Good day, ladies and gentlemen, and a warm welcome to today's earnings call of the Exasol AG, following the publication of the Q3 figures of 2024. I'm delighted to welcome the CEO, Joerg Tewes, and CFO, Jan-Dirk Henrich, who will speak in a moment and guide us through the presentation and the results. Please note that every participant is muted during the presentation. After the presentation, we will move on to a Q&A session in which you will be allowed to place your questions directly to the management. So, I would say, let's jump straight into the numbers, Mr. Tewes, this stage is yours.
Thank you very much, Ingmar, and also a warm welcome from me to everybody who's joining us this afternoon. Today we're going to speak about the last nine months. We share with you the details on our Q3 numbers, walk you through this, and we also provide you an outlook for the remainder of the year, as well as some views and updates on our overall company strategy. Next slide, please. Here's our standard disclaimer. Next slide. Let me start with the key points, the key metrics that we have been achieved, accomplished this year. We're really proud that we got the company back into profitability. We have seen positive EBITDA growth for the last three consecutive quarters now. This 2024 marks the first year in recent Exasol history in which we're actually achieving that profitability.
That's a huge milestone for the company. I'm proud for the whole team that we've been able to get there. Remember, we're coming from pretty significant losses in 2021, 2022, over some moderate losses in 2023, and now we are seeing the first year on profitability. For the first three quarters, we achieved EUR 1 million EBITDA, and we're going to share, and you're going to see this on this slide as well. We expect to end the year in the range of EUR 1.5 million-EUR 2 million EBITDA. That is a substantial increase, and it also is a substantiation of what we guided at the beginning of the year, where we said we would end the year in positive. Recall, in 2023, we had a minus EUR 5.3 million, I believe. That's a significant uptick there.
On ARR, and maybe let's go to the next bullet point here first. This also means as a kind of a follow-on on the EBITDA beat that we're also on a higher liquid funds level compared year- over- year. So in December, or at the end of Q3, we were at EUR 17.8 million. We went up from EUR 13.3 million. Now, remember, Q4 is typically a month where we have a little bit more decline of liquid funds over the other quarters. So we're guiding EUR 11 million-EUR 30 million for the remainder of the year. So the previous guidance was just north of EUR 10 million. Our ARR was up 12% on a year-on-year, and we're back to quarter-over-quarter net growth in Q3, comparable to last year. So that's a 12% uptick. We have gross new ARR that is slightly above prior years.
The churn in the first three quarters was in line with our expectations. We had, as we shared previously, one larger customer in Q2 churning, which impacted our overall net growth ARR, but in general, we have basically managed the churn so that it's in line with the expectation that we have previously shared. We're seeing an uptick in new logo generation in Q3, Q4. We're going to talk a bit more about it, and we've done a significant review of our strategy and sharpened the strategy going into 2025. I'm going to speak more about this at the second half of the presentation, and last but not least, the full outlook that we had for 2024 is confirmed, and we substantiate it with more details that we have, so with that, I'm going to hand over to JD, and he's going to walk you through the detailed Q3 financials.
After that, I'll come back on and talk about some of the strategy updates. JD?
Yes, thank you, Joerg. So let me provide you with some more details on the first nine months' financials before I hand back over to Joerg for a little bit of a deep dive in what we've learned over the past 12-18 months and how that influences our strategy in 2025. Overall, the first nine months this year continue to be in line with what we expected when we set out for this year. Most importantly, as pointed out by Joerg, it marked the third consecutive profitable quarter in a row. Profitability was roughly on the same level as in Q3 again, and then also a return to net growth after two quarters of ARR decline, but let's take it step by step, starting with the ARR by quarter.
This chart, as usual, shows you quarter-on-quarter ARR development on a constant FX basis and on a like-for-like basis. Year- on- year, compared to Q3 last year, ARR is up by 12% or EUR 4.2 million in total. We are back to net growth in Q3, which was slightly above the net growth that we achieved in Q3 last year. Gross new business in Q3 was slightly higher compared to Q3 last year. We had roughly EUR 1.75 million euros of gross new ARR in the quarter versus EUR 1.6 million euros of gross new in Q3 2023. For Q4, we expect significantly higher net growth than that. Again, as you know from past years, Q4 is our strongest quarter in terms of gross new business achieved.
It's probably not going to be on the same very, very high level as Q4 last year since that was influenced by a range of migration to subscription deals that we did. So as you remember, over the last couple of years, we gradually migrated our customer base from legacy, from licenses to subscriptions. This journey was largely completed by the end of last year, and we had some significant upsell effects in Q4 last year. Nevertheless, as mentioned, we expect a significant additional momentum in net growth compared to Q3 this year.
So if we walk away from the year-to-date view on ARR and just look on the classical subscription metrics over the last 12 months, which then kind of accounts for those seasonalities as well, you can see, as mentioned before, we had EUR 4.2 million of absolute growth over the past 12 months, which equates into 12%. Upselling continued to be the dominant growth driver in this time, whereas new customer acquisition was not yet on the level which we aimed for based on the Espresso initiative that we started last year. Joerg will talk a little bit about the learnings that we've gathered for that and how this informs our approach into 2025. Worth mentioning, though, that while ARR new logo growth was still relatively moderate, we were able to accelerate the number of new logos won.
In the first nine months this year, we were at 12 new customers gained with quite a bit of an amount of additional new logo potential for Q4 in the pipeline, which gives us visibility to getting 20 plus new logos this year, which is an improvement over what we've achieved last year. If we look at the last 12 months in the classical subscription metrics, you can see the elevated churn clearly showing in this chart. Over the past 12 months, we had a churn rate of 15%. Net revenue retention was actually slightly higher compared to last year's level, but this elevated churn, but what happened is that the elevated churn basically equalized the significantly higher gross upsell rate that we've been seeing. Overall, net revenue retention was stable.
If we look a bit more at the ARR by region, that gives you an additional insight into what the sources of the churn were. Here you can see the last 12-month growth split up by our two main regions. North America, in terms of growth rate, grew roughly double the rate compared to Europe, although obviously, in absolute terms, EMEA remains our biggest growth contributor. You can also see that the gross upsell rates over the past 12 months were roughly basically identical, but that the EMEA region was experiencing, in particular, the elevated churn of 16%. As Joerg will illustrate to you in his section later, this churn in EMEA can be traced back to very specific verticals and industries. Those are the verticals where we see the biggest shift to also cloud-native solutions.
And Joerg will talk a little bit more about that in a moment. So putting this churn dynamic additionally a bit into a perspective over time, you can see that in Q3, the last 12-month churn rate has stabilized after a period of a sharp increase coming first, which started end of 2022, which took the churn rate gradually up to 15% where it was in Q2 and also remained in Q3, which is also roughly on the same level that we see with peers based on benchmarking data that's available to us, which highlights the overall dynamic that we're seeing in our industry marked by technological shifts. And because of these shifts, it's very imperative for each player in the market to have a very clear sense of the core strength and where we focus. And again, that's something that Joerg will talk to you in about a minute.
Now, if we move away from ARR into profitability. As mentioned now several times, we made the journey back into profitability this year. It's the third consecutive profitable quarter, bringing us to EUR 1 million on a nine-month basis compared to -EUR 4.1 million in the first nine months of last year. So an improvement of slightly more than EUR 5 million. It also shows on a quarterly level where EBITDA improved from -EUR 700,000 to +EUR 400,000. So an improvement of slightly more than EUR 1 million. If we look at the sources of where that came from, you can see there's a clear increase in revenues, particularly recurring revenues, which rose by 13%-14%, depending on whether you look at nine-month or quarter-on-quarter. And you can also see a slight decline in one-off revenues compared to last year. This, however, is more of a timing effect.
As I've mentioned several times, one-off business is not something that we pursue systematically. It happens opportunistically throughout the year. So far, in the first nine months this year, we didn't have much one-off business. However, now in October, we actually concluded one deal. So when we talk about the full year numbers in three months' time, you will see higher one-off revenues for 2024 as well. Second big contributor, of course, was a further improved cost base. So nine-month total costs were at EUR 20.2 million. And basically, all cost categories were on a similar or lower level compared to last year, with the exception of IT expenses, which were driven by increased cloud expenses for internal development purposes and rising IT infrastructure costs. But overall, that puts us on a very good track. There's two one-off effects in the first nine months' numbers, which offset each other.
As last year, and as I've mentioned in previous webcasts, we have received research grants or subsidies for our development projects in the field of big data and data analytics. So this impacted gross margin positively by EUR 1 million. On the other hand, the nine-month figures' personnel costs include roughly EUR 900,000 severance and restructuring expenses. So these two effects offset each other, which also means that if you look at the EUR 1 million EBITDA achievement up to this stage in the year, this reflects a genuine core operational performance of the business, which is not biased by one-time effects. So if we look at how this positive profitability development has impacted cash, as mentioned by Joerg, our liquid funds increased in the first nine months by EUR 4.5 million. There was one last remaining one-off effect from the settlement of pre-IPO stock programs.
I've talked about that several times over the past years. This was the final and last payment from that program. So starting 2025, we will not see these effects anymore. So adjusting for that effect, we had pretty much EUR 5 million increase of liquid funds. And this is almost solely driven by the increase in deferred revenue because of the way our customers pay us. So on top of the operational EBITDA of EUR 1 million, we had basically EUR 3.3 million of prepayments for the full year. If we look at the development of EBITDA and liquid funds over time, this overall gets us to the very positive pictures, which depicts our continuous journey from our peak negative profitability or negative loss in Q4 2022, where we lost almost EUR 5 million on a quarterly basis, now into the three consecutive quarters of profitability on the right-hand side.
In terms of liquid funds, the curve in the middle of the chart shows you the seasonal pattern of our cash flows that Joerg already alluded to. But you can also see, if you compare the respective quarters with each other, the improvement that we've achieved there and how then also overall annual cash flow will be positively impacted by that. And with this development, and then also with us getting closer to the end of the year, put us in a position where we were able to substantiate our outlook for 2024, which we're very happy about, particularly on the EBITDA and liquid funds level, since we have good visibility now on the remaining revenue to be recognized and the cost for the rest of the year.
We were able to specify and substantiate our EBITDA guidance to EUR 1.5 million-EUR 2 million, as well as our guidance for liquid funds to EUR 11 million-EUR 13 million versus the previously guided, more vaguely guided values. On ARR growth and revenue growth, we maintain our outlook. So for ARR growth, we're expecting up to 10% of growth and revenue growth coming in at 10%-15% by the end of the year, largely depending on some remaining one-off business that also will happen this year. So this is what I wanted to share with you in terms of the financial numbers. I think in summary, I can only second Joerg's comments.
We are very happy to have concluded that important milestone for the organization coming out of a very shaky and unstable financial situation in the first one to one and a half years post-IPO to the sustained profitable situation that we're in now. It certainly makes the work in the company a very different one, also for the workforce and the staff, and also for customers, I might add, which gives them security and certainty that we're a partner they can build a collaboration with, they can build a relationship with, and which they can also financially rely on in the future. And how we are planning to continue to build on that and drive us back into higher growth regions is something that Joerg will elaborate on now. So I'll hand back to him for an update on strategy.
Okay. Thank you very much, JD.
So as most of you know, I've been with Exasol now since the beginning of 2023. And so I've seen a lot of great things, things that work well, but I've also seen things that do not work that well. So as in any good strategy, obviously, no strategies ever final. And we constantly review what actually is working well and then do more of that, but also identify the areas that are not doing as well and ideally do less of that. So that sounds pretty easy and straightforward. And let's maybe break this down a little bit more on what we're actually doing and which are the areas we believe we will be investing more in to ultimately get back to that higher growth that we all want to accomplish. So before we do that, let me maybe recap. Next slide, JD.
What we previously shared are product offerings that we have in the market, so we're basically addressing several use cases that customers have. They span from the typical BI acceleration use case to help customers in their environment, in their existing environment, be that more on the legacy data warehouse, but also in the new modern data lakehouse architectures when they have performance or cost issues, so that's where Exasol comes into play and helps customers overcome those performance and/or cost issues. The other product that we have, the other line of product, is our data warehouse in which we basically just operate the whole analytics environment for the customer, and as we're going to see, this primarily happens for on-prem customers in more regulated environments. Next slide, so we've kind of sharpened our, let's call it, elevator statement.
Let me walk you through this and then explain on the following slide what that actually is. So we offer a powerful engine that allows our customers to generate lightning-fast analytics on massive data volumes at low cost, thereby expediting customers' journey into a GenAI-driven world. So a lot of words, but in essence, it describes that what I just said. We have this unique engine, this unique analytics technology where customers gain better insights faster at lower cost. And of course, all our customers are in one way or the other on a way to include AI, GenAI solutions into the overall analytics space. So our products are the natural choice for all organizations with high performance requirements, particularly those leveraging on-premises or hybrid setups for cost, security, and compliance reasons. That's very important.
The on-premise, so where are we playing, where are we winning, which I'm going to show you, is the on-prem or hybrid space. So that's an area where we're going to invest more and basically double down our efforts. Next slide. So what we've been seeing year- over- year, like for like, both on new logo generation and gross new ARR. So we've seen an uptick on new logos that we have year- over- year. And also our gross new ARR, which is the combination of new logo plus upsell ARR increase, has increased from EUR 3.9 million to EUR 4.1 million. What you see here on the right side is actually several new customer wins in the financial services sector. So we had three European banks here on the list. We had U.S. financial service providers. We had a European insurance. We had a couple of wins in the healthcare space.
You see the majority here come from a certain segment. Let's maybe go to the next slide, JD. This slide illustrates that as well. What you see is basically the development from end of 2021 towards the end of 2024; that's forecast. The verticals that we are focused on a going forward basis, which is financial services, so banks and insurance companies, healthcare, public sector, telcos; this has been increasing over to become over 50%. In that, we also have a really good upsell rate, 131%. We have seen a rather modest churn rate of 6%. Net revenue retention is 125%, and we have a growth rate of 28%. That segment of the market has actually been doing really well for us.
Now, on the flip side, if we, let's say, look at the glass half empty, there are other segments of the market, retail and services primarily, that have actually declined. And in that segment, we're also seeing a lower upsell rate and a substantially higher churn rate. So that's an analysis that we've done on our portfolio, on our customer portfolio. And as we're obviously doing, like I said before, now we're diving deeper into, okay, how can we do even more and even be more conscious about what's actually working well for us versus where we have some struggles. Next slide. So this basically sums it up.
So we believe our path back to double-digit growth will be to lean into our core strengths, which is our future strategy is designed to be focused on defensible and sustainable strengths with the goal to return to a dynamic growth rate on a profitable basis. That's very important. So our goal and our commitment is that we're going to remain profitable on a going forward basis as we develop that focus strategy. So we will concentrate our go-to-market focus even more to on-premise and hybrid customers. So we have a lot of activities actually going on right now that specifically speak to that motion, to that go-to-market motion. Should also note that the product that we have is actually working perfectly well. We have the best product to run on-premise in that environment. So it isn't like we got to develop a ton of new functionality in our product.
No, we actually have a great product that fits that segment and that requirement really well. So the market research shows that the on-prem market continues to be a multi-billion-dollar market, growing single-digit rate. And we have a market breakdown on the next slide. Also want to make the point that we've seen trends now in the market for several reasons that the spending level or the transition to the cloud, to the native cloud solution, is slowing down. Several reasons for that. One is high cost of cloud-native solutions. So customers who have migrated into the cloud several years ago now basically seeing really high cost. So that's one challenge. That even leads some customers to move back from the cloud to on-premise solutions or at least slowing down their migration to the cloud.
So this move back, that's a term in the U.S. that's being used more frequently. It's called repatriation, going back to your own data center to save cost. At the same time, also the slowdown. So what we mean by hybrid customers are companies that basically keep maintaining both. So having a cloud-based solution for some BI workloads, but keeping other workloads on-prem. That's what Exasol provides a really good fit and solution for. So let's go to the next slide, JD. This is basically the breakdown of the market and also for us, as we call or it's being called the obtainable market. So how this is being broken down. So the global on-premise market is $37 billion, which is actually growing at single-digit year- over- year. So I think this year it's 3%-4% growth in that segment.
Now, we got to break it down a bit towards actually in reach for us as Exasol, so subtract the transactional database market. We're not a transactional database. We are an analytics database. Subtract some of the regions that we're not playing in, and then subtract C and D, non-focus customer markets and non-core use cases. This leaves us with an obtainable market size of roughly $3 billion in which we can play and which we will continue to play. Next slide, so who are our customers and how are we approaching and how we're prioritizing these customers, so we've gone through this exercise to basically focus our activities, focus the organization, our marketing and sales activities. Where are we going? Which industry, which segment, and which region to have certain investment priorities?
So what you see here, the first one, the first target ICP ideal customer is the so-called regulated customer. Regulated customers typically have regulations that drive some of their IT decisions. They are found in the banks, healthcare sector, but also public sector, telecom, utilities. These are areas where there's more regulation than in other areas. And those customers are very often on-premise. Specifically here in Central Europe, in the German-speaking countries, we do see a lot of customers from the banks, healthcare, also public sector to be mandated to be on-premise. So that's the sweet spot that we have where we also had really good success recently. So like I said, we're going to double down on what's working well. That's the number one priority. So the regions are the DACH regions, some other European regions. We're also, I would say, tiptoeing into the Middle East.
This week, for example, we're attending an event in Dubai. We've seen some attraction there. And we continue to be present in the U.S. In the U.S., there's also a significant part of the $2.8 billion on-prem market is actually in the U.S. I think it's somewhere around 50%. That's a market we think we can get further into. We haven't had that success yet, but that's something we're exploring. That's why it's not dark yellow, only lightish yellow here. So these customers, that's a very attractive segment. And like I said, we're focusing our activities on that. We are going after replacement of certain legacy on-prem databases. We're working with the right partners in that segment. And so you're going to see us more and more investing here. Second, the cloud smart customer, this broadens the ICP a bit.
So there are some other industry segments here: e-commerce, retail, transportation, utilities. We do think, I mean, we have existing customers in that space, but we also think that there are opportunities for us there. This is basically the hybrid-first approach. So what I described here are customers that are mixing between on-prem and cloud-based solutions. Remember, our product runs both on-prem, in the cloud, in the different hyperscale environments. So we offer customers the ability to basically do both and mix and match an on-prem with a hybrid strategy. That's where we're seeing success. Where we're not seeing success right now is in the cloud-first environment. So for those customers that I just lost the presentation, for those customers that are JD, I think we lost the presentation. For those customers who are cloud-first, we are seeing more competitive challenges.
That's why we are basically going into areas where that competitive pressure is not that high. Let's maybe go to the next slide. That basically concludes the strategic update. Happy to take more questions. I will also be, as you can see here on that calendar, I'll be at the Münchner Kapitalmarkt Konferenz tomorrow. I'll have a presentation there. If anyone is there and wants to also have an in-person conversation, happy to do so. JD will be attending the Deutsches Eigenkapitalforum in Frankfurt on November 25, 26. He will be there. I think he has one-on-ones, but he's also presenting. He can also take a question.
Then in the first quarter, we haven't published now the full financial calendar for the full year, but we'll be attending the HIT conference in Hamburg on February 6th as well. Then on February 19th, we're going to present the full year results and also then provide an outlook for 2025. That concludes our presentation. Now let's open up. If anyone has any questions, we're happy to take those.
Yes. Thank you very much for the presentation. We will now move on to the question and answer session. For a dynamic conversation, we kindly ask to ask your questions in person via audio line. To do so, click on the raise your hand button. If you have dialed in by phone, please use the key combination star nine followed by star six.
If you're not able to speak freely today, you can also place your question in the chat box. We have one question at once, and Mr. van der Horst, you should be able to speak now.
Yeah. Hi. Can you hear me, everyone?
Yes.
Perfect. Thanks for taking my question. I have a couple of those, actually, so the first one, I saw that the new logos increased year to date by about 30%, while the gross ARR gains compared to last year were less so, and there was, at least since you're focusing on more complex problems with larger customers, it's not intuitively clear to me why that is the case. The second question is, you mentioned that some customers are even moving back out of the cloud into an on-prem solution for cost reasons.
I remember that in the last case, we already discussed that Exasol, since it uses whatever performance you have more efficiently, could also be a way to make actually a cloud environment cheaper since you don't have to buy as much performance. Is this something that you are already discussing with customers? If so, I would be very interested in what the first feedback is. This would be my first two questions.
Should I take the first one and then
you take the first one and I'll take the second one?
Yeah. The ARR, and I refer to new logo gains right now, right? There was one effect in the 2023 numbers where we won one very large customer. We had a new logo in 2023 in the U.S., which was, I think, EUR 350,000 per year customer, which is extraordinarily big. Yeah.
Our typical average customer size of a newly gained customer is between 50 and 100. Then there's the occasional EUR 200,000 customer. So if you look, I would say the new logo profile of the new logos this year, if you allow me to jump back to this page, gives you a pretty good picture, right? So the biggest new logo gains this year was this European bank with roughly 200K, US financial service provider with roughly 200K. But this is kind of the upper end of the typical range. In 2023, we had an outlier there because we had one particular customer who was twice the size. And that's why, despite the higher number of new logos that we won so far this year, the ARR value associated to it is not higher than the one last year.
Yeah. Okay. Perfect. That makes sense.
Just so the gross new ARR here includes both new logos and upsell, correct?
No, on the right-hand side, that's just the customer wins.
Y eah, yeah, but the rest is about the gross new ARR.
Yeah, yeah, so the bar charts in the middle, which is the gross new ARR, is both across new logo and upselling. Yeah, but so you're right, Joerg. So if you look at those charts, there's actually two effects on the new logo side. There's the effect which I just mentioned to you, Robert. The second effect, which I might add, is something I alluded to in the presentation just now: in our upselling performance in 2023, we had quite a bit of migration to subscription effects left, which the upsell performance of this year is not reflecting anymore. Yeah, because we've basically migrated our customer base now to subscription.
So the upselling performance that you're seeing this year, if you want, is a true upselling performance in the sense that more volume, more scope, more use cases.
Yeah. Okay. Perfect. And could you remind me real quick, how large was the effect, like the transfer from legacy license customers to subscription customers last year? Was it too many?
Well, it was more because if you look at one of our biggest European retail customers alone, there was almost EUR 800,000-EUR 900,000 of migration to subscription effect in there. And if I look across the whole customer base, I think I don't have the exact percentage in my head, but it was about one-third of the upsell performance last year, at least, was driven by migration to subscription. Yeah.
So if you want, in many ways, this year is the first year where we fully rely on a classical upsell motion.
Okay. Understood. Thanks.
And Robert, to your second question, which I think is the follow-up on my comment on cloud costs, I think there's a large trend in the market or concern in the market of many enterprise customers who have switched to cloud-native solutions in the last three, four, five years, primarily to Snowflake and Databricks on cost, basically going up at a substantially or at a significant rate. So, costs, most of these business models are based on consumption-based pricing. And obviously, the entry is relatively low. But then as companies ramp up their investments, they are seeing that cloud costs are really going through the roof. We actually have a couple of customers that have picked us recently to counter that.
So they're basically using an Exasol installation to reduce workload out of one of these other cloud-native database systems. That can either be on-prem or it could be in the cloud. That's what I mean. Or that's also what we mean by hybrid customer. That depends on the landscape that the customer has where they put their data. Sorry. We're helping them basically to mitigate costs. So it's an interesting trend. Actually, in the U.S., there are even startups getting funded on, let's say, driving down data analytics costs in the cloud with certain add-ons to the leading tools.
So I think. I think this distinction is very important. I think there's a choice that customers make on which type of provider is used as the general analytics platform. So this is where kind of on a larger scale, you run all your analytics on.
Then the question is whether you use, let's call it special purpose vehicles for specific use cases to lower peak costs or to drive them down. I think what we've seen, and this is reflected in the refined strategy, is we are fully capable of competing as a full-scale platform in the on-prem world. Yeah. I think that's where what Joerg mentioned is we have a highly competitive product. I think when it comes to people who have chosen to be cloud-native with their overall full-scale platform, it's going to be very difficult for us to compete that away and become the full-scale native cloud platform. What Joerg is saying is that there is a play for us to, as a selective special purpose vehicle, help those customers drive down costs in the platform that they've chosen in principle.
And if they indeed choose to move complete loads back to static cloud or on-prem, then that's an area where we can play again also as a broader platform. Yeah. And I think that's a distinction that we've seen in the market, which also kind of relates back to some of the churn that we've seen, that there's some types of customer profiles who just choose to become cloud-native in their overall platform, but then they run into trouble. And then for selective special purpose situations or use cases, they either repatriate or they might use a particular add-on technology to drive down costs. And I think this is something that we are also exploring.
Okay. Perfect. Thanks. And then I have to, I guess, a little bit more boring questions. So one is, you've already increased your profitability.
I think since it's a very scalable business, should do so going forward. But how do you internally think about growth and your cost discipline and basically the balance thereof? So I guess now that you become probably cash positive in the coming years, do you expect to increase costs as well? Or let's say, how do you think about your journey to the Rule of 40 would be my last question.
Can I start? Do you want to build on it, Joerg? Yeah. I think if you look across our functional cost fields, I think where we see clear scalability is obviously in the back office, my area. Also on the Salesforce, I think we can continue to drive up Salesforce productivity moving forward. So in terms of Salesforce cost, I don't see it scaling one-to-one in the future.
Marketing, depending on traction that we see, probably not next year, but if we gain traction the year after, probably scale up a little bit. I think where we will use any headroom that we are generating from growth moving forward, and the headroom is created by the very high gross margins that we have, will mostly go back into product and technology to stay competitive, to defend the strong position that we have in the focus verticals that we have there. That also includes adapting to a changing regulatory environment, making sure our technology is up to snuff with it, and then also exploring complementary cloud plays and AI plays that we see. But this is mostly a tech investment question then.
So if you see costs go up, and this is something that we're discussing right now on how we want to evolve our cost base for next year because we're in the middle of the budgeting process, the areas where you will see investment is in tech. Whereas in the other areas, we continue to be very focused on driving up profitability and scale the existing cost base.
Okay. Perfect. Thanks. You mentioned, I think in the last call, it was more an offhand comment that you might reach the Rule of 20 at least next year. So can I think of the coming next three years? I mean, just ballpark, like Rule of 20, Rule of 30, Rule of 40, is that kind of realistic? That's, of course, not a guidance, but I'm sure you're thinking about those numbers as well. So am I completely off here?
Yeah.
So I think, obviously, our aim is to continuously improve both EBITDA margin and net growth. I think as we go through the current planning process for next year, we're definitely aiming for double-digit rule of 40 value next year. Whether it's going to be a rule of 20 depends on the churn that we see for next year in the non-focus verticals that we spoke about, which is something we will have to continue to deal with as we shift the portfolio. But we will definitely further improve EBITDA margin, further improve net growth next year, and over the horizon of the next three to four years without that being a guidance now, but definitely evolve the rule of 40 into solid 20 regions based on the focus strategy. Yeah. So that's something we'll talk about in more detail in February.
For next year, we're currently going through the detailed planning process.
Okay. Perfect. Thanks.
Okay. I saw we had two or three questions from Benjamin in the chat. We switch over to that. Benjamin, and thanks for your question. Robert, thanks for your question.
Sure. Oh, thanks for answering.
Benjamin. So I'm just reading it. Yeah. Do you want to read it out?
I can read them out. We got two questions here from Benjamin. The first one is concerning the sales productivity you also referred to. But in addition, it's when would you decide to hire new sales? Any updates on the partnership strategy? Do you see partners contributing to growth meaningfully in 2025?
Yeah. Let's start with that, and then maybe we can get to the next question. Are we happy with the sales force productivity at this juncture? Yes and no.
I think we are constantly looking at how we can basically optimize the investment that we're putting into our Salesforce team. And we're also looking now at how do we structure the organization for 2025. So I think one of the structural changes we're going to make is to have more of a separation between new logo hunting and existing logo upselling or farming. So that's something we're in the process of establishing. This also then has obviously different productivity targets. So please recall, we hired a new sales leader about, well, 11 months ago, Henrik Jorgensen, and he took over the Chief Revenue Officer function in August this year. So he's in the process of refining the strategy and ultimately improving the efficiency of the sales organization. And second part of the question, once we see that certain things are working, sure, we're going to do more of it.
This also means if we see that a certain sales motion is working, then, of course, we would invest more. But it's always finding the right balance, right? So what do you invest? When you see it working, do more of it. So I think where we are with our planning right now, I think we're in a good place in terms of increasing overall profitability. So we're using some industry-specific metrics, and I think we've been improving those metrics, the ratio basically of investment in sales and marketing versus the ARR that comes out of it substantially over the last 12 months. And our goal also is to continue that journey into 2025. Partners, yes, very important for us. I think we are reestablishing some of the partnerships that Exasol had in the past.
We have a few, I would say a handful of partners that are working well right now. We're investing in those relationships, and we're also going to broaden this specifically, also part of the strategy looking at certain verticals, such as, for example, banks in German-speaking countries. There are certain types of partners that serve this market. So we're engaging deeper with those respective partners. Then maybe the last question, can you update us on the AI roadmap? You had the intention of launching a GenAI retail product in 2025. Are you on track? We are not going to launch a standalone product at this point in time. However, we will continuously increase the AI capabilities of our core product. So we're just with one of our largest U.S. customers, T-Mobile, we're doing a deep AI machine learning integration.
So, happy to share more at a future call here with you. I think this is actually going really nicely and letting our customers use AI in conjunction with the core Exasol database. I think we have two more raised hands.
Yes. We got two more raised hands and two questions concerning the time. I hand over to you, Mr. Huber. You should be able to speak now.
Yeah. Hi there. Just one question on the ARR growth. You're guiding up to 10%. So do you also have a low band? What is the minimum you would like to reach this year?
Well, up to 10% positive implies zero as the minimum. I mean, but I mean, as usual, you see Q4. We certainly want not zero, but positive growth.
I think realistically speaking, we're going to land in the lower mid-section of that band, but it depends on several bigger deals, again, in the financial services industry as last year that we are working on, who are, I would say, relatively certain. So even if they don't come, they slip into next year, they're not lost. But the timing of those deals will determine where we land in terms of ARR guidance this year.
Okay. Thank you.
And we got one last question from Colin Stone. You should be able to place your question now.
Hi. Can you hear me, guys?
Yes. Hello, Colin.
How are you? Okay. JD. I just had a question on churn. Your assessment of the risk that this elevated level of churn continues into 2025, particularly in these non-core verticals, is this what do you think the outlook is?
Do you know that you already have some customers in non-core verticals where there's a serious risk?
There are some customers in the non-core verticals where we know they're actively thinking about going cloud native, so shifting their full analytics platform to cloud native. I think what we're currently assessing, and in all realistic assessment, we will continue to see an elevated churn next year. I think where we're trying, what we're working on with them now, and this is kind of the lower part of, let's say, this chart. So whether we might be able to mitigate some of those risks by playing an accelerator or cost reduction role in their cloud native environment, especially with one of our very large customers, we're having good discussions on that. But it's in, I would say, MVP stage, which we're testing out.
So that's something which at this stage, I'm not able to factor into next year yet or not. We will be much smarter on that by the end of the year. But this will kind of determine the churn that we'll see from this non-focus verticals over both next year and 2026. I mean, obviously, the good thing about these dynamics is because we clearly see the new growth next year happening in the focus verticals, and we have very stable subscription parameters and stability in those verticals. So as we continue to shift our customer base, that will automatically stabilize our business on the churn side while also driving average gross upsell rate up. But for next year in particular, I think we will have to continue to deal with an elevated churn.
Okay. That's understood.
And just when we spoke back in February, you said there were four or five kind of mega deals. I guess most of that would all be, I guess, with existing customers on upsell. Have any of those landed already in the first nine months? And do you think you have some candidates which might come in Q4, or do you think many of these will slip till next year?
Joerg, do you want to comment on that?
Yeah. We're going to expect one to two large deals closing in Q4. I think they will, in one form or the other, close. The question is then how much will be affected or how much will happen this year versus next year. So actually, we are tracking on getting at least one, if not two, closed this quarter.
Okay. And there haven't been any so far this year?
No.
Okay. Good.
This is a very encouraging update overall. Thank you very much, guys.
Thank you.
Thank you, Colin.
Good to talk again.
And we thank you. I think we're out of time. Yeah. In the meantime, we have received no further questions concerning the time. We would say that this is the end of today's earnings call. Thank you for joining in this lively conversation. Should further questions arise at a later time, please feel free to contact Head of Investor Relations, Christoph Marx. And as you mentioned, you guys can be seen on the venues in Frankfurt, Munich, and in the year 2025 in Hamburg on the HIT meeting. Well, I wish you all a lovely remaining week. And with this, I hand over to Mr. Tewes for some final remarks.
Yeah. Thanks, Ingmar. I really like the format. I think that's a very lively format.
So thank everybody for joining us today. And I appreciate your continued interest and support for Exasol. Thank you very much. Have a nice day.
Thank you. Bye-bye.