Just to keep things on time today. Once again, Mike Funk, Bank of America, SNMCAP Software Analyst, joined on stage by Matt Bullock, who also works on the software team. He'll be asking some questions today as well. Very grateful once again to have Asana and Sonali and Aziz here with us at the Bank of America Conference. Thank you.
Thank you. We are really delighted to be here.
No, no. And really great, great timing, my perspective, at least. You reported earnings last night, and so, you know, kind of hot off, hot off the press. You know, I wanted to kick off with, you know, a few points, maybe some clarification. I think maybe some investors were confused on last evening. And, you know, on the FX first, Sonali, you know, last quarter, I think you talked about kind of a 100 basis point headwind, but that was rounded to maybe withdrawing more 80 basis points last quarter. And what you're guided to for the year, a lot of change in FX. And investors were thinking that it should have been a much larger help than how you framed it last time. I think last night you framed it now as a 50 basis point tailwind, right?
Can you just, I guess, correct me if I'm wrong on that, and then kind of give us the like for like back to how you talked about 80 basis points last quarter to where we are today?
Sure. Okay. Starting with a very technical, specific tactical question. I love it.
I just want to, I just want to address the kind of biggest question.
Yeah, no, absolutely. I think firstly I'm going to go back to when we guided Q4, which was in March, where I'm just going to repeat what I said on the call yesterday. That was a really different time in terms of the macro than where we find ourselves today. When we guided in March, we guided 8%-9%, 8.5% midpoint. We said that currency was about 1% headwind to that. It was about 0.7%. Yes, that was around.
I was close with the point.
Exactly. It was about, you know, actually probably 0.75%, something like that. But you're there or thereabouts. Last night we guided 7-9%, so 8% midpoint. We didn't specifically call out the tailwind from FX in that new guide. In that new guide, there is a tailwind from FX, and it's about $5 million.
Yeah. I think that, I think the right way to think about it, Aziz, or.
Yeah. I think, you know, I think when we framed the 9-10 comparison in Q4 versus the guide of 8-9, it was really to say, you know, in our Q4, the change of currency devalued our ARR base by about $5.5 million. If that would not have happened, the guide would have been more like 8.7-9.7, rounded to 9-10. That was for basis of comparison because, you know, analyst models had not taken that into account. They were at 11%, but that did not take into account the currency coming down. That was just a frame of reference, not meant to be a guide. Then.
Really more to help analysts in their modeling when you felt that people maybe were out of bounds with how they were modeling.
Exactly. This actually accounts for the headwind that we had faced over the course of Q4. Now, fast forward, we did have a tailwind over the course of Q1 that's driving about 50 basis points to the full year. It was not felt that pronounced in Q1. It was only about 20 basis points to our Q1 growth, but 50 basis points to the full year. If you want to like for like, it would be 8-9 would have been the constant currency guide. The new guide would be on a constant currency 6.5-8.5.
Okay. Thank you for answering that. I know it was kind of more technical. Maybe you wanted to address first.
Just to add, there is like, we do not intend every quarter to guide in two separate ways. Like, we really, exactly. We really called it out in Q4 because it was such a big impact in a single quarter. That was why we called it out.
I think there were two other points I think last night that are important. You know, there was also the offsetting factor in the guidance from the renegotiated contract with a large, large customer. I do not think you named the customer on the call, but.
No, we didn't, but it's a large enterprise tech customer and our largest customer.
Yes, exactly. That was an offset to the FX help in the guidance as well. You also had, I think, what you characterized as unseen but possible macro headwinds that you're now incorporating where last quarter, I think you said the guidance incorporated no change in the macro. Did I capture everything?
You captured that perfectly. Just to be clear on the 7-9% that we guided last night, the low end of that guide incorporates a worsening of the macro in terms of what we are seeing today. We did call out some trends that we began to see really around April. I think we are not alone there. I have seen others call out, you know, post-liberation day. Some of those trends that we have seen are slightly more elongated sales cycles, slightly smaller lens, just a bit more buyer scrutiny. By the way, I am becoming, I am scrutinizing things more, like ask Aziz, like things that come to my desk, I am like, no, you know, like the first response is no.
To get to that lower end of the guide, we would need to see things change for the worse in a meaningful way. I wanted to give ourselves that room and that space because I feel like, you know, as I started with my opening remarks, the macro that, you know, the world we're operating in today is more uncertain than it was when I last guided, which was in March. It's just a more uncertain world.
Would you characterize the low end of your guide as being de-risked?
I would say it's prudent.
Okay. Not, not de-risked. You wouldn't go that far.
I mean, again, you don't know what you don't know, right? I would say it incorporates a degree of conservatism and prudence.
Okay. Fair, fair, fair enough. I want to let Matt jump in now with some questions. You know, Aziz, I think is going to answer a lot on AI Studio. We spent a lot of time and obviously Sonali, everything else.
Thanks, Mike. Sonali, before we get into the AI Studio, I wanted to touch on that $100 million plus TCV deal over three years. Obviously, you know, a huge deal for the company speaks to the strategic nature of Asana, but I know there were some puts and takes, in terms of the ACV there. I believe seats did expand, but there was some incremental discounting because of the three-year deal. Maybe you could help us better understand kind of how that renewal process went and kind of the financial impact of it.
Sure. Absolutely. You're right. It's a $100 million TCV deal over three years, largest deal in our company's history. We feel a real testament to not just our leadership in the category, but our ability to scale, to be able to serve a customer at that level. We didn't disclose the actual number of seats, but you are indeed right. It was an expansion. The expansion covers up to a certain number of seats, but we actually see room for it to expand even beyond that. We actually think that it could expand from a financial point of view as well. The deal, the $100 million TCV, doesn't cover add-ons, things like AI Studio, which we think, you know, we feel excited could be an add-on.
Then also things like services, foundational service plans, which we've talked about, again, that could be incremental. When we, you know, Aziz and I were part of the deal team and, you know, there's some commercial sensitivity here and I'm sure that partner will listen to these remarks. There are always puts and takes and it's not unusual for a deal of that size and scale for you to be willing to afford a slightly higher discount than the last time around because the last time we negotiated with that counterpart, it was for a one-year renewal. I was willing to trade off a bit on price in order to get the visibility. A CFO loves visibility. Now fiscal year 2027 and fiscal year 2028 is significantly de-risked.
We don't have to go back to that negotiating table again. In the meantime, if you think about our roadmap, which Aziz will touch on, there's a lot of new stuff that's going to be coming out between now and then, you know, AI Teammates, Dustin talked about on the call, AI, sorry, resource management and AI Studio Plus. All of these things we believe could be add-on. We are nowhere close to going wall to wall with this customer. It's a significant customer, obviously, if the ACV is, you know, the $100 million divided by three. The ACV did incorporate a modest downgrade, compared to where we were a year ago. You asked how the negotiation went. Some of the things that we are going to do with this customer is partner with them on innovation.
They are one of the greatest innovators in the world. We see upside from that too. They have a huge marketplace. We see upside from that too. There is more to go for.
Interesting. Maybe if you could, you could touch on the impact to NRR. That's certainly been topical for the Asana debate. How does, how is NRR going to be influenced by that renewal, maybe 2Q throughout the remainder of fiscal 2020?
Yeah. Really good question. Thank you for asking it. As you know, we had been seeing, like, let me start firstly by saying net retention is not where we want it to be. It is a huge priority. We need to fix it. We have, you know, a lot of strategies, including a new Chief Customer Officer in place to drive that. In the current quarter, our in quarter net retention was actually stable. As we look ahead, as the renewal comes into our numbers from Q2 and into the rest of the year, that downgrade to ACV will pressure our in quarter NRR. You should expect that to go down. I do not think we quantified it, but, you know, I would say at least a percentage point.
That being said, you know, a lot of the strategies that we have in place now, things like better coverage of our small business base, which actually had not really been covered. It tends to be a churnier part of our overall, you know, customer base. We have a much better coverage model in place now. That should start to bear fruit as we exit this year. We also have, you know, we've become a multi-product company. We have AI Studio that we can introduce into renewals conversations. That has been really helpful. That should continue to help and offset. What I would say is if it were not for this landmark deal, which specifically impacts our tech vertical, our enterprise tech vertical, we would have seen a continued stabilization in our net retention.
You know, our goal as a management team is not just stabilization. Once we get into fiscal year 2027 and the impact of this ACV downgrade makes its way through, we should expect stable to improving NRR again. You know, we sort of see it as like stabilization interrupted, but interrupted by this very specific deal. The only other thing I would call out, and AI Studio is a big mitigant to this, we have since April seen slightly more cautious behavior, particularly in our renewals book from certain customers on the enterprise side. What I would say is whilst we are seeing some downgrade activity there, we are retaining the logos. That is really important because that means when the macro comes back, you have an opportunity to expand again with those customers.
In fact, our logo churn this past quarter has improved. I expect that trend to continue. It is not all bad news on NRR. It is just we felt it was really important to give you a view because we had talked about the stabilization on what was likely to happen over the next couple of quarters.
Good. Absolutely. It's a good segue into some more questions for Aziz on AI Studio because we had the very exciting $1 million in ARR threshold crossed last night. Maybe, Aziz, could you help us think about what's driving the success of AI Studio so far? How are customers utilizing it? How quickly do they get comfortable with it? You know, maybe walk us through some of the upside cases for the remainder of the year, in terms of adoption and revenue contribution.
Yeah, sure. Thanks. Yeah, it was a huge milestone of the quarter in just a couple of months since going GA of generating a million plus ARR. And the pipeline is really strong going into Q2. Strong demand, strong uptake. It's really cross vertically, cross regionally, and our AEs and our sales operators have really embraced it. I think this last quarter we had 90% of the AEs have generated pipeline and a high degree of that's late stage. Really strong enablement efforts to drive that pipeline and our whole field is kind of participating in that. The value that it drives is what's driving the demand. I think we talked about like this first layer that we were targeting is really the builders within our base, those who have built automations with Asana.
We're seeing really strong uptake of those. Those tend to be some of our larger customers. Of our top 100, I think about 40 plus are enabled on AI Studio. We're seeing really strong adoption amongst builders, those who have built automations, and they're deriving a ton of value. I mean, we've seen some really large customers drive significant ROI that's like many, many multiples of what they're spending. It's really encouraging. From a usage basis, that cohort that started in our kind of early trial preview type phase, the growth of that cohort in terms of usage has grown and grown and grown. We've seen, you know, a handful plus that have actually graduated to consumption base and are buying top-up credits and moving on and so forth. That's super encouraging.
What will drive the kind of continued strength is really bringing AI Studio from kind of those who build, who have built automations, to more of our general base. That is really in two ways. One, we introduced the Smart Workflow Gallery, which is a gallery of templated use cases like HR onboarding, building a marketing campaign, agile product development, project management, ticketing, amongst others, that customers can adopt extremely quickly and start realizing the value of AI Studio, you know, in a matter of, you know, hours and, you know, less than days. This is really targeted to those who are not builders, who are not going to build custom rules, but want things that have worked for others that drive value very quickly. It is early, but we are seeing strong adoption that is driving and fueling the funnel.
Because you can imagine like our sales force now is really coming with, here's solutions you can adopt today to common outcomes and business outcomes that our customers want to drive. I think the second thing is bringing this capability to our full base. Self-service will be available in Q3, and that will open this up to the whole base. Also in Q3, we're introducing a new kind of add-on to AI Studio, AI Teammates, which allows work to be done in a multi-step way, with basically agents or teammates that are doing the work, that are executing the tasks, complementing the humans that are teamed with those agents. That's super exciting. That's again, targeted at non-builders and driving more value from Asana and from the work they do.
It sounds like there's multiple catalysts to really even further accelerate the AI Studio momentum in the back half of the year, which is exciting. Maybe if you could talk about the monetization strategy over the medium term, you know, I think it's fair to say we're certainly still in the proliferation phase, but right now most of the ARR is platform fees. Hopefully, you know, down the line we start to see more consumption-based contribution from those large power users. Help us think about, you know, is there a critical mass you're targeting before you flip a switch to more monetization from proliferation? Or how should we think about the business model?
Yeah. We think there's a huge opportunity just in the platform fee. We've seen, in cases of customers, the platform fee actually eclipsing the ARR for that customer, because a few users can drive a tremendous amount of value from AI Studio. That's really, really encouraging. It's key to the monetization strategy because we designed this where the platform fee would allow the customer to do a lot with AI Studio and not have to worry about overages or top-ups because just the credit allotment provides ample ability to execute workflows cross-functionally and no barriers to proliferating this within the organization. That's been really well received. We do think there's a huge opportunity just in the platform fee.
As Dustin, you know, has said on many of our last earnings calls, there are these emergence of these whales, who are going to eclipse the platform fee and go into consumption in a very big way. We're seeing those emerge, right? How many, how quickly, still TBD, but that's a kind of an opportunity to expand and accelerate on top of the platform fee. The real beta is bringing this to the base, bringing this to non-builders, bringing this in a templated use case by function, by vertical. That's the real opportunity to create the beta. That's what's happening in the second half with self-serve, what's happening now with Smart Workflow Gallery, with Teammates. That really will drive that beta.
It's both the consumption element, but then bringing this to a more broader set of our customers.
That's helpful. I wanted to switch gears here to Sonali. Mike and I know you from your days at RingCentral when you were phenomenal at driving profitability improvements. Certainly.
I've been phenomenal at Asana.
You have. I was getting to that. Huge outperformance in 1Q on the margin side. Seems like you're making a ton of progress on go-to-market efficiency as well. I guess what I'd like to ask you is, what have you had success, what has been the low-hanging fruit that you focused on in your 10 months at Asana? Are there any other initiatives that you're looking at to drive continued margin expansion? How do you balance that with this incredible growth opportunity you have going forward?
Yeah, no, great question. I'm glad you asked about the balance because it is a balance. Just for everyone in the room here, I seem to have a reputation as being the person who drives profitability and efficiency. I do believe we should be as efficient as possible, but like, I love growth too.
You don't want to be chainsaw, so I'm like.
No. Please nobody repeat that. Just start a meme.
Awesome.
Yeah, look, we're super proud of what we've accomplished at Asana in, you know, the last 10 months. And, you know, the 1,300 basis point year-over-year improvement in OP that we posted this quarter. What I would say is, like, don't model that for next year because that's, you know, it's not linear. What I can say for certain is that you will continue to see sequential margin improvement and you will continue, I can guarantee this, to see continued annual multi-year margin expansion from where we are today. You saw that we increased the guide to at least 5.5% for this year. And if you think about where we were in Q1, you know, that implies that at Q4 where we're exiting, it's going to be significantly above where we were in Q1, which was 4.3%.
I think that that story is very much intact and there's lots more to do there. Just from the actions that we took from when I first arrived, that continues to help actually every quarter this year because, you know, the savings ramp. We made a very difficult decision to let go of about 5% of our FTE workforce. That again, it works its way through the P&L all year. The other thing I would say here, and this is really different from, you know, other companies, I'm not going to say RingCentral specific, but other companies that I've worked at, which there have been several, like our gross margin here, we start from a very enviable position. Like we have 90% gross margins.
Right.
Like, it's a beautiful thing. And so, you know, everything and anything we do below that line, just, you know, with our growth drives significant, significant operating leverage. I think there's more for us to do on the sales and marketing side. Hopefully you've seen good progress. I think, you know, as we exit, when we get to Q4, you'll look at where we were a year ago as a percentage of sales and you'll say, wow. You know, it's never like you, you talked about like the easy stuff. It's never easy. But, you know, one of the things that I would say, you know, we're really excited about is we cut back our performance marketing dollars significantly. We have seen very minimal change to pipe. If anything, we've seen the quality of the pipe increase.
Really paying attention to, you know, those marketing channels and where we're getting the highest ROI has been, like, a winning strategy and an area where I think we can go even deeper and segment even more. You know, Aziz works really closely with the marketing team and with the data science team. I think, like, more to go for there. The other thing I would say is, like, the R&D spend, like, if you look at the last couple of years, we've spent a lot as a percentage of revenue compared to our peer group, but a lot of that was the investments we were making in AI Studio. So AI Studio, that investment has been many, many years in the making.
You shouldn't expect now, even though our roadmap sounds super sexy and cool and we're excited about it with, you know, teammates and AI Studio Plus and self-serve, that's a real reallocation of R&D dollars. You shouldn't expect R&D dollars to suddenly balloon or explode. On the contrary, you should expect them as a percentage of revenue to continue coming down. What I would say there is when I arrived, you know, if you look at our employee mix, kind of where the headcount sits, high cost versus low cost GOs, it was off benchmark. That's an area where we've been able to, partly through attrition and partly through, you know, a little bit of the FTE action that we took last year, we've been able to, you know, get that more in line to industry benchmarks.
I think as we continue to see, you know, just normal attrition, we will do that. The beauty of that is when you lose R&D people in San Francisco or New York, you can often go to a lower cost geo and replace them with, you know, not just one head, but one and a half or two. You actually end up, you know, getting a lot more productivity for those dollars. We do not always do that, and we are always looking for, you know, opportunities to optimize. You know, again, you are not like slashing and burning, you are optimizing your R&D spend. I think we are doing a really good job there. The other thing I would say, and like I sit in this category, as does my salary, like G&A, like, you know, it is too high.
This quarter actually was a little bit elevated, partly because of taxes going to G&A, but I think that there's more we can do there just by being more disciplined. You know, I like to think that the discipline that we can show in those areas will free up dollars to reinvest in things like, you know, AI Studio and all the exciting initiatives that Aziz was talking about. I think you should, when you think about, you know, the margin potential of this business, keep in mind that we want to grow and we want to re-accelerate growth. We feel that once we stabilize net retention and, you know, as that deal works its way through, once we stabilize net retention, that alone is a huge tailwind to growth.
You add to that AI Studio starting to become more meaningful, today it's a more meaningful percentage of our bookings, our net bookings, but when it actually starts to be a more meaningful contributor to revenue. You combine that with some of the things we're doing on channel, which we think truly lends itself, AI Studio truly lends itself to selling with the channel more. We think we can really accelerate that. You know, you get to a point where you, you know, you're looking beyond this year and you re-accelerate growth. I want to make sure that people realize that some of the savings we want to reinvest in the business. This category has like this amazing greenfield opportunity. You know, my enthusiasm and you asked, you've asked me before, like, why did you join Asana?
I remember you asked me, Mike. You know, the category and the structural growth and you combine that with the AI opportunity, like my enthusiasm is so much higher today, 10 months on. I feel like there's almost no limit to where it can go. Like all the adjacencies and, you know, at the same time becoming more efficient, the financial profile we can drive, I just think there's a huge amount of value creation that can come from that.
It's fantastic. I wanted to wrap up, we have a few minutes here left. I wanted to wrap up by touching on SMB because that's been, I would say, given, you know, all the noise, a really nice upside case for Asana, believe growing well above the corporate average in SMB, very topical. I'll use the opportunity to plug our SMB primer as well. Check it out. We published that last week. Can you talk about what's driving that strength in the SMB segment? You mentioned you're even spending less dollars. Are you benefiting from lower CPMs? Are you just, you know, more efficiently allocating dollars to different channels? Anything would be helpful there.
Yeah, I think it's both. We're, you know, from a channel and a geo mix, really have optimized and timed that to understand. And a lot of this is the models and things we've built behind this to be able to be a lot more precise about understanding dollar and ROI and kind of cost curves. And so we've been able, as Sonali said, to drive healthier pipeline, more pipeline, higher converting pipeline with less dollars. And that's benefit. A lot of that paid media is going towards SMB. I think the second is on the product side.
Like there's been some great new features and focus on SMB onboarding and how do we not only convert them from the trials, but once they're here, keep them for longer because that SMB base, especially those on monthly, they churn at a higher rate and it's a disproportionate amount of our churn. The SMB strength has not only been the pay on the booking side because of the efficiency of the market spend and driving better pipe and conversion, but there's now a concerted effort. Now we have them, how do we keep them for longer? We're starting to see early signs of success there, but it's a huge opportunity because a basis point two, three goes a long way in terms of our net retention and our growth.
It continues to be a strength and you're right, it's growing above the corporate average and we expect that to continue.
That's great, guys. Thank you guys so much, Sonali and Aziz. Thank you for coming in. I appreciate it. Thank you all for attending.
Thank you.
Sonali, thank you so much.
Yeah.
I apologize for the delay.
Okay. Is this the last one?