Momentive Global Inc. (MNTV) Q4 2022 Earnings Call Transcript

Momentive Global Inc. (NASDAQ:MNTV) Q4 2022 Results Conference Call February 16, 2023 5:00 PM ET

Company Participants

Gary Fuges - VP, IR

Zander Lurie - CEO

Rich Sullivan - CFO

Priyanka Carr - COO

Conference Call Participants

Ryan MacDonald - Needham

Chad Bennett - Craig-Hallum

Matthew Kikkert - Stifel

Robert Coolbrith - Wells Fargo

Operator

Good afternoon, and thank you for attending today's Momentive Q4 2022 Earnings Call. My name is Jason, and I'll be the moderator for today's call. [Operator Instructions].

I would now like to pass the conference over to your host, Gary Fuges, Vice President of Investor Relations.

Gary Fuges

Thank you. Good afternoon, and welcome to Momentive Global's Fourth Quarter and Full Year 2022 Earnings Call. Joining me on the call today are Priyanka Carr, COO; Zander Lurie, CEO; and Rich Sullivan, CFO. After management's prepared remarks, we'll take your questions.

Prior to this call, we issued a press release with our Q4 and full year 2022 financial results, which can be found on our Investor Relations website at investor.momentive.ai. During the course of this call, management will make forward-looking statements, which are subject to various risks and uncertainties, including statements relating to our strategy, including the restructuring plan we just announced, financial outlook, investments, revenue, operating margin and free cash flow.

Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, in particular, in the section entitled Risk Factors in our quarterly and annual reports, and we refer you to these filings.

Our discussion today will include non-GAAP financial measures unless otherwise stated. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which is furnished with our 8-K filed today with the SEC and may also be found on the Investor Relations website. Finally, please note that the growth rates cited in today's prepared remarks are on a year-over-year basis unless otherwise noted.

With that, I'll now turn the call over to Zander. Zander?

Zander Lurie

Thank you, Gary, and thank you all for joining us today. I'm going to walk you through some of the important changes to the business we announced today, including a decision to reduce the size of our workforce and our continued effort to drive profitable growth. Rich then will discuss our Q4 financial results and outlook.

For Momentive, 2022 was all about resilience. We began repositioning the company in late February and ran the business with more operating rigor in the face of a more challenging macroeconomic environment. We delivered meaningful operating leverage during the year, culminating in Q4 results that included 19% non-GAAP operating margin in Q4 on $122.4 million in revenue. Both metrics exceeded the high end of our guidance ranges.

As part of our repositioning, we streamlined our sales organization in October to make our customer acquisition and expansion motions more efficient. We believe this would be sufficient to help us both navigate a more challenging selling environment and achieve our long-term goal of delivering more profitable growth. However, it's become abundantly clear that we need to take more strategic actions to succeed in 2023 and beyond.

After a thorough review of our business, we've concluded that our best path forward is to: one, further lower our cost structure across the organization; two, focus our resources on the products that win, retain and expand with customers most effectively; and three, standardize our most important offerings onto our core platform and one pricing model.

Our go-forward plan includes the following: reducing our workforce by approximately 14%, which impacts all major functions of the organization; shifting our customer experience product focus away from GetFeedback and making SurveyMonkey Enterprise our CX solution for new and expansion customers; transitioning our market research sales-assisted products to a subscription model; and prioritizing free user engagement and paid user growth in self-serve by providing more features in our free offering and more affordable options in our paid plans. These are significant changes, and we do not undertake them lightly. But these decisions are supported by data and customer feedback.

Since combining the CX and SurveyMonkey Enterprise sales teams in early 2022, we validated that SurveyMonkey Enterprise is a very competitive offering for CX use cases, with consistently stronger overall win rates and renewal rates than GetFeedback. Going forward, SurveyMonkey Enterprise will become our CX solution, and we plan to build additional functionality into our core survey platform to better support CX customers, including leveraging some of GetFeedback's strengths in analytics and sales force integrations.

We plan to maintain GetFeedback for existing customers as we make this transition. Ultimately, we believe this will enable us to drive more expansion opportunities with SurveyMonkey Enterprise customers, our largest sales assisted customer base, and allow us to deliver more innovation and customer value through products run on a single core platform.

In market research, we have delivered awesome products and won blue-chip logos, but we've sold these products primarily on a credit basis, which makes customer engagement more project-oriented and rev rec less SaaS-like. We began rolling out subscription-based products with the successful launch of brand tracking in 2021, demonstrating that the subscription model can work here. In Q3, we began piloting broader subscription-based selling, and in Q4, we hit our stride. We closed over 2 dozen subscription deals in the fourth quarter that would have been project-based engagements under the prior model. And we doubled the mix of subscription business in market research from approximately 20% in Q3 to more than 40% in Q4.

We believe we now have the right selling impacting formula to transition market research to subscriptions in 2023. We believe this will result in higher quality, more sustainable revenue from our market research solutions. And in self-serve, our work in 2022 validates a getting back to the basics of product-led growth is the way to fully reinvigorate that channel. We made further progress in Q4, including driving sequential growth in free planned sign-ups, improving survey deployment rates and improving conversion rates from responsible pricing and packaging. From here, we'll work to improve our ability to engage more users and capture more value from those who are willing to pay for the value we deliver.

As we focus on these 3 priorities, we expect to expand margins further in 2023. The changes to the cost structure we announced today put us on a path to double non-GAAP operating margin in full year 2023 versus full year 2022. I take full responsibility for the decisions that led to today's announcement. In short, the investments we've made over the last few years are not delivering returns sufficient to justify the cost. We believe the changes we've announced today are the right strategic steps to manage the business through a tougher short-term environment and position the company for more profitable growth over time.

2022 was a challenging year. the Board, executive team and I are incredibly grateful for the dedication and hard work the Momentive team delivers for our customers and their colleagues. For those who are leaving us, we will do our best to help them succeed in their next steps. For those who are staying on, we are committed to partnering with you to win as a team.

I'll now turn the call over to Rich, who I want to formally welcome to our executive team. I'm looking forward to you getting to spend time with him, and I am confident you'll appreciate his strength as our new finance leader. He's a great addition to our culture, and he's already adding value to how we run the business. Rich?

Rich Sullivan

Thanks, Andrew, and I'm excited to join the exceptional team here at Momentive as I'll be working with all of you. I also look forward to working with the people on the phone today and getting to know you all better.

As Andrew pointed out, we are making some significant changes to the business. And while there's a lot of work to do in the coming months, I believe the steps we are taking today best position Momentive for sustainable long-term success. We continued to deliver value on products that attract and retain loyal customers, as evidenced by our strong renewal rates. I believe we're making the necessary changes to these products and to our cost structure to come out of these challenging times a stronger company with a commitment to deliver profitable growth.

As stated in today's press release and 8-K, we announced plans to streamline our product offerings that simplify our go-to-market strategy and improve operating margins going forward. Unfortunately, the plans involve the reduction of the company's talented workforce by approximately 200 individuals or 14%. We estimate that we will incur approximately $7 million to $9 million in charges related to employee severance and employee benefits in connection with today's announcement. We expect that the majority of these costs will be incurred and paid during the first quarter of 2023 and the execution of the plan, including cash payments will be substantially complete by the end of the second quarter of this year.

Turning now to the full year Q4 2022 financial results. Unless otherwise noted, all comparisons are year-over-year. For full year 2022, revenue increased 8% to $481 million. On a constant currency basis, revenue increased approximately 9%. The sales-assisted channel revenue increased 27% to $181 million and self-service revenue to $300 million in the year, essentially flat. In 2022 we generated 7.9% non-GAAP operating margin, which exceeded the high end of the guidance range of 6% to 7% the company initially provided in May of 2022.

Free cash flow was $0.2 million and reflects the impact of approximately $33 million of restructuring and deal-related cash outlays. As Zander pointed out, 2022 was a challenging year. both because of the up sales deal and increasing and an increasingly difficult macro environment. Many of our customers haven't been part of cost-cutting initiatives at their own company, especially in the tax sector. Budgets are more limited and potential new customers are putting every deal under greater scrutiny. This is clearly having an impact on our ability to grow new customer contracts.

In the end, much of the investments we made to aggressively scale and grow the top line through sales to new customers did not yield the desired return and has led to many of the changes to our cost structure we announced earlier today.

In the fourth quarter, as expected, we saw a continuation of the challenging selling environment especially internationally. Q4 total revenue increased 4% to $122.4 million, putting us above the high end of our guidance range. On a constant currency basis, revenue increased approximately 7%. U.S. revenue increased 8% to $81 million and now accounts for approximately 2/3 of total revenue. Rest of world declined 2%, primarily due to foreign exchange and additional challenging macro environment headwinds.

Self-service revenue declined 6% to $73.1 million. As Zander mentioned, we continue to make progress in reinvigorating this channel in Q4, as evidenced by sequential growth in free plan sign-ups, improving survey deployments and improved free-to-pay conversion rate. While revenue for our sales-assisted channel increased 27 -- while revenue for our sales-assisted channel increased 23% to $49.3 million, we saw a continuation of a challenging selling environment. Existing customers, while not immune to economic issues, continue to be resilient as renewal rates and expansion success for our subscription products increased year-over-year. We ended the quarter with approximately 14,500 sales-assisted customers, up 23%.

Excluding team customers, average revenue per sale of assisted customers was up 13% year-over-year. And more than 2,200 customers are spending $25,000 more with us annually, up 16%. Deferred revenue increased 3% to approximately $207 million. Remaining performance obligations, or RPO, which is the sum of deferred revenue and backlog, rose 5% to $239 million, partially driven by continued traction in winning multiyear customer commitments.

Turning to profitability. Non-GAAP gross margin was 85%, a record level and 138 basis points increase from a year ago today. Non-GAAP operating margin of 18.8% exceeded the high end of our 14% to 16% guidance range due to the previously mentioned gross margin strength, continued operational rigor and the measures we began taking in October to lower sales and marketing expense and streamline our go-to-market motion. All operating expenses improved sequentially and year-over-year on both a dollar basis and as a percentage of revenue.

Q4 operating margin benefited from bonus accrual reversals. Note that the full impact of the reversal is expected and included in the Q4 guidance range the company provided on our last call. But it's important to keep in mind when comparing sequentially to Q1 2023 margin. Net cash provided operating activities -- sorry, net cash provided by operating activities was $8.2 million and free cash flow was $6.6 million, with a free cash flow margin of 5.4%. Excluding the impact of $4.3 million of restructuring-related expenses, Q4 free cash flow would have been approximately $11 million. We ended the year with $18 million in net cash and cash equivalents, which reflects the impact of the $83.5 million of share repurchases during the year. Our outstanding authorization of our share repurchase program was $116.5 million as of December 31, 2022.

Turning to our outlook. For the first quarter of 2023, we expect total year-over-year revenue growth to be between 0% and 2%. In Q1, we expect to continue to see the impact of the steps we took in 2022 to reduce spend resulting in a Q1 non-GAAP operating margin guidance of 6% to 8%. Note that Q1 operating expenses are seasonally higher than Q4 due to the timing of employee-related accruals and taxes as well as marketing spend, which is typically higher in the first half of the year.

Based on the visibility due to these challenging macro environment as well as potential short-term impact of the strategic changes we made today, we will not be providing full year guidance. However, improving operating margin will remain a top priority in 2023. And the changes to the cost structure we announced today put us on a path to double non-GAAP operating margin on a full year basis.

Despite the uncertainty and macro headwinds, we are committed to continued cost discipline and controlling spending to deliver strong full year margin improvements, while still investing in the areas of the business that will drive profitable growth.

With that, I'll now turn it back to Zander.

Zander Lurie

Thanks, Rich. I'll turn it to the operator and be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Ryan MacDonald with Needham.

Ryan MacDonald

Welcome, Rich. Great to have you on. Maybe Zander, just starting out. As we think about the outlook for 2023, I understand you're not providing guidance for the full year. But maybe just in the context of first quarter, can you give us a sense of sort of what those expectations are in terms of the trajectory on both sales assisted versus self-serve?

And then in that context, what may be as a part of this transition is creating enough variability where you don't have that sort of visibility from a full year perspective?

Zander Lurie

Well, I think I'm inspired by the product market fit and the satisfaction and joy our customers get from our products. So you could see the gross renewal rates, both in the web channel as well as in the sales-assisted channel are healthy.

Clearly the new environment for demand on the web and in sales has deteriorated over the last year. And so I don't have bright visibility on when those new cohorts of customers will come back in stronger numbers. I'll say we're inspired by the expansion efforts that our sales team has employed. And that's primarily selling market research and additional SurveyMonkey Enterprise to existing customers. And so we see really good uptake there.

And on the web, we continue to experiment with pricing packaging, as I mentioned on the call, unveiling some new, more affordable annual plans. And really just getting more users to try our products and see the full value of our features before asking them to pay. So we're employing a whole bunch of different tests that we're excited about. I think you will continue to see really healthy renewal rates.

But look, the current environment and macroeconomic environment where you see layoffs in droves every day, particularly in sectors where we have some customer concentration, do present headwinds. And frankly, it's just not the best use of our time to provide visibility into Q3 and Q4 numbers right now. We know what we need to do to win, and then we'll come back each quarter and tell you how we did.

Ryan MacDonald

Okay. And then as you’re sort of shifting focus and sort of deemphasizing some offerings, emphasizing others, shifting to a new pricing strategy, I guess, how is that being sort of relayed to customers? And what’s the risk here that we kind of have to go through some churn as you sort of shift to new pricing models and to new, I guess, branding models on some of these products here?

Zander Lurie

Yes. I mean there’s always the risk of churn when you have either product changes, business model changes, pricing changes. The goal here is that CX has always been a primary use case of SurveyMonkey on the web and SurveyMonkey Enterprise.

And in acquiring GetFeedback and building out a new product offering, we were able to attract a new cohort of customers with a product that have particular strength, and I’m proud of the work that team did. But in a world where we need to rationalize resources, drive incremental profitability, we recognize there’s quite a bit of overlap in terms of what those products offer.

And so what you’ll see us do is just dial down investment in that arena. Renew those customers best we can while try and attract them over to our flagship SurveyMonkey Enterprise CX offering.

And then on the web, of course, we’re constantly iterating. We’ve got a terrific growth team that is data science-driven and making sure the new features we offer new plans, pricing, maximize both customer value, but also bookings and revenue for us. So I’ve got a lot of confidence in this team as we both transition products and also pricing plans that we will be both business model focused as well as NPS focused.

Operator

Our next question comes from Robert Coolbrith with Wells Fargo.

Robert Coolbrith

I wanted to ask a little bit more about the decision to move away from GetFeedback for CX. Maybe some more context on how large the GetFeedback business is today, the size of the book of business, maybe how fast it's been growing.

And if you could give us an update on any functional differences that remain in the products, certainly like Enterprise versus GetFeedback. And I guess just following on the last question here. Maybe just give us a sense of your confidence in your ability to continue to serve those customer needs with SurveyMonkey Enterprise going forward.

Zander Lurie

Sure. Thanks, Robert. I'll kick it off, and then I'll hand it over to Pri. Yes, I think we've said in the past that the stand-alone CX represents less than 10% of our total book of business. As I mentioned before, SurveyMonkey Enterprise has a robust set of features for CX and also a robust customer base.

And so I'm confident that the folks who love GetFeedback will continue to renew GetFeedback while we build that bridge and maintain that bridge for GetFeedback customers to walk over to SurveyMonkey Enterprise. So the team is hard at work on analytics capabilities, sales force integrations so that we can deliver that customer delight across both product suites and ultimately steer our investments into SurveyMonkey Enterprise. Pri, what do you want to add to that?

Priyanka Carr

No, I completely agree with that. And I would just add that we're transitioning the GFP GetFeedback product but not stepping away from CX. As Zander mentioned, CX is close to our top use case SurveyMonkey Enterprise and that core platform. We have customers currently using it heavily for those CXs.

We have very, very strong overlap on the capabilities with GetFeedback direct. So we're confident that we can service those customers on to our SME platform. Our product innovation road map going forward, is really focused on strengthening that CX use case but on our core platform. So that includes the analytic capabilities, strengthening our integrations, making them more native and the team that built us all of those great GetFeedback capabilities is a team that will be supporting that work going forward.

So I have high confidence that the SurveyMonkey Enterprise products look to serve the CX use case incredibly well and already definitely today. And the investments we're making and streamlining into a core platform will allow us to deliver even more value to those customers.

Operator

Our next question comes from Chad Bennett with Craig-Hallum.

Chad Bennett

So just want to dig in a little bit on the self-serve side. You talked about seeing kind of green shoots there in terms of free plan sign-ups increasing sequentially. And I think you indicated increases in conversion rates.

We also kind of caught, and I just want you to confirm this, that I think on the Advantage plan, you implemented a pretty decent price increase on that plan in the quarter. Just trying to get a sense for, obviously, that business accelerated downward on a year-over-year basis in the fourth quarter. Do you have enough data? Do you have enough confidence where the rate of decline improves throughout the year? Or how should we think about that?

Zander Lurie

Yes. I mean we are busy making a lot of changes to stabilize that business. And I am confident that we have arrested the fall. Clearly, we did not see the kind of uptick in Q3 and Q4 that we had modeled in and hoped. And so we're taking appropriate actions.

And whether they be our own business model decisions or macroeconomic, it doesn't much matter. I think the team has got a beat on what we need to do and we've deployed some of those initiatives. As I mentioned, this doesn't happen overnight. A lot of the work we do, whether it's in SEO or in product or in pricing and packaging, there's a funnel from a user coming to surveymonkey.com, the first time between that day and when she ultimately pays for a plan.

So we drive some things last year that didn't deliver the kind of success we hoped. I think we've made a lot of progress, and we will do our best to deliver results this year that show Q4 was below mark. Pri, anything you want to add?

Priyanka Carr

Just specificity on the -- you're correct, we did do a price increase on our Advantage customers, our existing ones, and that rolls into positive impact on the renewal base as they renewed throughout this year and 2023.

The green shoots that give us confidence are the ones Zander mentioned earlier, our free plan sign-ups are growing positively in the U.S. deployment rates. So those users sending surveys also grew one of the strongest indicator of upcoming conversions.

And we've taken actions to optimize the conversion rates as well on that business. So a lot of positive indicators that give us confidence that we have a good trajectory forward. But also most importantly, continue testing and optimization in a challenging macroeconomic environment to make sure that we're pricing affordably to value and getting access to most customers throughout this year.

Chad Bennett

So you haven't seen any kind of incremental or outsized negative gross churn impact from the price increase on the Advantage plan is what I'm getting. Is that the correct take?

Priyanka Carr

We do see some churn increase. Sorry, go ahead.

Zander Lurie

You've got it, Pri.

Priyanka Carr

I was just saying, there will be always optimal price increase with the churn impact on it. And so any price increase does impact churn to some extent, but this is the assumption of our customers. And the net impact through our testing is net positive on bookings.

Chad Bennett

Perfect. Okay, got it. And then maybe one clarification for me at least, could be for Rich or Zander. Just on the sales-assisted customer count, I just want to make sure I heard it right. Is it 14,500?

Zander Lurie

That's correct. Yes.

Chad Bennett

Okay. And that's comparable to 15,400 last quarter or not?

Zander Lurie

That's correct.

Chad Bennett

Okay, all right. And then just real quick, maybe last one for me on the sales -- or sorry, yes, the sales-assisted side of the business. I guess -- did you notice anything in the quarter from a bookings or billings standpoint? I think you hinted towards international being tougher. But were -- did you actually see, sorry, more scrutiny or pushouts or elongation of sales cycles in the fourth quarter on that side of the business?

Zander Lurie

For sure. Yes. I mean, harder quarter all around. I think you see some of the customer churn on the sales-assisted side of the house was obviously at the lower end, lower price points because you saw that our overall kind of average revenue per customer was up nicely year-over-year.

But the most sensitive enterprise customers had higher churn in the quarter. And sales cycles on new customers are just more challenging. You have folks that have more scrutiny on your budgets, you have buyers that were laid off and just a more difficult selling environment and new.

Operator

Our last question comes from Parker Lane with Stifel.

Matthew Kikkert

This is Matthew Kikkert on for Parker. First off, kind of on operating leverage for fiscal '23 as you're looking to gain leverage there. Are there any other areas that you're looking to cut costs this year outside of the restructuring plan that you announced today?

Rich Sullivan

I appreciate the question. I think the -- we have the -- we have multiple paths here to get to that operating margin charge for 2023. As Zander pointed out, it's a challenging macro environment to predict. But what we do control is cost.

And so we have -- I believe we have many levers to pull to make sure that we can remain on the path to double that operating margin in 2023. We'll continue to monitor the market and adjust accordingly. But on the cost side, driven by a lot of the changes we made today, we're on the path to have double margin year-over-year.

Matthew Kikkert

Okay, got it. And then as you're transitioning -- focusing more on the enterprises and the sales motions there. What -- like high-level investments are you still making in the self-service channel?

Zander Lurie

Pri, do you want to take that?

Priyanka Carr

Yes. In the self-service channel, we continue to invest in features on our product capabilities there that really improve usability of the product, covering of use cases that are common for our self-serve, smaller customers or smaller teams and discoverability.

A lot of our work as well, as we've alluded to before, is really optimizing the value we deliver to customers, how easily we can -- they can access that value and the pricing that goes along with it. So we have a great growth team, a data science team by constantly optimizing that with a change in macroeconomic environment. So you should expect to see a lot of changes on that throughout the course of the year that we keep delivering on.

We're also building capabilities into the product that make it easier with AI for users to get to the value moment. So being able to send a survey and receive responses and get insights from that. Those capabilities extend both to our self-serve products and our enterprise capabilities and our enterprise products as well.

So continued investment in this area, especially as it is a really important theater of our sales-assisted enterprise businesses and strictly linked to the products that we sell on the sales specific side.

Operator

And our final question is from Robert Coolbrith with Wells Fargo.

Robert Coolbrith

I just want to ask a couple of follow-ups. First on the sales-assisted customer count. Could you remind us the impact from the SMB sales force rationalization and sort of definitional change versus organic trends there?

And then one thing, I think last quarter, you pointed out that in terms of new business may be a little focused upmarket. I think that the macro might drive some increased churn among some of your larger competitors' customers. Just wondering if you can give us a sense of anything you're seeing in the market there, if that thesis is playing out so far? So those two.

Zander Lurie

Yes. So on the sales-assisted side, our customer count was down about 900 customers, Q4 over Q3. And that, as I mentioned, was mostly concentrated in the SMB area. So lower spending customers.

And then on the new selling environment, as I mentioned, I would say that the vast majority of our investment, time people, energy, marketing demand, for the last several years was focused on winning new business. And that has won dramatically towards renewing and upselling existing customers, 14,500 customers where we have a relationship, we have a contract, we're delivering value. They're seeing the benefit of our deployment.

And so for every single one of those customers, there is more business to win and more value to deliver. And the ROI is just a lot better there than in the new area. We are competing for customers who are churning out some of our more expensive competitors. We are winning there.

Now the numbers won't overcompensate for losing some of the smaller SMB customers we have, so it will be difficult to derive those wins there. But we're seeing folks roll off of some of our more expensive competitors who are looking for an offering, and we deliver great value there on us to make sure that our marketing and selling teams get in front of those opportunities.

We'll keep you posted on progress we have, delivering product market fit, upselling. You saw that our 25,000 customers was about flat or down maybe 2 dozen, to the tune of 2,200 in Q4. And obviously, those are the customers that are buying bigger deployments, buying multiple products and ones that are getting the disproportionate share of our attention.

Robert Coolbrith

Great. Thanks again.

Zander Lurie

Well, I want to thank everybody for joining us today. We believe we're taking the right steps to navigate what is a pretty choppy short-term environment and position the company for more profitable growth over time. And once again, I just want to send my heartfelt appreciation to the Momentive team for all their dedication, folks who are staying with us and folks who are departing as well. I want to wish you all a happy and healthy evening, and we look forward to [indiscernible] soon.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.