, one example might be like we have a voice intelligence product. We talked about that today, too, where we're able to extract insights as a result of the context of that call, use it both inside of that call that's taking place at the time, but also feed it back into a profile so that, that data can be reused for the next time that, that brand ends up interacting with the consumer. Similarly, I think where that will increasingly go is, you'll end up without perhaps even realizing it, although I think we'll probably disclose it, interacting with an automated agent where all of that is taking place seamlessly. They're able to process natural language. Like I don't think that's per se like our strategic advantage in AI. There're a number of companies that can do that. We'll partner with those organizations. What they don't have, though, which I think is our secret sauce is going to be how do you get to that specific consumer and thousands of others at exactly the same moment in time to deliver each of them a unique and personalized experience. That comes from contextual data, and that's why we're so bent on ensuring that we deliver Segment natively inside of Communications so that we can deliver that entire workload. Does that make sense, Derrick? Derrick Wood: Yes, that's great color. Thanks. Helpful. Thank you. Operator: [Operator Instructions] Our next question is going to come from the line of Samad Samana with Jefferies. Your line is open. Please go ahead. Billy Fitzsimmons: Thanks for taking my question. This is actually Billy Fitzsimmons on for Samad. In terms of a short one, stock-based comp is down year-over-year in both dollar terms and percentage terms. Just how should we think about where that can kind of go from here and kind of what inning we're in on that front? Obviously, you guys have highlighted changes to the bonus structure what should it kind of bottom? Is there more -- is there more work to be done -- continue to decline the way it has been? Thank you. Aidan Viggiano: Yes. Thanks for the question. There's more leverage here in terms of the opportunity ahead. So we were 13.6% SBC in the quarter, was down 110 basis points year-over-year, it was down 13% quarter-over-quarter. It's on the back of the things that you've talked about. We've reduced, obviously, the size of the employee base we've made a shift in terms of compensation mix away from equity and towards cash. And we've also been more selective in terms of which employees get equity in the company. Those changes have already been made. In terms of looking forward, we think that there's still opportunity here for leverage. We had originally, several years ago, committed to 10% to 12% SBC as a percentage of revenue by 2027. So we're still marching our way down the cost curve to get that kind of range. Billy Fitzsimmons: And then if I can ask a second one. Can we just double-click on Communications' gross margins in the quarter? Any changes there, positive or negative, both domestically and/or internationally? And then how should be kind of think about the Comms gross margins going forward given some of the new initiatives and given the mix of growth in new products going forward? Aidan Viggiano: Yes. In the quarter, you'll see that Comm's gross margins were up year-over-year but down quarter-over-quarter. The quarter-over-quarter dynamic was just really driven by the hosting credits that we saw come through in the first quarter. They were about 80 basis points of a quarter. That didn't repeat quarter-over-quarter. So that's kind of the headwind. Year-over-year, they were up 160 basis points or so, and that was driven by two things, product mix. So, one, when we talked about e-mail growing or accelerating that obviously helps margins because it's higher margin than the Comm's average. The other dynamic in that year-over-year growth was the fact that we had had the dispositions last year that we did that in July timeframe. They were at a gross margin rate that was dilutive to the company. And so not having those -- the value first and IoT businesses actually helps margins. As we think about going forward, margins in the Communications business tend to be driven really by mix. That product mix between messaging or voice or mix, et cetera, or termination mix within the messaging business. So if you're terminating more internationally or domestically, that will drive different gross margins. I think the framework we think about and kind of think about and kind of look at look at is we look at the unit economics. And so is we look at the unit economics. remain attractive, we'll continue to do the business. So you should expect, I'd say, in the near term, some level of some level of variability in the Communications' gross margin. Billy Fitzsimmons: Super helpful. Thank you very much, Operator: [Operator Instructions] And our next question comes from line of Mike Funk with Bank of America (NYSE:BAC). Your line is open. Please go ahead. Unidentified Analyst: Great. Yes. This is Matt on for Mike Funk. Appreciate taking the question. Can you help us think about the second half revenue guidance in the context new customer additions versus uplift from expansion? And then looking beyond even this year from a high level, how you might expect the growth algorithm to shake out in the medium term? Aidan Viggiano: I missed the second part. No, we're not going to get into the split in terms of how to think about the revenue guidance. That's not something we've ever really done in terms of splitting the guide between new customers and expansion. I think we feel good about the 5% to 6% range we gave you for Q3, the 6% to 7% for the year. And we talked about the dynamic market, the fact that we're usage based and the fact that we will continue to plan prudently just given those dynamics. Can you just repeat your second question? I missed it. Unidentified Analyst: Yes. It was just high level about how the growth algorithm could shake out over the next couple? But it seems like -- that's not something you're going to comment on? Operator: Thank you. And I'm showing no further questions. So this is going to conclude today's question-and-answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating, and you may all disconnect. Everyone, have a great day. Goodbye.

Earnings call: Paylocity reports robust fiscal 2024 results, eyes growth By Investing.com

Paylocity (NASDAQ:PCTY) Holding Corporation (PCTY) has announced its fourth quarter and fiscal year results for 2024, showcasing significant growth. The company's recurring revenue increased by 15% in the fourth quarter and 17% for the fiscal year, with total revenue climbing by 16% in Q4 and 19% for the fiscal year, reaching $1.4 billion. The addition of 2,850 new clients brought the total to 39,050, and the average recurring revenue per client grew by 8% to nearly $33,000. Paylocity's financial performance was strong, with a gross profit of $240.4 million in Q4 and $960.8 million for the full year. Operating income was reported at $62.9 million for Q4 and $260.1 million for the full year, while net income stood at $48.8 million in Q4 and $206.8 million for the year. Looking ahead, the company anticipates continued growth in fiscal 2025, with projected increases of approximately 10.2% in recurring revenue and 8.3% in total revenue. In conclusion, Paylocity Holding Corporation reported a strong finish to fiscal 2024 and is poised for continued growth in the coming year. The company's strategic focus on product development, go-to-market strategy, and operational strength has positioned it well to capitalize on market opportunities and drive further revenue growth and margin increases. With a solid base of nearly 40,000 customers and a clear vision for the future, Paylocity's leadership remains committed to the company's success. Paylocity Holding Corporation (PCTY) has demonstrated robust financial health in its latest fiscal year, supported by strong revenue growth and impressive gross profit margins. The company's strategic initiatives and market performance are further reflected in several key metrics reported by InvestingPro. InvestingPro Data shows that Paylocity's market capitalization stands at $8.92 billion, indicating a substantial market presence. The company's Price to Earnings (P/E) ratio is reported at 43.25, with a slight increase to 45.72 over the last twelve months as of Q3 2024. This P/E ratio suggests that investors are willing to pay a premium for Paylocity's earnings, which is often a sign of expected growth and investor confidence in the company's future. Additionally, Paylocity's revenue growth over the last twelve months as of Q3 2024 is an impressive 23.61%, highlighting the company's ability to expand its top-line figures. An InvestingPro Tip that aligns with the company's reported financial performance is that Paylocity holds more cash than debt on its balance sheet. This financial position provides the company with a buffer to navigate economic uncertainties and invest in growth opportunities. Another relevant InvestingPro Tip is that net income is expected to grow this year, which bodes well for Paylocity's profitability and its ability to deliver value to shareholders. For investors seeking a deeper analysis of Paylocity's financials and market performance, InvestingPro offers additional tips. There are 14 more InvestingPro Tips available for Paylocity, providing insights into various aspects of the company's financial health, valuation, and growth prospects. These tips can be accessed at https://www.investing.com/pro/PCTY and may serve as a valuable resource for investors considering Paylocity as part of their investment portfolio. Operator: Hello, and thank you for standing by. Welcome to Paylocity Holding Corporation Fourth Quarter 2024 Fiscal Year Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ryan Glenn. Sir, you may begin. Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter of fiscal year 2024, which ended on June 30, 2024. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp and Toby Williams, Co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule, Toby will be attending the Stifel Tech Executive Summit in Deer Valley on August 27, and I will be attending the Citi Global Tech Conference in New York on September 4 and HR Tech in Las Vegas in late September. Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve. Steve Beauchamp: Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2024 earnings call. Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and help drive recurring revenue growth of 15% and total revenue growth of 16% in Q4. For fiscal 2024, recurring revenue grew 17% over fiscal 2023, and total revenue grew 19% and finished at $1.4 billion. Our solid results were once again driven by both adding new clients and employees and increasing average revenue per client. We ended fiscal 2024 with 39,050 clients compared to 36,200 at the end of last fiscal year, an increase of 8%. Additionally, our average number of employees per client increased to over 150 given our continued upmarket success. Average recurring revenue per client was nearly $33,000 in fiscal 2024 compared to just over $30,000 in fiscal 2023, an increase of approximately 8% as a result of increasing product attach rates across our client base. We continue to attach more product at the time of sale and have realized increased success selling back into existing clients as our products, focused on the modern workforce, resonate across our entire client base with Learning Management, Recognition & Rewards and Employee Voice seeing particular success. Our sustained investment in product development allows us to continue to expand our product suite, evidenced by the release of several new premium offerings and feature enhancements in fiscal 2024, including Recognition & Rewards, Employee Voice, Advanced Scheduling, Market Pay, AI-driven personalized learning plans and our next-gen mobile app. We are pleased with the early traction of these new product offerings, highlighted by more than 30,000 market job searches within Market Pay, over 500,000 AI-assisted platform interactions and our mobile app ranking is one of the highest in the software industry with the majority of employee interactions on the platform now occurring via mobile. Our commitment to product development continues to be recognized in the market with Paylocity recently being ranked as an overall leader for 10 product categories in G2's Summer 2024 Grid Reports, listed as the Best Payroll and Software combo by Forbes Advisor, named as TrustRadius Top Rated HR Management software platform for the second year in a row and recognized in Gartner (NYSE:IT) Peer Insights 2024 Voice of the Customer for cloud HCM suites for 1,000-plus employee enterprises. I would now like to pass the call to Toby to provide further color on the quarter and fiscal 2024. Toby Williams: Thanks, Steve. As Steve highlighted, in fiscal 2024, we continued our investments in R&D to further grow our differentiated value proposition of providing the most modern software in the industry and increased our PEPY by more than 10% with the introduction of new premium products and feature enhancements. And we're excited to continue this trend with the launch of headcount planning later in fiscal 2025. In Q4 and fiscal 2024, our differentiated position was reflected in solid sales execution. And we have continued investing in our go-to-market functions to carry this momentum into fiscal 2025 across sales, marketing and channels. Coming into fiscal 2025, we expanded our sales force by 8% to 885 sales reps and will be focused on continuing to drive productivity and efficiency across our teams. Consistent with prior years, we are pleased to be fully staffed to begin fiscal 2025. We continue to successfully attract the best talent in the industry, and we believe that we are well positioned for the fiscal year. We have also continued to invest in our marketing and channel efforts to support our sales teams throughout fiscal 2025, including the recent release of our new Benefits Decision Support enhancement to help continue driving further differentiation and value to our clients and broker channel, which once again, delivered 25% plus of our new business in Q4 and fiscal 2024. Revenue retention also remained strong at greater than 92%, and we remain committed to continuing to invest in our service and support teams to deliver world-class service to our clients. The strong culture at Paylocity continued to be recognized this fiscal year as we were recently named one of Forbes' Best Employers for Diversity for the third year in a row, received ATD's BEST (NYSE:BEST) for Employee Talent Development Award and earned the Great Place to Work certification for the seventh consecutive year. Our strong culture, industry-leading software and exceptional sales and operational execution would not be possible without the dedication and commitment of our over 6,000 employees. As we close out a very strong fiscal 2024, I'd like to thank all of our people and teams for a fantastic year. I would now like to pass the call to Ryan to review the financial results in detail and provide fiscal 2025 guidance. Ryan Glenn: Thanks, Toby. Recurring revenue for the fourth quarter was $324.7 million, an increase of 15%, with total revenue up 16% from the same period last year. As Toby noted, our sales team had another solid quarter, and we were pleased to come in $5.5 million above the top end of our revenue guidance with the majority of our Q4 beat coming from recurring and other revenue. Adjusted EBITDA for the fourth quarter was $120.2 million or 33.6% margin and exceeded the top end of our guidance by $13.1 million. For fiscal 2024, adjusted EBITDA was $505.6 million or 36% margin, and an increase of 35% on a dollar basis from fiscal 2023, resulting in leverage of 410 basis points. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal 2024 was 30%, reflecting operating leverage of 280 basis points versus fiscal 2023. Additionally, we continue to show strong progress on free cash flow with fiscal 2024 free cash flow margin of 21.8%, up 340 basis points and an increase of 42% on a dollar basis from fiscal 2023. Excluding the impact of interest income on funds held for clients, we drove 170 basis points of operating free cash flow leverage in fiscal 2024 to 14.4% margin. Given our increased profitability and limited remaining NOLs and credits, we expect to become a full cash taxpayer in fiscal 2025, which will create a free cash flow margin headwind in fiscal 2025. But we remain confident in our ability to continue expanding free cash flow margin in the coming years. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 14.6% of revenue in the fourth quarter and on a full year basis, total R&D investments were 14.2% of revenue. On a dollar basis, our year-over-year investment in total R&D increased by 18% in fiscal 2024 when compared to fiscal 2023. We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth as we deliver the most modern platform in the industry. On a non-GAAP basis, sales and marketing expenses were 22.5% of revenue in the fourth quarter and 21.2% of revenue in fiscal 2024. On a non-GAAP basis, G&A costs were 9.6% of revenue in the fourth quarter versus 10.7% in the same period last year. Full year G&A costs were 9.3% of revenue as compared to 11% in fiscal 2023 representing 170 basis points of leverage, and we remain focused on consistently leveraging G&A expenses on an annual basis. Briefly covering our GAAP results. For Q4, gross profit was $240.4 million, operating income was $62.9 million and net income was $48.8 million. For the full year, gross profit was $960.8 million, operating income was $260.1 million and net income was $206.8 million. In regard to funds held for clients and interest income, our average daily balance of client funds was $2.8 billion in Q4 and $2.6 billion for fiscal 2024. We are estimating the average daily balance will be approximately $2.5 billion in Q1 of fiscal 2025 with an average annual yield of approximately 450 basis points, representing approximately $28 million of interest income on client health funds in Q1. On a full year basis, we are estimating the average daily balance will be $2.75 billion in fiscal 2025 with an average yield of approximately 390 basis points, representing approximately $107 million of interest income on funds held for clients. In regards to interest rates, our guidance assumes 425 [ph] basis point rate cuts during fiscal 2025 with the cut assumed in September, November, March and May reflected in guidance. Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 1.1 million shares of common stock at an average price of $142.82 per share for $150 million in aggregate repurchases during Q4. As a reminder, we have $350 million remaining under our share repurchase program. We also closed Q4 with $401.8 million in cash and cash equivalents on our balance sheet. In fiscal 2024, we also drove 200 basis points of leverage in stock-based compensation expense. And in fiscal 2025, we expect to drive continued leverage in stock-based compensation towards our target of less than 10% of revenue and are committed to driving incremental leverage and stock-based comp annually going forward. Finally, I'd like to provide our financial guidance for Q1 and full fiscal 2025, which includes the impact of the 425 basis point interest rate cuts in fiscal 2025, as mentioned earlier, and roughly flat workforce levels in fiscal 2025 versus fiscal 2024. For the first quarter of fiscal 2025, recurring and other revenue is expected to be in the range of $325.5 million to $330.5 million or approximately 12.5% growth over first quarter of fiscal 2024 recurring and other revenue. And total revenue is expected to be in the range of $353.5 million to $358.5 million or approximately 12.1% growth over first quarter fiscal 2024 total revenue. Adjusted EBITDA is expected to be in the range of $116.5 million to $120.5 million. In adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $88.5 million to $92.5 million, which represents approximately 60 basis points of leverage over Q1 of fiscal 2024. And for fiscal year 2025, recurring and other revenue is expected to be in the range of $1.405 billion to $1.420 billion or approximately 10.2% growth over fiscal 2024 recurring and other revenue. Total revenue is expected to be in the range of $1.512 billion to $1.527 billion or approximately 8.3% growth over fiscal 2024. Adjusted EBITDA is expected to be in the range of $533 million to $543 million. Adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $426 million to $436 million, which represents approximately 50 basis points of leverage over fiscal 2024. Despite the macro headwinds we faced in 2024, we're pleased to finish the year with 19% total revenue growth, 17% recurring revenue growth and adjusted EBITDA margin of 36% and a rule of 55 overall performance. As we kick off fiscal 2025, we remain confident in our differentiated value proposition, go-to-market strategy, operational strength and product road map, and we have a high level of confidence in our ability to continue driving durable revenue growth and increasing margins as we execute against our multiyear goal of achieving $2 billion in total revenue. I would now like to turn the call over to Steve for final remarks. Steve Beauchamp: Thanks, Ryan. As announced in our earnings release, I'm excited to move into the role of Executive Chairman of the Board effective August 5. This is the natural evolution of the co-CEO model we put in place in March of 2022. I have full confidence that under Toby's leadership as President and CEO of Paylocity, will continue its market-leading position. My role as Executive Chairman will allow me to continue to focus on product and corporate strategy while working closely with Toby and the Paylocity leadership team to continue delivering the most modern platform in the industry. As Executive Chairman, I will continue to dedicate my time and energy to Paylocity, including participating on all future earnings calls. Looking back, I'm very proud of everything we have accomplished and I'm very excited about our future opportunities. With that, we are ready for questions. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Brad Reback with Stifel. Your line is open. Brad Reback: Great. Thanks very much. And Steve, it's been a great run, and I know it will continue. Given your experience, Steve and Toby, in the market for as long as you've been in it, can you help frame up what's going on? Obviously, growth has meaningfully decelerated across the industry. Is this purely cyclical? Or are there some secular issues at play here as well? Thanks. Steve Beauchamp: Sure. I'll start, Brad. I think you've got a few things going on. So I think, first of all, we remain pretty excited about the size of the opportunity. So we obviously have a small penetration rate in terms of the available TAM. And so we still think there's a great opportunity to be able to grow. You've got certainly some law of large numbers and then growing at this size and scale. Certainly has been impactful. We've called out the most recent impact in terms of whether it was employees on the platform or some of the economic headwind we saw in the sales cycle, we see certainly some impact from that. And so I think you get to a bit of a new normal where we still have an opportunity to be a growth company focused on that $2 billion target. And at the same time, we've shifted our focus to driving profitability. And so we're balancing that equation. I think when you put all that together, we're still pretty excited about the story that we've got in front of us and the size of the opportunity. Brad Reback: That's great. Thanks very much. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samana with Jefferies. Your line is open. Mason Marion: Hi. This is Mason Marion on for Samad. Thanks for taking our questions. So congrats on the move, Steve. Can you talk about why you felt this is the right time to step back in the co-CEO role and glad to hear you will still be joining us on these calls in the future. Steve Beauchamp: Yes. It feels pretty natural, I think, internally. Toby has been co-CEO now for over two years, and I have been gradually transitioning different functions to him. This past year, I have largely been focused on our product and technology organization. So that will obviously transition to him formally and that team will report into Toby. However, I will still be involved in the product initiatives as I have before, I'll be involved with our corporate strategy team as we kind of chart out our course over the next several years. So I think this is the stuff that I'm the best at, to be quite honest with you. It gives me an opportunity to focus on that. And I think the second part is I've got a tremendous amount of confidence in both Toby and the team of executives that we have around so that I feel like I'm in a position to do that. Mason Marion: Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Scott Berg with Needham & Company. Your line is open. Scott Berg: Hi, everyone. And Steve, good luck on the next step. And Toby, I hope you have really big broad shoulders. You might need them. Couple of questions for me. Let's start off with the guidance for the year. The guidance would at least to me imply subscription revenue growth of sub-10% exiting the year. How do we think about kind of breaking that down a little bit between ARPU growth and net new customer adds? Your growth between accounts and customers pretty balanced last year roughly 8% in each of those categories. But we're going to be in the sub-10% category, how do we think about what that kind of blend looks like? Toby Williams: Hey Scott. I mean, I think you saw a pretty balanced performance this last year, and I think that came from the result of executing pretty well from a go-to-market perspective, driving, I think, a ton of new products to market over the course of the last, call it, 1.5 years or so and having success with those products, both in terms of attached to new deals and then being able to sell back into the customer base. And I think ultimately, then we also had strong execution from an operations perspective and providing service to our clients. So I think had a pretty balanced year. As you know, those numbers in the mix has pushed around in prior years a little bit. And I think as we jump into fiscal 2025 we're really pressing on all the same things, driving strong go-to-market execution, continuing to drive from a product execution and from an attach and penetration perspective and then ultimately, same thing from an ops standpoint, delivering world-class service to our clients. So yes, I think it has changed. The mix is different in every single year. I think we're happy with the result from a balance perspective in fiscal 2024. And I think as we jump into 2025, it's continuing to drive on those three things and probably expect that to be you don't know exactly where it's going to land throughout the course of the year, but probably expect a relative level of balance in those different factors. Scott Berg: Understood. Helpful. And then, Toby, I think you noted that your sales capacity is up 8% year-over-year going in this year, you're fully staffed for the busy selling season. But how do we think about your investments here going forward through the balance of your fiscal year here? What have you contemplated for capacity growth into next spring? And then how flexible are those plans assuming that the macro might potentially change both one way or the other? Toby Williams: Yes. I think we've maintained a fair amount of flexibility as we go through the course of fiscal 2025. And I think that's been - that's certainly been our thinking and what we've said over the last couple of quarters. And I think the recognition coming into 2025 was that we want to be rightsized for the opportunity in front of us in terms of go-to-market capacity. And as Steve said, I think we feel really good about the opportunity out there in the market. coming in with 8% year-over-year growth in reps, I think, allows us to press on the productivity levers as well as we've launched a lot of new products. We feel really good about the go-to-market motion. And I think coming in fully staffed with the ability to attract, I think, the best sales and go-to-market talent in the industry, I think we feel really good about how we're positioned coming into the year. And if we get an uplift in terms of what the macro looks like. I think we have the flexibility that would allow us to even move that up from where we're starting and coming into the fiscal year. Scott Berg: Great. Very helpful. Thanks for taking my questions. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mark Marcon with Baird. Your line is open. Mark Marcon: Good afternoon and thanks for taking my questions. Steve, it has been a tremendous run and glad that you're going to stay and Toby, congrats in terms of taking on the sole role [ph]. I'm wondering with regards to the comments on the back-to-base motion, can you tell us how big the internal sales group is in terms of that back-to-base motion? And how much when we take a look at the bookings over the course of this year, how much was from new logos versus upsells into the existing base? And how do you think that could trend? Toby Williams: Yes. I mean maybe just start with a little bit of the history. I think if you go back to our back-to-base motion really would have started in earnest coming off of ACA and that was coming out of, I think, 2016 general time frame wise. And I think that was really the start of that motion and being able to go after that opportunity for us. I think we've continued to invest in that more so every single year. And part of that is, as we've grown the client base. Part of that is we've also grown the product set that we have available to sell back into the base and deliver incremental value to our existing clients. And I think that's been the direction of it over the last handful plus of years. And in most years, we've invested the headcount growth in that team has been higher than the overall coming off a smaller base than and bigger one now. But that's been the investment philosophy. I think it's paid off really well for us, both in terms of being able to drive incremental product attachment penetration and incremental revenue growth. But it's still smaller on a relative basis to our focus on going after new logos and new business in the market. And I think that's - but as we come into 2025 and even as we look forward, I think our philosophy around investing there would remain true and constant in terms of continuing to deploy dollars there. And ultimately, it's about being able to bring back solutions to our customers who might not have bought those products or those solutions at the outset of their partnership with us and being able to just keep providing more and more value to our client base. Mark Marcon: Can you say like how big it is in terms of the incremental bookings that you had this year relative to the total bookings and where that could ultimately go? Toby Williams: Yes. I don't think we've done that with any of our different teams. But I guess, try to give you a pretty good directional view of how we've thought about the opportunity. And I think from a strategy perspective and then into the execution, I think the real focus is on continuing to drive new unit growth, continuing to drive the employees on the platform and also expanding the product set to be able to continue to take advantage of that opportunity as we look forward. And again, ultimately, just being able to deliver incremental value year in and year out to our client base. Mark Marcon: Great. And then can you just comment with regards to - you mentioned success in terms of engagement tools, LMS is getting good upsell. On some of the upsells, obviously, some of them you're pioneering and they didn't exist before. Not broadly available. But things like LMS, which have been around, are you displacing other players or some of your clients is basically saying, hey, this sounds like a great tool that we haven't used before. Steve Beauchamp: Yes. I think as we think about our new product strategy, you can kind of fit it into a couple of buckets. So one ends up being kind of an innovation in the market where we're often first to market, and we're able to sell that as a new module and then the second category probably refers to kind of LMS or even think about that as scheduling plus where we have an existing offering, and we've enhanced it to a point where there's additional capabilities that we think we can monetize and bundle. And so LMS was a new bundle that we had with additional content that was available from a compliance perspective for customers that they saw value in. So we have the opportunity there to sell that to new customers as they come on board, but we also have the opportunity to go back to customers. And so as we think about the product opportunity going forward, we look for both of those opportunities. How do we add more value by taking our products to the next level and coming up with new bundles and packages that offer them value and then how do we come up with new and innovative ideas that allow us to continue to be the most modern platform in the industry. Mark Marcon: Great. Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Brian Peterson with Raymond James. Your line is open. Brian Peterson: Thanks, everyone. And Steve, it's been a heck of a run. I'm glad you're staying on and Toby I'll echo a well-deserved congratulations. So we've seen growth rates moderate across the industry. I appreciate there's still a big opportunity ahead as you look towards $2 billion in revenue. But I'm curious if there's anything that's changed as you're thinking about your guidance strategy. Toby Williams: No, I don't think there has been. I mean, I think we've been pretty consistent in our guidance philosophy over the course of time. And I think we come into fiscal 2025 with that same philosophy. And yes, I think we try and call what we can see right in front of us at the beginning and evolve that as we go throughout the course of the year. Ryan Glenn: Yes, Brian I'd agree. I think obviously, had a strong fourth quarter, particularly on the recurring revenue side, really happy with where the beat came in feel like we've got a lot of momentum headed into fiscal 2025. But I think to Toby's point, as we start out any fiscal year, certainly a desire to get back to a beat and raise cadence. I think you see a higher revenue growth in the first quarter. Was that closer to us and more visible and taking a sort of prudent and measured approach as we think about the balance of the fiscal year. I think with some strong execution, we feel really good about this plan and certainly feel good about the momentum across both product and operations and sales as well. Brian Peterson: It's good to hear. Maybe following up just on sales hiring. I'm curious if anything has changed in terms of the types of reps that you may be looking to bring in and anything in terms of the type of people that are available in the current environment. Steve Beauchamp: Thanks. Yes, sure. It's a good question. I think Toby made the call out as well that we've been pretty happy getting fully staffed. And I would say we had very low turnover, certainly when you think of the performing category this year. So not only were we fully staffed, but we came in with a really strong team that we were able to retain going into the year. I think that really speaks to the position that we have in the marketplace. The reps often want to be able to sell the best product in the marketplace. And so we feel good about that. We continue to hire mostly with industry experience. So that would be another point I would make. We're able to bring on talent. Sometimes it comes from a competitor, sometimes they've got prior experience in the industry, but we definitely feel like those folks can ramp faster. And so that is another element of our strategy in terms of building the sales force. And so all three of those elements were clicking going into this fiscal year. Brian Peterson: Great. Thanks, Steve. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Jared Levine with TD Cowen. Your line is open. Jared Levine: Thank you. Can you discuss how top of funnel activity and pace of prospective client decision-making has trended since the last earnings call? Steve Beauchamp: So I think we highlighted on the last couple of earnings calls that we were definitely seeing good activity top of funnel. Think about that as first-time appointment opportunities. We are definitely seeing maybe a little bit longer decision cycles, particularly upmarket. And we are certainly making some changes in that part of the sales force just to be able to drive efficiency. So we feel like going into the start of this fiscal year, we've been able to continue to see strong top-of-funnel activity. We've been able to drive, I think, a better sales process and a more efficient sales process. The reality is those larger clients take longer to implement and start. And so I think we called out last quarter that you start to see the success of that on the back half of that year. You get a fair number of starts in January. So we're off to a good start. We feel good about the plan that we've got in front of us, and the activity levels are strong. Jared Levine: Great. And then in terms of the 4Q [indiscernible], can you discuss what drove that beat there? Ryan Glenn: Sure. I think it was, as you said, that beat really coming from recurring revenue. I think sales activity was strong in the quarter. We felt really good about where retention ended from a fiscal year perspective. We probably saw some incremental positive trends from a workforce level perspective. I wouldn't call that out as particularly material. But was incrementally better than expectations. So I think it's really a combination of each of those items that drove a better fourth quarter than maybe it was initially expected. Jared Levine: Just to clarify, were client employment levels flat quarter-over-quarter? Or was there still some sequential pressure? Ryan Glenn: Did not see the same sequential pressure that we saw earlier in the year, up a bit year-over-year sequentially. That really started to normalize. Jared Levine: Perfect. Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open. Terry Tillman: Great. Thanks so much for taking the questions. Steve and Toby, congratulations to you both. Curious what kind of signals you are seeing down market and in the more traditional mid-market. And then I had one follow-up. Thank you. Steve Beauchamp: Yes. We've been pretty happy with the activity levels and kind of our core marketplace. So think about that as kind of under 500 employees. That's where we have the bulk of our sales force, where we've been in a long time. We get a lot of our broker referrals coming in that marketplace. And so kind of the similar comments going in really well staffed. I feel really good about the staffing levels. Ryan just called out, certainly, sales was one of the reasons we beat in fourth quarter. So coming into this year with a fair amount of momentum. And the top of funnel comments would be the same. We're seeing good top of funnel activity in the upmarket space as well as our core. Terry Tillman: Much appreciated. And then if rates move aggressively over the next couple of years, does that change your thinking around long-term margin targets? And if so, are those still achievable? Ryan Glenn: Yes. I think we obviously reset or increased our margin targets on this call last year. And as I referenced in my prepared remarks, have made significant progress, not only this year, but over the last few years, well into the profitability levels that we have today. Certainly, there's a potential headwind there. If you look at the guidance for 2025, we have four rate cuts assumed, so pretty aggressive rate cut activity over the next 12 months. I think the way that we would think about it is you're seeing us continue to drive leverage ex flow, right? We've called out what the guidance looks like outside of interest rates, we're guiding to, call it, 50 to 60 basis points of leverage this fiscal year. So obviously, that may be a headwind over time. But I think from an operational standpoint, we expect to be able to continue to drive leverage both within adjusted EBITDA as well as free cash flow. Terry Tillman: Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Jake Roberge with William Blair. Your line is open. Jake Roberge: Hey, thanks for taking the questions. Just on the guidance, has anything changed from a competitive environment perspective that's impacting the guide? Or is this mainly just the macro-driven issues and the law of large numbers as you scale? Steve Beauchamp: Yes. So I think it's probably more the latter. We're seeing the same competitors in the market. It's always been a pretty competitive environment. You're typically competing with two or three different other competitors as the customer is evaluating that, that dynamic has not changed. As certainly the law of large numbers, not just with us is with the competitive set as well. So we've all gotten bigger. And so that is definitely a factor. But when we look at the size of the opportunity relative to our size today, we still feel pretty comfortable that we can not only execute on the plan in front of us this fiscal year, but we can really set our sights on $2 billion and beyond. Jake Roberge: Okay. Helpful. And then if you just had to parse out some of the growth drivers heading into next year, with - between new logos coming from competitive displacements and then thinking new logos that are being driven from that partner channel motion, and then the last being the expansion motion back into the existing base, which do you feel kind of the most confident in heading into next year and which might maybe be a little bit more pressured in the near-term? Toby Williams: Yes. I mean, I would say, overall, I think we feel good about our relative position coming into the fiscal year. Most of your questions is really centered around go-to-market. I think we feel good about our staffing levels. We feel great about our level of talent across all the go-to-market teams, particularly the sales teams. Yes, I think we feel Q4 and then fiscal 2024, another year of driving 25%-plus of our new business coming through our referrals from our partners. And I think have a high degree of confidence in our ability to continue to execute that play as we go through fiscal 2025. So I mean, I think we feel good about our starting point coming into the fiscal year. We think we have some momentum around go-to-market. And I think that momentum and the confidence we have is fairly well balanced across each one of the areas that you asked about. Steve Beauchamp: Yes, I think the only thing I would add is, and we've made this clear in the last couple of earnings calls, we focused a fair amount of time. We've grown that upmarket team pretty aggressively. We've had great success over the last several years. It certainly was a little bit of a headwind into this year. But as we go into next year, we feel very well positioned with that team. That's the one that we called out before that we focused on, and that's the one that we spent more time and attention on. And if I look back at where we are at the start of this fiscal year with that team versus last year, we are in a much better position. Jake Roberge: Very helpful. Thanks for taking the questions. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Your line is open. Daniel Jester: Great. Thanks for taking my question. Maybe one on sort of headcount planning that's coming up this year. As you think about a solution like that, it feels like it could be used in use cases beyond just in the HR suite. And so as you start thinking about your roadmap and the opportunity to expand wallet share within your customers, how are you thinking about selling into potentially different persona in the organization, if at all? Steve Beauchamp: Yes. It's a great question. I think one of the real values that we offer our customers is just the way we give them a platform to manage all their employee data. And when you've got all the employees continually logging into the platform, logging on to our mobile app and using the platform for things like workflows and approvals, it really does start to open up different opportunities. As we - you think we've been first to market on so many different products, you think of video as part of the platform, that probably wasn't something I would have imagined 10 years ago. So we're really starting to look at how do we leverage that employee data that we have to be able to really help our clients offer more value. Headcount planning has a natural tie to HR as position gets replaced, where a new position gets added, there's approvals, there's workflows. You've got to then tie it into your recruiting platform, then it gets tied into onboarding. So we're going to continue to maybe push the boundaries of what might have been a traditional HCM by leveraging that data set. And we're very excited. The CFOs, the persona that we'd be selling headcount planning to largely, they're very much involved in the sale already today. So I wouldn't call that out as a new persona. They probably become more of the primary buyer than maybe the decision-maker today. But our teams are really used to dealing with that persona. They have a lot of interaction with the CFOs today. So that part is probably an easier part of the equation for us. Daniel Jester: Okay. That's really helpful. And then, Ryan, I think you mentioned about sort of cash tax payments that we're going to see this year, and a little bit of a headwind on operating cash flow. Did you sort of quantify what that could look like maybe relative to EBITDA margin? Ryan Glenn: So not in the prepared remarks, Dan, but I think the way to think about that is there's sort of a two-step process for us to becoming a full cash taxpayer. And you saw it step one this year and you look - if you look on the cash flows at the supplemental disclosure, you see we paid roughly $50 million of cash taxes this year versus just a few million dollars a year prior. So that is a headwind that we faced this year. Obviously, you saw significant increases in overall profitability, working capital improvement. So we grew through that, and we continue to leverage free cash flow. Next year, we'll have a similar step up. So you may be looking at $100 million on the round of cash paid for taxes. So that was the call out. Next year, we would become a full cash taxpayer, continue to have a lot of confidence in our ability to drive free cash flow leverage going forward. But that will be a headwind in this 12-month period that we'll be fighting through. Ex float, we'd still expect to be able to drive at least flat free cash flow margins, but did want to call that out as we are entering sort of inflection point there on the cash tax side. Daniel Jester: Great, thank you very much. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Pat Walravens with Citizens JMP. Your line is open. Pat Walravens: Great. Thank you. And congratulations, Steve and Toby on - it seems like a well-planned transition. Are you guys seeing any sign that as your clients adopt more AI technologies, that's going to impact client levels? Steve Beauchamp: Yes. So we haven't seen that yet. And it's hard for us to know what's going to happen from a macro perspective in terms of AI driving efficiency in the overall workforce. As Ryan said, this last quarter, we actually saw things stabilized pretty well. So workforce levels were better last quarter than a little better than what we would have expected and pretty stable on a sequential basis. So no early signs that, that is kind of happening in the workforce today. And yes, I think one of the things you got to remember is just a significant part of that workforce that are in industries, that will take a much longer time to be impacted from an AI perspective. And I think lots of organizations might be hiring a little bit less trying to drive efficiencies in this type of macro market. That's been evidenced by workforce levels over the last 15 months. But when we talk to our customers, and we have interactions with them, we don't really hear AI as being the primary driver of that. Pat Walravens: All right. That's great. Just a quick follow-up. What are some examples of some of those industries? Steve Beauchamp: Well, we're in every - it's a great part about our business, nearly 40,000 clients. We're in every industry. You can imagine restaurants, hospitality, and we really kind of line up, if you took like the Dun & Bradstreet distribution of businesses, our client base lines right up over top of that. So more than half of our client workforce is hourly, as an example, and that's the case kind of across America. So it really lines up to what you see every day. Raimo Lenschow: Thank you. Thanks for squeezing me in. A lot of the questions centered - like the growth questions that you got centered around like, okay, what's the growth outlook for you. But like I want to frame it slightly bigger. Do you think there has been a change - or do you think there's a change in industry growth rate? How do you see industry growth rate? And how it's both or last season, how you think about that going forward? Steve Beauchamp: Well, I think if you look at earlier in our growth trajectory, we were certainly relatively in terms of what the size of that opportunity. So now you've obviously got us at $1.4 billion, you've got Paycom (NYSE:PAYC) a little larger than that, ADP, Paychex (NASDAQ:PAYX), UKG, all still grow. And so yes, I think there is some element of the law of large numbers. And it's always - like I said, it's always been kind of a competitive environment. I think you've had a macro that's been kind of uncertain overlaid on top of that. So we are not out there saying, hey, this is - we think we can grow this business at 30% per year. We're talking about, can we continue to grow this business double-digits on a recurring revenue basis? At the same time, can we drive profitability and margin? Because I think that's also a factor. You're trying to balance the equation. And so if you put all that together, and we think we can have kind of a great business. We outlined what those targets will look like last year. We've made great progress over this past year to be able to get there. And we feel good about our starting point and kind of focus on beating and raising from there if we can execute. Raimo Lenschow: Yes. Okay. Perfect. Yes, that's very clear. Thank you very much for that. And then, Ryan, one for you on capital allocation and in this context of the interest, well, maybe, like can you talk a little bit about how you think about like M&A, share repurchase, et cetera, from your perspective? Maybe remind us on where you're standing there. Thank you. Ryan Glenn: Sure. So as you remember, last quarter, we announced a $500 million share repurchase program. We repurchased $150 million of stock this past quarter. So we have $350 million remaining under that program. There's no formal expiration date. So that's something that will be available to us for the foreseeable future. So that continues to be something that we will look at closely in fiscal 2025. I think for us, we have the ability to really drive a number of different priorities from a capital allocation standpoint. So having done $150 million of repurchase in the fourth quarter, we still have $400 million of cash on balance sheet. We have access to a significant amount of cash within our credit facility, and we have increasing cash flow. So we will continue to look at sort of all aspects of capital allocation. Obviously, we've had a handful of acquisitions over the last few years, we're certainly active looking. Bar is high for us, but we're looking at things that may be strategic as well. So I feel like we're in a great position and sort of all things are on the table because of where we are from a financial standpoint. Raimo Lenschow: Thank you. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open. Siti Panigrahi: Thanks for taking my question. I just want to dig into the recurring revenue per client growth. If I see that, that's two years back growing 18% to 14% to 8% this year, I mean, FY 2024. So what are the factors influencing that? Are you seeing any kind of pricing pressure or less cross-selling, lower size - customer size? What's driving that? And how should we think about that revenue per client going forward? Steve Beauchamp: Yes. I think, as we've called out, we have largely been focused on really landing new customers and selling them more product. And so when you've got 8% client growth, and you're selling those customers more product, that is a big contributor, that average revenue per customer. I think when you go back four years when it was higher, then we had much higher client growth. So that's one aspect. And then on top of that, we've called out the fact that we've been able to sell back to the client base pretty effectively. And so you put that together, and that's what gives us the 8% average revenue per customer growth. Ryan Glenn: I think, Siti, the only thing I would add is, if you're going back a couple of years, which, I think, was embedded in your question, you have periods where you saw some pretty rapid expansion within the client base from a average number of employees as companies rehired post-COVID. So that likely showed up in that year-over-year growth in recurring revenue. So you've got some elevated numbers in the fiscal 2022 and 2023 period that probably, when you start to normalize it, would make those numbers look more consistent with what you would have seen last year. Siti Panigrahi: Okay. That's fair. Now looking at the client growth also, it assumes - I think your guidance assumes that for the resource and client growth, so what sort of trends are you seeing among customers switching their payroll vendors? And what's really driving that? Because it's a displacement market, so what is causing them not to switch or to switch in this kind of environment? Steve Beauchamp: Yes. I think you're trying to get at the same question of what does the growth model look like on a go-forward basis for this business. We're at $1.4 billion in revenue, and we feel like we can continue to grow this business on a recurring revenue basis double-digits. I think that's what we're talking about doing. And at the same time, we can increase profitability. The size of the opportunity is big enough. As you mentioned, everybody has to get paid some way. So the payroll component of it is often displacement. We then try to add additional products beyond that. And so we feel like we're approaching this with a growth priority, but a fairly balanced view on profitability going forward, and we think there's still a really big TAM for us to attack. Siti Panigrahi: Thank you. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Kevin McVeigh with UBS. Your line is open. Kevin McVeigh: Great, thank you so much. Following up on the 2025 guidance, it looks like the recurring is outpacing the float, but it looks like the EBITDA is a little bit better. And all things equal, we think float's a little bit higher margin. Anything to reconcile like, where is the leverage coming in? Just given it looks like on a relative basis, again, core is outpacing the float a little bit. Just any puts and takes on how that flows to the EBITDA. Ryan Glenn: Sure. So I think in the guidance, both in the prepared remarks as well as the earnings release, we provided a recurring revenue guide, a total revenue guide. So the delta there is going to be the interest income expectations. And then we gave adjusted EBITDA as well as adjusted EBITDA ex interest income on client-held funds. So you're able to see all the puts and takes. So I think if you look at those pieces, we're guiding to about 50 basis points of adjusted EBITDA leverage ex-float. When you include the impact of the four rate cuts assumed in the guide, you do see adjusted EBITDA margins going backwards a touch because of those four rate cuts embedded in the guide. Kevin McVeigh: Okay. Thank you. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Jason Celino with Key. Your line is open. Jason Celino: Thanks for taking my question. Maybe if we kind of go back to Siti's logic and reasoning, so if we think about the current environment, in any normal year, would you say that there's a finite number of customers who would be willing to evaluate switching payroll providers? And then would you find that, that number, that propensity of switch has been reduced in this type of environment? In a better environment, it would kind of increase? Steve Beauchamp: Sure. So we have just shy of 40,000 customers. The market for us is over 1 million customers. And yes, so in any given year, there's a fair number of customers that would consider change. Sometimes you can convince a customer to change when they were not considering a change. So I'm not sure that's completely formulaic. And then there are cycles, whether they're economic cycles, we've also seen compliance cycles, where certain laws and rules come in place that create more of a burden for customers. So there can be some cyclical nature to what happens. And then, of course, macro. Maybe I'm less inclined when the macro environment is a little bit tougher. But still, a lot of customers go through change there. So yes, I think that's absolutely the case. I think we've called out over the last 12 months, it has been from a macro perspective, a little bit of a tougher environment, taking people a little bit longer to make decisions. We've called out this quarter and last quarter that top-of-funnel activity has been pretty good. And we obviously had a pretty nice beat this last quarter. So right now, we're feeling like a more normalized environment than maybe it was six months ago. Jason Celino: Okay. And then you're a little more insulated because you have a June year-end. But do SMBs care about the election in terms of their spending or payroll intentions, not from like a hiring standpoint, but from like a software standpoint? Steve Beauchamp: I don't think that's something that we've necessarily observed in the past. It's probably just broader macro than specifically an election. Jason Celino: Okay, thank you. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Zachary Gunn with FT Partners. Your line is open. Check to see if you are on mute. Zachary, your line is open. Check to see if you are on mute. All right, no response from Mr. Gunn. Steve Beauchamp: Do we have any other questions? Operator: I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks. Steve Beauchamp: Well, I wanted to just say thank you very much for all of you with your interest in Paylocity this quarter and over the last 17 years. And my final remarks are, I'm not going anywhere. That's the big message. I'm excited about Paylocity, what we're going to be able to do. I'm excited about Toby and the team that we have, driving the success going forward. So look forward to continued conversations. Have a great day, everybody. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Snap (SNAP) Q2 2024 Earnings Call Transcript | The Motley Fool

Good afternoon, everyone, and welcome to Snap Incorporated's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. I would now like to turn the call over to David Ometer, head of investor relations. David Ometer -- Head of Investor Relations Thank you and good afternoon, everyone. Welcome to Snap's second quarter 2024 earnings conference call. With us today are Evan Spiegel, chief executive officer and co-founder; and Derek Andersen, chief financial officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, Investor Letter, and investor presentation.This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes, as well as depreciation and amortization, and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Hi, everyone, and thank you for joining our call. Q2 marked an important milestone for Snap as we reached more than 850 million monthly active users and 432 million daily active users on the path to our goal of 1 billion monthly active users. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to serve more than 75% of 13- to 34-year-olds in over 25 countries. As Snapchat has grown, our community has grown with us, and approximately 80% of Snapchatters are above the age of 18. We also continue to broaden and deepen engagement with our content platform in Q2, with global content viewers growing 12% year over year, and global time spent watching content growing 25% year over year. The growth of our community, the progress we have made with our direct response advertising business, and the success of our Snapchat Plus subscription business that now reaches more than 11 million subscribers, all contributed to revenue growth of 16% year over year, despite the impact of a weaker brand advertising environment for certain consumer discretionary verticals. We are pleased with the ongoing progress made in our DR business as well as the continued rapid growth in the total number of active advertisers which more than doubled year over year in Q2. We believe this progress validates our strategy of focusing on growing our community and engagement, investing in our Direct Response advertising products, and diversifying our revenue growth with our subscription offering. The actions we have taken to optimize our cost structure have cleared a path to meaningful Adjusted EBITDA profitability and positive free cash flow. In Q2, the combination of topline progress and expense discipline translated to $55 million of Adjusted EBITDA and sets us up well for continued improvement in operating leverage as the year progresses. Adjusted EBITDA flow through, or the share of incremental year-over-year revenue that flowed through to Adjusted EBITDA, was 55% in Q2, up from 22% in Q1. Moving forward, we will continue to calibrate our investments carefully to ensure we build on this momentum, while also realizing the operating leverage necessary to drive improved financial performance. We believe that the strong financial foundation we are building and our track record of innovation position us well to fulfill our long-term vision for augmented reality. Visual communication is at the core of the Snapchat experience. Our strategy to drive Daily Active User growth and engagement is focused on improving the way Snapchatters communicate and interact with their friends, family, and the world. We have delivered a number of new communication features and user experience enhancements in recent months to execute on this strategic initiative. For example, in Q2, we introduced Map Reactions that enable Snapchatters to send their favorite emojis to friends on the Snap Map to start conversations. We also launched Editable Chats, which allows Snapchatters to edit messages up to five minutes after sending them, and My AI Reminders that gives Snapchatters the ability to ask for a reminder for an upcoming deadline. In addition, we are investing to enhance iOS app performance by making improvements to battery management, app and screen loading latency, and camera quality. We are also leveraging machine learning and generative AI to help our community form meaningful connections and to deliver engaging product experiences. These improvements have contributed to all-time highs in the number of daily active users sending Snaps in every region, which is an important input to sustained daily engagement. The results of these initiatives are reflected in our global community reaching 432 million Daily Active Users in Q2, an increase of 10 million quarter over quarter. Daily Active Users in North America was 100 million, down by less than 1% year over year but up quarter over quarter as our initiatives to improve the way Snapchatters communicate begin to show early signs of progress. DAU in Europe was 97 million, compared to 96 million in the prior quarter and 94 million in the prior year. DAU in Rest of World was 235 million, compared to 226 million in the prior quarter and 202 million in the prior year. To further deepen content engagement, we continue to invest in our ML models to improve content ranking and personalization across all of our content surfaces. As a result, we are seeing significant improvement in content engagement, with global time spent watching content growing 25% year over year and 10% quarter over quarter in Q2, driven by strong growth in total time spent watching Spotlight and Creator Stories. In North America, some of our changes have been disruptive, and this contributed to mixed results on time spent with content, which declined by just under 2% on a year-over-year basis while increasing nearly 6% on a quarter-over-quarter basis in Q2. North America content engagement trends improved as we moved through the quarter, and time spent with content increased year over year in the month of June. In Q2, we continued to make progress unifying the ranking models between Spotlight and Stories to a single backend stack that ranks all content types to deliver the most engaging content to our community, regardless of format. To expand our content supply, we are focused on growing our creator community and making it easier for creators to submit and subsequently share compelling content. These efforts contributed in part to the number of creators submitting Spotlight content growing more than 20% year over year in Q2. We are also working with publisher partners to bring new and engaging content to our community. For example, in Q2, we announced Snap Nation, an evolution in our existing partnership with Live Nation that gives Snapchatters access to tour and festival experiences, including exclusive behind-the-scenes content and live music experiences. Augmented reality continues to inspire communication, and Snapchatters play with AR Lenses billions of times per day on average. In Q2, the number of Snapchatters sharing AR Lens experiences with their friends increased 12% year over year, driven by the popularity of innovative generative AI Lenses and improved ranking and optimization of our AR experiences. For example, our ML Scribble World Lens, which enables Snapchatters to transform into artistic, cartoon-style versions of themselves, was viewed over 1 billion times in Q2, and our 90s AI Lens was viewed by more than 20% of U.S. Snapchatters. In addition, we launched a generative AI Lens in collaboration with Beyoncé, dedicated to her new COWBOY CARTER album, which was engaged with 80 million times in the first three days. We continue to improve our AR ranking technology in order to personalize the AR experience and deliver relevant AR content to our community. We recently enabled dynamic, ML-driven Lens ranking based on Snapchatter preferences, and we improved the quality of Lens ranking model predictions for AR Snaps. These initiatives contributed to a 10% year-over-year increase in Snap Story posts with an AR Lens globally. Our progress in AR is powered by our Lens Studio developer platform and the hundreds of thousands of creators who have leveraged this platform. In Q2, we released Lens Studio 5.0, which features our new GenAI Suite, powered by proprietary SnapML technology, that enables Lens creators to generate Lenses in minutes using a text prompt that requires no coding by the creator. The response to our new tools in Lens Studio has been inspiring and reinforces our belief that long-term success in AR requires a vibrant developer and creator ecosystem. As we move forward, we are focused on innovating and enhancing our core product experiences in order to grow our global community and deepen engagement. We believe continued progress on these initiatives is a critical input to both serving our community and expanding our monetization opportunity over time. We look forward to sharing more of our progress at our Snap Partner Summit on September 17. We continued to make progress on three foundational advertising platform initiatives, including larger ML models, improved signals, and more performant ad formats. Our 7-0 optimization for purchases continues to drive encouraging results for advertising partners. For example, Ridge, an everyday essentials e-commerce company, continued to lean into Snap's DR best practices to drive success. Leveraging 7-0 Optimization, Conversions API, and our ML-based Auto-Bidding, Ridge drove a 73% higher ROAS compared to their prior campaign strategy. For app-based advertisers, we have invested in improvements across the entire ad stack. We made ad format enhancements and streamlined the app download experience on iOS so that Snapchatters can install apps without leaving Snapchat. Early testing shows that the enhanced app download experience is driving lower cost per install and improved ROAS for advertisers. We also expanded 7-0 Optimization to app install and app purchase, and after testing showed consistent improvement in cost per install and cost per purchase, we recently began scaling these products with our advertising partners. We are encouraged to see that a number of gaming app clients, including Roblox, are seeing a 30% to 50% improvement in ROAS on Snapchat. We have also begun testing Value Optimization, which allows advertisers to bid on the value of purchases, and we are seeing encouraging early results. We anticipate that mobile gaming and e-commerce advertisers in particular will benefit from these new optimizations. For example, Lancôme, a beauty brand from L'Oreal, leveraged our new Value Optimization with the aim of increasing average purchase cart size and ROAS. The campaign exceeded expectations and delivered a 38% increase in average purchase cart size and a 4.4x increase in ROAS. Our DR ad platform relies on scaled privacy-centric signals that advertisers can use to optimize their ad campaigns. Conversions API, our privacy-centric first-party signal solution, is driving improved results for advertisers. For example, European e-commerce company, My Jewellery, saw their campaign deliver 156% higher last click ROAS and 13% lower cost per visit after implementing CAPI. In addition, we announced several partnerships, including Snowflake, Datahash, LiveRamp, and Tealium, to make it easier for advertisers to adopt Conversions API in a seamless and privacy-centric way. Our improvements to Conversions API, improved collaboration with advertisers, and growth in partner integrations resulted in Conversions API integrations growing over 300% year over year in Q2. We are excited by the progress we're seeing with our small and medium-sized business advertising partners. Today, SMBs and creators alike can promote their services, content, or products, reach new audiences, and gain more followers, all in just a few taps within Snapchat. In addition, we launched useful tools such as dynamic campaign setup recommendations and codeless Pixel setups to help businesses achieve higher ROAS. These changes have been instrumental in the growth of SMB advertisers on Snapchat, which contributed in part to total active advertisers more than doubling year over year in Q2. This quarter, we continued to build compelling advertising products to help our brand advertising partners reach the Snapchat community at scale. For example, at our NewFronts presentation, we announced a number of sponsorship opportunities, including our partnership with NBCUniversal for the Paris 2024 Olympic Games, where some of our most popular creators will share stories of the games with their unique perspectives and on-the-ground access in Paris. We also renewed our long-standing sports partnerships with the NFL, NBA, and WNBA to provide official content across Stories and Spotlight for our community. In an effort to drive incremental performance for brands, we recently announced the Snap Advanced Partner Program, which will offer qualifying agencies and advertisers personalized training and enablement sessions, dedicated support, and additional tools and resources to enhance their campaigns. Our sponsored AR advertising solutions offer marketers the opportunity to leverage unique and engaging augmented reality experiences that lift the measurable performance of their brand campaigns. Specifically, research has shown that campaigns that pair AR Ads with Video Ads on Snapchat deliver 1.6x ad awareness lift when compared to Video Ads alone. Research from our partnership with OMD and Amplified Intelligence found that Snapchat campaigns that include AR in their mix drive 5x more active attention compared to industry peers. In order to expand the reach and impact of our AR advertising solutions, we recently launched AR Extensions for businesses, which extend our AR advertising products beyond the camera to all of our ad surfaces, including our Dynamic Product Ads, Snap Ads, Collection Ads, Commercials, and Spotlight. As we move forward, we have conviction that our continued focus on improving our ad platform and delivering solutions that drive measurable business results for our advertising partners is the key to building a larger and more durable advertising business. With the most important foundational elements of our advertising platform now in place, we look forward to making further progress on helping our advertising partners grow their businesses. With that, I'd like to turn the call over to Derek to discuss our financial results. Derek Andersen -- Chief Financial Officer Thanks, Evan, and good afternoon, everyone. Total revenue was $1.24 billion in Q2, up 16% year over year, while advertising revenue was $1.13 billion, up 10% year over year. DR advertising revenue increased 16% year over year, driven by a combination of total active advertisers more than doubling year over year, continued progress with our 7-0 Pixel Purchase Optimization, and early contributions from the product improvements delivered for app-based advertisers. Brand-oriented advertising revenue declined 1% year over year, driven by particularly weak demand from certain consumer discretionary verticals including retail, technology, and entertainment, as well as the timing impact of holidays shifting out of Q2 in the current year. We continued to make progress toward diversifying our revenue sources, with Other Revenue up 151% year over year to reach $105 million in Q2. Other Revenue includes all non-advertising revenue, the majority of which is Snapchat+ subscription revenue and Snapchat+ reached the 11 million subscriber milestone in Q2. In Q2, North America revenue grew 12% year over year, with the relatively lower rate of growth in this region due to the impact of weaker brand-oriented demand being relatively concentrated in North America. DR was a bright spot in North America in Q2, driven in part by strong growth from our small and medium-sized customer segment. In an effort to accelerate our growth in the Americas, we made changes in Q2 to optimize our go-to-market organization in North America to better support clients where we see the best product-market fit and greatest opportunity for our business going forward. Europe revenue grew 26% year over year, as continued progress on our DR ad platform, and a relatively more stable demand environment for brand-oriented advertising solutions, fully offset the impact of more challenging prior-year comparisons. Rest of World revenue grew at 20% year over year, driven by the continued progress of our DR ad platform, while the deceleration versus the prior-quarter growth rate was due primarily to the timing of holiday periods shifting out of Q2 this year. Global impression volume grew approximately 13% year over year, driven in large part by expanded advertising delivery within Spotlight. Total eCPMs were down approximately 3% year over year as inventory growth exceeded advertising demand growth in Q2. Adjusted cost of revenue was $586 million in Q2, up 19% year over year. Infrastructure costs were the largest driver of the year-over-year increase in adjusted cost of revenue, driven in large part by the ramp in ML and AI investments that we implemented in Q2 and Q3 of the prior year. Infrastructure cost per DAU was $0.81 in Q2, which is up from $0.80 in the prior quarter but below our expected range of $0.83 to $0.85 per DAU due to a combination of greater-than-expected engineering efficiencies and a more moderate ramp in ML and AI investments. The remaining components of adjusted cost of revenue were $236 million in Q2, or 19% of revenue, which is in line with the prior quarter and at the lower end of our full-year cost structure guidance range. Adjusted gross margin was relatively stable at 53% in Q2, up from 52% in the prior quarter but down slightly from 54% in the prior year. Adjusted operating expenses were $596 million in Q2, down 3% year over year. Personnel costs decreased 12% year over year in Q2 following the restructuring initiative we announced in Q1. We ended Q2 with 4,719 full-time head count, down 11% year over year. The decline in personnel-related costs was partially offset by increases in legal-related costs in Q2, including the impact of complying with an increasingly complex global regulatory environment, as well as the impact of a previously announced settlement with the state of California. In addition, we incurred $8 million in costs related to the retroactive Digital Services Tax implemented by the Canadian government in Q2. Adjusted EBITDA was $55 million in Q2, up from negative $38 million in Q2 of the prior year, reflecting higher revenue and operating expense discipline. Adjusted EBITDA flow through or the share of incremental year-over-year revenue that flowed through to Adjusted EBITDA was 55% in Q2, up from 22% in Q1, as we continue to carefully prioritize our investments in order to drive topline growth and deliver improved profitability. Net loss was $249 million in Q2, compared to a net loss of $377 million in Q2 of the prior year. The improvement in net loss year over year reflects the flow-through of the $93 million improvement in Adjusted EBITDA as well as a $57 million reduction in stock-based compensation and related expenses. The reduction in stock-based compensation was driven by a combination of the diminished impact of refresh grants on the GAAP accounting of SBC, combined with the reduction in head count that resulted from our recent restructuring. The $269 million of SBC and related expenses we reported in Q2 better reflects our SBC-related expenses at current staffing levels. The benefits of improved Adjusted EBITDA and lower SBC were partially offset by $16 million in costs associated with the early retirement of $386 million of our outstanding convertible notes in Q2.Free cash flow was negative $73 million in Q2, which reflects the impact of collecting seasonally lower Q1 revenue in Q2. Over the trailing twelve months, free cash flow was positive $15 million while operating cash flow was positive $244 million as we continue to balance investments with topline growth to deliver sustained positive cash flow. Dilution or year-over-year growth in our share count was 1.9% in Q2, down from 3.8% in the prior quarter. As part of our efforts to responsibly manage the impact of SBC on our share count, we repurchased 7 million shares at a cost of $76 million in Q2, reflecting an average share repurchase price of $11.06. Since we began opportunistically managing our share count through share repurchases in Q3 of 2022, we have repurchased 151.5 million shares, representing 8.4% of fully diluted shares outstanding, at an average price of $9.91 per share and a total cost of $1.5 billion. In Q2, we issued $750 million in convertible notes maturing in 2030 with a coupon of 50 basis points. In addition, we negotiated the repurchase of $148 million of our 2025 convertible notes and $238 million of our 2026 convertible notes. We also unwound the capped calls associated with our 2025 convertible notes, resulting in proceeds of $63 million. We ended Q2 with $3.1 billion in cash and marketable securities on hand, with no debt maturing in the current year, $36 million maturing in 2025, and $250 million maturing in 2026. We believe the combination of these transactions have ensured more than adequate liquidity for our operations while further strengthening our balance sheet for the long term. As we enter Q3, we anticipate continued growth of our global community, and as a result, our Q3 guidance is built on the assumption that DAU will be approximately 441 million in Q3. We are focused on executing against our roadmap to deliver improvements to our advertising platform to drive strong performance for our advertising partners. Our Q3 guidance range for revenue is $1.335 billion to $1.375 billion, implying year-over-year revenue growth of 12% to 16%. Our investment plans for Q3 remain consistent with the full-year cost guidance ranges we provided last quarter, which assume we make modest incremental investments in infrastructure, personnel, and marketing to sustain the momentum we have established in our business, and that we continue to experience the impact of an increasing legal and regulatory burden on our cost structure. Given the revenue range above, and our investment plans for Q3, we estimate that Adjusted EBITDA will be between $70 million and $100 million in Q3. As we move forward into the second half of 2024, we will remain focused on prioritizing our investments carefully to deliver against the cost plans we have set out for our business, while investing prudently to deliver for our community and our partners. To learn more about the progress we are making for our community and our partners we encourage you to tune into our 6th Annual Snap Partner Summit on Tuesday, September 17. Thank you. And we'll now take your questions. Operator Thank you. We will now begin the Q&A session. [Operator instructions] We will pause momentarily to assemble our roster. Our first question today comes from Ken Gawrelski with Wells Fargo. Thank you very much. Good afternoon. To help us out with maybe some of the volatility you've seen in advertising results over the last several quarters. Could you just talk a little bit about the advertising performance within the quarter, maybe how the months progressed in the June quarter? And then maybe I'll -- the third quarter has started off. And maybe just to add to that, could you talk a little bit about the impacts of the Olympics? I know you've put out releases about your NBC relationship with the Olympics and some of the content related to that. Could you talk about contributions from the Olympics in 3Q and then potentially political in the U.S. in the second half? Thank you. Derek Andersen -- Chief Financial Officer Ken, it's Derek speaking. Thanks for the question. I think at a high level, it might make sense to talk about how revenue growth has progressed through the course of Q2 in the context of brand and DR separately. I think one of the things that we're seeing with the DR business is that it is incredibly resilient, and it's been growing at a pretty strong clip. And it's also fairly stable. So, to put a little bit finer point on that, direct response revenue advertising was up 16% year over year in Q2. And that's roughly in line with the 17% that we observed in Q1 despite a tougher comp going into Q2. So, what you're seeing is a business there that is very much based on performance. And so, if you're looking under the hood of that business, we're seeing really good momentum on our 7-0 Pixel purchase optimizations. And then as we move into the current quarter, that's performing alongside some of the newer advertising solutions we've delivered for app-based advertisers. I think Evan mentioned earlier in the prepared remarks that we've been scaling up our 7-0 optimization to App Install and app purchases in the quarter after some of the testing that showed really good results. And we're seeing advertisers benefit from that now. And then we've shared some case studies also in the letter to that effect. We also began testing value optimization in Q2, and we see some really good results from that in the early going, which is promising. And then you've also got the ongoing momentum of really strong CAP adoption. That was up 300% year over year, which is, of course, an improved -- a driver of improved performance. So, taken together, that's contributing to a business on the DR side that's highly performing and has some ongoing growth behind it. And you can see that also reflected in the really strong growth we're seeing in active advertisers there. We shared earlier that we saw active advertisers more than double year over year in Q2. And obviously, that's reflective of some really strong growth we're seeing in the SMC segment. And of course, there's a number of drivers behind that, including the progress we're making with Snap Promote some of the things we're seeing around automated campaign setup tools to make it easier to get started and realize positive ROA quickly for those customers. And then also some improvements in our go-to-market operations there on the SMC side in order to help us focus on acquiring and supporting clients where we have a really good product market fit. So, that business, there's a reason why we've been very focused on investing in this business because it's performance-based tends to be more resilient, and the growth there is a little bit more stable. I think over time, what you're seeing in the -- on the brand side is there are a couple of things that led to the decel there from the prior quarter. We mentioned one of them on the last call, which is just that there's some timing of some events and holidays in Q2 that were a bit of a headwind, but that was known going into the quarter. I think the portion of the demand performance in Q2 that was particularly disappointing in some of the weakness that we've seen in particular consumer discretionary verticals, including technology, entertainment, and retail that we mentioned earlier. And so, when I'm thinking about that business, we've built a very large brand-oriented business over the years. And we have very performing brand products for our advertisers to allow us to reach our very large community at scale when they have big events and whatnot. But we've also learned over time that that brand business can be very volatile, which is again why we focused a lot on investing in the DR business. So, I think a really good example what we can see in moments of volatility like this or where we're seeing in moments where maybe the economic environment is tougher, and people start moving down funnel with their marketing investments is that we do particularly well in verticals where we have really good performance for Direct Response. And so, I think a good example of a vertical that fits that is restaurants. In the most recent quarter, I think you've probably seen lots of economic data suggesting that the environment for restaurants has been a little tougher in some cases, but that's a category that continues to grow for us on the DR side in the current quarter because we've got great performance for those advertisers, and they've been able to continue to invest and grow their business on the back of that. So, hopefully, that gives you a little bit clearer understanding of the dichotomy there. And then as we move into Q3, maybe I'll share a little bit of color on how we thought about our revenue guide for Q3. To start off with, we shared the expectation for top-line growth in Q3 would be 12% to 16% year over year. First of all, just to put that in context, that implies quarter-over-quarter growth of 8% to 11%, which historically speaking, would be a really strong quarter-over-quarter result for Q3. And we are off to a good start to begin the new quarter, which is reflected in that. And I think if you step back and look on a two-year stack basis, can give a little bit more context too, that implies 18% to 22% on a two-year stack which would be a significant step up from the 11% to 12% that we've seen in the first half of this year. So, hopefully, that puts the guide into Q3 into a little bit more context. Specifically, we expect more of this trend of the business and its growth going forward to continue to be driven by strong performance from the DR business. We've got a great road map there, and of course, continued contributions from Snapchat+ other revenue, which comprised mostly of subscription revenue up 150% plus year over year and now at a run rate of over $100 million a quarter. So, those are the big areas we're seeing -- expecting to see drivers from the brand side, we've not assumed that we would see a big rebound in Q3. Now, certainly, you called out some events like the Olympics, and we've got a great lineup of content around the Olympics. We've got creators at the Olympics covering things we've had lots of participation in athletes. The content on the platform has been terrific. And of course, we do see brand spending around halo events like that. But at a high level across the entirety of the quarter, we've not built a huge recovery in that brand business in there. We're expecting the step up in improvements in the business in Q3 to come predominantly from the DR and Snapchats+ business in the coming quarters. So, hopefully, that gives you a little bit better sense of how the business has been progressing year to date and what we expect things to look like as we go into the next quarter. Thanks for the question. Operator Our next question comes from Dan Salmon with New Street Research. Your line is now open. Daniel Salmon -- Analyst OK. Great. Good afternoon, everyone. I have a two-part question. So, the total advertiser count more than doubled this quarter. That's a little different than the 85% growth in SMB advertisers you talked about last quarter, but presumably, SMBs are still a big driver of that. So, the first part is, can you speak to the drivers of advertiser growth count? I imagine improvements in the DR ad performance are part of that, but are there any of the partner programs, reseller agreements, or anything else that you'd highlight that are really helping drive that growth? And then the second part is on your ad product road map and whether or not this growth in the total advertiser count has you rethinking any elements of the road map. And in particular, whether it starts to make sense to look at developing more AI-based automated ad-buying products like those we're seeing generate a lot of value for SMBs on other platforms. I'd just be curious to hear your updated thoughts on whether that makes sense yet. Thanks. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Thanks, Dan. I think just at a high level, we're incredibly excited by what we're seeing with small and medium-sized advertisers. I think our SMC business overall is probably the most important driver of long-term revenue growth for us over the coming years. So, to really see that progress there has been really exciting. From a road map and automation perspective, automation is vitally important for these advertisers, and it can really reduce the friction in terms of getting started and then ultimately growing spend on Snap. I think if you look at some of the enhancements we've made for SMC advertisers, we're getting better at inferring SMC advertiser objectives when they sign up for an account on Snapchat and then we direct those customers to preconfigured campaign setups. And that can be really helpful for getting folks started. We also offer tools like codeless signal setup, for example, that are very useful. I do think there's more we can do on automation, especially in terms of creative optimization as well as budget optimization. We have some improvements coming there. I think -- more specifically, we're thinking ahead to the holiday season. So, as I look at e-commerce, SMC advertisers, we're really focused on things like product selection, leveraging on and off platform, privacy-safe signals, doing more work to drive in-session conversions with some major model updates we've been working on. And then overall streamlining the checkout experience, which we think is really important for driving more of those in-section conversions. Those in-section conversions are some of the most incremental conversions. They're really valuable to SMC advertisers. I think in terms of the top-of-funnel for the SMC business, one of the big drivers there has been Snap Promote, which allows advertisers to get started in app. We reached over 850 million users on a monthly basis. And so, I think we've just been really excited to see that their passion for our service and their usage of our service has also, I think, encouraged them to try out Snapchat for growing their business with our advertising tools. So, I do think the Snapchat community overall will be a great source of growth for our SMC business, and we're very focused on growing that both in the near term but, more importantly, as a real long-term driver of our growth. Operator Our next question today comes from Doug Anmuth with JPMorgan. Your line is now open. Unknown speaker -- JPMorgan Chase and Company -- Analyst Yeah. Hey, this is Katy on for Doug. First, I just want to touch on the brand business. Again, I know you mentioned it's been more volatile versus DR is more resilient. So, can you just talk about how much visibility you typically have over the brand side and what you can do to maybe improve the stickiness of spending on Snap within brand overall? And then second, on the engagement side of the platform, that's obviously been an important focus area. You talked about rolling out some product improvement inter-quarter. Some had positive effects on engagement in North America, some more negative. So, can you just talk about the puts and takes there and just to give a little bit more color? Thanks. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Yeah. Thanks, Katy. I think as we look at the brand business, the most important thing is really driving performance for advertisers. Our solutions are very performant, whether advertisers are measuring performance with our first-party tools or with MM or MTA, results and I think more recently with some of our conversion lift solutions. So, we continue to help advertisers really measure what matters most to them. And I think one of the most important things, especially as we look at brand spend in the back half is the relationship between brand spend and lower funnel performance. And I think some of the most sophisticated advertisers are really leveraging full-funnel solutions because building that brand awareness is really important in terms of improving overall conversion rates on the lower funnel. So, I think as we get into the back half of the year, really working with our advertising partners to make sure they're leveraging our full-funnel offering and our performance brand solutions will be really important. And then I think in terms of the progress we're making on content engagement, especially in North America, the team has had a bit of a split focus over the past couple of quarters, we've been building out a whole new back-end ranking stack that combines stories and Spotlight. We think that's a better experience for our community because it combines both types of content that they really love. Spotlight has been a real bright spot for us in terms of growth and engagement and so have creator stories. And then, of course, as always, friends' stories. People love to see what their friends are up to. So, being able to combine all those content types rather than requiring our community to go to different places to get those different types of content, I think we'll be very positive for the content experience on Snapchat. But maintaining our existing production content stack while building a whole new combined stack has been a bit of a challenge and what the team's focus. And I think that contributed to a little bit of the choppiness we saw through the quarter. But ultimately, as we look at North America engagement overall, both North America, DAU, and content time spend were both up quarter over quarter. So, directionally positive as we really work to make progress there. Operator Our next question comes from Rich Greenfield with LightShed Partners. Your line is now open. Rich Greenfield -- Analyst Hi. Thanks. I got a couple of questions. One, I just wanted to follow up on DR. You talked about DR advertisers and API integrations making meaningful progress over the course of the quarter and obviously, year over year, yet, Derek, I think you talked to a slowdown in the ad revenue tied to DR from Q1 to Q2. I guess the question everyone who's listening to this call was wondering is like given all the progress you've made and how much focus you put. Why is DR not exploding? Like why is it growing mid-teens? Why isn't it scaling dramatically? And tied to that is just how much of a headwind is brand advertising in the Q3 guide? And then just a follow-up for Evan. On the whole conversation you were having on the last question about the integration of the app what is actually causing -- when you talk about sort of the changes are pressuring time spent, what's actually happening? And what you're learning as you make this integration is the goal still to get to a single unified like you open up the app and its content. Is that still the plan? And how soon could we see that from what you've been testing overseas? When could we see that in the U.S.? Derek Andersen -- Chief Financial Officer Hey, Rich, how are you doing? Thanks for the question. I think just diving in a little bit on the Q3 guide and how to think about the projections for ad revenue and DR revenue specifically, I think it's important to just remember that there was a nine-point percentage point acceleration in overall revenue in the prior year from Q2 to Q3. And it was actually a slightly faster than that acceleration for the Direct Response business. So, I think to put it in a little bit more finer context, at sort of the midpoint of our guidance range for the coming quarter, we'd be overcoming almost all of that nine-point acceleration in the prior year. So, we'd essentially be nearly keeping pace. And at the high end of our range, we'd be fully keeping pace with that acceleration for the prior year. And just to put a finer point on that, I want to sort of reiterate that guide implies an 8% to 11% quarter-over-quarter improvement in the overall business, which I think if you look historically across periods, is a very good result for Q3. And then to maybe even look at it another way is to think about it on a two-year stack where the guide for Q3 implies 18% to 22% for Q3, and that's up from 12% in Q1 and 11% for Q2 of this year. So, I think it's really tough to characterize that guide in Q3 is representing a business that's not improving. And you've got a pretty solid road map on the DR side. But I'll turn it over to Evan to talk a little bit more about the other parts of your question. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Thanks, Rich, for the question. And we've definitely been working hard on the content experience. We know how important content is to our community and also in terms of just the way that they maintain their relationships by sharing content with one another. When we look at the content experience, as I mentioned, we really want to combine stories and spotlight, which are both beloved content types on Snapchat but are now located in two different tabs on the app. And that just makes content discovery just have a bit more friction. It also doesn't take advantage of the overall supply that we have across both stories and spotlight. And we know that combining that supply will help us provide more relevant content to folks based on their interest and will allow us to leverage signals across both of those content types. So, if you think about the steps to get there, one is sort of a user interface change that combines both the stories and short video user interface, so that has been in testing. There's also the infrastructure piece of it to combine both content types and rank across both content types, which is nontrivial because the objective function has to work across the way that those different types of content are consumed. That's also in testing, where you'll see that first is actually in spotlight, where we've made progress, for example, adding publisher stories and have been testing that combined the content experience. And of course, we'll have a bunch more to share at the upcoming Snap Partner Summit, which is on September 17. Hope to see you there. Operator Our next question comes from Mark Mahaney with Evercore. Your line is now open. Ian Peterson -- Analyst This is Ian Peterson on for Mark. Focusing on the brand advertiser demand, how have the verticals that you called out that were soft in Q2 trended quarter to date? Have they gotten worse, the same, better, and any granularity you can give on a vertical level would be helpful. Thanks. Derek Andersen -- Chief Financial Officer Hey there, thanks for the question. I think probably the most important thing to sort of zoom in on when we're talking about how we're beginning into the new quarter and what's assumed in the guide is probably a little bit of what I touched on earlier on the assumption essentially in the revenue guide that the growth that we're going to see in Q3, will continue to be driven predominantly by the direct response business and the ongoing momentum we've got there as well as the continued momentum of the Snapchat+ business. So, there's not an assumption built into that guide that we're going to see significantly improved or really significant turnaround in the brand performance in the quarter. Obviously, we're working hard on that. We've been delivering some innovations for customers there with some stuff we announced at new fronts and other things we've talked about in a letter there. So, I would sort of think of it that way. What we're really focused on here, and I think you've heard us talk about this and deliver on it consistently over the last 18 months is the investments we're putting into product and go-to-market around DR and a really keen focus around delivering ad products and optimizations that deliver performance results for advertisers that they can scale on and having go-to-market operations that are wrapped around those solutions and deliver to customers, we have strong product-market fit from. I think you're going to see us continue to lean into the momentum we're seeing in the small and medium-sized customer front and some of the optimized campaign setups that we're delivering there continuing to lean into Snap Promote, continuing to deliver performance results for those folks as well. So, building on what have been our strategic priorities for the last 18 to 24 months and building on the results that we saw in the most recent quarter around our DR and Snapchat+ verticals. So, hopefully, that helps a little. Operator Our next question comes from [Inaudible] with Bank of America. Your line is now open. Unknown speaker -- JPMorgan Chase and Company -- Analyst Hi. Thank you for taking my question. Could you provide some insights into the current stage of spotlight monetization and how you are expected to grow over the next few quarters? And in the long run, how big can the surface become related to your current scale and potential time frame for that? Thank you. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Yeah. Thanks so much for the question. We've definitely been excited about the growth in spotlight time spend, the uptake of that service. And certainly, it's been a source of inventory growth for us. I think if I compare time spent on spotlight to other short video services, I think we have an enormous amount of headroom on Snapchat. That's part of the reason why we focus so much on this combined content experience, we know how much our community loves stories, and we really believe that a combined experience that combines the stories format with short-form video will be most compelling and easiest to use, especially in terms of content discovery. So, the team has been working very hard on that. We continue to make progress in terms of model improvements. We've seen some great growth in terms of spotlight submissions and that's helping with overall content supply. One big area of focus for us in the coming months is really around model freshness and making sure that we are updating our models quickly enough to learn from engagement with new pieces of content so that we can serve the freshest possible original content to our community and not have to wait for days in some cases, for us to understand and leverage that signal. So, a lot to do there, but certainly, I'm pleased with the growth so far and excited to get the combined content experience out to our community. Operator Our next question comes from Mark Shmulik with Bernstein. Your line is now open. Unknown speaker -- JPMorgan Chase and Company -- Analyst Hi, this is Jenny on behalf of Mark Shmulik. Thank you for taking our questions. We just have one, just given the launch of Snapchat's web product, is there any consideration to moving away from having the app open to the camera to perhaps something more like spotlight, that's more monetizable? Thank you. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Thank you so much for the question. Opening to the camera has always been a really important part of the Snapchat experience, especially because it keeps you grounded in the real world with your friends rather than distracting you with content created by other people. And that prompt to create and express yourself is something that's really important to the Snapchat product. It starts -- helps people start new conversations when they share a Snap or helps them share what they're seeing and experiencing with their friends if they add that snap to their story. And of course, it's an amazing top-of-funnel for our augmented reality platform where hundreds of millions of Snapchatters engage with lenses on a regular basis. So I think opening to the camera is really a unique part of the Snapchat experience and part of what really differentiates our service. And I think given the strength we've seen now, I think it's been almost, what, 13 years that we've been working on Snapchat, we continue to see new highs in terms of the number of unique Snap centers, which were up across hit record highs across all regions in the quarter. So, I think the strength of the core product and that prompt to really express yourself and share with your close friends and family is something that's really unique to Snap and differentiates our service. I do think, though, and I don't want to run too much of the surprise with the Snap Partner Summit coming up. But there is an opportunity, I believe, to help simplify the Snapchat experience overall, and that's something we have been working toward, and we look forward to sharing more at the Summit. Operator Our last question comes from Eric Sheridan with Goldman Sachs. Your line is open. Eric Sheridan -- Analyst Thanks so much. Maybe taking a step back and asking a bigger-picture question, Evan. You talked a lot and you have a lot of detail on this call so far in terms of the journey you've been on sort of the evolution of the platform and product as you sort of look toward the back half of this year and was a value toward 2025, any updated skew in terms of your key investment priorities or things you think of is critical to execute on that positions the platform for elements of user growth, engagement or monetization with an eye to the medium to long term. Thanks very much. Evan Thomas Spiegel -- Co-Founder and Chief Executive Officer Thanks so much for the question. I've certainly been spending a lot more of my time over the past year or so on the monetization side of the business. And I think just looking at the long-term strength of the business and our opportunity in augmented reality. I think a personal goal and maybe a broader growth for the business is really to have our revenue resilience match the engagement resilience we see on our platform with our community of 850 million people around the world. I think over the years, we've seen that that engagement has really been durable, and we've been able to continue to grow service. I think as I look at the revenue side of things, what really excites me and a big area of focus and investment for us in the coming year will be the small and medium-sized customer segment. I think it really leverages the strength of our scale with our community and also our ability on the product and engineering side to drive results for advertisers. And ultimately, we really believe that that will result in much more resilient revenue from a diversified customer base, and that's a sort of foundation we want to be building our business on for the long term. So, certainly, a continued focus on the monetization side, especially with small, medium-sized customers, and then making a lot of progress on foundationally on our machine learning models and our ability to drive performance. Operator Thank you. This concludes our Q&A session as well as Snap Inc.'s second quarter 2024 earnings conference call. [Operator signoff]

Twilio (TWLO) Q2 2024 Earnings Call Transcript | The Motley Fool

Good day, and thank you for standing by. Welcome to Twilio Inc. second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bryan Vaniman, SVP, investor relations. Please go ahead, sir. Bryan Vaniman -- Senior Vice President, Investor Relations Good afternoon, everyone, and thank you for joining us for Twilio's second quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, chief executive officer; and Aidan Viggiano, chief financial officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release, and our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K and our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q2 results, and then we'll open the call for Q&A. Khozema Z. Shipchandler -- Chief Executive Officer Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio delivered a good second quarter. We are driving durable profitable growth as we exceeded our Q2 guidance with $1.1 billion in revenue and $175 million in non-GAAP income from operations, both record levels. We also delivered nearly $200 million of free cash flow, another strong quarter of cash generation. We're running the business with increased rigor, which we are confident will drive improved growth rates and additional operating leverage over time. The communications business is performing very well. And in our Segment business, we're focused on executing on our commitments. While reducing non-GAAP operating losses in Q2, we saw continued signs that Communications growth is stabilizing, including quarter-over-quarter improvement in international trends. And I'm encouraged that our more disciplined approach is unlocking teams to innovate on the critical areas that will enable Twilio to power the future of customer engagement. What's true across the board is that in the world of AI, contextual data is paramount. According to Twilio's Annual State of Customer Engagement Report, we found 84% of businesses said they provide good or excellent customer engagement, yet only 54% of consumers agree. That disconnect is because brands need help contextualizing the data they have. By combining our leading communications capabilities, our rich and contextual data, and the power of AI, we are uniquely positioned to unlock smarter, and more personalized interactions for brands that enable them to reimagine customer engagement and drive more revenue at a lower cost. Let's turn to our business highlights. Our Twilio Communications business had a strong quarter, with revenue of $1.01 billion, up 7% on an organic basis year over year on the back of solid performance in messaging, acceleration in email growth, and strong ISV contributions. During the quarter, we also focused on a number of initiatives that we believe will deliver improved growth rates over time. In the near term, we expect our growth to be fueled by our expanded network of partners and ISVs, self-service enhancements, and cross-sell opportunities. While we have made meaningful progress in all these areas, I'm particularly pleased with our success in securing new partners and ISVs. During the quarter, we achieved an eight-figure renewal with a leading customer experience provider who will continue to embed Twilio Voice within their customer service software solution. Additionally, we signed a new partnership with Omnisend, an omnichannel marketing platform targeting the SMB retail market, who will help Twilio expand its footprint into new geographies. We also extended our co-sell partnerships with Airship, Bloomreach, Braze, Insider, and Klaviyo into new geographical territories to power a data-enriched end-to-end marketing experience. During the quarter, we delivered the strongest revenue growth in our self-service business since Q1 of 2023, and we continue to make enhancements to simplify the onboarding experience for customers. For example, we introduced a new console experience that helps make recommendations, guiding customers to which products they should be using based on their desired use cases and outcomes. And our new one sign-up streamlines the log-in process by having one log-in for a customer to access all of their Twilio accounts and products. In the medium term, product innovation will be an important growth lever as we deliver on our vision to unlock smarter, more personalized interactions for brands. In the quarter, we started to see success with our newer higher-margin software products. These are products that leverage AI such as Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as traffic optimization engine and engagement suite to drive greater deliverability and better customer engagement. These products are rapidly gaining adoption and can become meaningful growth drivers over time. One customer, a leading mortgage lender, adopted both Voice and Verify in the quarter and expanded their messaging usage. Twilio won this competitive cross-sell deal as our platform enabled the customer to have a single console with both voice and messaging for the thousands of bankers who are using it on a daily basis to better connect with customers. Since deploying Twilio, the company is already seeing a 38% increase in SMS response rates and a 20% increase in banker productivity. More importantly, these products are gaining adoption because they are simple to use, trusted, and intelligent. Verify is a great example. Not only is it growing quickly it is saving our customers millions of dollars by mitigating fraud at the source and to continue to deliver better outcomes for our customers leveraging AI, our SMS pumping protection product went GA during the quarter, which can be enabled with one click and automatically detects and blocks fraudulent messages, a growing issue in certain international markets. We're continuing to deliver on our promise of natively integrating Segment capabilities into our Communications business. This quarter, we released personalized virtual agent into private beta, marking Twilio's second product that natively embeds Segment into Communications. With personalized virtual agent, our customers receive a truly personalized interactive voice response. Each caller receives a custom menu of options based on the recent interactions with the company, purchase history, recent support inquiries, and responses to marketing emails, among others. The product combines Voice, virtual agent with Google Dialogflow agent, studio, and unified profiles into one simple product that is guided with this wizard setup. We're excited with this release as it marks the next chapter for how IVR is evolving in the world of AI. And lastly, Twilio's Communications products continue to receive recognition as we were named a leader in the Gartner Magic Quadrant for CPaaS for the second year in a row, positioned highest for ability to execute and ranked No. 1 in four of six use cases in the Gartner Critical Capabilities report. Twilio is also named a leader in IDC's Marketscape Worldwide Contact Center as a Service. Turning to our Twilio Segment business. Segment delivered revenue of $75 million, up 3% year over year as we continue to focus on delivering against the priorities that we outlined in our operational review in March. We made solid progress in improving customer time to value and executing on data warehouse interoperability. We also made significant improvements in our cost profile in Q2 and lowered our non-GAAP operating losses by 25% quarter over quarter. We also continue to focus on driving efficiencies in our go-to-market, which yielded an increase in sales productivity, and in Q2, over 40% of our new bookings were multiyear deals versus 17% in the prior year period. A key win for Segment included our largest deal of the quarter, a seven-figure deal with IBM. On the product front, we delivered on new capabilities to further enhance our interoperability with data platforms and data warehouses. In Q2, we released data graph and linked audiences into public beta, which seamlessly integrate with data warehouses, including Databricks and Snowflake. With linked audiences, marketers can now activate centralized data in the warehouse and combine it with real-time events and predictive AI traits to generate unified customer profiles and audience cohorts to deliver targeted personalized experiences. We've gotten a great response, and we're excited to have customers like Legal Zoom and TradeMe deploy and realize the benefits and efficiencies. We are also improving time to value for customers. During the quarter, our use case in-product onboarding went live, guiding customers through a customized onboarding experience, focused on their specific business goal. Additionally, our CDP co-pilot is reducing instrumentation and development time. Customers can now deploy and get value from Segment four times faster, and we are seeing early signs that we're able to accelerate business wins for our customers. Overall, I'm very pleased with the progress we've made so far this year. We're continuing to deliver durable, profitable growth while driving strong free cash flow, and we have a number of organic initiatives underway that we believe will reaccelerate revenue growth over time. I'm incredibly energized about our opportunity to become the leading customer engagement platform combining communications, contextual data, and AI to deliver intelligent engagement and outsized outcomes for our customers. And I remain very confident in our ability to deliver accelerated growth and continued improvements in our free cash flow profile over the coming quarters. And with that, I'll turn it over to Aidan. Aidan Viggiano -- Chief Financial Officer Thank you, Khozema, and good afternoon, everyone. Jumping into our results. Total Q2 revenue was $1.083 billion, up 4% reported and 7% organically year over year. Communications revenue was $1.007 billion, up 4% reported and 7% organically year over year. And Segment revenue was $75 million, up 3% year over year. Our Q2 revenue growth was driven by solid performance in messaging, acceleration in email growth as well as continued strength in our IFC business. We continue to see signs of growth stabilization in our Communications business, and we saw modest sequential improvements in international as well. Company organic revenue growth and communications organic revenue growth were both roughly 100 basis points lower due to the sunsetting of the software component of our Zipwhip business. We continue to expect modest headwinds over the balance of 2024 from this decision, which we estimate will be roughly 90 basis points in Q3 and 80 basis points for the full year. Our Q2 dollar-based net expansion rate was 102%. Our dollar-based net expansion rate for Communications was 102% and 103% when excluding Zipwhip software customers. Our dollar-based net expansion rate for Segment was 93%, driven by elevated churn and contraction. Mitigating churning contraction remains a focus for Segment, and we're encouraged by the progress we made in Q2. As Khozema discussed, we are improving time to value, and customers are deploying use cases four times faster as a result. We are also pushing for more multiyear deals with customers. And in Q2, over 40% of Segment's new bookings were multiyear deals versus 17% a year ago. We delivered record non-GAAP gross profit of $577 million, up 7% year over year. This represented a non-GAAP gross margin of 53.3%, up 110 basis points year over year and down 70 basis points quarter over quarter. As we noted in our Q1 call, we recognized elevated cloud hosting credits that benefited Q1 gross margins by roughly 80 basis points, and those credits did not recur in Q2. Non-GAAP gross margins for our Communications and Segment business units were 51.8% and 73.4%, respectively. As we noted in Q1, we are migrating part of Segment's architecture to new infrastructure providers this year to recognize greater efficiencies. We began migrating data to our new provider in Q2, and during this transition, we will incur some overlapping vendor expenses. As a result, we expect reduced segment gross margins until the migration is complete, which is expected to occur by the end of 2024. Non-GAAP income from operations came in well ahead of expectations at $175 million, up 46% year over year even after including $20 million of incremental expenses associated with our new employee cash bonus program. As a reminder, we initiated this program at the start of the year to reduce stock-based compensation expenses over time. The outperformance was driven by our revenue beat, improvements in Segment's expense profile, and ongoing cost discipline. Our non-GAAP operating margin of 16.2% was up 460 basis points year over year and 100 basis points sequentially. Non-GAAP income from operations for our Communications business was $250 million and non-GAAP loss from operations for our Segment business was $16 million, a $5 million improvement quarter over quarter. GAAP loss from operations was $19 million as we continue to make solid progress on our path toward GAAP profitability. Stock-based compensation as a percentage of revenue was 13.6% excluding restructuring costs, down 130 basis points quarter over quarter and 110 basis points year over year. We generated free cash flow of $198 million, driven by continued operating efficiency and ongoing collection strength. This was up $126 million year over year. And over the last 12 months, we generated free cash flow of $781 million. We're making good progress on free cash flow, and we believe there are significant opportunities to drive more leverage over time. Finally, we're continuing to execute on our $3 billion share repurchase program and have repurchased over $700 million since our last earnings call in May. This brings our total repurchases to date to over $2.2 billion. We intend to complete the remaining $800 million of authorized repurchases by year-end, which should meaningfully reduce our outstanding share count over the next two quarters. Our total shares outstanding as of June 30 was 164 million, down 10% year to date. Moving to guidance. For Q3, we're initiating a revenue target of $1.085 billion to $1.095 billion, representing year-over-year growth of 5% to 6% on both a reported and organic basis. We've now lapped our two divestitures from last year, so starting in Q3, reported and organic quarterly revenue will be equivalent. Given year-to-date performance, we're narrowing our full-year organic revenue growth guidance range to 6% to 7%. Turning to our profit outlook. For Q3, we expect non-GAAP income from operations of $160 million to $170 million. Given our outperformance in Q2, we're raising our full-year non-GAAP income from operations guidance to $650 million to $675 million. Finally, we remain focused on improving our free cash flow profile, and we continue to expect that full-year free cash flow generation will be in line with our full-year non-GAAP income from operations. We're encouraged by the performance we delivered in the first half as we stabilized revenue growth and delivered strong profitability and free cash flow. As we look ahead, we're investing in initiatives to reaccelerate growth, but we continue to plan and guide prudently. We are progressing toward GAAP profitability, and we continue to see significant opportunities for margin expansion and improve free cash flow over time. I'm excited to continue to build on the progress we've made to deliver improved outcomes for both our customers and our shareholders over the coming quarters. And with that, we'll now open it up to questions. Operator Thank you. [Operator instructions] One moment while we compile our Q&A roster. And our first question is going to come from the line of James Fish with Piper Sandler. Your line is open. Hi, guys. This is Quinton on for Jim Fish. Thanks for taking our questions. Maybe first on the margin side. You know, you've talked about a fair amount of incremental leverage opportunity coming from automation of back-office activities like contract management or that product activation. What inning are we in for those operational improvements across the business? And as we think about the upside you've shown relative to guide so far this year, how much of the cost savings is coming from these process improvements versus just better rigor around managing spend? Aidan Viggiano -- Chief Financial Officer Great. Why don't I start? And then Khozema can jump in. Listen, I think we've done a lot on margins. If you just take a step back and think about the expansion that we got last year, and then coming into this year, our initial guide assumes very little operating margin leverage. If you look at our current guide for the year at the midpoint, it's about -- I'd say 250-ish basis points of margin expansion. So, we continue to find opportunities to get expansion on both the opex line as well as the stock-based compensation line. And we don't think we're done. So, we've talked about the fact that we're going to get the Segment business to break even by the second quarter of next year. That business lost $16 million in the second quarter, $21 million in the first quarter. So, you can see that there's an opportunity to get leverage there. And then in addition, in the broader business, I'd say in communications and the G&A functions, there's a lot of work that we're doing around, you mentioned automation. We are a remote-first company, so we do have the opportunity to leverage lower-cost geographies as a way to continue to get efficiencies. And so, we're doing all of these things and continue to do them. I would say -- I'm not going to give you an exact inning, but I would say we have a lot of opportunity to continue to expand margins both on the non-GAAP side as well as the GAAP side, including stock-based compensation. In terms of the profit, in terms of what's coming from improvements in process versus cost discipline, I think it's a little bit of both. It's largely cost discipline though. We continue to believe that we can run this company without having to add a lot of incremental costs. You've seen us do that now for six quarters in a row. And so, we're really just much more disciplined in terms of how we're running the company, and that's something Khozema drives pretty regularly with the team. Unknown speaker -- Piper Sandler -- Analyst That's helpful. And then on the revenue front, it sounds like we found stabilization here and actually quarter-over-quarter things sound a little bit better, which is great. But we also tightened the kind of revenue targets for the full year down slightly. Can you talk about what's embedded into the guide here? What assumptions or incremental prudence that you've incorporated relative to the kind of last guide that we got last quarter? Thank you. Aidan Viggiano -- Chief Financial Officer Yeah. Thanks for the question. I'll take it again. So, we grew year to date through the first half 7%. We're guiding to 5% to 6% in Q3. We think the 6% to 7% that we gave for the year is a reasonable range based on what we're seeing today. I will say that, in the second quarter, we did see a number of very encouraging trends in the business. In particular, we saw strength in messaging, as you know, that's our biggest business. Solid performance, both in the U.S., which we've seen for the majority of this year, but also, we saw modestly improving trends internationally. We also saw growth in our email business accelerate and really -- and Khozema kind of talked about it in his prepared remarks as well, really strong performance in both our ISV and self-serve businesses. So, we saw a number of encouraging trends. We guided to 5% to 6% in the third quarter. I mean, if you think about how we guided in Q1 and Q2, that was 4% to 5%. So, you are seeing some of these trends kind of flow through to the guidance. But we are still a usage-based business. So, there is inherent variability that comes along with that. And so, we'll continue to plan, we'll continue to guide prudently just given that and given the dynamic market that we're operating in. Khozema Z. Shipchandler -- Chief Executive Officer I'll just add one thing maybe, which is, we're not really planning for any kind of like macroeconomic environment like whether it's good or bad. I think we're just planning to run the company well. As we've alluded to a number of times, running it with better discipline, better rigor, and it's obviously a dynamic global market with a lot of different kind of geo things going on, macro things going on. I think irrespective of however any of that plays, we feel really good about the guidance that we've given. And as Aidan said, we'll continue to be prudent about the way that we guide. Operator Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Mark Murphy with JPMorgan. Your line is open. Thank you very much. So, Khozema, you mentioned an acceleration in email. And I'm curious to what you might attribute to that, whether it's more marketing emails, transactional emails, notification emails, is there anything there that makes you think companies are finally starting to lean back into outbound marketing activities or on customer engagement initiatives in a way that maybe they weren't a couple of quarters ago? And then I have a quick follow-up. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. Hey, Mark, thanks for the question. I wouldn't say that it necessarily breaks down exactly the way that you said it. I think, in general, we are seeing just kind of elevated trends in that product, in that part of the business. I think maybe to just sort of build on your question through the Twilio lens a little bit more. I think where we continue to see a lot of opportunity, and I think email and the other channels to be beneficiaries is, as Communications become more targeted, as they start to leverage more contextual data as we kind of talked about, especially through vis-a-vis Segment, I think there is an opportunity to grow the email channel. And because what you and I will receive as consumers will be much more specified, much more targeted, much richer communication. And I think we're seeing a little bit of that. And I think a lot of that is kind of really more on the comm. But in the quarter, I wouldn't necessarily point to one thing or the other. I'd just say kind of elevated trends on the product. Mark Murphy -- Analyst OK. Thank you for that. And then, Aidan, I wanted to ask you -- I want to try to combine two quick thoughts. But you generated, I think, $1.25 a share of free cash flow in Q2, right? So, it arguably puts you on a $5 per share run rate, which is a lot. And just -- is anything one-time in nature? Or could we roll that kind of free cash flow margin into 2025? And then I did just -- relating back to that question of the narrowing of the range, we're trying -- I think we're trying to reconcile there's a lot of positive comments and then that got narrowed just a hair below the midpoint. And I'm just wondering, we've had a Starbucks, Nike, McDonald's, Tesla. There's been a lot of consumer slowdown. Is there anything there factoring in maybe to how you're thinking about the holiday season? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. So, Mark, let me start on the back end of the question, and then I'll let Aidan pick up on the cash flow side. So, I think from an industry perspective, I mean, kind of the good news for Twilio is, I mean, you know the company really well. You've been following us for a long time. Like we have a very, very distributed consumer -- or customer base, right? So, over 300,000 customers, we're spread across a wide variety of industries. And so, we're always, quite frankly, looking at like some up, some down in a variety of these different areas. I would say as it relates to some of the kind of areas that you pointed to, like let's maybe just categorize those as retail, e-commerce. I would say that that was an area that was particularly good for us. I wouldn't necessarily point to a seasonal or holiday trend. I'm not necessarily forecasting like a strong like Thanksgiving or Christmas season. Like again, we're kind of planning for like whatever the period is. We just want to run the company well and guide prudently through all that. So, that's kind of how we're thinking about the way that we're running the company, first and foremost, and then how that ends up translating into some of our revenue guidance. And then on cash, Aidan, do you want to take that? Aidan Viggiano -- Chief Financial Officer Yeah. So, thanks, Mark. And if you look at our cash performance kind of through the first half or at least in the second quarter, you can see that cash is kind of outpacing our non-GAAP profit. It was about 18% free cash flow margin in the second quarter. What we saw there is largely a function of the profit generation and the continued leverage that we're getting on opex, but we did see collections improvement in the quarter by about two days. Now, on the flip side, AP kind of went the other way. So, net-net, working capital really wasn't a help. So, I wouldn't call out anything specifically. What we said for the year is you should expect free cash flow generation to be in line with non-GAAP profit. I think that's a good framework in terms of how to think about it for the time being. Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Arjun Bhatia with William Blair. Your line is open. Great. Thank you. This is Chris on for Arjun. I was hoping to get a little extra color on segment NRR in the quarter. It was great to see the improvement there. And I was wondering if you think that we're starting to stabilize and kind of found the bottom and how we should think about the trends going forward. Aidan Viggiano -- Chief Financial Officer Yeah. I think as it relates to segments dollar-based net expansion was 93% this quarter was 92% last quarter. The business grew 3%. What we said for this year is you should expect that business to -- the growth in that business to be muted. I think that continues to be our expectation for the year. I'd say 93% DBNE per segment was kind of in line with what we were expecting. And really there, we're focused on a number of different initiatives that we laid out in March kind of at our operational review readout. And we're focused on a couple of things. Number one, we're improving our customers' onboarding experience. Historically, it took way too long for customers to get to value. And now Thomas and the team have implemented a number of different things that get customers to value on their first use case in a matter of weeks versus historically in a matter of months. In addition to that, we're making a concerted effort to sign more multiyear deals, and that will help with churn and contraction. That will help with dollar-based net expansion as a result. And this quarter of the bookings that we signed, 40% of them were multiyear deals versus just 17% a year ago. And then the last thing we committed to at the Investor Day or one of the other things I should say, it's not the only thing, we are making progress on our data warehouse interoperability, which is important for our customers. And in Q2, we introduced linked audiences. And what that does is it allows customers to combine their segment CDP data with data in their warehouses. And that's, again, an important thing for our customer base. So, all of those things combined, we think, over time, help DBNE. It won't be immediate. DBNE is a trailing 12-month metric. So, it's not going to reflect immediately. But as these things start to get traction, we think that it will send that metric in the right direction kind of over time. Unknown speaker -- Piper Sandler -- Analyst Great. Thank you. That's very helpful color. And the second question for me was, the personalized agent sounds like an interesting way to kind of combine the Communications platform with Segment. I was curious what kind of reception is getting from customers so far. And what other kinds of products are on the road map that incorporate Segment into Communications? Thanks. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I don't want to get too far ahead of the road map. So, maybe I'll park that for an upcoming period when we report. I think in terms of the launch that we just did, I think it's pretty early. I mean, we just launched the thing a few weeks ago. I think based on the customer conversations that I've had, people are really, really excited about it. I think the whole notion of being able to leverage like a detailed profile about a customer in the context of a conversation is incredibly important. And I think it also has the benefit of like creating a feedback loop. So, the customers that I've spoken with are very, very excited. I know our team is very excited based on the customers they've spoken with as well. But in terms of financials, it's just early days, and we'll have to kind of report back on that later. Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Taylor McGinnis with UBS. Your line is open. Yeah. Hi. Thanks so much for taking my questions. So, maybe going back to the full-year revenue outlook and some of the assumptions, you talked about an improvement in trends with international and email. Segment growth improved slightly, and then you talked about some of the ISV and co-sell opportunities. So, I know you have some initiatives in place to accelerate growth that could be additive to a stabilization in the macro in the second half. So, when you think about like those playing out and what might be embedded into the guide, it looks like the revenue guide just assumes trends remain status quo and maybe doesn't assume much upside from some of these initiatives that you have in place. So, could you just provide a little bit more color there and what those opportunities could look like? Thanks. Aidan Viggiano -- Chief Financial Officer Yeah. I think we -- I'll start. I think we believe that the Q4 implied math gets you to kind of a reasonable range of outcomes based on kind of what we're seeing in the business today. As we said, you kind of call them out, a number of different trends that we're seeing that have been encouraging over the last three months. I think the thing to remember is -- which is very dynamic, and we are usage-based. And so, we continue to just plan prudently in that light. And so, we just want to make sure that we're not getting ahead of ourselves. We're not reading into too much in terms of what we're seeing over three months, and that's just the right thing to do, just given how dynamic the market is. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. Taylor, the only thing I'd add is -- I mean, again, just to maybe reinforce a few points that Aidan made, I think we see encouraging signs like we feel good about the guidance that we provided today. I think as these things start to materialize, like we'll feel better, obviously, but there are a number of things that are happening inside the business today that certainly feel like they could be juice for growth down the road, and we're optimistic about it. But we're going to continue guiding prudently just given that it's a dynamic environment. Taylor McGinnis -- Analyst Perfect. And then just maybe as a follow-up, when you talked about some of the improvement in trends that you saw in 2Q, maybe you could just talk about like linearity a little bit in the quarter. And as we start 3Q, would you say that a lot of those trends have remained similar or any notable changes to flag? Thanks. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I mean, we're not going to get ahead of that, obviously, Taylor. Like I think orders don't have sort of the linearity dynamics maybe of what you see in some other companies. I think, again, we saw pretty positive trends as a result of the three-month period that we're talking about today. I certainly don't want to get into July or anything like that, but based on what we've seen, we're encouraged, and we'll play through Q3. Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Meta Marshall with Morgan Stanley. Your line is open. Great. Thanks. I just wanted to kind of confirm on political traffic. I know in the past, you guys have kind of said that that was going to be an area that you weren't going to invest in. But just as we kind of head into a political season, just should we still be thinking about kind of political traffic either to email or text message is something that's kind of more limited contribution to Twilio? Thanks. Aidan Viggiano -- Chief Financial Officer Yeah. I think as it relates to political, we always have some political traffic kind of rolling through our business. But I wouldn't expect outsized revenue impact as a result of the upcoming election. We have registration requirements we talked about before with you in an acceptable use policy. And if customers don't meet those policies, we won't take the traffic. So, it ensures a level of quality on our networks and on our platform, and it protects consumers. We think that's the right thing to do. So, there might be a little bit of a bump, but it won't be anything outsized as we get closer to the U.S. Great. Thanks. And then just -- I noted you guys said international improvement. Is that some end-market improvement? Or do you kind of attribute that to some of the ISV relationships growing? Just how do you think about kind of some of that improvement that you're seeing or ISV traction? Thanks. Aidan Viggiano -- Chief Financial Officer Yeah. So, we did see this kind of improving trend with the international. It's international -- when we say international, just to be clear, it's internationally terminating messaging traffic. And I would say it was a bit broad-based. It wasn't one group of customers or the other. So, that was encouraging in a way to see that it was a bit broader versus just an ISV group or another group of customers. But beyond that, I wouldn't call out anything specific. It wasn't a certain industry. It wasn't a certain market where traffic was terminating that spiked or jumped out to us. It was broader. Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Ryan Koontz with Needham and Co. Your line is open. Hi. Thanks for the question. I wanted to ask about any of the changes you're making in go-to-market and these sort of changes that are driving the strength you're able to reduce costs. And any progress in automation that you've had on the Comm side of the business? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I mean, just to maybe go back a little bit, like we made a number of changes, obviously, that unfortunately resulted in a whole series of layoffs toward the earlier part of last year. So, now we're kind of back into 2023. And we're starting to see some of those -- well, a lot of those changes, frankly, especially in our cost profile, rippled through the business. In terms of some of the rationale behind what we did at the time and what we were kind of expecting going forward, like we did want to orient many more of our customers toward self-serve. And I think we pointed to a couple of things in the quarter around self-serve like it was definitely one of the better quarters for that kind of cohort and segment of customers. It's a very, very kind of broad set like you can have customer spending small amounts of money up to kind of decently large sized amounts of money. And so, it's a kind of broad category that has seen strength. There's a number of things that we did from a technology perspective as well to make sure that we were able to onboard, onramp customers in a way that they could kind of activate with Twilio fairly quickly as well. So, I'd say very good progress, quite frankly, in terms of self-serve as it relates to communications. Maybe just the other thing that you didn't ask, but just to kind of touch on is also with -- as Aidan kind of talked about in some of her comments, also good progress, I wouldn't call it per se self-serve, but in terms of just accelerating customers to value on the Segment side as well, like we have done a lot of work from a technology perspective there, too, to increase just the velocity with which customers get to value. And then I think more broadly, there is work that we're doing on automation. But we still think that our ability to drive cost leverage here that there is a lot of opportunity going forward, and we'll continue doing that. Thank you. One moment for our next question. Our next question is going to come from the line of Alex Zukin with Wolfe. Your line is open. Hey, guys. This is Rich Magnus on for Alex Zukin. I just wanted to double-click again on that segment onboarding process you've been speaking about. I know in the past, you mentioned leveraging AI to produce friction in that process and drive that faster TTV through the self-serve process. But can you sort of help us think through any impacts there that might drive segment growth this year and next year? Thanks. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. Maybe I'll just touch on the technology, and I think Aidan kind of answered the growth dynamics earlier. Like just to reiterate that last point, I think growth will continue to be muted for the kind of foreseeable future. We've been kind of saying that for a while. And I think while there are improvements in the business, like just given the nature of it, that will take a little bit of time to show up in growth. That said, I'd say there's a handful of things that have been really encouraging for us in the Segment business. I think one is that time to value work. It's a combination of AI work that we've done to help customers get through the process faster. There's also use case onboarding wizard that's also allowed customers to kind of get to their specified use case a lot faster. And then I'd say also a really concerted effort by our customer success team. And so, the combination of those things, I think, has been pretty powerful, frankly, in really accelerating what Aidan characterized as what was months in the past, down to weeks, and what we've kind of quantified as a 4x improvement from where we were. Operator Thank you. And we'll move on to our next question. One moment, please. Our next question is going to come from the line of Walravens with Citizens JMP. All right. Thanks for taking my question. This is Austin on for Pat. You touched on an eight-figure renewal during the quarter in Twilio, voice being a part of that. Can you just talk about how you view your opportunity with respect to AI at this point and the opportunity with these products? Thank you. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I mean, I think that our opportunity around AI is everything to do with data. And I think as it relates to data, in particular, contextual data. And I think the reason that we feel such deep conviction about that is, is that all of our customers are sitting on proprietary data sets that will never be turned over to an LLM, right? Like that is the part of their business, and our ability to work with them vis-a-vis Segment and ingest that data, use it as part of an overall profile that we have for every single unique consumer to be able to drive a personalization experience back to them, I think that is like a really, really significant unlock that's going to be able to drive business more -- drive growth, excuse me, more broadly for the overall business. But it's that combination of communications plus contextual data plus AI and the mix as well. Now, just to go back to voice for a second since that's where you started, I think what's interesting about voice as it relates to all of that is, is that AI is the most natural in voice, right? Like in the same way that you and I are interacting right now, like it's just very normal to kind of have a conversation in that way. And I think that the AI capabilities are becoming so sophisticated in their ability to process natural language in this way that, when paired with contextual data, I think that is going to be a heck of an opportunity. And I think a lot of that value will end up accruing, not just a messaging and email, which we feel optimistic about, but certainly voice as well. Thank you. And one moment for our next question. Our next question is going to come from the line of Nick Altmann with Scotiabank. Your line is open. Awesome. Thanks, guys. You guys sort of have a reenergized focus on your ISVs. You named a handful of new partnerships in the prepared remarks. I guess when you look at sort of the other potential ISV partnerships out there, how much runway is there left in terms of acquiring new ISVs? And then just any sense of what percentage of the business is coming from those partners and any goalposts in terms of how fast that part of the business is growing? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. We're not going to break out the kind of percentage of revenue, per se, but I'll just maybe provide a little bit of color based on your question. Obviously, there's been strong growth there, and we feel very positive about it, as you probably ascertained from our remarks. It is a sizable portion of the Communications revenue today, and it's also growing faster than our total organic growth rate, and it's got, quite frankly, compelling gross margins as well. So, that all feels pretty good. As you alluded to, we did sign a number of large ISV deals in the quarter, including wins with payment processors, customer experience companies, marketing automation platforms, and more. I'd say those businesses have been growing pretty well, too. And so, I think we'll accrue some benefits as a result of their growth. I think, two, it's not just domestic, which kind of speaks to like how much runway is there here. We're also seeing good growth in EMEA and APJ as well. And I think what's kind of important from our standpoint is, is that these relationships are evolving beyond just being like software providers using our channels to kind of real relationships where we have an opportunity to kind of deepen what we do with the likes of a Braze, Klaviyo, Insider, Bloomreach, Airship because we've got like these strong integrations within the ecosystem. We're engaged in co-sell and resell with a lot of these partners. And I think that also allows us to get some go-to-market leverage in terms of expanding our own go-to-market footprint. So, yes, I mean, we do feel pretty good about where we are. We do feel pretty good about the growth trajectory, and we're excited. Thank you. And one moment for our next question. Our next question is going to come from the line of William Power with Baird. Your line is open. Great. Thanks for taking the question. This is Yanni Samoilis on for Will. I know you mentioned earlier in the call that retail and e-commerce was pretty good this past quarter, and it seems like things are pretty stable overall across the business. But I guess, outside of retail and e-commerce, are there any other verticals out there that are standing out right now or maybe even showing signs of upward inflection? Aidan Viggiano -- Chief Financial Officer When we look at our top industries, I'd say most of them are actually up and growing. I'd say for us, social and messaging continues to be one that's a little bit softer, though it's a relatively smaller portion of our business right now. So, financial services is one that has been strong. You called out retail, e-commerce, and a couple of others that have been pretty strong as well. But broadly, I'd say most of the industries that we operate in, our top industries are growing. Yanni Samoilis -- Analyst And just to be clear, growing but not necessarily growing above the company average or -- Aidan Viggiano -- Chief Financial Officer In some cases, they are. In some cases, it's more in line with the company average. Thank you. One moment for our next question. And our next question is going to come from the line of Derrick Wood with TD Cowen. Your line is open. Great. Thanks. Just on AI, I guess, stepping back a bit from a high level, Khozema, how would you describe the generative AI monetization strategy for Twilio, whether via direct modernization or just indirect implications? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I think there's a couple of angles there. So, let me just -- I'll spend a moment on it. So, I think, first of all, where we kind of started with AI with some of the earliest use cases was really around fraud and trust, right? So, we embedded AI capabilities to help protect the consumer just given that we want to, at all costs, protect the vitality of the ecosystem. And so, there were a number of things that we introduced to basically protect the consumer, like Fraud Guard, Verify, these are different products we've announced over the course of the last year or so. As we talked about in the remarks today, like, we're seeing good activity there. I think as we go, it's really going to be maybe AI-centered predominantly around contextual data. I think where we see the big unlock here, certainly for our business and as it relates to what we've referred to for a long time and others do too, is customer engagement like the real unlock there is like through personalization at scale. And so, the way that you get there is having this, like, really rich contextual data about every single one of us as consumers that comes through segment. Being able to relay that back to a consumer vis-a-vis some sort of communication channel and then obviously using AI to supercharge that. So, one example might be like we have a voice intelligence product. We talked about that today, too, where we're able to extract insights as a result of the context of that call, use it both inside of that call that's taking place at the time, but also feed it back into a profile so that that data can be reused for the next time that that brand ends up interacting with the consumer. Similarly, I think where that will increasingly go is you'll end up without perhaps even realizing it, although I think we'll probably disclose it, interacting with an automated agent where all of that is taking place seamlessly. They're able to process natural language. Like I don't think that's, per se, like our strategic advantage in AI. There are a number of companies that can do that. We'll partner with those organizations. What they don't have, though, which I think is our secret sauce is going to be how do you get to that specific consumer and thousands of others at exactly the same moment in time to deliver each of them a unique and personalized experience. That comes from contextual data, and that's why we're so bent on ensuring that we deliver Segment natively inside of Communications so that we can deliver that entire workload. Does that make sense, Derrick? Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Samad Samana with Jefferies. Your line is open. Hi. Thanks for taking my question. This is actually Billy Fitzsimmons on for Samad. In terms of a short one, stock-based comp is down year over year in both dollar terms and percentage terms. Just how should we think about where that can kind of go from here and kind of what inning we're in on that front? Obviously, you guys have highlighted changes to the bonus structure what should it kind of bottom? Is there more -- is there more work to be done -- continue to decline the way it has been? Thank you. Aidan Viggiano -- Chief Financial Officer Yeah. Thanks for the question. There's more leverage here in terms of the opportunity ahead. So, we were 13.6% SBC in the quarter, it was down 110 basis points year over year, it was down 130 quarter over quarter. It's on the back of the things that you've talked about. We've reduced, obviously, the size of the employee base we've made a shift in terms of compensation mix away from equity and toward cash. And we've also been more selective in terms of which employees get equity in the company. Those changes have already been made. In terms of looking forward, we think that there's still opportunity here for leverage. We had originally, several years ago, committed to 10% to 12% SBC as a percentage of revenue by 2027. So, we're still marching our way down the cost curve to get to that kind of range. Billy Fitzsimmons -- Analyst And then if I can ask a second one. Can we just double-click on Communications' gross margins in the quarter? Any changes there, positive or negative, both domestically and/or internationally? And then how should we kind of think about the Comms' gross margins going forward given some of the new initiatives and given the mix of growth in new products going forward? Aidan Viggiano -- Chief Financial Officer In the quarter, you'll see that Comms' gross margins were up year over year but down quarter over quarter. The quarter-over-quarter dynamic was just really driven by the hosting credits that we saw come through in the first quarter. They were about 80 basis points of a help in the first quarter. That didn't repeat quarter over quarter. So, that's kind of the headwind. Year over year, they were up 160 basis points or so, and that was driven by two things: product mix. So, when we talked about email growing or accelerating that obviously helps margins because it's higher margin than the Comms' average. The other dynamic in that year-over-year growth was the fact that we had the dispositions last year that we did that in July timeframe. They were at a gross margin rate that was dilutive to the company. And so, not having those -- the ValueFirst and IoT businesses actually helps margins. As we think about going forward, margins in the Communications business tend to be driven really by mix. That product mix between messaging or voice or email, etc., or termination mix within the messaging business. So, if you're terminating more internationally or domestically, that will drive different gross margins. I think the framework we think about and kind of look at is we look at the unit economics. And so, long as the unit economics remain attractive, we'll continue to do the business. So, you should expect, I'd say, in the near term, some level of variability in the Communications' gross margin. Thank you. And one moment as we move on to our next question. Our next question comes from the line of Mike Funk with Bank of America. Your line is open. Great. Hi. This is Matt on for Mike Funk. I appreciate you taking the question. Can you help us think about the second half revenue guidance in the context of new customer additions versus uplift from expansion? And then looking beyond even this year from a high level, how you might expect the growth across to shake out in the medium term? Thanks. Aidan Viggiano -- Chief Financial Officer I missed the second part. No, we're not going to get into the split in terms of how to think about the revenue guidance. That's not something we've ever really done in terms of splitting the guide between new customers and expansion. I think we feel good about the 5% to 6% range we gave you for Q3, the 6% to 7% for the year. And we talked about the dynamic market, the fact that we're usage based, and the fact that we will continue to plan prudently just given those dynamics. Can you just repeat your second question? I missed it. Unknown speaker -- Piper Sandler -- Analyst Yeah. It was just high level about how the growth algorithm could shake out over the next couple of years, but it seems like that's not something you're going to comment on. Thank you. And I'm showing no further questions. So, this is going to conclude today's question-and-answer session. Ladies and gentlemen, this is also going to conclude today's conference call.

Earnings call: Altair Engineering Inc. shows robust growth in Q2 2024 By Investing.com

Altair Engineering Inc. (ticker: ALTR) has reported a successful second quarter for 2024, with total revenue reaching $148.8 million and software revenue climbing to $135.4 million. This represents a 10.6% year-over-year increase in software revenue, which now comprises 91% of the company's total revenue. The growth was largely driven by strong performance in the aerospace and defense sector and the release of enhanced AI capabilities in Altair HyperWorks 2024. Additionally, Altair's leadership in data science and machine learning was recognized by Gartner (NYSE:IT), and the company has expanded its reach with the acquisition of Metrics Design Automation. With a solid cash position and optimistic guidance for the upcoming quarters, Altair anticipates continued growth and higher gross margins. Altair's Q2 performance and strategic initiatives suggest a strong trajectory for the company. The continued emphasis on AI and data science, coupled with strategic acquisitions and partnerships, positions Altair Engineering Inc. favorably in the global market. With a robust product lineup and a focus on expanding its reach, Altair is set to maintain its momentum in the competitive landscape of engineering software solutions. Altair Engineering Inc. (ALTR) has been making significant strides in its financial and market performance. According to recent data from InvestingPro, Altair's market capitalization stands at a robust $6.83 billion, reflecting investor confidence in the company's growth prospects. This is particularly notable as the company continues to expand its software offerings, a key revenue driver as highlighted in the Q2 earnings report. InvestingPro Tips suggest that while Altair's Price to Earnings (P/E) ratio is currently high at 255.38, this metric has seen an even sharper increase in the last twelve months as of Q1 2024, reaching 672.27. This could indicate that investors are willing to pay a premium for Altair's earnings potential, buoyed by the company's technological advancements and market expansion strategies. The company's revenue growth remains steady, with a 7.11% increase in the last twelve months as of Q1 2024. The Gross Profit Margin stands at an impressive 80.64%, showcasing Altair's ability to maintain profitability amidst its expansion efforts. Moreover, the EBITDA growth of 259.85% during the same period is a testament to Altair's efficient operational management and its focus on driving profitability. For investors and stakeholders looking to delve deeper into Altair's financial health and market potential, InvestingPro offers an additional 15 tips that can provide a more comprehensive analysis. These insights could be crucial for understanding Altair's valuation, including its InvestingPro Fair Value estimation of $69.33, which is based on various financial metrics and market conditions. As the company looks forward to its next earnings date on October 31, 2024, the continued focus on AI and data science, as well as strategic acquisitions, will likely play a critical role in shaping Altair's financial trajectory and market positioning. With a fair value analyst target of $95, Altair's current price at the previous close of $85.32 suggests room for potential growth, aligning with the company's optimistic outlook for the coming quarters. Operator: Good day, and thank you for standing by. Welcome to the Altair Engineering Inc. Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Palmtag, Investor Relations. Please go ahead. Stephen Palmtag: Good afternoon. Welcome, and thank you for attending Altair's earnings conference call for the second quarter 2024 ended June 30th. I am Stephen Palmtag, Altair's Head of Investor Relations. And with me on the call, are Jim Scapa, Founder, Chairman and CEO and Matt Brown, Chief Financial Officer. After market closed today, we issued a press release with details regarding our second quarter 2024 performance and guidance for the third quarter and full year 2024, which can be accessed on our Investor Relations Web site at investor.altair.com. This call is being recorded and a replay will be available on the IR section of our Web site following the conclusion of this call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations. These risks are summarized in the press release that we issued earlier today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our quarterly and annual reports filed with the SEC as well as other documents that we have filed or may file from time to time. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions, we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Jim for his prepared remarks. Jim? Jim Scapa: Thank you, Stephen. And welcome to everyone on the call. During the second quarter of 2024, Altair maintained its strong trajectory. Total quarterly revenue was $148.8 million with software revenue accounting for $135.4 million, both surpassing the high end of our guidance for the quarter. Adjusted EBITDA was $17.3 million above the midpoint of our guided range. Altair's Q2 results underscore the robustness of our software product lineup, which continues to empower customers with industry leading computational intelligence. Software revenue on a constant currency basis grew 10.6% year-over-year in the second quarter. Software revenue as a percentage of total revenue grew to 91% compared to 88.8% in the second quarter of 2023. Altair's success in the quarter spanned broadly across technologies and industry verticals with notable strength in Aerospace and Defense. Last month, we unveiled exciting product enhancements with the release of Altair HyperWorks 2024, which includes substantial advancements in artificial intelligence. This further solidifies our platform status as a leading environment for AI powered simulation driven innovation. HyperWorks 2024 includes improvements in AI driven engineering, design of mechanical and electronic systems and design and optimization driven by simulation. It's the only platform that offers a unified modern user experience across any geometry, physics and complexity at every stage of the product development lifecycle from design to in service. With AI embedded workflows, photorealistic graphics and a unified back end data system, Altair HyperWorks is the foundation upon which many of the world's most innovative digital engineering practices are being built. In June, we announced that Altair was named the leader in the Gartner Magic Quadrant for data science and machine learning platforms for our offering, Altair RapidMiner. Gartner's Magic Quadrant, especially for data related technologies, is widely regarded as an influential tool in the IT industry and serves as a key reference point for many organizations when evaluating technology vendors. The evaluation is based on specific criteria that analyzes a company's overall completeness of vision and ability to execute. Being named as a leader in this ranking report validates what we have known for years, Altair has one of the market's most unique and comprehensive offerings for data analytics and machine learning. For us, this placement is a testament to our unmatched vision and business model, which has defined us since our inception as pioneers at the forefront of technological innovation and computational intelligence. I am proud of where Altair stands today and look forward to the strides we continue to make each day. In July, we announced the acquisition of Metrics Design Automation, a Canadian company with a game changing simulation-as-a-service business model for semiconductor electronic functional simulation and design verification. The Metrics Digital Simulator, DSim, when combined with Altair's silicon debug tools, will deliver a world class advanced simulation environment with superior simulation and debug capabilities in the EDA and semiconductor space. The cloud based business model has the potential to transform the semiconductor space by making high caliber EDA design tools, much more affordable and accessible for companies looking to aggressively scale out simulations to accelerate design cycles. Today integrated circuit design verification has high licensing costs and may require hundreds and sometimes thousands of seats to run a single chip simulation. Additionally, these tools run on desktop machines and are not typically cloud native or cloud enabled. The Altair Metrics solution delivers the flexibility to run as a desktop app on your own servers or in the cloud, and can run very large regressions with customers paying only for what they use. Customers will be able to run simulations concurrently and at scale, removing massive amounts of time and cost from the traditional design cycle. By combining our best in class software with Metrics cloud based simulation-as-a-service, we are excited to bring this groundbreaking technology to our EDA and semiconductor customers. We are unique in our ability to merge simulation with industry leading workload and workflow optimization technology, serving as a true partner for companies embracing innovative tools and resource delivery models in this highly specialized and high stakes industry. Customers now have a choice in design verification. DSim will be available through Altair One, Altair's cloud innovation gateway where it will also be available for desktop download. Altair's software portfolio continues to demonstrate leadership across industries. This quarter, we were thrilled to highlight the role our technology is playing throughout the development cycle for many teams in their quest for victory in the 37th America's Cup beginning August 22. Our work with America's Cup teams demonstrates the power of Altair's computational intelligence vision on a global stage like no other. These are world class organizations always looking to find new ways to innovate and succeed just as Altair is. Their use of Altair's solutions and expertise is helping design state of the art AC75 yachts. Altair is the official computational science and artificial intelligence partner for the New York Yacht Club American Magic team, as well as an official supplier of Luna Rossa Prada (OTC:PRDSY) Pirelli, and we are excited to watch the races and experience the outcome of these remarkable athletes and technologists. In the second quarter, we partnered with Hewlett Packard to enrich the Altair Material Data Center with HP's proprietary material information, enhancing its utility for designers, engineers and scientists. This aims to overcome traditional 3D printing challenges and improve component design for multi jet fusion and metal jet printers. The collaboration bridges the often siloed functions of design and production of 3D printed parts. Now engineers with access to the Altair Material Data Center will be able to use HP material data to design efficient components, conduct structural analysis using [Indiscernible] and analysis and predict and fix manufacturing defects during design and simulation. The collaboration will also benefit users of Altair Inspire Print3D, which accelerates the creation, optimization and study of innovative structurally efficient additively manufactured parts by providing a fast and accurate toolset for the design and process simulation of parts made by metal binder jetting. Customers within our automotive vertical continue to adopt our cutting edge technology. In the quarter, a motorsports company with aspirations of joining the F1 grid signed a six figure three year deal to leverage our comprehensive suite of simulation and high performance computing solutions. The organization believes our simulation driven design philosophy and will use SimSolid and Inspire throughout the design process for rapid design exploration. The value, breadth and flexibility of the Altair unit software licensing model continues to be an important factor in securing new deals. In the banking, financial services and insurance vertical, we welcomed one of the largest property and casualty insurance companies in the United States as a new customer. This organization will leverage Altair SLC, our powerful SaaS language compiler to construct advanced machine learning models, perform data preparation and execute data transformations. Their decision not only emphasizes the quality of our data analytics and AI platform but also highlights the significant potential for growth in this sector. In addition, a Canadian bank leveraging our data analytics platform expanded its six figure annual spend with Altair by over 200%. We also maintained strong performance within the aerospace and defense vertical. We signed an eight figure three year contract with a multinational aerospace company, our largest deal ever. The commitment was driven by Altair HyperMesh, part of the Altair HyperWorks design and simulation platform, which continues to provide superior capabilities for structural modeling and analysis. With HyperMesh, we continue to expand our presence in mission critical workflows at some of the world's most important companies. In addition, a European aerospace, defense and security company signed a seven figure agreement representing a 49% year-on-year expansion compared to 2023. This agreement grows our presence in simulation, high performance computing and data analytics, underscoring the convergence of these domains and Altair's unique ability to deliver comprehensive solutions. This year, Altair established a new vertical focused on healthcare and life sciences where we already had significant business in the areas of HPC and simulation and won our first data analytics deal in Q1 2024. During the second quarter, we saw several new sales and our pipeline of data science activities significantly grow in this vertical, especially for our SaaS language solutions and our graph database technology. Our indirect sales channel remains an important contributor to our overall revenue and a priority moving forward. A clear testament of this commitment is the addition of three new channel partners during the second quarter. [Indiscernible] based in Seattle will offer customers Altair's full suite of comprehensive data analytics and AI solutions found in the Altair RapidMiner platform. Devoteam and Semantic Partners will extend the reach of Altair's data analytics and AI solutions to customers across the EMEA region. And [Indiscernible] [Atec] will bolster Altair's expansion into the Northwest and Central African regions dynamic areas primed for swift adoption of technological solutions. The first half of 2024 was a strong start to the year. We are confident Altair is well positioned for future growth, and we remain committed to delivering best in class technology to our customers. I will now turn the call over to Matt to provide more details on our financial performance and our guidance for the third quarter and full year of 2024. Matt? Matt Brown: Thank you, Jim. Hello to everyone on the call and thank you for joining us. Altair had a strong Q2, exceeding the high end of the guidance range for software revenue and total revenue, and adjusted EBITDA was above the midpoint of our guidance range. Our first half performance was driven by growth across multiple products and verticals with especially strong performance in aerospace and defense where demand for our products continues to be robust. Altair's solutions are fundamental to our customers' mission critical workflows, spanning design, simulation and data analytics. As we look forward, we remain committed to innovation and product excellence, striving to exceed our customers' expectations. As a reminder, some of our revenues and expenses are transacted in currencies other than the US dollar, and therefore, our reported results may be impacted by changes in foreign exchange rates. To aid in the review of our results, throughout my remarks, I will reference growth rates in both reported and constant currency. For the second quarter, calculated total billings were $154.5 million, a year-over-year increase of 4.5% in reported currency and 7.1% in constant currency. Software revenue in Q2 was $135.4 million a year-over-year increase of 8.1% in reported currency and 10.6% in constant currency compared to Q2 2023. The year-over-year increase in software revenue was driven by high retention rates and new and expansion business with notable strength in aerospace and defense where customers are increasingly leveraging the convergence of capabilities in our software. For instance, one aerospace customer is using romAI for multidisciplinary optimization of an avionic system, while another is using RapidMiner for predictive maintenance and root cause analysis. Our unique ability to deliver these comprehensive AI powered engineering solutions gives us great confidence in the long term trajectory of our software offerings. Additionally, our strength in software continues to be broad based with gains across the Americas, EMEA and APAC. Total revenue in Q2, which includes engineering services and other revenue, was $148.8 million, a year-over-year increase of 5.4% in reported currency and 7.8% in constant currency compared to Q2 2023. Non-GAAP gross margin, which excludes stock based compensation, was 80.9% in the second quarter compared to 80% in the prior year period, an increase of 90 basis points. The year-over-year increase in non-GAAP gross margin in Q2 was driven by the mix shift towards software revenue where gross margins are higher than our engineering services and other revenue margins. Software revenue was 91% percent of total revenue in Q2 compared to 88.8% in the prior year. We expect software revenue growth will continue to outpace that of engineering services and other revenue and therefore continue to push our blended gross margins higher. GAAP operating expenses were $128.2 million compared to $126.6 million in the prior year period, reflecting growth of just 1.2% due to the continued and sustained year-over-year reduction in stock based compensation expense. Non-GAAP operating expenses, which exclude stock based compensation and amortization of intangible assets were $105.3 million compared to $96.9 million in the prior year period, reflecting the planned investments we're making in product development and sales capacity to capitalize on the large and exciting opportunities we're seeing ahead of us. Adjusted EBITDA in Q2 was $17.3 million or 11.7% of total revenue compared to $17.1 million or 12.1% in the prior year. Moving to our balance sheet. We ended the quarter with $507 million in cash and cash equivalents, an increase of approximately $88.7 million from the prior year period and $39.5 million from year end. These increases in cash and cash equivalents were despite us paying $81.7 million for the settlement of our 2024 convertible notes in the second quarter. Free cash flow continues to be strong and was the primary driver of our cash and cash equivalents balance. Free cash flow was $97 million for the six months ended June 30th compared to $83 million in the prior year period, an increase of 16.8%. We expect to continue to generate significant free cash flow going forward and we will continue to allocate capital with focus and discipline to drive long term shareholder value. Turning to guidance for Q3 and full year 2024. We've provided detailed tables in our earnings press release, including reconciliation to comparable GAAP amounts. To provide clarity on the FX impact to our expectations, we've provided growth rates in both reported currency and constant currency in our guidance tables. For Q3, we expect software revenue in the range of $130 million to $133 million, a year-over-year increase of 9.2% to 11.7% in reported currency and 11.1% to 13.7% in constant currency. For full year 2024, we are raising our previous outlook in constant currency for software revenue and also adjusting for changes in foreign currency exchange rates over the past quarter. These amounts are offsetting and therefore, we expect full year software revenue in reported currency to be a range of $590 million to $600 million a year-over-year increase of 7.3% to 9.1% in reported currency and 8.9% to 10.8% in constant currency. We expect Q3 total revenue, which includes engineering services and other revenue in the range of $145 million to $148 million, a year-over-year increase of 8.2% to 10.4% in reported currency and 10% to 12.3% in constant currency. For full year 2024, we are maintaining our previous outlook in constant currency for total revenue. This includes the increase in our full year software revenue outlook in constant currency and an offsetting reduction in engineering services and other revenue. However, due to changes in our foreign currency exchange rates over the past quarter, we are adjusting our full year outlook and reported currency to a range of $648 million to $658 million, a year-over-year increase of 5.8% to 7.4% in reported currency and 7.5% to 9.1% in constant currency. For Q3, we expect adjusted EBITDA in the range of $16 million to $19 million or 11% to 12.8% of total revenue compared to $15.5 million or 11.5% of total revenue in Q3 2023. For full year 2024, changes in foreign currency exchange rates have also impacted adjusted EBITDA. And therefore, we are adjusting our outlook to a range of $136 million to $144 million or 21% percent to 21.9% of total revenue compared to $129.1 million or 21.1% of total revenue in 2023. And finally, for the full year 2024, we expect free cash flow in the range of $122 million to $130 million, which has also been impacted by changes in foreign exchange rates and therefore, has been adjusted in line with the change in our full year adjusted EBITDA guidance. As a reminder, our cash flow expectations are sensitive to billings and collections patterns, which fluctuate seasonally. We continue to be pleased with the high free cash flow as a percentage of adjusted EBITDA at approximately 90%. We are excited about our strong Q2 and first half performance to start the year and we are looking forward to maintaining that momentum in the second half. With that, we'd be happy to take your questions. Operator? Operator: [Operator Instructions] Our first question comes from Matt Hedberg with RBC. Matt Swanson: This is Matt Swanson on for Matt. It was great to hear about the success in the aerospace and defense. And Jim, I think you mentioned big HyperMesh win, which has always been kind of seen as a best of breed product for the space. And then, Matt, I think in some of your examples, we talked about some of the newer products like RapidMiner. Could you guys just talk a little bit about the go to market and the ability to be able to sell both those things, and kind of interconnectedness from your traditional products and some of these newer data focus? And just how the sales force is doing ramping on that? Jim Scapa: Yes, I mean, the go to market, first of all, in general, we've moved to this vertical market orientation for all the strategic accounts. So in the aerospace and defense vertical, we have a global team that is managed by one individual and then the account teams are spread throughout the world. When you think about an account, one of the major aerospace accounts, most of them are using HyperMesh and it just continues to expand and now we're expanding out to many of the other products. RapidMiner os pretty natural next step, because they have a lot of test data or they're trying to process material data, for example, coming in for, for example, if they want to project what are values that maybe didn't come in through testing and they want to project those using some AI technology. I just saw that this morning. So it's fresh in my mind. It's just a great tool for doing that. So we're seeing more and more applications throughout our traditional engineering customer base. And I would say that the account teams that are traditionally selling simulation applications are becoming more and more comfortable as they see more of these applications, understand them and can really just talk about them. And we bring experts in of course more and more. The other big application is a solution called physicsAI or romAI, reduced order modeling. So when we're doing digital twins very often we're creating these reduced order models that are typically neural net type models to simulate a part of a system in the digital twin. Similarly, physicsAI lets you run a number of simulations and then run it through the neural nets of physicsAI build an AI model, if you will. The next simulation just simply runs the AI model. So it's really starting to take off. We have a lot of technology just embedded in our tools also as all built on machine learning and AI. So it's sort of permeating throughout the products. And I think we have frankly speaking quite a big lead on our competition and applying this kind of technology. It does take time for everyone to come up to speed, the tech support guys, the sales guys, but we've been at this for five, six years now. And so we are just really running with it. We've been running these seminars, AI for engineering and we have, in some cases, thousands of people signing up for them. So it's been very, very positively received. Matt Swanson: And then my follow-up question was actually kind of on that getting up to speed standpoint and just the idea of kind of the push and pull of AI with your customers right now. It was great to hear about those updates that came for the HyperWorks 2024 around AI. But I'm just curious, like is AI something that your customers are looking to as a must have when you enter into a new deal process, or are you really [Multiple Speakers]... Jim Scapa: I think so, and I think it's what's putting us really in the lead at this point. We see our position in many of these accounts where typically there's multiple vendors in each one of these accounts, ourselves and competitors. But we see our position sort of rising across the board actually. And a lot of the reason for that is the AI technology that we're bringing, I think. So yes, I think it's very important. Operator: Our next question comes from Blair Abernethy with Rosenblatt Securities. Blair Abernethy: Jim, just wanted to drill in a little bit more on your comments about the channel and adding some new capacity there. Are you looking at emphasizing the channel more now that you have more product? Just kind of what are your thoughts there? And I'm not sure what the current percentage revenue from the channel is for Altair? Jim Scapa: We are trying to emphasize the channel more. It's particularly important on the data side, to be honest with you, but it's also important on the simulation side in many of the regions that we probably historically have not gone to market indirectly as much. So some of the larger markets where we were selling a lot directly, we were underserving, I would say, the small, medium accounts and we need to get to those through indirect channels and that's what we're doing. The other thing very, very important for us is systems integrators on the data side, particularly when a customer wants to do like a data modernization program, moving their SaaS to stay into Python in some cases or into a mix of Python and ARM, and SaaS. We're really well positioned for those deals but they have to be done through systems integrators. And the other one that heavily relies on systems integrators is the graph technology. We have a lot of activity happening with that and -- in pharma and in those opportunities very often it's a system integrator that's heavily involved in the implementations. So yes, indirect is really important for us. Blair Abernethy: And just one other, if I could, called out the HP partnership and with your material solutions. Is that strictly a product arrangement or is there some go to market there as well? Jim Scapa: There is no go to market there that I'm aware of, maybe I'm missing something, other than the fact that now their material data is available in our material database modeler, which is really important. We have about 400 different providers. HP is a new one that's added, but a very, very important one. That solution has been maturing and I think it's going to really take off. We're going to move it into a units model approach coming up pretty soon here. And I think that's going to be very, very transformational. I think most of our existing customers are going to start using it. And when they do, I think it's going to really change the game. It's a gorgeous product and it uses AI as part of it as well. So there's some new things coming that are rather cool. Operator: Our next question comes from Charles Shi with Needham and Company. Charles Shi: I know we're in the -- well, middle part of the year, still a little bit away from 2025. But Jim, Matt, any initial thoughts on next year at this point given there seems to be some renewed concerns about the macroeconomic environment, particularly we're seeing news, Stellantis (NYSE:STLA), for example, I'm sure it's probably one of your large customers in automotive, seems to be -- that there's some rumored layoffs there. Not so sure if this is isolated case or not, but I want to get your thoughts in the middle part of 2024, any initial view on 2025, the macro environment, automotive and what you think about the Altair business? Jim Scapa: No, that's a good question. In general, I feel like these companies have no choice but to continue to innovate aggressively. And so my feeling is that these downturns aren't necessarily bad for my business, because I think I bring a lot of value to the customers. And I think the customers are going to choose to work more and more with Altair as time goes on. But of course, when there -- if there is an overall malaise or whatever, I suppose it can have some effect. But generally, I'm not that concerned. I feel really, really optimistic coming into 2025. The product lineup that we're bringing at the end of this year into next year, it's just second to none across the board on the simulation side. All the modeling and visualization, all the work we've done on the modeling and visualization is essentially complete and we are seeing ourselves very, very competitive against really, really everyone. Similarly on the data side and the HPC stuff we're launching a product called NavOps. We've got a huge number of customers lined up. It lets you get to the cloud, basically it works with any of the different cloud providers, every customer is interested in being able to do that managing cost and performance. So I just think we're in a great spot. Of course, macro can have some overarching effect but it's my job to plow us through whatever and I'm pretty confident about it. Charles Shi: Maybe a second question. Glad to see you at the Design Automation Conference. I can feel like Altair has a bigger presence at that EDA industry trade show. And I do want to ask, maybe first off, can you kind of help us give us a reminder what are the Altair business, Altair exposure to the semiconductors at this point? And it's interesting to see Altair announce acquiring this company called the Metrics Design Automation, but also want to check with you because that company, the founder, Joe Costello, is very famous for his different thinking along the business model, charged by the minute rather than charged by the seat that has been his pitch to the EDA industry. But that does echo some of the new point based business model you have been promoting for over the year. So I wonder if we can get a comment from you on that as well. Jim Scapa: We've been building on our portfolio in electronics starting with printed circuit boards and now more and more in the semiconductor space. Obviously, we're not a major player there yet but we're coming with a lot of I think interesting technology that DSim probably tested the hell out of it and it's very, very competitively performing to the best in class logic simulators. And we have really nice digital debug technology, honestly best in class there. We plan to integrate that stuff, make it available so people can run desktop on their servers or in the cloud with business models and technology that makes it very interesting. And there's -- the market I think for semiconductor design is exploding starting from universities and small companies. And I do think that there's been a bit of a duopoly there with very expensive software that is sort of anathema to the creative power of the market to be able to go out and innovate. So I think we're going to bring some disruption there. I don't mean that we're going to completely change the world in six months but I think we are going to see a lot of traction around the stuff we're bringing. And you also have this move to 3D IC and healthcare is very well positioned with some really nice technology in that direction as well. So I think it's going to be more and more important what we do, obviously, we played big on the HPC side there as well. So bringing all that, that convergence, if you will, is going to be important. And I think some of the expertise and technology we bring on the AI side as well is going to bring some interesting innovation. I think that particular market, the EDA market, is right for some disruption and we're going to try and bring some. Operator: And our next question comes from Steve Tusa with JPMorgan (NYSE:JPM). Steve Tusa: Just a question on the guidance and the margins. I would assume that part of the margin tweak down is due to foreign exchange. Can you just confirm that or is there something else in the business that you're seeing on the cost side? Stephen Palmtag: If you look at the full year guide and we have a table that's there that's helpful in getting you to bridge from sort of one quarter to the next. The full year guide from an EBITDA perspective in constant currency is unchanged. So you're correct that the only impact to EBITDA is due to FX. Steve Tusa: And then as far as the aerospace strength is concerned, it's kind of as juxtaposed against I know you're not like direct competitors on certain fronts, but juxtaposed against, Dassault, who called out aerospace and defense as being a headwind. Is there anything to kind of like directly read through there to market share or are these just on like very -- obviously, they're a large company with many different product lines. But is there anything to kind of read through from that to like a direct project win or direct deal win for you guys? Jim Scapa: I don't think there's anything direct Altair versus Dassault, if you will, but I do think some of the players are rising and some are slipping some. And I would say Altair is gaining and others are perhaps slipping some. So without calling out names, not sure what else I can say there. But it's part of why I don't concern myself with some of the macro, because I think it can create new opportunities and I think Altair is rising irrespective of where the tide is going. Operator: And our next question comes from Mark Schappel with Loop Capital Markets. Mark Schappel: Nice job on the software revenue print. Jim, question for you on metric design. I appreciate your color on that in your prepared remarks. You mentioned that you thought the technology was groundbreaking. I mean, would you consider the technology groundbreaking in the EDA space in the same way that maybe SimSolid is disruptive in mechanical simulation? Jim Scapa: No. So I said it's groundbreaking, the business model that they're applying here, because with the cloud you can scale up to thousands of simulations simultaneously. And so you can basically do in a very, very short amount of time, which you could do in much, much longer period of time because you perhaps don't have enough licenses or enough computing hardware to scale out as fast. So the business model and the approach I think is what's groundbreaking and can really accelerate design. But general technology of the logic simulator, I think it's a really excellent logic simulator, which I admit before a lot of testing that we did, we were a little skeptical but it's really quite strong. In fact at the DAC conference one of the gentlemen that does all these evaluations and whatever actually wrote similarly, he was quite surprised with its performance and we were as well, we tested it with a team overseas. So no, I don't think the simulator itself is groundbreaking, I think it's a very competitive simulator. I think the business model is what's groundbreaking. Mark Schappel: And then on physicsAI that was a big topic during the user conference and Investor Day. What kind of an uptake rate are you seeing with your physicsAI tools? Jim Scapa: I think, huge percentage of the customers are beginning to use it. So it's getting a lot of uptake. Operator: And our final question comes from Dylan Becker with William Blair. Dylan Becker: Jim, maybe touching on kind of the HyperWorks 24 rollout, any kind of additional color you could give us around maybe added functionality for customers, how they're thinking about adoption of this, what that can mean for incremental usage or units, kind of the right way of thinking about what that means for the business? Jim Scapa: So I think it's sort of a broad based release with a lot of really great things touching it. The HyperMesh product, which is our flagship product, has gone through this complete transformation. It's a new user experience, it's all Python, all of that. And there's a lot of underlying stuff that you can't see that we are taking out, if you will, because we have two processes running simultaneously. So the performance is dramatically improving. It improved dramatically with the 4.0 release and 4.1 release, which is right now and the 4.2 release in a few months, each one of these is giving us a lot of new performance and that is extremely important, a lot of robustness as well. So brand new user experience, much higher performance. Some of the products have the new graphics engine in it, which is gorgeous. And so it's full time real time rendering, it's really beautiful stuff. The Inspire product continues to really just be groundbreaking for simulation driven design. And I think over the next six months to 12 months, I think we're going to see a lot more take up of Inspire and that addresses the design community. And I'm very excited about that as well, especially some of the new technology for implicit design is, I think very, very interesting as well. So there's a lot, I mean, it's hard to pinpoint lots of new things in SimSolid, the electronics, electromagnetics and SimSolid continues to evolve here. And we're continuing to benchmark run against our traditional electromagnetic solver Feko and getting very, very good results. So we are excited about where things are going. Dylan Becker: Maybe two for Jim and maybe or Matt as well too. On that kind of push to new verticals, obviously, we've kind of restructured and verticalized the sales force, but it sounds like there's some key wins in some of those segments as well. I guess, how should we think about kind of the evolution of those pockets of strength within some of these new markets, and how to kind of fully capitalize on the potential in each of those as well? Jim Scapa: I can answer that. I don't know if Matt has a different answer here. But I think some of them are -- have matured faster or really hitting their stride, aerospace and defense for sure. Some of them are continuing to mature and we're continuing to tune them. Some of the people that we might have selected whatever we're making little changes here and there and kind of learning from the ones that are doing well. We're also adding more folks with domain expertise, for example, in life science space. We've had to add a couple of people that really deeply know that space, particularly on the data science side. But some of the acquisitions that we've made, for example, the graph database acquisition had a lot of life science expertise in it. And so that's really shored up that new healthcare life science vertical, which really looks like it's taken off for us. So in general, I mean, I think it's coming along and it's only a year and a half into this new organization. And I think an organizational transformation like this probably takes three, four years to really completely hit its stride. Matt Brown: The only thing I would add there, Dylan, is just that I think the momentum we're seeing is really strong. And Jim called out in his prepared remarks in Q2, we signed our largest deal ever and that has a lot to do with us moving to verticals. So a lot of these verticals are starting to hit their stride. We were pleased with our Q2 software revenue performance, getting to 10.6% in constant currency and we're excited about our guide for Q3 at the midpoint of 12.4% in constant currency. So just we're pleased with how momentum is building here and feel very good about it. Operator: This concludes our question and answer session. I would now like to turn it back to Jim Scapa for closing remarks. Jim Scapa: Okay. Well, thank you very much. I want to just express appreciation to the team because everyone worked really hard on the Altair team. And appreciate everyone's interest in our company and look forward to continued success here. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Earnings call: ResMed reports robust Q4 growth, plans to expand digital health By Investing.com

ResMed Inc. (NYSE: RMD), a global leader in cloud-connected medical devices and out-of-hospital software solutions, has reported strong financial and operational performance for the fourth quarter of fiscal year 2024. The company announced a 9% increase in group revenue, reaching $1.22 billion, and a 10% increase in its quarterly dividend to shareholders. ResMed's focus on digital health solutions, strategic partnerships, and product innovation has contributed to its solid growth across all regions and segments, particularly in the sleep apnea market. ResMed's financial strength in Q4 of FY 2024 is a testament to its successful execution and strategic focus on operating leverage, which has led to profitable growth. The company's commitment to innovation and its position as a market leader in sleep apnea have allowed it to navigate a competitive landscape successfully. With a clear plan for reinvestment in growth and a continued emphasis on digital health solutions, ResMed is poised to maintain its momentum in the upcoming fiscal year. As the company forges ahead with its mission to improve patient outcomes and expand its market share, stakeholders can anticipate ResMed's continued dedication to being at the forefront of the digital health revolution in sleep and respiratory care. ResMed Inc. (NYSE: RMD) has demonstrated a strong financial trajectory in the last twelve months as of Q1 2023, a trend that is reflected in several key metrics that are crucial for investors to consider. The company's market capitalization stands at a robust $32.97 billion, underscoring its significant presence in the medical device industry. InvestingPro Data reveals that ResMed is trading at a high Price/Earnings (P/E) ratio of 32.14, which suggests investor confidence in its future earnings potential despite the ratio being above the industry average. This is further reinforced by the company's solid revenue growth of 14.16% over the last twelve months, indicating a healthy expansion in its business operations. Moreover, ResMed's commitment to returning value to shareholders is evident from its dividend track record. The company has not only raised its dividend for 12 consecutive years but also has the financial strength to maintain these payments, as evidenced by its ability to sufficiently cover interest payments with its cash flows. InvestingPro Tips for ResMed highlight the company's ability to sustain its dividend payments, with a noteworthy increase over the last decade. Additionally, ResMed's liquid assets exceed its short-term obligations, providing it with financial flexibility. These factors, combined with the company's moderate level of debt, position it well for ongoing operational success and potential future growth opportunities. For more detailed analysis and additional InvestingPro Tips on ResMed, investors can refer to the full list of tips available at https://www.investing.com/pro/RMD. There are a total of 16 InvestingPro Tips listed, offering in-depth insights into the company's financial health and investment potential. Operator: Hello, and welcome to the Q4 Fiscal Year 2024 ResMed Earnings Conference Call. My name is Kevin, and I'll be your operator for today's call. [Operator Instructions] Please note this conference call is being recorded. I'll now turn the call over to Amy Wakeham, Chief Investor Relations Officer. Please go ahead, Amy. Amy Wakeham: Great. Thank you, Kevin. Hello everyone. Welcome to ResMed's fourth quarter fiscal year 2024 earnings call. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for the GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on our reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'll now turn the call over to our Chairman and CEO, Mick Farrell. Michael Farrell: Thanks Amy, and thank you to our shareholders for joining us as we announce results from our full fiscal year 2024 and review our fourth quarter results in more detail. Our global ResMed team executed incredibly well in our fourth quarter, producing another strong period of growth and execution across our business. With solid performance across all regions and all segments of our business and strong double-digit bottom-line growth. Ongoing new patient demand for our market leading flow generators remained robust in the quarter, even against a very tough year-over-year comparable. Media interest in sleep apnea and all the various therapies seems to be helping patients find their way to screening, diagnosis and therapy. And especially the lowest cost, most efficacious therapy with the best outcomes, which is positive airway pressure therapy. In terms of our masks and accessories, business physicians, respiratory therapists and patients are choosing ResMed masks when they start therapy and as they continue through resupply, resulting in very strong double-digit growth in our masks and accessories business. Our residential care software business delivered double-digit growth in revenue and in net operating profit. Our laser focus on operating leverage has delivered another quarter of strong, profitable growth and we're well positioned to continue on this trajectory as we launch into fiscal year 2025. Over 2.4 billion people worldwide suffer from sleep apnea, insomnia or respiratory insufficiency due to chronic obstructive pulmonary disease or neuromuscular disease. As the market leader in respiratory medicine and residential care globally, here at ResMed, we're uniquely positioned to drive increased market penetration through demand generation to accelerate growth. These chronic conditions in sleep health and breathing health form a global health epidemic that ResMed is well positioned to address. We believe that healthcare should be delivered in the lowest cost, lowest acuity and highest comfort location possible, in the optimal case, that's right, in a person's own home. ResMed is the clear leader in sleep apnea, a market of over 1 billion people globally. Our end markets remain significantly underpenetrated. We're leading the industry in digital health solutions, with approximately 19 billion nights of medical data in the cloud and 26 million 100% cloud connectable medical devices sold into over 140 countries worldwide. We've leveraged these de-identified data to show that our therapy solutions lower costs, improve outcomes and bend the curve of chronic disease progression. Significant opportunities remain in digital health, and we plan to be right there at the cutting edge of innovation. The latest advances in wearables from the consumer technology industry and the latest medicines from big pharmaceutical companies will bring more and more new patients into the healthcare system. We have many opportunities to add value, expanding interoperability, lowering costs and improving patient outcomes. Billions of people can benefit from our products and solutions, and we're focused on expanding our reach and growing the market to help people get on their pathway to better sleep, better breathing and better care at home. Sales of our flow generator devices, including the category leading AirSense 11 platform, grew 6% year-over-year globally. We're supporting the global market and every patient who needs a device has access to our market leading 100% cloud connectable platforms, the AirSense 10 and the AirSense 11. We continue increasing the availability and production of our AirSense 11 and our AirCurve11 platforms worldwide as we secure regulatory clearances and launch these market leading technologies country by country. Our masks and accessories business grew 15% year-over-year, expanding in a competitive category globally. Our latest mask innovation, the AirFit F40, introduced last quarter, is doing extremely well in the markets that it has launched in. New patients are selecting the F40 for its comfort, fit and ease of use. It is the smallest profile oronasal mask on the market from ResMed. Patients are voting with their wallets, and respiratory therapists are voting with their setup protocols, and physicians are voting with their prescriptions. We look forward to ongoing success in the US and across global markets as we increase availability and introduce the F40 into more and more countries throughout fiscal year 2025. ResMed's clinical and commercial teams continue to partner with physicians and providers to drive resupply programs directly with their patients, and we're successfully establishing subscription programs in our cash pay countries to help consumers find their path to therapy with resupply directly. Masks and accessory resupply programs are a very important part of our offering as we serve the ongoing therapy needs of patients globally, research shows that resupply programs can both improve patient adherence and improve long-term clinical outcomes. In the US our resupply programs are powered by our digital health ecosystem, including AirView for physicians, myAir for patients and Brightree for home medical equipment providers. We will continue to develop, launch and scale these technologies and programs to help people take control of their own health, regularly refreshing their ongoing therapy needs. As the global leader in significantly underpenetrated markets, our most important opportunity is to expand and grow the market through awareness, diagnosis and seamless pathways to treatment. We aspire to be the digital health concierge for each person as they pursue their personal journey to better sleep, better breathing and better residential care. We are ramping up our demand generation initiatives to raise awareness and create pathways for patients to help them find access to care for their sleep health and their breathing health. We're serving traditional healthcare channels as well as investing in cost effective, social media driven, demand generation campaigns to help consumers who are concerned about their sleep and breathing, find ways their own personal way into appropriate screening, diagnosis, treatment and management pathways. Our physician and provider-based software ecosystem called AirView now contains over 28 million patient records. Adoption of our consumer patient engagement app, which is called myAir, where people choose to participate in their personalized sleep health journey, remains incredibly active and now includes over 8.3 million users. These digital health ecosystems are growing every quarter, showing the engagement of physicians as well as patients in accessing their own data to measure progress along their personal health journey. As we look to the future, I've discussed two global megatrends that I believe will further support ongoing growth for ResMed. Awareness of sleep health issues driven by consumer technology companies, specifically, sleep tracking wearables like the Samsung (KS:005930) Galaxy Watch, which has a De Novo FDA clearance to screen for moderate to severe sleep apnea. And we expect similar capabilities from other wearable players in consumer tech such as the Apple (NASDAQ:AAPL) Watch, Google (NASDAQ:GOOGL)'s Fitbit (NYSE:FIT), the Oura Ring, WHOOP and Garmin (NYSE:GRMN). In terms of the second megatrend behind future patient growth, we are seeing increased volumes of patients entering the healthcare system driven by the efforts of big pharmaceutical companies as they increase awareness of the treatments for diabetes and obesity medicines and they continue their research into the impacts of these medicines on sleep apnea. Together, we believe these two mega trends in consumer tech and big pharma will increase patient awareness and be a significant tailwind for long term growth here at ResMed, our goal is to educate people as they move from what we call sleep wellness tracking on a wearable to what we would call sleep health tracking, where they are seeking the help, advice and care of a health professional in the field of sleep medicine. This connection pathway from consumer awareness of sleep health and breathing health issues into a true healthcare pathway is what we are calling the digital health concierge opportunity. Our plan is to be there for that person as they go through the process of screening, diagnosis, treatment and ongoing management of their sleep health and their breathing health for life. Big Pharma is squarely focused on GLP-1 medications. For many people dealing with their obesity and diabetes issues, their healthcare goals are focused on losing weight while improving their diet, cardiovascular exercise and their sleep routines, something that Bill Dement called the triumvirate of health. We believe that increased utilization of GLP-1s to treat obesity will bring many new people into the healthcare funnel, activating them to see their primary care physicians as they strive to achieve and maintain weight loss. We believe this will open them up to treating other chronic diseases that they may suffer from, including increased awareness of sleep apnea, ultimately driving new patients into diagnosis and treatment pathways that they may not have previously considered or been treated for. So, it's not just driving more patients into our channel, but we believe it's also driving more motivated patients. The emphasis on GLP-1 medications and increased focus by Big Pharma has put a spotlight on sleep apnea like never before. We believe that the growth in weight loss drugs will be a net positive for our business and the data support that thesis. ResMed has added to the biggest study in the field and our data which is using real world evidence of the impact of GLP-1s through a de-identified patient analysis leveraging third party claims data. We now have an expanded cohort of over 811,000 de-identified subjects in our analysis. This analysis demonstrates that GLP-1s are having a positive impact on patients both seeking and adhering to positive airway pressure therapy. The latest numbers are an improvement from what we have presented previously. For patients prescribed a GLP-1 medication, the latest data show a 10.7 absolute percentage points higher propensity to start PAP therapy over those without a GLP-1 prescription. These data show that patients with this drug prescription are more motivated to start their CPAP, APAP or bilevel therapy. In terms of longer-term impacts on PAP therapy, we have seen that the resupply rate at T equals 12 months is 310 basis points, so 3.1 absolute percentage points higher for the patients who have a GLP-1 prescription and further at T equals 24 months, the resupply rate is 530 basis points, or 5.3 absolute percentage points higher for PAP therapy resupply for patients who have a GLP-1 prescription. These data show that the new pharmaceutical class is a clear tailwind for our business, bringing more patients into the healthcare system. And more than that, we believe it is bringing highly motivated patients into the healthcare system. We've included this updated analysis in our quarterly earnings PowerPoint deck and I encourage you to review the data there in further detail. ResMed is the clear world leader in sleep health, breathing health and healthcare delivered at home. Frankly, it's our obligation and it's our brand promise. It's the ResMed brand promise to ensure that sleep concerned consumers find their path to the highest efficacy, lowest cost and most comfortable therapy that's out there and it's best for them. Our peer reviewed and published evidence demonstrates that we can achieve over 87% to PAP technology, 87% adherence to PAP technology in the first 90 days by combining our market leading device platforms with digital health solutions, myAir and AirView. Of course, that means that 13% of patients in that scenario still need alternatives and ResMed wants to be there to help those patients too. So, we are investing in alternative therapies to help patients who can't adhere to PAP therapy to find their pathway to second line therapies. And that includes dental devices where ResMed provides Narval, the market leading 3D printed dental device for treatment of sleep apnea with dental treatment in western and northern Europe. In addition, we have investments in third-line therapies, including pharmaceutical options with our investment in ApneaMed and hyperglossal nerve stimulation technology with our investment in NIC (NASDAQ:EGOV) SOA. So, let's step back and talk about broadly our digital health technology investments. Leveraging an extraordinary ecosystem of almost 19 billion nights of de-identified medical data, we are developing and continue to expand our portfolio of artificial intelligence driven capabilities, as well as customer facing AI products that we're launching into the market from our ecosystem. We continue to roll out and expand the AI products in AirView such as compliance coach in the United States and our new smart coaching pilot which is expanding into a few new countries as we go through our current quarter, which is Q1 of fiscal year 2025 and beyond. We are also progressing with our generative AI capabilities to help patients along their health journey. A project that was initially piloted within our Asia Pacific region, our generative AI sleep concierge that we call Dawn and yes, that is a reference to the sun rising at dawn after a great night of sleep. Dawn was recently expanded from Asia Pac into our US market. We'll continue to share the progress on this front of GenAI and simple ML and generic AI as well, as this tech is further developed and scaled across our business. It's going to enhance the user experience and drive consumer awareness and what we're focused on is outcomes, not the tech, but what it can do for a patient, a physician, a provider. In our residential care software as a service business, we had another strong quarter with year-over-year growth of 10%, supported by strength in our home medical equipment provider business through our Brightree brand, as well as very strong growth in our home nursing and nursing home business with our MEDIFOX DAN brand. We've made very good progress in the business segment throughout fiscal 2024 and we plan to maintain high single-digit growth to low double-digit growth throughout each quarter in fiscal year 2025. But really importantly, we're driving operating leverage and we're going to have very strong double-digit net operating profit growth from our residential care software business sector in 2025. Our residential care software business is integral to the broader ResMed growth portfolio with ongoing synergistic growth opportunities across our businesses. We are accelerating growth across our residential care software business intrinsically, but we're also helping to support the core business through mask and accessory resupply growth. We continue to drive operating leverage by managing across our businesses with capabilities managed such as cloud compute, cybersecurity, interoperability, privacy and research and development velocity across our software platforms and with our core sleep, health and breathing health businesses. We are transforming respiratory medicine and residential care software at scale. We are leading the industry in developing, applying and adopting digital health technology across the 140 plus countries that we serve. We continue to scale and drive efficiencies in our operations. We're focused on driving top line revenue growth, but with strong cost discipline and increasing efficiencies to accelerate profitability at the bottom line. We made excellent progress on that this quarter. The global team delivered growth in non-GAAP operating income of 30%. The global team also delivered growth in non-GAAP net income of 30%. I'm more than incredibly proud of our global team and their performance. We provide differentiated products and solutions for customers worldwide, driving long term sustainable value for our shareholders. We lead the industry in digital health technology with the smallest, quietest, most comfortable, most connected and most intelligent technologies. During the last 12 months, we have improved over 178 million lives by delivering a medical device directly to a patient, or a complete mask directly to a patient, or a digital health software solution that provides personal care. We've helped each person sleep better, breathe better and live higher quality lives with best-in-class healthcare delivered right where they live. In closing, I want to express my sincere gratitude to 10,000 plus ResMedians for their perseverance, hard work and dedication today and every day across 140 countries. Thank you, team. With that, I'll hand the call over to our CFO Brett, who's in Sydney this morning for his remarks, and then we'll open up to Q&A with the global team here in San Diego and Sydney. Over to you Brett. Brett Sandercock: Great, thanks Mick. In my remarks today, I will provide an overview of our results for the fourth quarter of fiscal year 2024. Unless noted, all comparisons over the prior year quarter and in constant currency terms were applicable. We had strong financial performance in Q4 ,group revenue for the June quarter was $1.22 billion, a 9% headline increase and 10% in constant currency terms. Revenue growth reflects positive and consistent contributions across our product and resupply portfolio. Year-over-year movements in foreign currencies had a minimal impact on revenue during the June quarter. Looking at our geographic revenue distribution and excluding revenue from our software as a service business, sales in US, Canada and Latin America increased by 10%. Sales in Europe, Asia and other regions increased by 8%. Globally, device sales increased by 6%, while masks and other sales increased by 15%. Breaking it down by regional areas device sales in the US, Canada and Latin America increased by 5%, supported by solid ongoing new patient diagnosis. Masks and other sales increased by 17%, reflecting growth in both resupply and new patient setups. In Europe, Asia and other regions, device sales increased by 8% on a constant currency basis and masks and other sales increased by 9% on a constant currency basis. Software as a service revenue increased by 10% in the June quarter, underpinned by growth from MEDIFOX DAN and continued strong performance from our HME vertical. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release. Gross margin increased by 330 basis points to 59.1% in the June quarter. The year-over-year increase was driven by reductions in freight expense, manufacturing and component cost improvements, favourable product mix and an increase in average selling prices. Sequential gross margin improved by 60 basis points. The increase was driven by favorable product mix and manufacturing cost improvements partially offset by increased freight costs. We continue to monitor the freight cost headwinds arising from the Middle east, conflict and congestion in Asian ports. We expect increased freight cost rates will continue to impact our gross margin in fiscal year 2025. We have made good progress expanding gross margin over the last several quarters and we will continue to drive initiatives to improve gross margin. Looking forward, we estimate our gross margin will be in the range of 59% to 60% in fiscal year 2025. Moving on to operating expenses, SG&A expenses for the fourth quarter increased by 1%. SG&A expenses as a percentage of revenue improved to 19.8% compared to 21.5% in the prior year period and reflects savings and ongoing cost discipline following restructuring actions undertaken in the December quarter. Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue to be in the range of 18% to 20% for fiscal year 2025. Consistent with historical trends, we expect Q1 FY '25 will be at the higher end of this range. R&D expenses for the quarter increased by 4% on a constant currency basis. R&D expenses as a percentage of revenue were 6.6% compared to 7% in the prior year period. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year 2025. Operating profit for the quarter increased by 30%, underpinned by revenue growth, gross margin expansion and modest growth in operating expenses. Our net interest expense for the quarter was 6 million. Given our lower debt levels, we expect interest expense in the range of $1 million to $3 million in Q1 FY '25. Additionally, we will likely generate net interest income in the second half of fiscal year 2025. During the quarter, we recognized unrealized losses of $15 million associated with our minority investment portfolio. This reduced our Q4 earnings per share by $0.10. Our effective tax rate for the June quarter was 18.7%. Broadly consistent with the prior year quarter, we estimate our effective tax rate for fiscal year 2025 will be in the range of 19% to 21%. Our net income for the June quarter increased by 30% and non-GAAP diluted earnings per share also increased by 30%. Cash flow from operations for the quarter was $440 million, reflecting strong underlying earnings and improvement in our working capital position. Capital expenditure for the quarter was $25 million. Depreciation and amortization for the quarter totaled $44 million. We ended the fourth quarter with a cash balance of $238 million. During the quarter, we reduced debt by $300 million. As of June 30, we had $707 million in gross debt and $469 million in net debt. And we have approximately $1.5 billion available for drawdown under our revolver facility. We continue to maintain a healthy liquidity position. Today, our board of directors declared a quarterly dividend of $0.53 per share, representing an increase of 10% over our previous quarterly dividend and reflecting the board's confidence in our operating performance. During the quarter, we purchased 232,000 shares under our previously authorised share buyback program for consideration of $50 million. We plan to continue to repurchase shares the value of approximately $50 million per quarter in fiscal year 2025. This will more than offset any dilution from the vesting of equity to employees during the year. Going forward, we plan to continue to reinvest in growth through R&D, deploy further capital for tuck in acquisitions, and continue with our share buyback program. And with that, I will hand the call back to Amy. Amy Wakeham: Great. Thank you, Brett, and thanks, everyone. Kevin, I'd like to turn the call back over to you to review the Q&A instructions and run that portion of the call. Operator: Certainly with that be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Lyanne Harrison from Bank of America (NYSE:BAC). Your line is now live. Lyanne Harrison: Yeah, good morning, Mick, Brett and Amy. Can I start with devices that came in a little bit lower than what I had expected? And can you give us some color? In terms of that 6% increase in device revenues? How much of that do you think is driven by November price increases? How much is the AX 11 mixed benefit? And how much of that is volume? And then on volume, are you seeing any change in that new start pipeline coming through? Michael Farrell: Well, thanks for your question, Lyanne. That lets me talk through our really strong growth I believe in our devices business. Just to refresh in Q4 fiscal year '23 just 12 short months ago we were talking about US device growth of 30% and Europe, Asia, rest of world growth of 15%. So incredible double-digit comps that we're building these numbers off and we saw really good growth in the US of 5% growth in our US, Canada, Latin America and we saw 8% growth in Europe, Asia, rest of the world. We're in full competition with all the players out there and as you said, 6% constant currency globally. Look, you know, the market is growing in that mid-single digits and we are holding share or gaining share. But really now as the global market leader, our primary focus is on demand generation. Where are their capacities in the field for screening, diagnosis, treatment and management? That we can drive appropriate demand generation not to overflow the channel, but to make sure that any spare capacity in screening, diagnosis and treatment and management can come through. So, I was very impressed by those numbers. I think they're right in line with market and slightly ahead in Europe, Asia and rest of world. And I think the team did incredibly well. And we're doing it through patient flow, which is very strong. And yes, there are some ASP changes in there. They're kind of small. Our costs have gone up, and we did have some adjustments to pricing over the last 12 months. But the primary generator here is the flow of patients, which, as I said in the prep remarks, we're seeing really good flow of patients. And our job as the global market leader is to continue to have that grow and grow even faster as we go throughout the fiscal years ahead. Thanks for your question. Operator: Thank you. Our next question today is coming from Steve Wheen from Jarden. Your line is out live. Steven Wheen: Yeah thanks. I just had a question with regards to the gross margin. The -- are you going to quantify the freight-related expectations that you would have for the next quarter. And are you being able to introduce rate levies again given the spike in sea freight charges at the moment? Michael Farrell: So, thanks for the question, Steve. I'll hand that over to Brett to cover some issues around GM and really good accretion of our gross margin year-on-year and sequentially, Brett, over to you. Brett Sandercock: Yes. Thanks, Mick. Yes, Steve, we're seeing -- I mean, we're seeing pressure on freight cost, particularly around the rates, the quite significant increases. I think everyone's seen those. So that is obviously, will continue to be a headwind for us, but we think notwithstanding that, we should be in that 59% to 60% range on gross margin. There's a lot of factors, as you know, play into that. But the freight will be a headwind. In terms of -- really, I guess it depends how whether it's sort of permanent or transitory and see how the market goes in terms of freight that obviously, those costs we're bearing at the moment. So, what we do going forward, I think, is something we'll think about as the year goes on. Operator: Thank you. Our next question is coming from Brett Fishbin from KeyBanc Capital Markets. Your line is now live. Brett Fishbin: Hey guys, how are you doing? Thank you so much for taking the questions. Wanted to ask a quick follow-up on the gross margin question just now. Just thinking about some of the year-over-year trend, it looks like 2024 is finishing at about 57.7%, and you're guiding to 59% to 60%. So maybe if you could just walk through some of the positive incremental drivers relative to how we're exiting the second half year? And you already touched on the freight as a partial offset? Thank you. Michael Farrell: So Brett, back to you, gross margin. Brett Sandercock: Yes, sure. The -- you -- to clarify, you talking into the future gross margins? Brett Fishbin: Specifically, just asking about some of the commentary for FY '25 relative to FY '24. Brett Sandercock: Yes, going forward. So going forward, I guess there's some factors at play out on the gross margin. Some of these big positive. We talked about freight, which will be a headwind. But if you -- if we look forward, we have cost optimization initiatives that we're getting back to now, whereas previously, we were really just trying to meet demand and catching up. But now we're getting back to running a more regular cost optimization programs. So, we'll do that. We're building the pipeline of those initiatives, that will be around manufacturing improvements and efficiencies. It will be around the procurement initiatives than what we do there. And also, we'll get -- with the volumes we have now, we'll also get scale benefits coming through. So, they're kind of the areas, I guess, we look at in terms of cost optimization in supply chain. Other factors the continued transition to the AS 11 platform will be supportive of gross margin into FY '25. We think product mix will likely be favorable through the course of FY '25, that will be supportive. And I guess the last one is just around new product introductions as you introduce new products that helps with less discounting and you're able to price that according to the features and the value of those products. So, there are some of the factors, I think that will play out in FY '25. Operator: Thank you. Our next question is coming from Mike Matson (NYSE:MATX) from Needham & Company. Your line is now live. Michael Matson: Yeah, thanks. So, I guess, first, I just want to ask about Philips. Have you seen them reentering any of the international markets in any meaningful way with devices specifically? Michael Farrell: Yes. Thanks for the question, Mike. And yes, our -- I guess I'll call them our #4 competitor right now, right, because they've dropped down to fourth in new patient share globally. That competitor is back in many markets in Europe Asia and Rest of World, we grew in the quarter, 8% in Europe, Asia, rest of the world on a comp of 15%. So, if you see which I do, the market growing in mid-single digits. ResMed is taking share in Europe, Asia, rest of the world relative to our competition. So, competitors from Europe like the one you named, but there's other ones that have higher share and competitors from Asia who have higher shares than them. And so, I think that competitor as they come back are having to earn their way back. We've got to try to repair their brand, try to repair their approach that they're going to have a safe and efficacious product, and they're competing with the Tier 2, Tier 3 players and working their way in. They had a call last week, and they sound like they're growing from a very low base to something better, and that's good on them. I love competition. ResMed is the market leader. We have the smallest, quietest, the most comfortable devices, but more important than that, they're the most connected and the most intelligent and it's all about the ecosystem of AirView and myAir and getting those data to the cloud and getting to doctors, getting to physicians. So yes, that competitor is back in a number of markets. And as we said last quarter, the quarter before, we were beating them from 2010 to 2019, 2020 before they had the recall, and we're going to beat them as they come back and we've shown that this quarter, and we'll continue to show it going forward. Michael Matson: Okay, got it. Thanks. Operator: Thank you. Next question is coming from Dan Hurren from MST Marquee, your line is now live. Dan Hurren: Good morning. Thanks very much. I wanted to ask about that mask growth and the impact of the new products. And specifically, does that strong growth are reflective of an element of initial stocking? Or is that level of growth representative of what the new products can sustain? Michael Farrell: Look, it's a good question because we talk about mask growth being high single digits. And then obviously, in this quarter. We performed right there in Europe, Asia, rest of the world at 9%, right there in that high single digits. Then in U.S., Canada, Latin America, we performed at 17% growth. On a pretty good comp actually of 19% from the year before. So double digit on double digit. Look, you're not going to grow double digits in masks forever when the market is growing at high single digits, and you are the clear market leader. But you can drive demand generation and you can drive better resupply programs. And I said in the prep remarks, we've done a lot of investment in Brightree, Snap Technologies and all of the digital health technology that we have to support home medical equipment providers here in the U.S. market. And then globally, we've really set up some great subscription programs where people, frankly, I think, have been underserved in Europe, Asia and rest of world with the ability to get fresh equipment if they love their device and they love their mask, why isn't it super simple to just click on an app see the price and get a drop ship delivery of a device to your place in a cash pay market where those same people are doing the same and have done with Amazon (NASDAQ:AMZN) and all the other WeChat in China, Amazon, the U.S., et cetera, et cetera, globally. Everyone has seen this in the consumer field. And so I think health care needs to catch up and be more consumer focused and in those cash pay markets. We've set up some great subscription programs. And in the more regulated provider-based markets like the U.S. and Europe, we're really partnering with our providers like never before. So that's how we saw the outperformance. That's how we saw the extra demand generation. That's how we saw the extra resupply. Our goal is to meet or beat market growth every quarter that we go ahead. The team did it really well this quarter, and I have confidence that we'll be able to do it going forward. Thanks for the question about masks. It's a really important part of our business. Operator: Thank you. Next question is coming from David Bailey from Macquarie. Your line is now live. David Bailey: Morning. Thanks to -- thanks Mick and Brett. Just thinking about longer-term new patient growth. You sort of mentioned that the awareness piece could potentially increase on the back of some of the GLP-1 studies and data. Just on the diagnosis side of things. Are there any constraints in your view to more new patients coming through. And I suppose I'm getting to -- the question is, when do you think you might see an inflection from or an increase in that sort of mid-single-digit growth to something a little bit higher? Michael Farrell: Yes, David, it's a really good question, and it's sort of the 3.5 decade question for ResMed, right, which is how do you get people screen diagnosed and treated for a disease, whether they're unconscious when they suffer from it in sleep apnea, being asleep while you have the suffocation. So, education, awareness and better protocols to get patients into the funnel screening diagnosis, treatment and management has been our decades long mission. And look, we did very well, I think, going through COVID and on the other side to apply increases in home sleep apnea testing increases in remote patient monitoring and technology that we've used to help. And so, I do think the big pharma GLP-1 trend is bringing more and more patients in and they're very motivated patients. You saw our latest update on our real-world evidence, 111,000 patients seeing 10.7 absolute percentage points, high propensity to start CPAP. These are very motivated patients over the average patient. And I think that's a big trend. You didn't mention in your question, but I will, David, consumer tech, the wearables. I mean, Samsung dropping the mic there on the other consumer tech companies to say, we've got a de novo clearance to screen for monitor severe sleep apnea from a watch, from the Samsung Galaxy Watch. And I know the Apple Watch has an oximeter on it, and they can do the same. We know Google's Fitbit team have been doing sleep architecture for years. And they will start to recognize many patients with this. So, the real question is not will there be a flow of patients from consumer tech and big pharma. That's going to happen. The real question is, can ResMed really pick up and fight and be the world leader in a digital sleep health concierge to take that sleep concern consumer and help them find a path to a health care specialist to a protocol to a system that gets them screened, diagnosed and treated. We're making good progress on it. We've got a number of experiments globally. We're partnering with an ecosystem of other smaller players out there as well as our own technology in all 140 countries. I can tell you the experiments are happening, and we're seeing some success. The question of the inflection point, look, I do think we can take market growth rate and move it up by 50, 75, 100, maybe even 125 basis points. We're not going to double it. It's a huge, huge global franchise now. Look at our trailing 12 months revenue north of $4.5 billion, but I do think we can move it up 50, 75, 125 basis points by bringing these new technologies that help with that digital sleep pathway. Yes, I'm aware I've got a disease, my watch has told me I'm at risk what do I do about it? ResMed needs to be there to help that person find their pathway through the convoluted frankly, global health care systems to therapy. For those who are coming in the big pharma one, they're already in the health care system. They're going to a primary care physician or a specialist doctor. So that's an even easier route where it's more about education and driving the traditional channels. So we're working both, social media, digital and traditional channels. And together, I do think there's opportunities to accelerate market growth and watch this space. We've done well over the years, and we've learned a lot in these last five years. And now as the global leader, it's our obligation to do this, and we're all over it. Thanks for the question, David. Operator: Thank you. Next question today is coming from Gretel Janu from E&P. Your line is now live. Gretel Janu: Thanks. Good morning. Just back on the gross margin and the guidance of 59% to 60% for FY '25, how should we think about the cadence of that throughout the first half and second half weaker first half, stronger second half given freight or relatively consistent throughout each quarter? Thanks. Michael Farrell: Yes. Good question, Gretel. Over to you, Brett. And it feels like this is the after call with modeling. But over to you, Brett. Brett Sandercock: Great. Thanks, Mick. Thanks, Gretel. Yes, I mean, we're at 59.1%, I guess, exit there. I think we've got a 59% to 60% and I think it's probably likely kind of be that gradual improvement as we work through FY '25, I think it's kind of our best estimate at this stage. Operator: Thank you. Next question is from Suraj Kalia from Oppenheimer. Your line is now live. Suraj Kalia: Perfect. Congrats on a nice quarter. So, Mick, if I could, I'd love to push you on one of the earlier questions about pricing impact in the quarter. If you could strip out at least give us directionally a little bit additional color, that would be great. Mick and also, if I'll throw my follow-up question also together in terms of inventory levels, how should we think about inventory levels on masks, accessories across the pond. Is there anything out of the normal? Or how would you characterize it? Thank you for taking my questions. Michael Farrell: Great. Well, I'll take the first question around pricing impact. And then Brett, you'll take the sneaky second question there around -- sneaky, I mean, by getting it in upfront, Suraj, not the question itself, on inventory levels, particularly with masking accessories. And we saw the total inventory come down, but I think it's specifically Brett on masks and accessories. So firstly, on pricing impact, look, Suraj, you and all the sell side, you guys do your investigations and you look and talk to our customers, particularly in the U.S. and ask about pricing. You know that as a company, you've followed us over the last few fiscal years, we did see cost of components go up with inflation with shipping costs that have gone -- we've had increased cost of goods sold that ResMed has had to deal with, and we've shared some of that, not all of it. We've shared some of that with our customers with some increase in pricing. Often associated directly with innovation, right? The AirSense 11 was higher priced than the AirSense 10, but it's small, it's quiter. It's more comfortable. It's more connected. It has 2-way comps. It has over-the-year upgrades. It has all these advances. And so, it has a high price point. Similarly, with new mask inventions, the F40 is out there. It's a great mask. We don't need a price discount on something that is that much better than the competition. It's the smallest full-face mask, the smallest oral nasal mask in the history, a 35-year history of ResMed. So that -- those will be at price premiums. And so don't break out the exact breakdown on devices or masks of pricing or volume. But I can tell you, the vast majority of our growth was all on volumes. It's all about getting more of the one billion-plus patients with a sleep apnea, the half billion patients with insomnia and half billion with COPD into the system, so they can get better fleet and better breathing. So we focus primarily on that screening diagnosis treatment, get the volume in, and then ASP is a component in that where we have increased costs. Look, frankly, I hope inflation comes down and costs come down, and we can share some savings with our customers because they have a tough time with reimbursement often not going up. At least the U.S. Medicare went up at the start of this year, in line with an inflation adjustment, but not all insurance companies around the world do that. And so, our job is to get more patients in to make sure the channel is profitable so that we can have more money to invest in getting awareness out to all the patients who need our help. That's my answer to the first half. Brett, over to you to talk about inventory and masks and accessories, particularly. Brett Sandercock: Yes. Thanks, Mick. Yes, on inventory, we've brought the inventory levels down over the last 12 months or so. I think down to reasonably appropriate levels where we are seeing at the moment. And then inventory likely to grow more in line with revenue as we go forward. So, we feel we are in reasonable shape there. In terms of masks can accessories around that, we don't think of that too much differently. There's nothing particularly specific about it. We manage those inventory levels as we do with devices and components and so on. So, nothing particularly to call out there other than I think we've got -- we're more comfortable with inventory levels that we're at now, and we will work, for example, 12 months ago. So, I think we're in pretty good shape on inventory. Operator: Thank you. Your next question is coming from Margaret Andrew from William Blair. Your line is now live. Margaret Kaczor: Hey, good afternoon, good morning, folks. Thanks for taking the question. And I'm going to apologize because it's a series of three questions, but I'm going to say pick and choose whatever you want to answer. I promise they're all connected. And it's really -- Mike, you talked about wanting to be a sleep concierge service in one of your earlier question answers. And so, the question is, one, First, is the sleep concierge service something that you will give away as a service? I assume you will, but maybe there's some ability to monetize that. And then two, how many patients do you think that those digital technologies that you referenced, how many patients could they bring into the market over what time period? Is it millions already what's your success rate in getting those patients connected to you and ultimately, on a CPAP today versus what they're -- where they're getting lost. And third, again, I apologize for the multiquestion here. But ultimately, this all kind of brings this idea of the funnel together and you guys delivered double-digit growth this quarter, I guess, is that one way to continue that as a trend and whether you want to give it numerically or not. But how do you get that over time on a longer-term basis? Thank you. Michael Farrell: Yes, Margaret, it's a great set of questions. And it really is one question, right? It's really about that demand generation and how we can as a company best leverage what is, frankly, once in a generation in the pharmaceutical cycle. And I think maybe once in a generation on the wearable cycle from consumer tech of a bolus of patients over the coming one, three, five, 10 years. So, look, yes, we want -- we aspire to be this digital health concierge and digital health concierge specifically for sleeping and breathing. Look, I mean, obviously, when we're providing technology, if we're providing a service that is a service that's out there in the health care field, we're going to be charging for it. But in the context of helping people find access to information, ResMed has the world's leading database with 19 billion nights of medical data in the cloud. We have more knowledge than anyone on the planet. I wouldn't call it a data lake, but I'd call it a data well, it's a bunch of deep, deep information about the field of sleep and breathing and about patients how they get to sleep, how they breath all night, and how they wake up and have mask leak and/or apneas and/or issues. And so with that, we want to bring that information and bring it to the world. For instance, we don't charge patients for myAir. Patients get access because we believe they paid their insurance. They -- in markets that are cash pay, they paid for that product with their own cash. So I believe they have the right to access their own data on their myAir app. So if they sign up, there's 8.3 million patients, they get myAir for free. So in a similar context, I would want patients to be able to find access to a pathway on a sort of freemium basis. If there's advanced analytics and advanced information we're doing that does. AI isn't free, a lot of engineers to write it and a lot of energy consumed in the algorithms as they run. We probably will charge for some of those advanced information similar to what we do with AirView with our providers and physicians. So sleep health concierge, there will be freemium basis and will be out there. There probably will be some pay -- for the really advanced folks. But the primary goal is to help the billion people find their path to treatment. Now to your specific questions about quantifying how many patients in the channel, how many extra have we got from consumer tech, from big pharma versus from standard referrals. We do have some analytics and measurement on that. They're internal and they're not for sort of public consumption. If I say them here on the call, they become public for them. But I can tell you we are productively paranoid about analyzing this channel. The flow of patients in where they come from and how they come from, what we can do to drive more patients in from each element of that. how we can get an ROI of either direct consumer advertising or social media-driven advertising and really track the return on that. So watch this space, a lot of investment from ResMed. It is our brand promise to help people get better sleep, better breathing and better care at home. And we're the world leader. It's our duty to do so. So I do believe, to answer the sort of third part of your question, bringing the funnel together, it is all about that. We achieved incredible growth, double-digit growth, as you said, across the business, north of 6% in devices, north of 15% in masks and incredible growth in our respiratory care -- sorry, residential care services and software at 10%. So really proud of the team. Our goal to keep doing it and keep doing it quarter in, quarter out, and the team is on it. So thanks for your question, Margaret. Operator: Thank you. Next question is coming from Anthony Petrone from Mizuho Group. Your line is now live. Anthony Petrone: Thanks, Mike. Congrats on the quarter here, let me just stay on the theme high level. If you think about the debate on GLP-1, on the one hand, we still have a low diagnostic rate just for sleep apnea overall. I think it stands at 20% or so based on the last Wisconsin sleep study. So when you think about Lilly coming in here, potentially doing DTC. Where do you think the diagnostic rate can go, so that would be a huge tailwind. And then on the flip side, you think about the continuum. We have dental devices CPAP therapy, auto, CPAP, of course, in their sleep metrics on AirView, et cetera. And then we also have hypoglossal nerve stimulation. When we add in the GLP-1, how do you think the decision-making process will shake out over time? Thanks again. Michael Farrell: Yes. Thanks for your question, Anthony. It's a broad one. It allows me to talk about diagnostics rates, but also the different sort of, as you said, continuum of care of the therapies for obstructive sleep apnea or sleep apnea in general. So yes, the Wisconsin Cohort, The Sleep Heart Health Study is a fantastic multi-decade study and really Terry Young and her colleagues have done incredibly well to have such a broad study across the field. It does talk about the United States having diagnostic rates in that 15% to 20% rate. But it is a U.S.-based study in the Sleep Heart Health Study. It's out of Wisconsin, it's U.S. based. It doesn't talk about Europe. And in Western Europe, the diagnostic rate is well south of 10% across Europe. And in Asia Pacific, MEA and rest of world and Latin America, we're less than 5% penetrated into this. And if you just look at the macro of it, right, we've got -- and we brag about it. We're so proud of having 28 million patients in our ecosystem. That's out of one billion patients worldwide. So that's 2.8% of patients in our ecosystem. And we're the world leader. We're the world leader in digital health, not just for respiratory medicine, but across the board with 19 billion nights of data. So globally, this is a single-digit penetration market. And so, I welcome firstly, patients need treatment. I welcome all alternative therapies. We're investing in all alternative therapies. We invest in CPAP, APAP, bilevel, obviously, world leader in that. We're investing in dental therapy. We're the world leader in naval 3D printed devices for Western Europe and Northern Europe, #1 in three different dental devices in those regions. And we're investing in pharma with our at need investment and we're investing in hypoglycem with our XR investment. So we want to take care of every single patient. But the goal when you talk about the continuum of care, if you're a physician, payer provider and you're looking at the holistic system, you want lowest cost most efficacious, least invasive, most reversible and the most used in terms of data of lowering death rates 39% -- sorry, 29% reduction in mortality rates that we've seen PAP across our Alaska study. So our goal is, yes, get that patient in the sleep health concierge channel, get them to the best therapy, which is start with CPAP, as you said, probably upgrade sometimes to APAP, sometimes bilevel. If you fail all of those and maybe 10% of the patients, we just can't get there, 10% plus, we then will help them find a path to dental therapy, which is the next most efficacious therapy. Then after that, based on SIM out study, probably pharma comes a little bit ahead of hypoglossal nerve stim in efficacy, right? They're talking 60% AHI reduction versus just north of 50% for some of the surgical ones. So probably third-line therapy is going to be either GLP-1 or an apnemed-type product. And I think that all of the above are great, and we're investing in all of the above. And look, if you can't tolerate the see the dental and you won't take a pill, you probably do need to have that implant because some treatments better than no treatment. And we know that if you're treated for the suffocation, you're going to have lower incidences of heart attack, stroke, all-cause mortality and you're going to be less costly to the health care system. We have dose response relationship data showing for every hour on positive airway pressure therapy. We see 7% to 8% reduction in emergency room costs. So our goal is to continue and be part of this ecosystem and help patients find their pathway to therapy. We are seeing more patients coming from this. I hope it does increase that diagnostic percentage because it's our obligation as an industry to do so. Thanks for the question, Anthony. Operator: Thank you. And the next question is coming from Saul Hadassin from Barrenjoey. Your line is now live. Saul Hadassin: Yeah, good morning, Mick, Brett and Amy. Mick, can I just get you to give some commentary around the SURMOUNT-OSA write-up in the New England Journal and particularly some of those secondary endpoints as it relates to the reduction in AHI in that no disease effectively of mild disease. You mentioned the data as it relates to resupply. I was wondering if you have any data that looks at or tracks people who are giving a script for GLP-1 and CPAPs as to how many people have actually been able to come off CPAP at the end of either 12 months or 24 months? Thanks. Michael Farrell: Yes, Saul, thanks for the question. And look, we're looking at the real-world evidence every single way that we can. And yes, certainly, the SURMOUNT-OSA data had a pretty extraordinary trial, right, where they had the patients with the sleep coach, a nutrition coach, an exercise coach, they were calling them and interacting with them every day. So even people in the placebo arm had incredible reductions in weight and some really big reductions in HI in the placebo one, where they got no pharmaceutical medication, whatsoever, either saline or nothing. And so look, I think that under that circumstance, there's roughly 600 patients, plus or minus. They have some extraordinary results. But even in all those circumstances, they still weren't as good as dental devices and certainly nowhere near the 95% reduction in HI that any doctor would want with positive airway pressure therapy. But look, look, it certainly was larger than many people thought in the HR reduction. So, I think it's great. I think it means that those two companies that are investing in this are going to go through, getting the indication for use, and then they're going to be out there doing DTC advertising, which in the U.S, you can do a late-night television, and they'll be out there. They'll find some catchy tune and it'll will be out there driving patients into the funnel, and I think it will be good for all of us in the therapeutic side. We're definitely looking at the churn rates and CPAP quitters, APAP quitters, bilevel quitters and really looking in detail at it. I can tell you, in aggregate, we've seen no change on the data. And as you know, the latest generation GLP-1s, some of them have been out there one year, three years, four years plus these latest gen, and we're not seeing any increase in that. We're looking at it real-world data, and we're analyzing left, right and center, but we're not seeing an increase in quitters rates. If anything, we're seeing more motivated patients come in and holding on more. The combination therapy, which is what the primary investigators in this talk about, which is CPAP plus drug therapy as in I'm managing my weight and my suffocation are really there. And the vast majority of patients have incredible residual apnea at levels that would be treated by any primary care physician in the planet even under the very controlled circumstances of this trial, let alone what's going to actually happen in the real world. So we're watching it. We have a really strong focus on it. We've got 811,000 patients in our study. and we'll continue to publish data on it. And as we get more and more, we'll go even more to publish an American Thoracic Society, European Respiratory Society and get in the Blue Journal and all the big journals to have this down there in the clinical literature as well as the subjects that we're looking at in our analysis. Thanks for the question, Saul. Operator: Thank you. That's all the time we have for questions. I'd like to turn the floor back over to Mick for any further closing comments. Michael Farrell: Yes. Thanks, Kevin, and thank you to all of our stakeholders for joining us on this call. The opportunities in front of us, as you heard from all these questions, huge and largely untapped. It's an incredible runway. We see more and more people coming into the health system, and this will benefit us as we help them sleep better, breathe better and live better lives in 140 countries. Thank you to all the ResMedians, who listen to this call around the world. Many of you are also shareholders. So thank you for what you do today and every day. With that, I'll hand the call back to you, Amy. Amy Wakeham: Great. Thank you, Mick. Thanks, everyone, for listening and your questions. We do appreciate your interest and your time. If you have any additional questions, please don't hesitate to reach out directly. This concludes ResMed's Fourth Quarter 2024 Conference Call. Kevin, you may now close out the call. Operator: Thank you. You may now disconnect your lines, and have a wonderful day. We thank you for your participation today.

Earnings call: Atlassian confident in reaching $10 billion despite challenges By Investing.com

Atlassian Corporation Plc (NASDAQ:TEAM), a leading provider of team collaboration and productivity software, reported robust financial results for the fourth quarter of fiscal year 2024. The company announced revenues of $4.4 billion and free cash flow exceeding $1.4 billion, with a customer base now surpassing 300,000. Despite facing some headwinds such as slower cloud revenue growth and macroeconomic uncertainties, Atlassian remains optimistic about its long-term growth, aiming to achieve over $10 billion in annual revenue. The earnings call also marked the last for co-CEO Scott Farquhar, who will transition to a board member and special advisory role. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A highlights The earnings call provided a comprehensive view of Atlassian's current position and future plans. While the company faces challenges, such as slower cloud revenue growth and macroeconomic uncertainties, its strategic initiatives, including product innovation, cloud security enhancements, and enterprise customer engagement, position it well for long-term success. The company's leadership transition marks the end of an era, but Atlassian's direction remains clear as it pursues its ambitious revenue targets. InvestingPro Insights Atlassian Corporation Plc (TEAM) continues to navigate the competitive landscape of productivity software with notable financial resilience. According to the latest data from InvestingPro, Atlassian boasts an impressive gross profit margin of 81.86% for the last twelve months as of Q3 2024, underscoring the company's ability to maintain profitability in its core operations despite broader market challenges. The company's commitment to innovation and cloud security enhancements is reflected in this robust margin, which is a critical indicator of financial health and operational efficiency. While the company's revenue growth remains strong at 24.16% for the last twelve months as of Q3 2024, Atlassian's stock is currently trading near its 52-week low, presenting a potential entry point for investors. This juxtaposition of strong fundamental performance with a lower stock price could indicate an opportunity, especially considering that analysts predict the company will be profitable this year, as noted in one of the InvestingPro Tips. InvestingPro Tips also highlight that Atlassian operates with a moderate level of debt, which may offer some degree of financial flexibility as it continues to invest in growth initiatives and navigate potential macroeconomic uncertainties. For investors seeking more comprehensive analysis, InvestingPro provides additional tips on Atlassian, which can be accessed through the dedicated page for the company. In conclusion, Atlassian's financial metrics and InvestingPro Tips suggest a company with a solid operational foundation, poised for profitability, and currently available at a potentially attractive valuation. Investors and stakeholders can gain further insights and tips by visiting the InvestingPro platform, which offers a wealth of additional information to inform their investment decisions. Full transcript - Atlassian Corp Plc (TEAM) Q4 2024: Operator: Good afternoon and thank you for joining Atlassian's Earnings Conference Call for the Fourth Quarter of Fiscal Year 2024. As a reminder, this conference call is being recorded and will be available for replay on the investor relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam: Welcome to Atlassian's Fourth Quarter and Fiscal Year 2024 Earnings Call. Thank you for joining us today. On the call with today, we have Atlassian's co-Founders and co-CEOs, Scott Farquhar; and Mike Cannon-Brookes, and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our fourth quarter of fiscal year 2024. Shareholder letter is available on Atlassian's Work Life blog and the investor relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. Any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made and we undertake no obligations to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled, Risk Factors in our most recently filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the investor relations website. We'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Mike for opening remarks. Mike Brookes: Thank you all for joining us today. As you've already read in our shareholder letter FY24 was an incredible year for Atlassian and we're proud of all we've accomplished in a challenging environment. We generated $4.4 billion in revenue, over $1.4 billion in free cash flow, and surpassed 300,000 customers. We continued our steady drumbeat of innovation in FY24, shipping Atlassian intelligence, compass, and virtual agents for Jira Service Management into general availability. We also welcomed Loom into the Atlassian family and introduced Rovo and announced an entirely new era for Jira. We closed out our 3.5 year journey of winding down Server and successfully migrated millions of users to Cloud and Data Center. As we continue to partner deeper with our data center customers, they understand that cloud provides the ultimate Atlassian experience with the power of our unified platform and innovation such as analytics, automation, and AI. We've continued to deliver enterprise grade platform capabilities to this cloud and working data residency in six new regions, increasing the scalability for Jira to support up to 50,000 users on a single instance, and achieved FedRAMP In Process designation, a critical milestone in supporting the US public sector in our Atlassian Cloud. These and more are helping pave the way for some of our largest and most complex data center customers as they map out their journeys to cloud. We now have over 500 customers spending over $1 million annually. The progress we've made and the momentum we are seeing in the enterprise segment reinforces our conviction in our strategy to build and deliver solutions that help solve our customers' toughest team collaboration challenges. We have a massive, serviceable, addressable market opportunity across our three customer markets, including a $14 billion revenue opportunity just within our existing customer base alone. And we are more excited than ever to seize this opportunity and accelerate our path to surpass $10 billion in annual revenue. Lastly, this is Scott's last earnings call. It is truly impossible to put into words the impact that Scott has had on me, on the thousands of employees, hundreds of thousands of customers, and Atlassian as a concept and as a company over the last 23 years. It's been an honor to lead Atlassian side by side with him over the last two decades. And I look forward to his many continued contributions to the company as a board member and in his special advisory role. Thank you, Scott. And with that, I will turn it over to him. Scott Farquhar: Thanks, Mike. I look back on the last 23 years with immense pride about what we've built at Atlassian. We've always believed that only through teamwork can we achieve this seemingly impossible. This is why we spent over two decades building products that enable our customers to do just that. Our products have powered teams at the forefront of innovation, from the companies leading the next stage of space exploration to those developing ground-breaking medical discoveries that are saving lives. And it feels like we're only just getting started. Atlassian is incredibly well positioned to seize the massive opportunities in front of us across our three markets and an enterprise, AI, and of course, delivering innovation across the entire product portfolio. I'm more bullish than ever about our strong position to grow and deliver unparalleled value to our customers. Before I close out, I want to take a moment to thank every single Atlassian around the world, past and present. People say this place wouldn't be Atlassian without Mike or I, but the truth is, Atlassian wouldn't be what it is today without each and every one of you. You drive our mission forward and your dedication and unwavering commitment inspire me and make me incredibly proud. I look forward to seeing Atlassian continued to see with mission of our mission essential every team, albeit from a slightly different seat. With that, I'll pass the call to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from Keith Weiss from Morgan Stanley (NYSE:MS). Keith Weiss: Excellent. Thank you, guys for taking the question and Scott, congratulations on a really remarkable career. It's been a real pleasure working with you over the years. So coming out of a real building year in FY24, the FY25 guidance for total revenue about 16% is disappointing to investors. We see that in the aftermarket reactions. Do you guys remain confident in the longer term, 20% plus growth profile over the next three years? Can you help us bridge that equation? Where do you guys garner the confidence for like the 20% plus growth longer term? What are the parts of the equation that are going to turn on, if you will, as we go into FY26 and FY27 that we're not seeing today, that give you guys the confidence to make that statement with today's results. Joe Binz: Thanks Keith. This is Joe. I'll start and then I'll pass it over to Mike for more color. Despite the macroeconomic uncertainty and the execution risks related to the evolution of our go-to-market motion, we believe FY25 will set us up with a strong foundation to accelerate growth in FY26 and beyond. And keep in mind mechanically, there are a number of difficult prior year comparables in FY25 with the end of server maintenance revenue and event driven purchasing around the server end of support. Longer term fundamental growth drivers for FY26 and beyond are very consistent with what we shared at Investor Day back in May. So it starts with the opportunities we have in our three large markets, those being software, service management, and work management. Those are collectively growing at a solid double digit CAGR. We have a $67 billion addressable market opportunity with $14 billion of that in our existing enterprise customer base alone. And then from there, we can drive growth in several ways. We believe migrations from data center, given the size of the install base, will continue to be a driver of cloud revenue growth in FY25 and beyond. And we're investing and working hard to enable those customers to migrate to the cloud. In addition to migrations, we have paid seat expansion within existing customers as we move to enterprise and enable more wall-to-wall adoption. Then our opportunity to cross-sell additional products like Jira Service Management, Jira Product Discovery (NASDAQ:WBD), Compass, Loom, and Rovo to our over 300,000 customers is another great opportunity. We have the ability to upsell to premium and enterprise additions to our products, which is another significant growth driver. And then there are other drivers in the model like pricing and new customer growth, which is not significant in the short term, but is a longer term growth driver. And then lastly, with AI, I'd say we believe we have a unique and differentiated position with data graphs around high value workloads. And there's a lot of long -term opportunity in that space as well. So overall, we continue to expect to drive healthy revenue growth over the next three years at cloud. And from a data center perspective, that customer base is primarily composed of large customers with very high logo retention. So growth from the customers that remain on data center will be driven by pricing and seat expansion and cross-sell. So overall risks and tough comparables to navigate in the short term, but big opportunity and fundamental customer demand are there long-term, particularly in the enterprise customer segment, as you can see in the momentum and traction we're getting there. We cited we have over 500,000 customers spending more than $1 million with us, which is up 48% year-over-year. So we feel really good about that. And then I just say overall, we remain competent as ever in our ability to deliver revenue growth in excess of a 20% compounded annual growth right over the next three years. Mike? Mike Brookes: Yes, look, I think Joe's answer did incredibly well, Keith. Look, if I take, he's nailed the math there, right. And we are incredibly confident in our 20% figure we've given over the next three years and continue to be. So today, as we were at the Investor Day, for all the reasons that he stated and how the math plays out. I will say from a qualitative point of view, the more customers I spend time with, the more confidence I have in that number from on the non-math side, I suppose. Most of the large customers I speak to, in fact, all of the large customers I speak to, would tell you that cloud is a when, not a next for them. So that gap between the server migrations ending and the data center migrations picking our pace, that we have high confidence that will mature through in our engineering roadmap and in the deliveries, we have in cloud and how that's resonating with the customers in the stories they tell. Secondly, increasingly AI analytics and their platform are mentioned by those large customers as reasons for moving, as well as our cloud delivery. So our proven ability to deliver, as we saw with FedRAMP In Process this quarter, is resonating with those larger customers, as is the new products that Joe mentioned some also in Loom, Jira Product Discovery, Rovo, Guard, Compass. We have the best slide of new products in the nascent phases that we've had with very high customer resonance when you do qualitative checks with customers. All of those exist in the cloud and all of those are going to drive that migration journey. Lastly, I have a huge confidence in our long-term ability to evolve and adapt as a business. We've shown that over more than two decades. We're in one of those adaption phases at the moment, as we deal with the enterprise transition, I think, adroitly. And that evolution capability that Atlassian have will continue as we help those largest customers to go increasingly wall-to-wall across their enterprises. So a huge bullishness for me that we'll hit those numbers that we've given out. Operator: Your next question, from Michael Turrin from Wells Fargo (NYSE:WFC). Michael Turrin: Hey, great. Thanks. Appreciate you taking the question. Objectively, 30-plus percent subscription revenue growth, 30-plus percent free cash flow margin. Not something we're seeing a lot of across software, but in the spirit of the question is, Joe, you guided Cloud to 32% for Q4. The reported number came in at 31%, so just hoping you could provide some context around what drove the Delta in Q4 and maybe just help us frame the approach to Cloud guidance for fiscal '25. If there's anything additional, you're taking into account, obviously a lot of moving pieces and factors to consider, so any compare and contrast with the approach to guidance here versus prior periods is helpful. Thank you. Joe Binz: Yes, awesome. Thanks for the question. You're right. Revenue was up 31% year-over-year in the Cloud in Q4. That was slightly below our guided range of 32%. The variance to our expectations there was driven by two factors. One is the timing of high-touch enterprise deals, which landed later than expected in the quarter, and slightly lower than expected revenue from data center migrations. So I'll take each one of those and dive in. From a deal-slip perspective, deals closed and billings landed in the quarter just later than we expected, and that impacted revenue recognition. There were a couple factors that drove that. The first is what I'd characterize as the evolution of our high-touch go-to-market motions. We are driving larger, more complex deals that include more products and require more approvals. And in some cases, we're targeting large, complex migrations, and all of that adds up to longer sales cycles than we anticipated. Second, we always take a very disciplined and long-term oriented approach as we think through pricing and concessions on these deals. So we're not deadline driven. We don't do anything unusual or unnatural with deal economics to close a deal at a certain time, and we're willing to be patient and wait for the right deal for both the customer and for us, and that's what we did this quarter. In terms of the migration list, overall, migrations to cloud were slightly lower on an absolute basis in Q4 versus Q3, and you'd expect that following a catalyst like server end of support, with migrations from data centers slightly lower than our expectations as you highlighted. The driver there is the complexity of these migrations. Data center customers are our largest customers with the most complex environments to migrate. It's very different from the one to two day migrations that we can do with our smaller customers. Further, many of these customers, when they do migrate, do so taking a hybrid approach over time. And then lastly, many of these data center customers recently migrated from servers. So there's going to be variability in the pace of these data center migrations quarter-to-quarter, and overall, our customers are clear that their ultimate destination is in the cloud, as Mike talked about. It's the best and most secure experience, and it's where all of our R&D and product innovations pointed, so they can see the value we're delivering there and have a plan to get there. So it's just a question of what the timing looks like over the next several years. The last part of your question was on the approach to guidance in FY25, and what I'd say here is we have taken a different approach to our guidance this year, and that we have taken a more conservative and risk-adjusted view of our revenue outlook entering the year than we did a year ago. We believe this is prudent given two factors. First is the uncertainty we see in the macroeconomic environment. And second is execution risks related to the evolution and transformation of our enterprise go-to-market motion. And so our guidance balances the trends we've seen over the last year with the uncertainty that is out there, whether it's macro related or changes we're making inside the company. And it incorporates the assumption that macro gets worse and execution risks are realized to form a more risk-adjusted and prudent view entering the year than we did a year ago. So hopefully that color helps in terms of what we're thinking about from a guidance perspective. Operator: Your next question comes from Ryan MacWilliams from Barclays (LON:BARC). Ryan MacWilliams: Hey guys, thanks for taking the question. Maybe for Mike, I want to hear your thoughts on what's next for your go-to-market organization, like alongside a new head of sales. Does it make sense to go out and also hire more seasoned enterprise sales reps into Atlassian? And how have the sales team so far transitioned from a migration opportunity into selling into more enterprises or selling new Atlassian products at this point? Mike Brookes: Yes, hi, Ryan. I can certainly talk to that. It's a great question. Maybe let me start from the high level. And I think I would categorize this as another revolution in Atlassian's go-to-market motions overall. You've seen us do this before many times, and Atlassian has a pretty proud history of adapting to the environment, adapting to technological advancements like AI, but also changing the way we service support and make successful our customers. And our current go-to-market motion engine is obviously highly successful, right. We have a highly effective flywheel that serves the SMB and our enterprise customers well resulting in best-in-class efficiency and the financial profile that you're all aware of and has given us a huge volume of customers and an enviable margin and cash flow profile. We have made a series of evolutions in go-to-market I would say over that 20-year period. When we introduced Data Center, we added enterprise advocates and obviously we've shown a history of building a significant business in the data center world. When we added Cloud, we learned to sell and migrate and support customers in the cloud and built a very significant cloud business over time. You've seen us do that. And then more recently as we added additions in premium and enterprise additions in the cloud, we've added the muscles to be able to upsell customers and explain the success of their moving. And we have proof points of that in a strong adoption of premium and enterprise. So a series of evolutions we've had over time gives us confidence that we can continue to evolve and adapt as we have done. As we've talked about the more than $14 billion revenue opportunity in our existing base, we've spent a lot of time evolving R&D over the last three or four years to better serve the enterprises in the cloud. And we've got great proof points of delivery there. And now we're continuing to evolve our go-to-market motion to sell, support, and service those largest enterprises. As we said, we've grown more than 500 customers that are spending north of a million dollars, and that's great. We think we can continue to grow that portion of the customer base strongly and that evolution and that desire to keep changing and adapting and improving is one of the things that keep Atlassian a very special place to work. I do think it's worth saying at the highest levels too, it's important that what you can expect not to change in that evolution. First, I would say there is our discipline as a company. We've always prided ourselves on making economical decisions, understanding the deal economics in the enterprise as we do know better than ever before, and being continually capital efficient as we grow that as you've seen us do. Secondly, the long term focus doesn't change. Part of this evolution is looking forward multiple years and seeing how that enterprise part of our business is going to continue to grow and evolve, and how we serve those largest of the Fortune 5000 with incredibly complex needs, and our opportunity to do so and to help them out in their businesses. And lastly is maintaining a flywheel of our primary land motion for all customers, from the SMB customers in the Fortune 500,000 to the enterprise customers in that Fortune 500 and Fortune 5000. I point out that this enterprise focus is additive, right? Our SMB and product-led growth motions are incredibly important and efficient, and we will remain so for the business as we keep evolving. Now to the second part of your question. Look, we continue to focus on the talent levels experience we have as well as growing talent within our business. There are a lot of areas that we continue to grow as we strengthen our go-to-market muscles to focus on the needs of our largest enterprise customers. We have a proven ability to manage multiple go-to-market machines, I would say, and thread them together carefully. And I'm sure we'll continue to improve and grow that, but I'm really excited about this evolution correlation. Operator: Your next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Perfect. Thank you for taking the question here. If we can touch on the FedRAMP, it's the opportunity. It sounds like you're making progress there. I'm curious how long it might take before you can unlock some more federal deals in cloud. I assume you have a lot of existing federal customers on DC. Are those customers that you can start to migrate over to cloud, or is there still a little bit of a process to play out before the buying cycle occurs here in calendar Q3? Thank you. Mike Brookes: Hey, Arjun. I can certainly take that. Look, there's no doubt we have a huge volume of very large government customers in data center. And I would also say we have a large number of customers who service government entities who are also in data center, who may not necessarily be government entities themselves. But obviously, in a lot of working with the government, need FedRAMP or RAV for them to do businesses if they have FedRAMP capability. So it's not just about the government. It's the businesses around the government as well, which is a very large segment, as I'm sure you're aware. We have continued to work with a lot of those customers as we've developed our FedRAMP capabilities to keep them on the journey and aware of where we're at. And I will say our Cloud roadmap delivery is a really important point there. The last couple of quarters, we've hit 100% of items on our roadmap at or before the time. And this resonates with customers. So you can look just as they can at our future Cloud roadmap. That is online to talk to compliance, to scale, to performance, and to all the other things that we're building into that road map. We have a series of customer examples who have stated as they've moved to hybrid ELA. I can think of a very large global aerospace and defense company. It's a sort of 20-year customer of Atlassian that signed a hybrid ELA this quarter for the next couple of years and stated that FedRAMP and the inroads we've made in cloud security on the road map are called out reasons as to why they signed such a deal and moved forward, so that gives us great confidence as we move to the In Process designation of FedRAMP, but also [inaudible] and all the other compliance standards that we've shipped as well as data residency gives great confidence that we can move there and obviously BYOK as well bring their own key encryption capabilities very to this customer segment. Say that for data center customers migrating, it's a multiyear journey for a lot of these very large customers. Again the reason that that company signed hybrid ELA is to enable them to up-moving some workflows and loads to the cloud as the workflows and loads they have on-premise will continue there and they'll move into a hybrid state for probably a multiyear period before being entirely in cloud, and we intend to do that. It lets them test and learn about cloud, it'll let them see the strength of cloud and they will move that over time. I think that's a pattern we'll see with a lot of these larger startup center customers that can have tens, hundreds, sometimes even thousands of Jira and Confluent service running across their enterprise. This is a huge ability, this latent demand for Atlassian products and latent demand for Cloud, if you want to think about it that way, is a big strength of Atlassian as we look forward over the next few years and I'm confident our ability to unlock that and FedRAMP will be a huge unlock for our government and government adjacent customers. Operator: Your next question comes from David Hynes from Canaccord. Luke Hannan: Hey guys, thanks for taking the question. This is Luke on for DJ. So I was hoping to get some insights into the response you've received from customers since you've folded JWM and the Jira, just anything you've heard from both technical and non-technical teams regarding that change and whether it's been a positive from a marketing and messaging standpoint in terms of driving interest across those two audiences. Mike Brookes: Luke, certainly, great question. Look, I can say categorically it's been a positive from customers point of view. That one is a very, very easy answer. The system of work that Atlassian has continued to communicate and been sharper on over the last few quarters is very resonant with customers. The reason is a lot of our customers are incredibly technology driven companies. They realize that technology is their core competitive advantage going forward in their business, whether they're building cars or rockets or fantastical healthcare advancements, or whether they're building databases, right. Whether a technical or a non-technical company, they realize that technology is their core fundamental advantage. And in doing so, they realize that getting their technology teams to work closely to their business teams and to exchange data back and forth and to be able to work in a common set of tools and a common set of patterns is incredibly important for them to win in that technology driven era. That's one of the reasons why, although Jira Work Management was doing incredibly well as a product, and we were very bullish on it, we took the decision to merge the two into a single Jira to allow technology and non-technology teams to work together. That has been incredibly well received by customers. And it allows them to achieve those goals that they have, right. We have a series of stories where it also leads to two factors for Atlassian. Firstly, it allows the customer to consolidate on Atlassian off other work management tools because they have a singular cloud platform. And in the era where consolidation is incredibly important, that timing works very well for us and for them. We can talk to a company like Rivian (NASDAQ:RIVN) that took five different work management tools and consolidate on the Atlassian cloud due to the combination of Jira Work Management and JIRA Software, saved them over $2.5 million annually, and expanded their use cases for Jira into many other business teams. And secondly, for Atlassian, it allows us to expand our seat count. Because the technology teams within an organization are a relatively small proportion depending on the organization can be from 5% to 25% or 30% of an organization. The other 95% to 70% of the organization is a business teams that still have workflows and project capabilities they need. And Rivian is a good example where we've seen that, where we've got both consolidation and seat expansion for Atlassian due to the system of work. And the platform that underlies all of our products. So, incredibly good customer reception from this move. And as we continue to do at Atlassian over the long term, it's about listening to customers and understanding what they need and trying to deliver that in our product portfolio, in our R&D and also in our go-to-market motions and how we explain to customers what it is that we do and help them with. Operator: Your next question comes from Fatima Boolani from Citi. Fatima Boolani: Hi. Good afternoon. Thank you for taking my questions. Joe, this question is for you. Earlier, you were very explicit in the variables and assumptions you are taking into consideration for the cloud a book of business for fiscal '25, and you need a specific reference to execution risks due to some of the enterprise go-to-market motion changes that you're making. I was hoping we could go a couple of layers deeper into what specific variables or assumptions you're considering or flexing to kind of arrive at that conclusion and, relatedly changes in the sales organization and kind of the departure of Kevin. How is that flowing downstream in the way you're thinking about just productivity and quota attainment and things like that? I really appreciate some more granularity. Thank you. Joe Binz: Yes. Thanks for the question. I'll keep it at a fairly high level in terms of the execution risk we see in that transformation or evolution of our go-to-market enterprise sales motion. As you pointed out, there is leadership transition there, and so that's always something you want to keep in the back of your mind as you think about forecasting over the next year. And then I would just say it's a nascent capability that we continue to build and develop over time, and Mike highlighted the fact we've been investing in a space. We have a foundation, but as we continue to make more and more progress, we're going to continue to evolve and build that, and whenever you're doing that, that involves risk in our execution against that level of change. So from a high level, those are the two big factors, and I'll let Mike fill in the details. Mike Brookes: Yes, look, Fatima, great question. I want to, I guess I want to start from my point of view with nothing but gratitude and thanks for Kevin and the role he's played. He's been an incredibly dedicated leader of our sales function for a number of years, has built an incredibly strong sales leadership team, and has set up the foundation for us to make this continued transformation and evolution. So just have to call him out with great thanks from myself and from Scott in our context. As I said, we are searching for a transformational CRO who can continue to drive that next phase at ever increasing scale. That search is well underway, and in the short term, look, I personally led and built the go-to-market engine we have today for our first 17 years, I guess, and continue to be incredibly heavily involved there and with the customers. I will say we have an incredibly strong executive team. I would argue the strongest we've ever had across the business. So incredibly confident we can lead the business strongly through that evolution. I think Joe has spoken well to the prudence of our guidance in light of this transformation, but more in light of the other things he's mentioned, the other factors that go into that there. And I think you've seen from us prudence and careful thought as well as hopefully openness and explanation about what it is that we are going through as we focus on the long term. And lastly, I would reiterate our deep belief and confidence in the 20% multiyear revenue caveat that we've given out at Investor Day, and we would maintain those targets both on the revenue side and on the returning to historical operating margin side. Operator: Your next question comes from Brent Thill from Jefferies. Brent Thill: Thanks. Joe, as you know, the central question investors are asking us is the cloud guide and ultimately are you putting a little more conservatism into this forecast to give yourself more wiggle room? It's been a, I know it's been a challenging thing to forecast given a lot of different factors, but is your approach changed here? Has anything changed in the underlying assumptions to give investors more confidence that they can really believe in that number? The second one was just to follow up on two months ago, you guided at 20% top line, you're guiding 16%. Should we think differently now about the long-term growth or is this more of a tactical pit stop and you still believe in 20% over a period of time? Thanks. Joe Binz: Yes, Brent, thanks for the question. In terms of the revenue guidance, I'll just reiterate what I said earlier in terms of our approach. We are taking a different approach to our guidance this year. It is a more conservative and risk-adjusted approach. And the reason and the drivers for that are the risks and uncertainties that we talked about. One is we see uncertainty in the macroeconomic environment. And second, the question earlier we do see execution risk related to the evolution and transformation that we're undergoing on the go-to-market side. So we've taken all of that into account and the net result of that is we have a more risk-adjusted and prudent view this year going into the year than we did last year. So we have adjusted slightly to that. In terms of the cloud revenue and revenue overall, we are still committed to a three year 20% plus compounded annual growth rate on revenue. We talked earlier about the drivers on that. Nothing has changed in the last three months since Investor Day when we made that. We continue to reiterate our confidence around that. And we talked earlier on the call about the drivers behind that. Operator: Your next question comes from Alex Zukin with Wolfe Research. Alex Zukin: Yes, hey, guys. I think maybe it would be helpful to just unpack, kind of similar to how you at least commented in the letter on the margin side around the headwinds that investors should, or the tailwinds that investors should recall that were one time in nature on operating margins in fiscal '24, such that ex that the fiscal '25 margin guide is actually flat. Similar to that framing, if it's possible, just to understand, if you look at the guide that you gave for 16% total revenue growth, but that's in light of these onetime tailwinds of end of server conversion. Because I think if I adjust for that, the guide's actually closer to 19%. So just help us frame that, because that's obviously not going to recur. And presumably, it appears from your commentary that the guidance is more incorporating timing of certain deals closing on the enterprise side, maybe migrations on the enterprise side, that's informing the conservatism. But just maybe help better understand that a little bit. Joe Binz: Yes, Alex, this is Joe. I'll take a shot at that. I think, first of all, you started from an operating margin perspective, and what are the factors there that are driving the lower year-over-year operating margin. As you point out, we expect our non -GAAP operating margin to be 21.5%, approximately, in FY25. That's about 200 basis points lower than FY24. Keep in mind, as you pointed out, our FY24 non-GAAP operating margin benefited from the significant outperformance in data center and marketplace revenue related to server and to support in H2. That impact was about 200 basis points. And so when you normalize for that impact, our FY25 operating margins will be roughly flat year-over-year. In terms of the cloud revenue deceleration and the comps there, we do believe cloud revenue growth will decelerate in FY25. And the primary driver, as we expect, less contributions from server migrations. Now that we're past server and a support. And while data center migrations will increase, they won't make up for the decrease in server migrations. Given the migration path for many of those customers, as we've talked about earlier, will play out over a multiyear period with many involving hybrid deployments. We've also incorporated, as you pointed out, prudent assumptions to account for the impact of worsening macroeconomic environments and execution risks in our enterprise go-to-market motions. So those are the some of the factors that are driving that year-over-year decel in cloud revenue. Now having said that, as we pointed out in the call, we remain optimistic long term and expect cloud revenue growth to accelerate in FY26 as we lap the drag from server end of support and drive improving seat expansion cross-sell of additional products and upsell to premium enterprise editions of our products that we talked about earlier. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Gregg Moskowitz: Okay, thank you for taking the question. I had a follow-up on a couple of the go-to-market questions from earlier. Mike, you're looking, as you said, for a new CRO with expertise in leading enterprise sales transformations, but how do you define an enterprise sales transformation, and more specifically, how much do you foresee your go-to-market changing Atlassian, both in fiscal '25 as well as over the longer term? Mike Brookes: Hey, Gregg. How much is an interesting question. Look, I would say that we continue to be a very long-term thinking company, and when I say that, I mean at Investor Day, we talked about our R&D spend as a percentage of revenue moderating when we gave our long-term targets. And our sales and marketing spend increasing from roughly that sort of 15%, 16% range moving north of that. So you can see implied in that that there'll be increasing spending, but I would argue in a cautious and careful way, and we're very good at the capital efficiency, the calculation of where the ROI on that spend is, and it's a relatively moderate increase in spending, especially when you compare it to our comps in the market and other companies, right. We'll still be, after that transition, comparatively efficient on sales and marketing to most other software companies, and still comparatively high spending on R&D, because we believe that's where our fundamental advantages are. So think about this as an evolutionary and an adjustment in that manner. Now, the transformation is about how we continue to take those 500 customers spending more than a $1 million and the huge latent demand we have in a data center and increasingly build deep partnerships with some of our largest customers in how we are helping them transform their businesses. This is a part of our evolution, right. I've talked about when 15, 17 years ago when we started the data center business, we were talking about moving $5,000 customers to be $50,000 customers. Now we're a long way from that nowadays, but this is something that we are familiar with. It is a history of evolution that we've had and I think it's a very smart example of how Atlassian continues to evolve through the years in ways that benefit our customers. In this case, we're looking at our largest customers that are when you speak to them, they're betting incredibly hard on Atlassian. They think that we are transforming the way that their company works. They want to roll out to ever increasing numbers of scale and they want to understand the philosophies of how we work together and build a partnership across our portfolio of products and that's what we mean by that enterprise transformation and how we sell, support and ultimately make successful those largest customers. And lastly, I will point out that we believe this is additive to our model, not a swap or a switch. We have a great capital efficient flywheel in the product-led growth motion that we have at landing large numbers of SMB customers but also landing in those enterprise customers, which is what makes that enterprise motion more efficient for us than other companies. So they work together in harmony. Operator: Your next question. comes from Kasthuri Rangan from Goldman Sachs (NYSE:GS). Kasthuri Rangan: Hi, thank you very much. Mike, a question for you. These transitions can be very hard, and certainly the goal is to come out more successful as a company. Clearly, you're on the way. As you come out of the transition, what are the lessons learned, and how can there be further tweaks to the product strategy go-to-market? I guess we all learn from the most difficult, challenging times, and we come out mostly ahead. So one of the things that you have learned that you're going to adopt through the strategy company going forward, and also from a bandwidth perspective, you're in an unenviable position. You're now twice the CEO that you were before with Scott. Of course, he's on the board now. Then you're looking for a CRO. I mean these are some big shoes to fill. How, and you talked about Joe very eloquently talked about the lot how the different levers exist in place to get the company to potentially accelerate. And one of the very first questions I had, but I'm more curious about how you get there. What are the things that are being done internally differently? It's just, I know it's a long, rambling, complicated question, but I just wanted to hear you out a little bit more in depth as you start through all this stuff. Thank you so much. Mike Brookes: Sure, Kash, I'm guessing I'm going to take that one. Look, I said a few things. Firstly, I think I would start with saying we have an incredibly strong executive team. So a lot of the implications and questions are going to fall on my shoulders. And there's no doubt ultimate accountability does. I'm very comfortable with that. But at a high level, like we have a great executive team, we have a great South leadership team at the moment, and we're well familiar with this evolution and transformation motion and having it play out over the quarters and the years. This is not something that starts on July 1 of this quarter. This is something that's been going for a while. As you can see, with more than 500 customers north of a million dollars, this is not an entirely new motion for us, right. This is an evolution. There's nothing broken here, right. We're just continuing to improve and grow and stretch as we have done for a long time. The mix shift of being more and more additive in the enterprise, as we said, has come on the back of a huge amount of R&D investment into everything from data residency and BYOK to scale in the Cloud to FedRAMP. And now we believe we have the opportunity to increase our footprint in that enterprise customer base in all of our customer markets, I would say, from software teams. And in ITSM, you've seen how strong the Jira Service Manager of business is at the moment and through work management and collaboration as the system of work rolls out, we get a high footprint. So I think we feel the opportunity is there and we're going to go after that. I think when you talk about what lessons have, we learned, look, we continue to see great sales execution as we go through. Team '24 was a huge event for us in terms of a lot of things, product launches, but also in terms of pipeline builds. It was our largest enterprise event that we've ever held. And the confidence that comes from those customers often informs us in making these resolutions and movements. I would say that strength as a company has always been our ability to learn and evolve. I'm less worried about personal workload and personal bandwidth than looking at the team of, 10 odd people we have on the executive team, I guess you'd say, and then through the thousand leaders we have through the business and the 12,000 or more Atlassian staff and our ability as a collective to go after this mission, I feel incredibly confident that we can get after that and do that and that's what we intend to go do. Operator: Your next question comes from Nick Altmann from Scotiabank. John Gomez: Hey guys, this is John Gomez on for Nick Altmann. Thanks for taking my question. You guys outlined some interesting examples at the Analyst Day in terms of the product adjacencies with Loom and the core. So now that Loom has been part of Atlassian for a couple of quarters now, can you give us a better sense of cross-selling traction there? And as it pertains to FY25, do you have any goal posts for how we should be thinking about the Loom contribution? Joe Binz: Yes, thanks for the question. I'll take the first part of that, and then Mike will follow on. You asked about the FY25 impact that Loom will have. Within our overall revenue and operating margin guidance for FY25, we expect Loom to have about 1.5 to 2 points of impact on FY25 cloud revenue growth for the year. And consistent with our prior expectations, we expect Loom to be slightly dilutive to FY25 operating margins. And I'll turn it over to Mike on the cross-sell. Mike Brookes: I would say a few things on Loom. Personally, what an incredible product, right. The customer reception I would start there is fantastic. It is saving our customers a lot of time in meetings, and it's just a fantastic way to communicate with any, if you haven't tried it, I would encourage you to do so. We truly believe it can be transformational to the way that organizations work, the way that they work through video in an asynchronous manner in an increasingly distributed workplace that we live in. So our bullishness of the product and the product sector is still increasingly, is still very high. Secondly, as a product, it continues to sell very strongly, independently of Atlassian. And that's always the first step. I would say we've added a small amount of top spin to the business in terms of how it actually sells and when AI continues to sell and drive a change inland in and of itself as an ability to edit video just as you would edit a text document, rings true both with customers and also in the delivery of the product. We are continuing to integrate learn into our business practices as we do. So into the Atlassian Cloud platform, into a broader sales and marketing execution machine. That integration does take some time. We get better at it with each evolution, but there's sort of a two stream effect there. One is the product continuing independently to sell strongly by itself. And secondly, is the integration into our broader platform and the role it plays in the system of work. Maybe lastly, I would say that the team, the Loom team that's joined us and the additional Loom mates we've added to that continue to deliver a very strong product roadmap. If you look at the recent launches in Loom around integrations with Jira and Confluence, but also in the Loom.ai skew and continuing to work on how you can just seamlessly edit video. I think the product delivery there is going to continue to be important as we build the momentum in the Loom business. Operator: Your next question comes from Keith Bachman from BMO. Keith Bachman: Hi, many thanks for the question. Joe, I want to direct this to you. I appreciate your comments on being a bit more conservative on the outlook. And I wanted to tie that to some of the conversations we had in Vegas. And particularly as we think about the outlook for the year in the cloud and data center, how are you thinking about two variables that would contribute amongst others, but in particular as it relates to seats and pricing? How are you thinking about what the contribution from those in order to realize the targets that you've laid out for the year? Joe Binz: Yes, thanks for the question, Keith. From a paid seat expansion perspective, our expansion rates in Q4 were consistent to Q3. That's an encouraging sign, but one data point is not a trend to make. And so we are assuming that we'll see continued pressure in paid seat expansion in FY25. And that speaks to the risk adjusted approach we took around macroeconomics. In terms of pricing, we continue to expect to have pricing increases throughout the year. That will be a driver of cloud revenue growth as it has been in FY24 and prior. And so you should expect to see a similar impact in FY25 going forward. Operator: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Mike Brookes: Thanks, everyone, for joining the call today. Appreciate it all of your thoughtful questions and continued support. I guess I just want to add a small note on a personal level at the end here. It is Scott's last earnings call and you've all spread him some questions today which I'm sure he's very grateful for. When Scott sits down with graduates when they joined it last year with any new staff members, one of the things he said for more than two decades now is that the one thing he wants to leave them with is that they should leave Atlassian a better place than they found it. They should not treat it as a finished object but rather a continued construction project that gets better and better and that if they leave the company better than they found it that's the only thing they walk away with that we will all benefit. And I say that because I think if there's one person who's left Atlassian better than he found it, it is Scott and on behalf of the leadership team, of the 12,000 current Atlassian's and the 20 odd thousand, I don't even know how many Atlassian there are past and present add together. We all owe him a huge debt of gratitude and thanks for leaving Atlassian better than he found it is an underestimation but just a magical place to work and a fantastic and different company. And for me personally and from everybody else, thank you Scott for everything you've done to contribute to the business we have today. And the place we all lucky enough to get to work every day and for a long time to come. So thank you very much for me. We love you a lot and we wish you the best in all future endeavors. And with that have a great day everyone. And have a kickass weekend.

Earnings call: MP Materials faces Q2 challenges, optimistic for future growth By Investing.com

MP Materials (MP), the rare earth materials producer, reported a challenging second quarter in 2024 due to operational issues but remains optimistic about future growth. Production was impacted by equipment damage and a thickener issue, which slowed down operations for three weeks. Despite these setbacks, the company doubled its neodymium-praseodymium (NdPr) production and secured significant agreements with a global automaker and the Department of Defense. Looking ahead, MP Materials anticipates a record upstream production in Q3 and expects to benefit from customer prepayments and tax credits totaling approximately $190 million by the end of 2025. MP Materials, despite facing operational challenges in the second quarter of 2024, has managed to double its NdPr production and is preparing for a significant production increase in the third quarter. The company has also made strategic agreements with key industry players and is progressing steadily towards its goal of becoming a fully integrated rare earth producer. With a strong balance sheet, anticipated tax credits, and customer prepayments, MP Materials is positioning itself for robust growth in the coming years. MP Materials (MP) has shown resilience in the face of operational setbacks, and their strategic moves hint at a robust potential for growth. However, investors should be aware of the financial metrics and market sentiment that could impact the company's future. Here are some insights based on the latest data from InvestingPro: InvestingPro Tips for MP Materials highlight that management's aggressive share buyback strategy could signal confidence in the company's value, which is a positive sign for investors. Additionally, the company's liquid assets exceed its short-term obligations, providing it with a cushion to navigate through operational difficulties. For investors seeking a deeper dive into MP Materials' prospects, InvestingPro offers additional tips and insights that can help in making informed decisions. As of now, there are 13 more InvestingPro Tips available, which can be accessed for more comprehensive analysis and forecasts. Visit InvestingPro for MP Materials. To wrap up, this was undoubtedly our worst financial performance quarter as a public company. I hope I have always been clear that these kinds of quarters can happen once in a while. But as I said earlier, beyond the surface results, we made a substantial amount of progress. Our team is spectacular and relentless. Notwithstanding MP's unwavering nature, pricing conditions remain outside our control. We do know that no producers are thriving at these prices, not even in China. These market conditions have now destroyed most of the hoped poor projects from just a couple years back. Despite the efforts and investments of many governments, Chinese control over the vast majority of the supply chain remains. Rare earths, therefore, continue to be at the center of a highly charged geopolitical environment. In June, China tightened regulations over its domestic industry. Meanwhile, in the west, leaders pursue new protective measures of their own. And, with an election season in full swing, the criticality of our supply chain is one of the very few things upon which politicians in Washington agree. How this shakes out over a quarter or two is always uncertain, but what remains certain is the strategic irreplaceable value of the platform we are building at MP. In recent weeks, our team has turned a corner at Mountain Pass both on cost structure and ramp, and we are now positioned to scale volumes and complete our evolution as a fully integrated producer of refined rare earths. The timing aligns well with customer development activities. As I mentioned at the outset, we recently added another household name automaker to our growing client list. Between this new agreement and new and expanded agreements tied to our Sumitomo distributorship, a significant portion of our anticipated NdPr production at full capacity is now committed. With our products now qualified by some of the most scrupulous end use manufacturers and magnet makers outside of China, MP's position as the American champion is now cemented. Our downstream magnetics business is approaching a similar inflection point, and later this year, we'll return large scale rare earth metal production to the United States for the first time in many decades. In July, Michael and I celebrated the 7th anniversary of the acquisition of the Mountain Pass Mine and the founding of MP Materials. We are incredibly proud of the team we've built, the progress we have made, and even more excited about the future. In a geopolitically charged increasingly electrified world with billions of AI enabled robots, whether on wheels or legs, MP's products, technology and platform matters. I believe our long term success is necessary and inevitable. With that, we're happy to take your questions. Operator? Operator: Thank you. [Operator Instructions]. Our first question today is from the line of David Dekelbaum of TD Cowen. Please go ahead. Your line is open. David Dekelbaum: Thanks, Jim, Ryan, and Michael. Thanks for taking my questions, and thanks for all the details. I'm glad to see you guys putting this quarter behind you. I'm curious, Michael, if you can talk a little bit about just with this first upstream 60k milestone with the pilot testing around flotation. That test, I think, is anticipated to begin this quarter in the third quarter. How do we think about that in relation to the impact on your current operations? Michael Rosenthal: Thanks for the question. In terms of this initial test, we don't expect it to have any material impact on the operation. We'll be running a midstream through this equipment to see the performance, but we do expect it to ultimately need to additive results even as a pilot, and then we can look to scale that if the results are successful. We've already tried similar equipment, slightly smaller scale and been very pleased with the results. The grinding circuit investment that I mentioned is slightly bigger. It does have the potential for more temporary interference with the current operation. But like I said, I'm very excited about that one, particularly next year. David Dekelbaum: I appreciate the color. Ryan, I'm curious just, as we kind of navigate this year of weak prices, I think you guys highlighted still a robust cash position even with the downtime this quarter. Just talking about, I think the $150 million or so of prepayment and I guess, some tax receipts that you anticipate. Can you just kind of rehash the timeline and the conditions that you have to meet in order to receive those payments? Ryan S. Corbett: Yeah. Sure, David. Happy to. Yes. As you saw this quarter, we received the first $50 million of that $150 million set of prepayments for the downstream business. The way to think about the upcoming $100 million that is unlocked by further operational progress on the downstream business as we move towards commercial production of metal in Fort Worth, and continue to build up our metal making capabilities to support magnet making there. And so, we expect to receive the totality of that over the next 12 months. In terms of the incremental dollars that we flagged that are part of the various tax credits that we intend to receive, you saw actually in Q4 of last year, a receivable of nearly $20 million which relates to a 45x tax credit, which we expect to receive in the not too distant future here upon filing of our 2023 tax return. So, that's a pretty near-term receipt. The other elements of 45x relate to the ongoing 45x credits that we'll earn via production over the course of this year and next. In addition to that, as we announced, I guess it was last quarter is the $58.5 million of 48C tax credit for our investment in Fort Worth. We expect to likely receive about $30 million of that in cash next year and the remainder of that is also available for us to monetize in a variety of different fashions earlier in the 2025 timeframe or we can sort of allow that to play out over a longer period of time. But suffice to say, we've got a lot of opportunity to continue to support really healthy liquidity and the balance sheet as we invest here. David Dekelbaum: Thanks, guys. Operator: Our next question today is from the line of Laurence Alexander of Jefferies. Please go ahead. Your line is open. Kevin Estok: Hi. Good evening. This is, Kevin Estok on for Lawrence. Thank you for taking my questions. I'm not sure if you can answer the specifics around this, but I guess I just wanted to get a sense of maybe the size of the commitment that you have with the automaker that you announced today or maybe the length of time of the agreement, and maybe the same for the Department of Defense, supply contracts. I mean, just any specifics that you can offer would be helpful? Thank you. Ryan S. Corbett: Yes. Sure. It's Ryan. I'll take that. In terms of the OEM commitment, that is a multi-year commitment with deliveries starting this year and ramping through '25 in the following year. We expect over the medium-term that this commitment will represent a double-digit percentage of our total targeted output. So, it's a pretty significant commitment for us, which we're very excited about. And, I think stepping back and taking both this commitment and the DoD purchase agreement in context, which I'll give you some details about in a moment, I think it really is emblematic of some of the comments that Jim made about the importance of what we're doing. I think rewinding to many, many years ago when we started on this mission, the thought that a global automotive OEM would be reaching all the way upstream to directly make this type of commitment was unheard of. And so, I think that that speaks to the progress that we've made, both as MP and the increasing importance of our industry and what we produce. The DoD agreement is a pretty modest agreement. So, that was announced by them as well. It's about $11 million commitment from them, for the National Defense stockpile. But again, emblematic of continued support from Department of Defense, which we're very happy to see. Kevin Estok: Yes. Sure. Great. Thank you. I appreciate that. And, I guess just my last question, I guess in terms of the Chinese economy and the weakness there, possible stimulus of puts and takes, and obviously there's a flow through into pricing, I guess. Just curious to get what your guys' take on the economy, maybe your outlook in the Chinese economy, would be helpful? Thank you. Ryan S. Corbett: Sure. Yes, so the Chinese economy is still pretty challenged. I think we've been seeing that writ large around earnings season this year across, corporate America. We see that to property, everything related to it is very weak. It's really just an overall negative environment with respect to industrial production and consumer spending. So, we don't really have any different views than sort of what you've been hearing around the board, with respect to what's going on in China. I would say though, as it relates to underlying NdPr demand, anecdotally we do see Chinese industry growing abroad, particularly in the global south, in sort of South America, Sub-Saharan Africa. So, when you think about sort of the pace of what's happening in the Chinese economy, I would say that one mitigant is that Chinese industry is sort of attempting to make up for that with growth around the world, particularly in our space. And so, I do think that, and again, as you know, I always try to caveat these answers with respect to commodity prices. We don't know, but I do think that in the medium to long-term, the things that we're seeing, continue to show that the medium and long-term demand picture is very bright from China all the way around the world. Operator: The next question is from the line of Matt Summerville of D.A. Davidson. Please go ahead. Your line is open. Matt Summerville: Yes. Thanks. Couple of questions. Just back to Jim, I'd like to just pick your brain a little bit. What was sort of the criteria you used to make the strategic decision to align yourself with this particular automotive OEM for this agreement? And, to Ryan's comment, double-digits can mean a lot. Is there a way that you can maybe kind of narrow that down a bit? And more so, also curious as to whether or not this is causing panic, maybe too strong of a word, but causing other OEMs to come knocking on the door, so to speak, or lining up at the door to try and get in. Ryan S. Corbett: Sure, Matt. I'm going to steal that one from Jim quickly. Just, you're right. Double-digits is pretty broad. I can narrow that down to say, low-double-digits. And, obviously, we want to respect our customers' wishes and not get into specific details on any individual contract. But I think that as we look around the world, we certainly are seeing a lot of interest in our commodity as I mentioned. And I think that what we are most focused on is maximizing the realized price that we receive for a product that we believe is incredibly important. And obviously, as we look at contract structure pricing and all those things go together, we are going to prioritize customers that are thoughtful over the long-term and are looking at this as partners. And so that's certainly what we did with General Motors (NYSE:GM) with the downstream business. That's absolutely what we're doing with other OEM partners on the midstream business. And so, it's something that we're certainly very pleased about. In terms of other automakers panicking, I wouldn't put it quite a panic at this point, but certainly, there's a whole host of things that we've seen over the course of the last several months that have really, I think reenergized despite all of the headlines and sort of the Wall Street malaise on the electric vehicle trend. We've seen a lot of activity. Certainly, the tariff announcement by the current administration that may be caused a little bit of maybe you could call it panic in terms of automakers really being interested in what we're doing from the magnetic side. But overall, we're really pleased to continue to build up our book of customers with blue chip automakers. Matt Summerville: Thank you. And then, maybe for Michael, is there any way to kind of talk about based on the progress you're seeing or you saw in Q2 where you're tracking thus far in Q3 and your goal relative to that 50% production output increase of NdPr oxide. Is there any way to talk about where you hope to exit the year on a run rate basis in terms of NdPr production? Michael Rosenthal: It's still early, so it's hard to give a clear answer on that, and I'd rather not. But I would say that whereas in the past, we saw greater bottlenecks to the production, we're really working on optimizing and balancing the throughput and sorry, availability of equipment and getting that up and then pushing the throughput further. And whereas in the past, we may have seen more bottlenecks to availability, those are being released and we expect to see significant improvement. And I stated that July puts us on that path with a 50% growth. It's probably where I'll leave it, but I do believe there's significant opportunity for continued growth in the fourth quarter. Jim or Ryan, I don't know if you want to add anything to that. James H. Litinsky: The one thing I'd add is I think the reason that you're probably sensing a little bit of a shift in tone from us on this is, I think where we've progressed on understanding and getting our arms around the various moving pieces on incremental variable cost, we're sort of at the point from a cost structure perspective in the midstream business where getting to our targeted cost structure at this point is more a denominator issue. So, this is more about pushing forward on our volume ramp, will effectively have the cost structure take care of itself. And so obviously, Michael talked through some of the steps along the way, but we're very, very pleased to see that progress. And so I think that enables us to be even more tactical in how we approach the ramp here, over the course of the year. So, as Michael said, it's early to give specific numbers on volume because there are so many different ways to get to a particular volume number. We want to get there in the most efficient way possible, which is consistent with what we saw over the last couple of quarters. Ryan S. Corbett: And then I'll just add since to do the trifecta here, so you hear from all three of us on this one. I think, obviously, this tough quarter numbers aside, to see the scale of this ramp happening in the ordinarily, if you just sort of look at our industry or similar industries, when you're ramping up a multibillion dollar refinery, these things take time. And ordinarily, if you were looking at this with respect to another business that might not have an existing operation within it, you'd obviously see numbers in ramp and you wouldn't think much of it. And so the fact that the scale of this ramp is sort of happening, as impressively as it is with Michael and the team in Mount Pass, I think is, I'm very pleased of what's happening out there, and I really do think, again tough quarters number aside and obviously, we have to keep executing. But this is a really impressive ramp that is happening, and obviously, hopefully, we expect that to remain the case throughout the rest of the year. Matt Summerville: Great. Thank you, guys. Operator: The next question today is from the line of George Gianarikas of Canaccord Genuity. Please go ahead. Your line is open. George Gianarikas: Hi, everyone. Good afternoon and thank you for taking my questions. I guess I just want to start with I was wondering if the song choice was intentional, during the waiting period. I assume that I'm old enough to know what it was, and hopefully, things do get only do get better. James H. Litinsky: I'll take that real quick just so, that that's, I appreciate you recognizing the song. That is a song about, resilience and powering forward. And so we're very methodical about our song selection as you know every quarter. So, I think one of these days, we'll have to put together a Spotify (NYSE:SPOT) list of all of our, pre quarter songs so you have them in one place. But that was a deliberate selection. George Gianarikas: Nice. So, maybe to focus on the OEM decision for oxide. I'm curious as to what if you're the ones who drove the decision around oxide sales versus magnet sales or was that something that the OEM chose? Ryan S. Corbett: Sure, George. It's Ryan. That's something that is sort of mutual, I would say. The reality though is that with our current design capacity in Fort Worth, we're fully committed there at this point. And so to bring another significant automotive OEM on would entail incremental capital investment there, which is something that we do look very hard at. But obviously our focus at this point is delivering for GM. I think the thing to think about is the size of our upstream business, at least for the near and medium term is many, many multiples of the size of the downstream business. And so what we're focused on is ensuring, as I said, aligning ourselves with partners that may be long-term partners across all pieces of the business over the course of time. But certainly, we need to prioritize given, we've done a great job on the downstream in terms of sales. We need to prioritize continuing to push forward and align with the right partners on the midstream. George Gianarikas: Right. And do you know perchance who will be making the magnets for that OEM partner? Ryan S. Corbett: I wouldn't want to comment specifically. I think what I'd say about that in general though is we have seen some continued development in the market for ex-China magnet production in broader Southeast Asia. And so that opens up opportunities for us both to sell directly to those existing and future magnet bankers as well as, of course, these types of agreements where we're providing the material directly to the end customer. George Gianarikas: Thank you. Maybe a last question. Someone asked previous question around the state of Chinese demand, but I'm curious if you share your thoughts around Chinese supply. Clearly, some of the major, finders are losing money at current levels. I'm just curious as to Jim what your thoughts are on the sustainability of that and whether or not we could see a little bit of a supply, at least less growth or a supply reduction going forward. What are your thoughts on what exactly is happening there? Thank you. James H. Litinsky: Sure. Well, with my usual caveat that it is always very difficult to read the tea leaves in China, What I would say is that it's very clear that there's losses and I think there's a struggle in the supply chain there because nobody is doing well in this environment with prices where they are. That is, very clear. I do think that, there were some recent headlines about, China cracking down on illegal production, and I think that there's intent of the government to continue with frankly, what's been going on for the last few years to crack down on illegal behaviour kind of inside and outside the country. And I do think that when you think about sort of having a fully burdened cost of production, when you get a lot of that out, that is constructive for pricing and competence and frankly better for the environment. So, I think in the backdrop of what is clearly a challenged macro environment, there are a lot of good trends that suggests that when we sort of see the upcycle that it should be good. And then lastly and just kind of going back to what I said earlier, we do continue to see, substantial international investment from major Chinese downstream producers. I think we don't see those we're in the US, we see a lot of headlines obviously about our OEMs and our market. But let's not forget, obviously, China is the largest auto market in the world, but then there's the rest of the world, and you're seeing, real penetration there from the Chinese OEMs, and announcements around factories and localized production. And so I do think when we think about the upstream supply, the Chinese industry has to continue to supply its producers going around the world. But at some point, there that you do sort of cross that threshold where, they're not going to want to have big upstream losses to be supplying local competitors sitting next to them in factories that they have. So, I do think again, you know, the with the always the caveat that, nobody knows about prices, I do think that the pendulum which obviously, was very excited a couple years ago one way has swung too far the other way and it should recover at some point. George Gianarikas: Thank you. Operator: Our next question today is from the line of Lawrence Winder of Bank of America Merrill Lynch (NYSE:BAC). Please go ahead. Your line is open. Lawson Winder: Yes. Thanks, operator. It's Lawson Winder at Bank of America. Thanks very much and thanks for the presentation today. I wanted to ask just get your thoughts on the magnetics business and with commercial production being targeted for the end of this year, how do you think about that becoming EBITDA positive? Is that something that will happen this year? Do we think about that happening in '25? And then what's the ramp on the EBITDA contribution from the magnetics business? Ryan S. Corbett: Sure. This is Ryan. I'll take that. We do expect once we are producing product in the downstream business and just to clarify in terms of the production targets, we need to be in production with pre-crystal products with metal at the end of this year. We are still targeting production of magnets in the end of 2025. But in the downstream business, when we do start production and so I think the fair read through is for 2025, we absolutely do expect a positive EBITDA contribution from that business nearly immediately as we bring it on. Certainly, we've been investing in that business over the last several years and several quarters and you've seen within some of our G&A and R&D type of line items on the P&L increased investments there. But we do expect as we start making commercial product there to be both gross profit and nicely EBITDA positive in that business. In terms of your question on ramp and timing, we haven't gotten into specific details there. As you'd imagine with any type of launch of a new product and new process, not too dissimilar to the midstream operation, it will take time to reach full targeted throughput. And so we expect to embark on that very methodically as well. And so that will be, of course, reaching our targeted throughput of thousand tons of NdFeB magnets, will be over a multiyear period. James H. Litinsky: Let me just add, you know, particularly given our tough quarter that hopefully is now behind us after this call. But as a reminder, given that question that when we think about Fort Worth, a little over two years ago, that was a grassy field and this is a highly complex, product. And so the team has been executing really well. And to think that, now we're in this place where we're going to be EBITDA positive so quickly, building something from scratch going into a business that is brand new for us and frankly, the West is really remarkable. So, we're moving as quickly as we can on that front. Lawson Winder: Yes, great points, Jim. Thanks for those. And then also thinking about 2025 from a CapEx point of view, obviously, it's early and I know you guys probably aren't prepared to provide specific guidance, but just directionally thinking about what you provided for guidance for '24. Could you perhaps speak to the rough magnitude and direction of the CapEx move sort of like '24 to '25? Ryan S. Corbett: Yes. I think it's early for us to get into any sort of 2025 discussion. Obviously, as you would expect, we are laser focused on return on invested capital and ensuring that we've got a robust and healthy balance sheet. But at this point, it's early to talk about '25. We're halfway through '24 and you've seen our results from a capital deployment perspective there. And what I would say is that we gave a range of 200 to 250 in CapEx for 2024. And just looking at the progress to-date, we're likely coming in at the low end of that, certainly with our focus on trying to be as capital efficient as possible in the current pricing environment. Lawson Winder: Okay. Thank you very much. Operator: Our next question today is from the line of Bill Peterson of JPMorgan (NYSE:JPM). Please go ahead. Your line is open. Bill Peterson: Yes. Good afternoon. Thanks for providing all the details. Few questions. So first, coming to the back to the magnet discussion. So, discussed decommissioning the prototype production. I guess, can you provide additional color on the progress thus far? Have you been able to produce any material that are meeting any sort of initial customer specifications or expectations? And then maybe perhaps you could shed some light on the next steps over the next few quarters in terms of optimizing performance and the manufacturing scale up? Ryan S. Corbett: Sure. I'll try to give you some color there. I think I would split the discussion on progress and process development into a conversation around metal versus a conversation around magnets. We discussed, I think it was last quarter or the quarter before, a successful commercial scale pilot of our metal making technology and equipment in a pilot facility that is what we're bringing to bear in the Dallas Fort Worth facility by the end of this year. So, we feel very good about that given the fact that we've sort of proven out our approach to that. As it relates to magnet specifically, I think the beauty of building this business from scratch is that we've been able to engage with our customer, I think in a very thoughtful way to think about commercialization of this from the very get go. So, from our perspective, thinking about the types of magnets that will produce, the mix of magnets, the number of SKUs, the performance characteristics, etcetera. And we've been focused on ensuring that we are biting off what we expect to be able to chew here in the near-term. And so, we are absolutely not approaching this from the perspective of taking on a 100 different SKUs. We're thinking about this absolutely from being able to commercialize rapidly. What we've seen from the pilot production facility so far is and again, I don't think we wanted to pat ourselves on the back too much on this, but we have gone from metal to a finished magnet at a performance characteristics that we're pretty happy with already in this plant. So, when we talk about being in production with magnets at the end of 2025, we get this question a lot is, how are you going to be able to do that? Are you going to be beating spec? And so if we're already making magnets at the pilot plant, clearly we're working on dialing in all of those processes, our process development and technology starting now through the end of next year to be sure that we're ready to produce a commercial scale for GM. It's not lost on us that the automotive supply chain is not the easiest to qualify into. And that also explains part of the significant hiring that we've had down in in Fort Worth to ensure that we're ready for qualification, PFAP, etcetera. Bill Peterson: Yes. Thanks for that. Next question is on robotics. And I think your entry song last quarter was around robotics. But you had discussed now in a few quarters of this being an area for growth. But I guess have you begun direct discussions with any companies in the robotics value chain or magnet suppliers in that space? I guess thinking about potential supply agreements given, you spoke to the OEM one earlier, and you also spoke earlier that some of your, I guess, a large chunk of your volumes are going to eventually be spoken for. Just thoughts around what could happen in that space. James H. Litinsky: Sure. And great question. I spend a lot of time thinking about this because as we look around at all of the headlines and investment that are going into AI and now in robotics, what they call physical AI, there's no question that there's a lot of excitement in this area. So, we expect this to be sort of a game changer demand stream. Obviously, and I hope I've sort of said this, thoughtfully the last couple of quarters when we've discussed this, obviously, this is a few years down the line as far as something that is of scale. But I would say that this is all happening so fast. The advancements that we're seeing out there and obviously, you can follow a lot of this stuff, yourself. It's pretty remarkable. And without mentioning whether or not we've had discussions with a particular robotics company or producer or whatever, certainly, you can look at who the leaders are and, obviously, sort of, I would say, one of the most notable leaders out there is that that is talking about this is certainly Tesla (NASDAQ:TSLA) with Optimus. And we've seen discussion that Musk believes that will lead to $30 trillion of Tesla market cap and talking about $10 billion or $20 billion humanoid robots. And what I would say, is if you believe that that is one-tenth directionally correct, in 1-20th directionally correct, it is a game changer for rare earth magnetics, multiples to what EVs were, because there's typically two to five times the amount of rare earth magnet content in a humanoid robot than there would be in an EV, and then we're talking about many multiples of potential production. Again, this is all sort of long-term, but this is happening so fast, that it's really exciting. But again, I caveat it with, this is something that is a few years out. Bill Peterson: Understood. Thanks again. Operator: Thank you. And we have time for one last question today, which will come from the line of Benjamin Kallo of Baird. Please go ahead. Your line is now open. Davis Sunderland: Hey, guys. Good afternoon. This is Davis Sunderland on for Ben. Thank you for sneaking me in here at the end. Just rewind and maybe all the way back to the beginning, Jim, in your prepared remarks, I think you talked about NdPr production cost coming down materially over the next couple of quarters. I'm just wondering if you or Michael could give some color as to what materially means, maybe if we should expect a linear decline or step changes and anything you can take qualitatively about the levers for this cost improvement. Thanks, guys. James H. Litinsky: Alright. I'm going to hand that one to my CFO. I'll tap out of that. Ryan S. Corbett: Yes. No. I'm happy to take it. We made a couple of comments on this and I think the important thing to think about, in terms of our progression on the cost structure is that we talked about for the last couple of quarters, really getting our arms around the incremental variable costs and the items that were driving that and ensuring that we were not ramping in the face of very suboptimal incremental variable costs. And the important thing that we found over the last quarter or so is really getting our arms around that. So, we're not where we want to be, but I sort of think about it as when we started to ramp the plan, it was sort of trying to figure out where the pins are. Now we know exactly where the pins are. We just need to knock them down. So, we know, what we need to execute on and the team is working tirelessly to execute on them, as it relates to the variable costs. And what that really leaves us with is with the data that we've seen on a circuit by circuit basis over the last several months, what this becomes is a denominator, Ben. This is really about ensuring that, we are able to maintain the proper uptime. And then as we sort of check that box continue to push throughput and rinse and repeat, and bring more denominator into that equation, because that's going to be really what gets us to our targeted cost structure. So, a lot of it really depends on exactly what the volumes are and exactly how we get there. So, it's tough to give you a ton of specifics other in all the scenarios that we've modeled out, we absolutely from what we see now believe that as we drive volume towards our targeted throughput, we will get to our targeted cost structure. It's just a matter of us continuing to execute over the next several quarters. Davis Sunderland: Got it. Thanks, Ryan. Appreciate it, guys. Operator: Thank you. And I would now like to hand the call back over to Mr. Litinsky for any final comments. James H. Litinsky: Yes. Thank you, and thank you, everyone. And, I guess I will officially say good riddance to this Q2. And I would say, for those of us, who spend a lot of time on these things, I would say there are quarters there are bad quarters that are bad, and then there are bad quarters that have a lot of good in them. And, you know, I would put this in the latter category. We really responded extraordinarily well to some unanticipated downtime, and things are really humming, and we feel very good about the progress that we made last quarter that we're making this quarter, and we're excited to talk to you next quarter. So, thanks, everyone. Operator: Thank you. This will conclude the MP Materials second quarter 2024 earnings call and webcast. You may now disconnect your lines.

Earnings call: Corsair Gaming reported a net revenue drop to $261.3 million By Investing.com

Corsair Gaming, Inc. (CRSR) reported a mixed financial performance for the second quarter of 2024. The company faced weaker-than-expected results due to a decline in demand for high-end gaming components and systems, with net revenue dropping to $261.3 million from $325.4 million in the same quarter the previous year. Despite this, the gamer and creator peripheral segment showed resilience with a 20% year-over-year growth, thanks to successful product launches. Corsair Gaming anticipates a stronger second half of the year due to seasonal trends and new product introductions, including a focus on the SIM racing market and the launch of new GPU cards. Corsair Gaming remains optimistic about its long-term prospects, especially with the anticipated growth in its peripheral segment and the launch of new GPU cards. The company's strategic moves, including partnerships and potential acquisitions, aim to strengthen its market position despite the current challenges. The focus on cost-saving measures and operational efficiency underscores its commitment to navigating the competitive landscape and emerging stronger in the forthcoming periods. Corsair Gaming, Inc. (CRSR) has been navigating a challenging market, as reflected in its Q2 2024 earnings report. To provide further context to the company's financial health and market position, here are some insights based on real-time data and InvestingPro Tips. InvestingPro Data highlights a market capitalization of $665 million, indicating the size of the company in the competitive gaming industry. Despite the recent setbacks, the company's revenue over the last twelve months as of Q1 2024 stood at $1.443 billion, showing a growth of 7.03%, which aligns with the resilience seen in the gamer and creator peripheral segment. However, a notable InvestingPro Tip points out that analysts have revised their earnings downwards for the upcoming period, which may temper expectations for the immediate future. This is particularly relevant as the company is looking to recover from a net loss attributed to common shareholders in Q2 2024 of $29.6 million. Additionally, the stock's price movement has been quite volatile, and it is currently trading near its 52-week low, which could be an area of concern for potential investors. On the positive side, another InvestingPro Tip suggests that the stock is in oversold territory according to the RSI, which could indicate a potential rebound opportunity for investors who believe in the company's long-term prospects. Furthermore, the company's liquid assets exceed its short-term obligations, which is a positive sign for its liquidity and ability to invest in growth opportunities, such as the SIM racing market and new GPU cards. For those interested in a deeper analysis, there are 12 additional InvestingPro Tips available, which can provide more nuanced insights into Corsair Gaming's financial and market performance. These tips can be accessed through the InvestingPro platform. Corsair Gaming's focus on strategic initiatives and new product launches is commendable, but investors should keep an eye on the company's ability to turn around its financial performance and capitalize on the expected growth in the gaming peripheral segment. Operator: Good afternoon, everyone, and welcome to Corsair Gaming's Second Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] With that, I would now like to turn the call over to Ronald van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you. Sir, please go ahead. Ronald van Veen: Thank you. Good afternoon, everyone, and thank you for joining us for Corsair's financial results conference call for the second quarter ended June 30, 2024. On the call today, we have Corsair CEO, Andy Paul; and CFO, Michael Potter. Andy will review highlights from the quarter and Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call may include forward-looking statements related to the expected future results of our Company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in the earnings release and other SEC filings. Note, that until our 10-Q has been filed these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release we issued after the market closed today. With that, I'll now turn the call over to Andy. Andy Paul: Thank you, Ronald, and welcome, everyone to our earnings call. Q2 is always the lowest revenue quarter of the year for us, and this year is no exception. However, current macroeconomic trends and lengthened refresh cycles have caused this quarter to be weaker than expected. In our two business segments, the gamer and creator segment showed good growth, with revenue up approximately 20% year-on-year. We've launched some exciting products over the last 9 months, which have increased our footprint and market reach. This includes our K65 wireless keyboard, which quickly became best-selling keyboard in the U.S. according to third-party data in Q2. The gaming components and systems segment, which makes components used for self-built PCs and also for gaming systems, was a different story. There we see market dynamics where incredibly exciting new games and gaming hardware technology is on the horizon, but not here yet, which is causing many consumers to hold off with upgrades or new builds. We saw a dip in this components market of approximately 15% year-on-year. And on top of that, some ASP pressure and channel inventory reduction that altogether led to a year-on-year drop of 32% in this business segment. To expand on the market trends and conditions, it's helpful to put a 5-year lens on recent activity. We went through a surge of activity during the COVID lockdown, where third-party data showed that the demand for gaming headsets approximately tripled and the self-built PC market approximately doubled. 3 years on, having emerged from the lockdowns, the gaming headset market, which is the best indicator for peripherals, is now roughly double the size it was pre-COVID, while the While the self-built PC market, which we can see from third-party data on cases and power supplies, is roughly flat to pre-COVID levels. Refresh cycles are clearly lengthening on high-priced items like $2,000 plus gaming PCs. We see GPU cards, which used to be on the 18 to 24 to 30 months and some highly anticipated more complex games like Grand Theft Auto 6 have been pushed to 2025 while others like Call of Duty Black Ops 6 are now expected to be released both soon this year. We think that our historical view of a 3 to 5-year refresh cycle may now be looking more like four to six years in these current economic conditions. Also weighing on the market is the fact consumers are acting with caution and are getting used to July Prime Day. As a result, sales in the immediate months before prime day appear to drop. And as a quick preview, our prime day sales in July were quite successful, with most categories over-performing compared to last year. Looking at an overall view of the gaming market, we see that the installed base of gaming hardware, post-COVID, is at an all-time high. Gaming ads continue to rise, generation by generation, and incredibly exciting new games and new AI-packed gaming technology are around the corner. In fact, the gaming hardware space looking into 2025 has never looked more exciting. AI continues to move into every piece of gaming hardware, as we'll be able to use technology to make devices more adaptive and able to customize their settings to a gamers playing ability. And we expect to see new generation GPU cards within the next 6 months. In our gamer and creator peripheral segment, as I mentioned before, we are seeing very good growth with revenue up 19.6% year-over-year. This is the third successive quarter of high teens percentage growth. We are benefiting from a slight improvement in the overall market, combined with our success entering new parts of the market, which will drive our long-term growth. We intend to continue to grow the gamer and creator peripheral segment organically, as well as with strategic acquisitions. We expect this business will become larger than our traditional components business within a few years. This year alone, we launched teleprompters, PC controllers, and mobile controllers, as well as many other innovative new products in the existing categories. We also recently announced our entry into the SIM racing market with products which we recently showcased at Computex. Separately, as we noted in today's earnings press release, we remain interested in the SIM racing brand Fanatec owned by Endor AG. And though we were disappointed to see the company file for insolvency, we are still hopeful that we can acquire this company. Moving on to our components and memory businesses, we continue to dominate the market with leading market share in most categories. We intend to continue that trend while running these businesses as efficiently as we can from a cost standpoint, while we wait for the market to recover and return to growth. Overall, our long-term fundamentals remain strong, and we continues only lead, position to benefit from a strong refresh cycle when the new GPUs launch later this year, and we are excited about continued strong growth in our core gamer and creator peripheral segment. Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead. Michael Potter: Thanks, Andy, and good afternoon, everyone. This quarter was particularly challenging due to the lower-than-expected demand in the high-end gaming components and systems market where we have a leading market share. This had a significant impact on our profitability due to the lower-than-expected revenue and our operating cost base not yet being adjusted. It also had an impact on cash as we paid for inventory that has not yet been sold. However, as Andy discussed, we continue to expect a better second half due to normal seasonality and our new product introductions. To partially mitigate the near-term impact of lower revenue, we implemented additional cost-saving measures in July and will continue to reduce operating expenses where needed to better align with the reduced sales levels in the short-term. In terms of the specifics, Q2 2024 net revenue was $261.3 million compared to $325.4 million in Q2 2023. For the first 6 months of 2024, net revenue was $598.6 million from $679.4 million in the year-ago period. European markets contributed 33% of our Q2 2024 revenues compared to 34.3% in Q1 2024 while the APAC region was 10.9% of our Q2 2024 revenues compared to 13.8% in Q1 2024. Turning now to our segments. The gamer and creator peripheral segment contributed $94.2 million of net revenue during the second quarter compared to $78.8 million in Q2 2023. For the first 6 months of 2024, Gamer and Creator Peripheral segment revenue was $201.2 million compared to $167.1 million of net revenue. For the first 6 months of 2023. The gaming components and system segment contributed $167.1 million of net revenue during the second quarter from $246.7 million in Q2 2023. Memory products contributed $81.8 million in Q2 2024 compared to $108.9 million in 2Q 2023. For the first six months of 2024, gaming components and system segment revenue decreased to $397.4 million from $511.7 million in the first 6 months of 2023, with revenue from memory products decreasing to $206.7 million from $240.2 million dollars. Overall gross profit decreased to $149.7 million for the first 6 months of 2024 compared to $168.2 million in the first 6 months of 2023. Gross profit in the gamer and creator peripheral segment was $35.7 million compared to $25.5 million in Q2 2023. Gross margin was 37.9% compared to 32.4% in Q2 2023. We're pleased to see the continued rebound in this business and believe we're on track for further improvements, while Ohio sales volume continue. The gaming components and system segment gross profit was $27.4 million, compared to $57.3 million in Q2 2023, reflecting the lower sales volume. Gross margin was 16.4%, compared to 23.2% in Q2 2023. Our memory products gross margin in this segment were 11.5% for the second quarter compared to 14.6% in Q2 2023. Second quarter SG&A expenses were $70.4 million compared to $70 million in Q2 2023. Second quarter R&D expenses were $17.4 million compared to $15.6 million in Q2 2023. This reflects our investments in support of our expanded product line and new areas including mobile controllers and SIM racing. We expect R&D to decrease in Q3 given the number of new products we have already launched in 2024. As additional color, we are executing on cost savings and took additional action in July, including the reduction of approximately 100 employees and will reduce some external expenses, which will lower operating expenses in the second half of 2024. We remain committed to controlling operating expenses while continuing to support growth in our gamer and creative peripheral segment, which has higher operating expense demands for R&D and marketing. GAAP operating loss in the second quarter of 2024 was $24.7 million compared to gap operating loss of $2.7 million in Q2 2023. Second quarter adjusted operating loss was $3.8 million compared to adjusted operating income of $15.9 million in Q2 2023. Adjusted operating income was $11.6 million for the first half of 2024 compared to $34 million in the first half of 2023. Second quarter net loss attributed to common shareholders was $29.6 million or $0.28 per diluted share as compared to net income of $1.1 million or $0.01 per diluted share in Q2 2023. On an adjusted basis, second quarter net loss was $6.8 million or $0.07 per diluted share compared to an adjusted net income of $9.8 million or $0.09 per share in Q2 2023. For the first 6 months of 2024, adjusted net income was $2.7 million or $0.03 million or $0.03 per diluted share compared to $21.8 million or $0.20 per share in the first 6 months of 2023. Finally second quarter adjusted EBITDA was a loss of $1.2 million compared to a gain of $17.8 million for Q2 2023. For the first 6 months of 2024, adjusted EBITDA was $16.8 million compared to $38.3 million in the year-ago period. Turning now to our balance sheet, we ended Q2 with a cash balance including restricted cash of $94.6 million. We continue to maintain a healthy balance sheet with sufficient cash to fund the development of our expanding product portfolio. We expect to further reduce inventory during the third quarter as we move into the traditionally stronger second half, which will also generate additional cash. In particular, we expect to sell an inventory that we ordered based on higher expected demand. This is concentrated in components inventory, which has a longer technology refresh rate, and we anticipate selling that inventory in the second half and turning it into cash in Q4 2024 and Q1 2025. We ended Q2 with $180.9 million of debt at face value and our $100 million working capital revolver remains undrawn and fully available. Overall, we expect liquidity to remain excellent for the rest of 2024, allowing us to be flexible as opportunities present themselves. In terms of the full year 2024, we are updating our previous outlook to reflect the market softness Andy discussed earlier. We now expect total revenue in the range of $1.25 billion to $1.35 billion. Adjusted operating income in the range of $48 million to $63 million, and adjusted EBITDA in the range of $60 million to $75 million. With that, we're now happy to open the call for questions. Operator, will you please open up the call for Q&A? Operator: [Operator Instructions] Our first question comes from George Wang with Barclays (LON:BARC). Please go ahead. George Wang: Hey, guys. Thanks for taking my question. Firstly, just on the self-built DIY PC kind of memory component, you guys talked about kind of recovery pushed out in terms of the refresh, kind of now 4 to 6 years, but still expecting GPU refresh in the next 6 months. Can you talk about kind of approval potential for further delay, or you guys are quite confident it should be on the horizon. Just maybe you can give a little bit more color just on how to the forecast potential downside, or given the macro, or do you think given historical presence and the data you are seeing should be relatively in short order. Andy Paul: Yes, so there's two things on that. One is, obviously, we're privy to confidential information from our partners that I can't share. What I'd say on the standard release of cards, the market is all kind of agreeing. All the buzz around the market is that the new cards will come out either very late this year or early next year. So that's out there. Now what will that do in terms of buying activity? Clearly the every 2 years up until now, or every 18 months to 2 years, Nvidia (NASDAQ:NVDA) or AMD (NASDAQ:AMD) is launching graphics cards. So if they launch in Q1, that would be more like 30 months. So that's a delay. Now, the second thing is what do we expect that refresh cycle to look like? We are pretty convinced that a refresh cycle after COVID where the PC component business basically doubled has to be followed by an echo of that huge surge. For an echo not to occur would mean that all the people that came into the market to buy, new people that came to the market to build gaming PCs, which we think was almost the same number that previously existed. All of those would have to go away and not ever upgrade, which is, we don't believe that scenario. So we're pretty sure it was going to be a strong refresh next year. And obviously, once we get into new graphics cards, the higher end where people are using these cards to build two, $3,000 machines, that is much more where we operate, and we have high market share. George Wang: Okay, great. Just a second quickly follow-up, if I may, just on the peripheral creative business. It's nice to see, almost 20% growth year-over-year with nice margins. Just curious how sustainable it is. And from a kind of high level in any latest updates in terms of the consumer as it relates to the peripherals? I mean, do you still see more white space to drive up the ASP over the next few quarters? Andy Paul: Well, yes, so actually this is a very interesting question. And I'll take in a few different parts. Firstly, the overall peripheral business is twice the size of what it was pre-COVID. So if you look at headsets, which is kind of the bellwether of the gaming market, it's the first thing gamers usually buy. The number of headsets that were sold in the COVID period tripled from pre-COVID, so 2019 to 2020, and at this point it's still 2x. So there's a healthy market that's growing there in terms of the number of people that are getting into gaming and buying gear. Now this year compared to last year the market has been relatively flat, but what we've seen in general is that there is the markets bifurcating a little bit so there's a fair number of very low-end peripherals at low ASPs which we really don't participate in. The ASPs from the major suppliers, you know who those are, those ASPs are typically going up. And so I think this is something I talked a lot about when we did the IPO, that I thought there was a lot of expansion possible as people who have been gaming for a while are happy to pay more for products with extra features. At the same we've seen in any enthusiast type products, whether it would be skiing or golf, people [indiscernible] older by more expensive gear with that futures. George Wang: Okay, great. I will go back to the queue. Operator: And the next question comes from Colin Sebastian with Baird. Please go ahead. Colin Sebastian: Thanks, and good afternoon. Andy, the comment in the release about the gamer peripheral segment perhaps becoming larger than components over time, I mean, that's an intriguing comment. I guess maybe if you could walk us through that dynamic in terms of maybe what you see is normalized growth rates in both sides of the business and maybe how that's informing your product development as you think about the next few years. Then I have a follow-up. Andy Paul: Yes. Well, look, first thing, this has always been our plan. And just from the pure math's of it, we have very, very high market share. Well, let me start at the growth numbers. So we've seen historically, because we've been doing this for a long time, right? We've seen historically 5% to 10% market growth on the gaming PC market. In other words, those people building two $3,000 gaming PCs. But we've seen 15% market growth on peripherals. And this is over the sort of 10-year period. Now that's obviously been shaken up a little bit by this explosion in COVID and now we're on the back side of it still. But so that just gives you a sense of the market dynamic. And so we're still seeing generational shifts of people doing more and more gaming. In other words, Gen Z are gaming more than millennials. Millennials are gaming more than Gen X and this sort of thing. So there's more and more people gaming. And the entry point is always a headset or a gaming keyboard. In terms of white space for us, we have a very, very low market share in peripherals and we have very high market share in components. So what that means is that we would expect, as things move forward, we obviously try and get more and more market share, but realistically we will grow at or slightly above the growth rate of components because we already have an extraordinary market share. With peripherals, we have so much space to grow that it wouldn't be out of the question for us to double that size of our business in a few years. And on top of that, this is where we're doing all the acquisitions. So we're looking around at all the small companies that are in the peripheral space or the enthusiast space. And in general there's a lot of sub-hundred million dollar companies that we can absorb and run much more efficiently than they can on their own. So that's kind of the game plan. So a combination of organic growth and acquisitions, I think, will grow that. We're already at this point, this year, we already expect that we'll make more gross our peripheral segment than our component segment. And so that's where we are putting most of the resources in. It obviously takes a lot more R&D and marketing to be successful in the peripheral space where the products are much more complicated. There's a lot of microcontrollers we have. So that just gives you a sense of where we're allocating both acquisition dollars and OpEx dollars to grow that segment. Colin Sebastian: Okay, thanks, Andy. And then, Michael, I guess in terms of understanding the pathway back to growth, maybe the shape of Q3 versus Q4, I guess, looking into Q4, what are the indications you're seeing around demand, your ability to meet that demand and then perhaps the role that promotions will play in driving retail sell-through this year from what from you're able to gather at this point. Thanks. Andy Paul: So we continue to expect to have the normal seasonal effect with the second half bigger than the first half and around the same sort of numbers we've talked about in the past. I mean roughly you could say 55 back half, 45 first half approximately. Usually Q3 accelerates off of Q2 and then Q4 is even bigger. So that tends to be the pattern that we see. We don't expect anything particularly different this year. In terms of supporting growth, I mean, in my comments, we certainly have inventory ready now. So it's not a shortage that we have there. New products we know to get to the market in sufficient amounts to support demand as well. So I don't think it will be an issue for us to support demand for the second half of the year. Colin Sebastian: Okay. Thank you. Operator: [Operator Instructions] Our next question comes from Drew Crum with Stifel. Please go ahead. Andrew Crum: Okay, thanks. Hey, guys. Good afternoon. So, on the peripheral segment, Michael, anything to the step down in gross margin in 2Q versus 1Q, and is - the 40% you achieved in 1Q too optimistic for '24? And on the SIMS Racing products that you launched back in early June, any early read, just the receptivity you've seen for that line, and then I have a follow-up. I'll let Andy talk about the SIM racing products a little bit, but just in terms of margins and things, somewhere around 40% is achievable. Q2, normally we just have lower unit volumes, so there's a little bit less fixed cost absorption, a little bit of mixed difference as well in the second quarter, but it was otherwise relatively similar to the first quarter, which had the 40%. Promotional activities usually step up during the Christmas selling season in Q4, but we haven't seen anything abnormal. I mean, the indications from the prime data just passed is that people will discount, but they weren't extreme like they were in previous years. So it was more like normal discounting that was going on. Michael Potter: I'll let Andy talk about the SIM racing product. Andy Paul: Yes, and I'd say also, Drew, that we've spent the last couple of years retooling most of the base technologies in our gaming peripherals. So our keyboards today are looking quite different from the keyboards of 2 or 3 years ago when the trends were slightly different. And one of the things we really concentrated on was how to get the cost structures right so that we could get back to target levels. So that's the first thing. SIM racing the -- as you probably know, we brought out a...we showed a prototype, essentially a Computex of a chassis. Everyone that saw it loved it. That's not due to go into production later. And I think as you know, we're also in the process of trying to acquire this company Fanatic from Germany. So we're all in on SIM racing and I think next year is going to be a big year. But that market is strong, growing, all the fundamentals are there. This is something where, in an environment where people's budgets are a little bit stretched, it's actually a lot cheaper for people that like racing to do SIM racing at home and practice on tracks rather than take their car to the track. And that with the drive to survive success and F1 success in the U.S., there's a lot of people now getting into this hobby. So very exciting market. Andrew Crum: Got it. Okay. And then on the components business, you discussed the new GPU is launching late in calendar '24 or early calendar '25. What is factored into your guidance for '24 at this point? And does the timing have any bearing on 4Q, or does it not matter? Is the sale of your products coincident with the launch of the GPUs, or is there a lag effect? Thanks. Andy Paul: Yes, it's a complicated question. What tends to happen, what I've seen in the past is that as soon as the specs are out and people understand what the future looks like, then people make buying decisions. And there's actually a lot of people who wait until they see the specs of the new cards and then perhaps go back and buy the previous generation because it's a much better deal. So there's a little bit of that. You get most hesitation in the market before any of the specs come out. And this is the situation we're in now where everyone's got the idea that I mean, just because the technology that's used in AI chips is going to move on to GPUs. Everyone's pretty anticipating great things from the new cards. But that tends to drive it. Now, there are a lot of people, and we saw this during COVID, the first thing people tend to do is they buy a case to start the build. And some of these builds, some people spend a weekend doing it, other people spend 3 months. And the last thing you tend to put in is a graphics card. So yes, we would see -- we would expect to see people sort of as we get towards Q4, once the specs come out and once people decide, okay, now it's time for me to build a new machine, there's a good chance that we can start selling cases and some of the other products before then. Andrew Crum: Okay, thanks guys. Operator: [Operator Instructions] Our next question comes from Doug Creutz with Cowen. Please go ahead. Doug Creutz: Hey, thank you. Just looking at your components and systems, margins, I think they were the lowest they've been in about five years. Could you talk about, elaborate on that maybe and talk about what kind of margin recovery you are baking in for the rest of the year? Thank you. Andy Paul: Well, I think there's two things. I mean Michael mentioned this earlier. There is certain amount of fixed overhead that we have that applies to margins with a much lower revenue base, that does move them down. But yes, we are having to retool some of these products, especially in power supplies and in some issues cases, to meet the current trends and demands. So there's a little bit of inventory clear out of old products in Q2. So yes, I would say, I would not expect the margins that we were seeing in Q2 to be repeated in three and four. I would think we'd do much better. Michael Potter: There's also a little bit of a shift to lower ASP products for us. So we make lower margin percent on the lower ASP products in general and higher margin percent on the higher ASP products. So as we move closer to the end of the year and the newer graphics cards start driving more of the buying pattern, the ASPs should move up again and that should help margins as well. Doug Creutz: Okay. Thank you. Operator: And the last question comes from Aaron Lee with Macquarie. Please go ahead. Aaron Lee: Hey guys, good afternoon. Thanks for taking my question. Maybe a quick one on the competitive environment. Can you just comment on what that looks like currently? Have you seen any competitors behave irrationally just given the softer than expected marketing conditions in the first half? Andy Paul: Well the major competitors, no, in general. I mean obviously there's always somebody that discounts heavily, but we just went through Prime Day and we didn't see anything insane. I will say that on a general basis, there's a lot of new brands showing up from the factories in China where China is definitely a weaker market than it was. Higher unemployment, economic situation is a little bit worse there. So there's sort of empty factories that need to be filled up. And we do see quite a lot of new brands showing up, especially on Amazon (NASDAQ:AMZN) marketplace, at fairly reduced prices. So that's the main thing I'd say. But this is where I was sort of talking earlier a little bit about ASPs of head tests. We are seeing that the market is somewhat bifurcated. So, there's a big chunk of very, very low-cost peripherals out there now. And then, in general, the major manufacturers, ourselves, Logitech (NASDAQ:LOGI), Razor, et cetera are managing to raise ASPs and do pretty well. Aaron Lee: Got you. That's helpful. Thank you. And then, quick follow-up, you recently announced a partnership with TD SYNNEX, which I imagine is geared towards peripherals, maybe something like your Elgato products. So correct me if I'm wrong there, but can you just talk about that partnership and what it can mean for your business? Andy Paul: Yes, it's really around our B2B group. So we've got a small B2B group where we're seeing demand from broadcasters and universities and this sort of thing. Yes, the most promising product lines that we are selling, actually the most things we sell out of that group are systems, complete PC systems and Elgato gear. Aaron Lee: Got you. Okay. Thank you very much. Andy Paul: And adding TD SYNNEX, but we added CDW (NASDAQ:CDW) last year and so this is just putting together the whole channel to that business can grow. Aaron Lee: Understood. Thanks for the color. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Andy Paul: Well, thank you everyone for joining us on the call today and for your continued support. If you have any follow-up questions, please contact our Investor Relations Department and we look forward to updating you next quarter. Thank you and have a good evening. Operator: Thank you everyone for joining us on the call today and for your continued support. If you have any follow-up questions please contact our Investor Relations Department. We look forward to updating you next quarter. Thank you and have a good evening.