Amplitude - Q2 2023

Transcript

Spenser Skates (Co-Founder, CEO, and Chairperson)

Good afternoon, everyone. Welcome to our second quarter earnings call. We appreciate you taking the time to join us. I'll be talking to three topics: our Q2 results and an update on our execution, the progress we're making with platform and product innovation, and our competitive landscape and customer adoption. Let's start with a summary of the Q2 financials. We closed the second quarter with $67.8 million in revenue, up 17% year-over-year. This is above the high end of the guidance we gave in Q1. Annual recurring revenue was $268 million. Our total customer count increased to 2,344 customers. Non-GAAP gross margin improved to 77.5%, up 3 percentage points year-over-year. This contributed to our first Non-GAAP profitable EPS quarter.

We generated record operating cash flow of $20.4 million and positive free cash flow of $19.3 million. With this result, we expect to be firmly in free cash flow positive territory as a company going forward. I'm pleased with our revenue beat, especially given the persistent challenges in the macro environment. Let me touch on a couple of those for a moment. Larger companies continue to optimize for their current level of end customer activity. We remain exposed to startups who are feeling that pressure more intensely. Continued cost-cutting is causing churn to tick up as macro ripple effects work their way through that portion of our customer base. While difficult, we believe these short-term challenges are just a temporary part of this macro cycle. There are several areas that fuel our cautious optimism here.

We see how our platform approach is resonating with customers, improving our competitive position against legacy and point solutions. Win rates remained robust in Q2. We continued to win deals against, as well as replace legacy players. We continue to refine our integrated go-to-market efforts, get closer to our customers, and build on the strong pipeline we saw in Q2. We are executing with urgency as a company. A lot is happening under the surface. New leaders are raising the bar. I'm pleased with the progress we're making here as a team. We're focused on what we can control. This means operating responsibly against our growth outlook while leaning into the massive opportunities that lie ahead. Our mission is to help companies build better digital products and experiences. I'll take this opportunity to provide a clear framework for our ongoing efforts.

The first pillar is what we call Win Simple, shorthand for how we're making it easier for everyone to get started with Amplitude. Many companies need more help getting started in driving digital maturity. Today's customers demand an experience that's effortless, offers fast time to value, and meets them where they are. One key facet of Win Simple is improving the user experience, and we've been hard at work there. Last quarter, we talked about early positive feedback around our new chart creation flow and layouts. We introduced more improvements in Q2, including industry-specific templates and a new homepage experience. We are striving to make Amplitude easier to adopt. We've doubled the conversion rate of users finding insights from templates and are seeing continuing week-on-week improvements in uptake. In some cases, we've seen users create their first Amplitude chart 40% faster. The second pillar is Win the Enterprise.

As part of our path to 1 billion and beyond, we are focused on meeting the needs of traditional enterprises. We are leading with use cases, taking a value-based selling and delivery approach, and expanding the audiences we focus on. Product and behavioral data is important to everyone in an organization. Marketing teams can target the right customers, engineering teams can identify bugs, and data teams can make detailed recommendations, all from product signals. We are already seeing this approach bear fruit. It drove one of our largest ever expansions in the quarter with an enterprise customer that's been with us since 2015. The third is Win the Category. Every business with a digital product and a digital experience for its customers needs to know more about what those customers love, what causes them to get stuck, and what keeps them coming back.

Our vision for the future state is one where real-time, operationalized product data is mission-critical to shaping dynamic and adaptive digital products and experiences. The lines between product, web, and marketing analytics are blurring, and the spaces will start to converge. Companies of all shapes and sizes are finding that legacy approaches cannot sufficiently address the universal needs of acquisition, retention, and monetization. Everyone wants to understand their customers better. Amplitude tells you exactly what your customers do and how they behave. We represent the best way to listen to your customers in an age of digital transformation. The center of gravity continues to shift toward product as more companies realize this. We have the strategic high ground in this convergence and intend to lead this massive category. Underpinning those three pillars is Win Together, the glue that binds it all.

The systems and processes that helped us grow from $10 million in revenue to where we are today will not be the ones that take us to $1 billion and beyond. We are systematically upleveling every area of our business so we can deliver exceptional value for our customers. When our customers win, we win. Against that strategic backdrop, let's turn our attention to product development progress in Q2. Our platform approach is resonating with customers. We are benefiting from vendor consolidation. An increasing number of companies chose to land with a combination of analytics, Experiment, and CDP in the first half of 2023. CFOs have been given a mandate to mercilessly target duplicative or inefficient spend. In this environment, we continue to see point solutions suffering disproportionately. Many customers struggle to deliver on the data, insights, and actions that are so critical to product and engineering teams.

We think that the majority of our base can benefit from the addition of Experiment. Traction here remains encouraging, as some of the largest wins in Q2 included Experiment upfront. Our CDP solution also continues to mature rapidly, with Amplitude now close to parity with many CDP market leaders in terms of connections. Our approach to CDP has primarily been about reducing friction and duplicative costs for our smaller customers. In Q2, we saw increased interest from multiple enterprise customers expressing a need for a holistic solution across data and analytics. We announced Warehouse-native Amplitude at Snowflake Summit in June. Our Warehouse-native approach is all about extending what has made Amplitude successful, being the most open, agnostic, and trusted way to access and find insights from our customers' data.

By providing access to Amplitude product insights directly from the data warehouse, we're making it easier for data teams to manage data and for product teams to use those insights confidently. Companies are taking differing approaches as it relates to governance and storage of their data. We want to be wherever our customers are along their journey. We believe this Warehouse Native option will be a natural on-ramp for many enterprise customers who have already made significant investments in their warehouse strategy. While early, we also believe this can be additive to our core Amplitude value proposition in many ways, including potential new personas and workloads. AI developments are an exciting opportunity for us to evolve how users engage with and find value from our platform. Product teams follow an iterative loop: build, ship, use, learn.

Companies like GitHub and Figma have made massive improvements to the build and ship phases. With AI, they've made it possible for developers to go from prototype to production in record time. At Amplitude, we're using AI to improve the use and learn phases. AI greatly accelerates the ability to get value out of huge quantities of data. We've amassed one of the largest databases of digital customer behavior in the world. We've spent the past 10 years pioneering the Behavioral Graph. We've already helped product teams leverage AI and ML techniques with our recommendation engine and product monitoring. Today, we're really excited to introduce Amplitude AI, a suite of AI-powered features. Here are two highlights. The first is Ask Amplitude, which uses AI to shorten the learning curve for anyone getting started with Amplitude.

Type in a question like, "How long does it take for new versus returning users to make a purchase?" We'll show a chart with the answer you need. The second is Data Assistant, which uses AI to make data governance effortless. It determines the most important ways to improve your data quality and automate certain updates. By improving data quality and trust, we're helping customers get value from Amplitude faster. We're also releasing functionality that automates formula creation and chart naming. Teams can pick from a variety of suggestions, so they can move fast and stay in control. These new features will help us accelerate time to value and expand the base of users we speak to, enabling us to Win Simple. We believe AI will dramatically improve the caliber of digital products and experiences, and Amplitude will help make that happen.

I'd like to talk about our second quarter success with customers from multiple industries. We both landed and grew our relationship with customers around the world, like Careem, Beachbody, Western Union, Alteryx, Cloudflare, Carta, and TaxJar. Other customers this quarter included airlines and supermarket chains. It's clear that the need for Amplitude is a universal one. We expanded with a brand name global sports organization to help drive global fan acquisition growth. This is a fantastic case study of the opportunity ahead of us as traditional enterprises continue with their digital transformation. To succeed, they needed to unify user data to personalize the fan experience across digital and non-digital properties. Marketing and product managers needed a shared view of the customer journey and a way to test hypotheses, target relevant audiences, and personalize content and features.

The organization's direct-to-consumer arm was already using Amplitude, but other teams used a combination of legacy tooling and marketing technologies. They couldn't scale, which caused major delays and massive engineering requirements. Amplitude's Digital Analytics platform was the clear choice for the business, and we're excited to help grow the subscriber base and, in turn, increase the company's broadcast rights to the tune of billions a year. Spin by OXXO is a financial app that provides mobile payments, transactions, deposit funds, cash withdrawals, and card services. Spin has been an Amplitude customer since 2020. Over the last 18 months, they have upgraded plans, added Amplitude Experiment, and most recently, in Q2, left a competing CDP for Amplitude. Their expanding use of Amplitude has enabled them to optimize their user journey, manage high user growth, and accelerate their presence in the LATAM market.

Spin has grown from 0 to 5 million users in just 1 year. Their goal is to double this by December. We want to help them achieve that. Against the backdrop of a challenging macro, we're steadfastly positive about our long-term potential and the opportunities in front of us. I believe in our ability to deliver in the months and years ahead. I'm incredibly proud of our entire team for everything they've done so far this year. With that, thank you for your interest in Amplitude. I'd now like to turn it over to Chris to walk through the financial results.

Chris Harms (CFO)

Thanks, Spenser, thanks to everyone joining us today. Amplitude's Q2 results demonstrate steady execution against a challenging environment. In the face of uncooperative macro, we expect to be firmly in free cash flow positive territory as a company going forward. We are intentionally shaping Amplitude to drive more operating leverage at scale. We've made strong progress, which I believe will eventually position us for re-accelerating growth. Now, on to our second quarter results. As a reminder, all financial results that I will be discussing, with the exception of revenue, remaining performance obligations, and balance sheet figures, are non-GAAP. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found in our earnings press release and supplemental financials on our IR website. Second quarter revenue was $67.8 million, up 17% year-over-year.

Total ARR increased to $268 million, an increase of 18% year-over-year, and $6 million sequentially. Here's more context. Implicit in the color and revenue guidance we provided in the prior quarter was projected record high levels of churn in Q2. Those expectations came to fruition consistent with our internal projections of a 50/50 split between full and partial churn. Of note, within partial churn, we saw significant optimizations with two large customers, one of which is a crypto company and one of which is a large digital-native customer. Within full churn was the expected concentration of accounts in the predominantly technology startup segment and commercial segment. New ARR in Q2 saw a rebound from the prior quarter. This was marked by a particularly large expansion as a longtime customer drastically grew both the scope and volume of their Amplitude relationship.

That expand deal was not the only one for the quarter. We again saw sequential growth in customers across both our $1 million+ and $100,000+ ACV base. Accordingly, our mix in Q2 was a little over 2 to 1 between expand and land new ARR. Lastly, we had strong execution on our newer products, with Experiment and CDP together now exceeding $20 million ARR. NRR on a trailing 12 month basis declined sequentially to 108%. In period, NRR was 101%, down from 118% in Q2 2022. Gross retention this quarter was in the mid-80s. Total RPO was $246 million, up 8% year-over-year. Current RPO was $192 million, flat sequentially, but up 13% year-over-year and represented approximately 78% of total RPO.

Gross margin was 77.5%, up 3 percentage points year-over-year and quarter-over-quarter. This was primarily due to the restructuring of our customer success organization in April and continuing improvements in unit hosting cost. Sales and marketing expenses were $31 million, or 45% of revenue, down from 53% a year ago. R&D expenses were $12.9 million, or 19% of revenue, down from 22% a year ago. G&A expenses were $9.8 million, or 14% of revenue, down from 15% a year ago. Operating loss was -$0.8 million, or a -1% of revenue, a 14 percentage point improvement on a year-over-year basis and an 11 percentage point improvement on a sequential basis.

Net income per share was $0.02, based on 126.3 million of fully diluted shares, compared to a loss of $0.08 with 111 million shares a year ago. All of the operating figures I just conveyed are exclusive of the restructuring charges we incurred in Q2 that approximated $8 million. Free cash flow was a +$19.3 million, or 29% of revenue, a 14 percentage point improvement on a year-over-year basis. This free cash flow figure incorporates a -$3.8 million cash impact from our April restructuring. Cash, cash equivalents, and marketable securities were $319 million at the end of Q2. Now, on to our outlook.

For the third quarter, we are expecting revenue between $69.7 million-$70.3 million, representing an annual growth rate of 14% at the midpoint. Non-GAAP operating income between +$0.6 million-$1.0 million. Non-GAAP net income per share to be between $0.02-$0.03, assuming shares outstanding of approximately 128.3 million, as measured on a fully diluted basis. For the full year, we are raising our 2023 revenue guidance to be between $273.6 million-$275.6 million, an annual growth rate of 15%-16%.

We expect non-GAAP operating loss between $7.6 million and $5.2 million. We expect non-GAAP net income per share to be $0.02 to $0.04, assuming shares outstanding of approximately $127.6 million, as measured on a fully diluted basis. As you adjust your models, keep in mind the following: We finished Q2 better than we expected. We still see a very challenging macro environment. Total Q2 ARR performance was positively impacted by a single large expansion. We believe renewal dynamics will remain challenging for the rest of the year. We're coming up on a slightly smaller renewal base in the second half versus first half. This renewal base steps up in the first quarter of 2024.

We also think that optimizations will persist into 2024 as our customers continue to deal with their own varying levels of demand. Restructuring charges will impact free cash flow negatively by approximately $3.4 million in Q3. Starting with August 15th, RSU vesting date, we will begin utilizing more of a withhold-to-cover approach to taxes, rather than exclusively using the sell-to-cover approach, which we have done historically. We estimate using $5 million-$6 million in this cycle. At a minimum, we intend to continue this approach through the November 2023 cycle, we'll update you in the future with more specificity on our approach for 2024. We expect about $3 million of interest income per quarter. Finally, gross margins should remain in the 77%-78% range. In summary, this quarter was better than expected, but we're not satisfied.

We're pleased to be operating as a free cash flow positive company. We're hard at work on improving the business and investing in key areas that we believe will eventually lead to re-accelerating growth. With that, I will open up for Q&A. Over to you, Yao.

Yao Ma (VP of Investor Relations)

Great. Please turn on your microphone and camera when called upon, and limit yourself to one question and one follow-up in the interest of time. Checking the list here, our first question comes from Koji Ikeda of Bank of America, followed by Patrick Schulz from Baird. Koji, go ahead, please.

Koji Ikeda (Director and Senior Equity Research Analyst)

Hey, guys. Thanks for taking the questions. Great, great to see you. The first question here, really on kind of the three, three growth metrics here, looking at RPO, I guess it's CRPO and RPO, you know, thinking about the decel there, the billings was good against a tough comp. You also raised the full year revenue guidance, but the revenue guide implies flat or key revenue growth. Really, how to reconcile all that with what sounds like to be maybe a stabilizing to, to slightly improving demand environment? I mean, I guess, what is the key metric to look at here to judge the underlying fundamental growth?

Chris Harms (CFO)

Koji, as always, you're very good with your math. Look, I focus on the ARR. The $6 million sequential was a very positive upside for us. We do acknowledge it was significantly impacted by one large expansion. We look through the remainder of the year as we consider our focus on the Win enterprises, all that we're doing within our operating functions across go-to-market and R&D and G&A. We recognize we'll be in a different operating position in the future, but against the macro conditions of churn and others, we have continued, implicit in our revenue guide, a very neutral performance of new ARR across Q3 and its corresponding impact into Q4 revenue.

Koji Ikeda (Director and Senior Equity Research Analyst)

Got it. I wanted to touch upon that large expansion deal. I thought it was pretty interesting is that you called out it was a customer since 2015. Maybe talk a little bit more about this customer. You know, was it a, a department expansion, new product expansion? I think maybe more importantly is, did this customer optimize in the past year and now is coming back to expansion, and, you know, maybe this is an early indication or some sort of green shoots that other large customers that have optimized in the past could start coming back to expand with you guys?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I, I think there's a few things that happened. One, I think it's representative of larger expansions that we've seen in the past. You know, obviously in 2021, we saw a number of large expansions just generally across our customer base for customers who, who had been using us for many years. And so this was in that vein where the amount of volume and the, the, the, the scope of the deployment continued to increase, and they wanted to set up an ELA so that they didn't have to worry about further volume increases in the future. We also had a new product introduced as part of this, so that was really exciting to see as well.

The last thing, just to call out very candidly, I think, we had Nate in particular, our new CRO, did a really great job of building a really strong relationship with one of the key executives there that was instrumental in driving this new ELA. Very, very positive signal. Again, just a single data point. I think it speaks to the broad opportunity that is gonna happen as the macro does come back. You know, we'll absolutely take the win, and we're thinking about how do we be more systematic and scale that motion across our entire go-to-market team?

Koji Ikeda (Director and Senior Equity Research Analyst)

Thanks, Spenser. Thanks, Chris.

Yao Ma (VP of Investor Relations)

Next, Patrick Schulz from Baird, followed by Nick Altmann from Scotiabank. Patrick, go ahead, please.

Patrick Schulz (Senior Equity Research Associate)

Hey, yeah, thanks for taking my question. I guess, first, just wanna touch on the competitive environment a bit. I believe the no new data date for Google Analytics was in July, and you guys have previously talked about this being an opportunity for Amplitude to take share. Curious if you guys have seen any changes to your win rates over the past few quarters, particularly as the macro has remained challenged and vendor consolidation continues?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, Google Analytics has been huge for us. There's actually 3 dates with Google Analytics. The free plan sunset date was July, as you mentioned. Google Optimize is sunsetting in October, and then the enterprise version of Universal Analytics is sunsetting next year. We're gonna expect to see continued- customers continue to migrate from Google Analytics to Amplitude. You see that show up in a number of ways. Obviously, we called out a number of wins last quarter that were specifically Google Analytics replacements. Just the increase in customer count broadly is another thing that's driven by that. We've created...

I, I think what we're seeing is the convergence of marketing, product, and experience analytics. We're gonna continue to drive on improving our capabilities in both marketing and experience analytics so that we're set up to drive full consolidation in the category. I think, though, the last thing I'll comment on Google Analytics is, though, even though the sunset date has already happened, there are still lots of teams that maybe they're on GA4, but the experience isn't working out, and so they're still evaluating other vendors now. We're seeing that contribute towards more Amplitude evaluations and growth in our business.

Patrick Schulz (Senior Equity Research Associate)

Okay. I appreciate the color, Spenser, it's very helpful. Chris, maybe this one's for you guys. You have raised profitability guidance once again, so it's clear this is a big focus for you guys internally. You've been on the job now for a little over a quarter, so just curious where you see the biggest opportunities to better leverage the expense base, aside from just the natural benefit you guys will see when to margins as revenue recovers. Just maybe how you think about the trade-off between investing for growth once we get through the challenging macro and improving profitability?

Chris Harms (CFO)

Yeah, no, all, all good, all good points. When we talked about the April restructure, that was very much for me, a restructuring, right? Getting very focused on how we invested in the go-to-market functions, the changes that Thomas was implementing there, the reduction we did on the customer success, and obviously, its impact on the gross margin impact. Inclusive in that is, you know, we've continued to make engineering investments to improve our unit hosting cost. Some of the changes I've weaved into the Q3 and Q4 really reflect on an expense structure, not necessarily a decision between investing or dropping into profitability, but more fine-tuning, kind of my expense calibration of, of where we're heading. As we think into the future, we're gonna continue to make that trade-off.

One of the things I will point to is we did increase our investment, and we're continuing to plan to increase our investment into our professional services organization. Both our recurring subscription technical account managers, as well as more of our implementation professional services capacity and bench. One of the pillars that we focus on is Win the Enterprise. We recognize kind of the whole product delivery concept for them and the integral role that those two functions, both at the implementation as well as that dedicated technical account person, moving forward play. We'll continue to make those choices. As you work through our numbers, you'll see that, like, our SaaS Magic Number is not where we want it to be.

Thomas, Nate, and the rest of the team is really focused on operationalizing discipline and really driving a much more return on effort within our go-to-market motion. As that starts to come to fruition, we've talked about, we really put that as the basis to our growth into 2024, as we start to be more effective on that, that front, as well as leveraging our PLG motion more on the bottom end. For us, it is very much of making more effective use of the investment levels that we've kind of recalibrated at, coming out of the April restructure.

Patrick Schulz (Senior Equity Research Associate)

Great. Helpful call. Thanks, guys.

Yao Ma (VP of Investor Relations)

Thank you. Next question from Nick Altmann from Scotiabank, followed by Taylor McGinnis from UBS. Nick, go ahead, please. I don't see Nick. Taylor, Taylor from UBS, go ahead, please, followed by Elizabeth Porter from Morgan Stanley.

Clare Gerdes (Equity Research Analyst)

Hi, guys, this is Clare Gerdes. I'm for Taylor. Just one on the guides. You raised the fiscal 2023 revs a little more than the 2Q beat. When we back into the 4Q implied revs guide, it implies sequential growth of only 1-ish%, so below 3Q. Is that just conservatism, or is there anything specific to 4Q that we should be keeping in mind? Thanks.

Chris Harms (CFO)

Yeah, yeah, clearly inclusive in, in the full year guide was the ARR performance in, in Q2, and the contribution it's gonna give us to the rest of the year. Then again, reflective of some of the points we made on the macro conditions, our expectation on the Q3 ARR performance, as embedded into our guide, is really a zero neutral position. Therefore, a really nominal contribution into the Q4 period. I, I would equate almost all of the increase in the revenue guide, reflective of what's in the rearview mirror, both from the Q2 revenue beat, as well as the overall ARR performance and the way it will play out through the rest of the year.

Clare Gerdes (Equity Research Analyst)

Okay, helpful. Thank you.

Yao Ma (VP of Investor Relations)

Great. Next question from Elizabeth Porter from Morgan Stanley, followed by Arjun Bhatia from William Blair. Elizabeth, go ahead, please.

Elizabeth Porter (Equity Research Analyst)

Hi, thanks for the question. I wanted to follow up on your comment around just the convergence of marketing, product, and experience analytics. Could you give us some color on how just the mix of users has changed over the last year or since the IPO? How does that change your access to budgets? As you're addressing kind of a larger base, are you seeing any sort of improvement in the budget that you guys are able to address and speak to?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, for sure. First, I, I'd say, product has historically been our main persona, since we started the company, and that has been the predominant user base. I think the change that we've seen is more and more marketing teams use Amplitude. That was in the single digits, when we first started to think about marketing analytics, and now it's in the teens in terms of total percentage of our user base, and so we've definitely seen a, an uptick, and, because of our marketing analytics capabilities and because of the convergence that, that I talked about. I think marketing is also essential to Win the Enterprise. I think what we've seen is that, particularly in these traditional enterprises, marketing tends to control the budget, and so it's not just a question of just getting in with product.

Like, as an example, I was visiting one of our large media customers in the U.K. a few months ago. The chief product officer there was a huge supporter and champion of us. They were trying to get us into the main streaming app of, of the, of their media product. They had to bring in the CMO as well. Now, after the CMO saw we had a bunch of marketing capabilities, they're like, "Hey, this is great. We're signed off on this. You know, we'd love to expand with Amplitude." So I, I think instead of in, in the technology industry, you may start in product and then expand to marketing over time, I think what we're seeing in the traditional enterprise is you often will want to land with marketing right away.

To the last part of your question, absolutely allows us to get more budget, so huge, huge deal from, from that standpoint. I think what we've seen in the last 5 years is a ton of innovation in the digital analytics space. You know, we've obviously been the leader in that. What you're gonna see over the next 5 years is you're starting to see the signs of consolidation, both in terms of analytics, experiment, CDP, as well as along the dimensions of marketing and experience analytics. We'll continue to come out with more offerings there so that we're able to drive that consolidation and come out on top.

Elizabeth Porter (Equity Research Analyst)

Great. Then just as a follow-up, on some of the Amplitude AI announcements, you know, how should we think about those impacting the financial model? Is it more incorporating features, and that's gonna attract kind of more customers and improve retention rates, or is there some sort of direct monetization that you guys see an opportunity to pursue?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, we're not doing any direct monetization at this time. It's all about that first pillar I talked about, Win Simple. How do you make it much easier for customers who aren't familiar with Digital Analytics to onboard and get value out of what we do? The Ask Amplitude is a great example of that. You just type in your question into a text box. You get an answer back. You don't have to know anything about how to use Amplitude. You don't have to know anything about your data taxonomy. It's gonna pull the full insight together for you. A lot of the, the stuff around the, the data management that I talked about also is about making it much easier to manage data at scale. Again, we're not...

It's making a lot of existing things that we do significantly easier, particularly for companies that aren't used to using digital analytics.

Elizabeth Porter (Equity Research Analyst)

Great. Thank you.

Yao Ma (VP of Investor Relations)

Next question from Arjun Bhatia, from William Blair, followed by Clark Jefferies from Piper. Arjun, go ahead, please.

Arjun Bhatia (Senior Research Analyst)

Yep. Hey, guys. Thanks for taking the question. Spenser, maybe going back to the CDP and the marketing persona aspect, can you touch on where the Amplitude CDP is from a feature parity perspective with some of the standalone CDPs that are in the market, or even other CDPs that are part of a broader marketing tech stack? Because there are those, you know, other offerings there? How have you been navigating, kind of switching personas to get more into the marketing department versus your historical advantage, which has been in product?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah. On CDP, it's, it's close to... The, the main thing you're evaluating a lot of these companies on is number of connections, so how many different endpoints can you send data to? As you imagine, there's, like, a long tail of hundreds of different possible endpoints. We're close to parity, with a lot of the leading CDPs that we see out there on that, and that's why we saw that switchover from OXXO, and we're continuing to see customers use it as an option. On CDP, in particular, we're not as religious about saying: "Hey, you gotta be on the Amplitude CDP." For us, it's just offering another option to get data.

Our belief is that data is just gonna live in tons of different places in the enterprise, whether that be CDP, whether that be Cloud Data warehouse, whether that's internal store or what have you. The more we can work with, the better, better, the more we can commoditize data access, the better. What, sorry, well, Arjun, what was your question on the marketing side?

Arjun Bhatia (Senior Research Analyst)

To just get access to the marketing persona, to the CMO, versus historically, you've been, you know, selling more to product teams?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I think we're seeing it more of a requirement within traditional enterprise to get into marketing right away, as I mentioned earlier. I think that's why we're kind of developing those things. I think we've seen our user base within marketing go up from the single digits to now we're, we're, you know, in the teens in terms of total percentage of end users who are in the marketing function. That allows us to capture more budget. It's now, I think the recognition from our side is that the power center hasn't shifted fully to product within these non-tech companies. You have to come in right off the bat, making the marketing team happy with an end-to-end customer view, not just product anymore.

Arjun Bhatia (Senior Research Analyst)

Okay, got it. That, that makes sense. Then maybe just a broader question: It seems like as, as we're looking at Q2 results, as we're looking at the forecast, it seems there's an impact from a small number of customers, right, that might drive volatility one way or the other. Can you touch on just customer concentration at a high level, and as you look through the remainder of the year? Do you see other potential high-dollar customers that could have an impact on your forecast one way or another? I guess just how are you thinking about that for, for the rest of the year?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I mean, I, I think relative to most other companies that are our size, we definitely have a lot of $1 million customers, and so that leads to the concentration and volatility that, that you outlined, Arjun. I think, you know, I was part of two of those. You know, obviously, crypto's been a tough space, and so that was a resizing by that customer. I was also part of the other resizing by the technology company that, that Chris mentioned. I think in both those cases, those customers are, you know, they went through layoffs, they're looking for short-term help on the budget side, and they just need to make those changes. Amplitude usage at, at those customers has actually been up, and so that's been great to see.

I think they expect to continue to grow with us over time, in the long term, so that's a very positive thing. This is just kind of more short-term volatility as they're readjusting their expectations of end customer growth. We've looked at stuff for both Q3 and Q4, and we kind of expect those right-sizings to continue as we go through this year. I think Q2's the single largest quarter in terms of total dollars up for renewal, so that's gonna be hit the hardest from a insurance standpoint. I don't think we'll see exactly the, the, you know, Q2's gonna be the high point from an absolute dollar standpoint, but we'll see similar stuff happen in Q3 and Q4, and we've kind of already baked that in.

Arjun Bhatia (Senior Research Analyst)

All right. Very helpful. Thank you, guys.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Sure.

Yao Ma (VP of Investor Relations)

Great. Next question from Clarke Jeffries from Piper Sandler, followed by Clark Wright from D.A. Davidson. Clarke Jeffries, go ahead, please.

Clarke Jeffries (Equity Research Analyst)

Hello, thank you for taking the question. You know, Spenser, I wanted to ask about, you know, the AI technologies that you're announcing, and maybe more broadly, you know, which do you think is the larger opportunity in terms of the solution set today, whether it's a conversational interface or something that's more along the data management lines? I'd imagine Amplitude has been using machine learning for a long time, and really the step function is on the language, natural language processing side.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah.

Clarke Jeffries (Equity Research Analyst)

So just wanted to get your thoughts on, you know, what it means, you know, long term, and then I have a follow-up for Chris.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah. I don't have all the clear answers in terms of here's the contribution, but let me give you our current thesis on the space. The first thing to understand is we have one of the largest data sets on behavioral data in the world. If you think about what AI is really good at, it's really good at extracting and summarizing insight from large volumes of data. I think it has the opportunity to supercharge what analytics does, whether that's from the instrumentation side and just making sure you're collecting the right data, whether that's the taxonomy side, and just making sure you're categorizing, whether that's the insight generation, or whether that's turning that insight into action with experiments and things like that. I think AI impacts all of it.

Right now, if you look at how companies leverage analytics, it's all human-based for each of those steps I outlined. I think AI can get orders of magnitude more leverage for all of them. I think you're gonna see a transformation of the space with AI. Now, we're very, very early days in it. The thing I'm excited about is we're the first company in Digital Analytics to come out with any LLM-based technology that improves it. You know, I already mentioned the Ask Amplitude, I mentioned the data taxonomy tools, I mentioned the, the formula suggestions and the, the chart name suggestions. I, like, you know... I, I think that's a first step, but there's gonna be a lot more behind that.

I, I think long term, it's all about how can you operationalize this data in different places across the business? I think AI is gonna accelerate our ability to do that across all the different fronts. I think, you know, there's an order of magnitude more value that can be generated versus the manual stuff that people go through today. Very, very early, but I think it's gonna be a, a, a really important part of the future of Digital Analytics.

Clarke Jeffries (Equity Research Analyst)

Absolutely. Chris, I just wanted to ask about stock-based comp. If you could give us sort of any expectations on how that would, you know, trend maybe over the near term, you know, how cost basis is being factored in. You know, maybe we have a little bit more of a, a conversation about, you know, GAAP operating profitability. You mentioned the withhold to cover, I was just wondering if you could, you know, maybe lay out the stock-based comp trend?

Chris Harms (CFO)

Yeah. I, I, I do know that it peaked as a percent of revenue in this last quarter. It has been trending up. I think we're 32%-33% rate. obviously looking to have that kind of tail off with time. I have not spent a lot of time on the kind of forward-looking outlook, really calibrating kind of just where we've been. Obviously, making changes as we think about how we're, how we're using cash, the withhold-to-cover you alluded to. If there's, I'll, I'll just say, Clark, I'll go do more into the forward-looking. It has not been one of the areas I prioritized this last quarter.

Clarke Jeffries (Equity Research Analyst)

Yeah, fair enough. Thank you very much.

Yao Ma (VP of Investor Relations)

Next question, Clark Wright from D.A. Davidson, followed by Tyler Radke from Citi. Clark Wright, go ahead, please.

Clark Wright (Equity Research Analyst)

Hi there, Clark Wright on for Gil Luria. You, you mentioned verticalization of the platform. Maybe you could just talk about what that means in your, in your go-forward picture is for how the Amplitude platform can evolve over time. Then, maybe just in addition to that, how the go-to-market changes in order to compensate for that?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I, I think, you know, there's obviously various degrees of verticalization. We're taking the very first step, which is: how can we take the existing Amplitude product and offer templates and guides for people from specific vertical industries like media or e-commerce or financial services or B2B, so that they instrument a bunch of stuff, and then we have a bunch of dashboards that come right out of the box? I think that's for, for me, that's both a part of the Win Simple as well as Win the Enterprise. A lot of those customers are looking for guidance for us, from us. Like, they don't even know what questions to ask out of the data. Hey, tell me the 20 events I should instrument.

I'll instrument those, then I can get, you know, lots of different charts and insights out of you without having to really think and figure out that, all of that on my own. So very, very excited about that. I think Thomas and Nate, we're in the very we're we're before even really thinking about that, candidly. I think that's gonna be kind of a many-year thing in terms of refocusing the sales force. We're still too small to really specialize from a vertical standpoint. We've done it one-off in different territories, as an example. You know, having AEs who are in New York have a constant...

You know, having a few AEs that have a concentration of financial services customers, and things like that, so that you have AEs who specialize in the, you know, business problems and use cases of the specific verticals. We're, we're quite far off from, you know, doing anything more drastic there. So that will be a kind of many-year journey as we continue to grow and get more advanced in our motion.

Clark Wright (Equity Research Analyst)

Thank you. All my other questions were answered. Appreciate it.

Yao Ma (VP of Investor Relations)

Great. Next question, Tyler Radke from Citi, followed by Michael Turits from KeyBanc. Tyler, go ahead, please.

Tyler Radke (Director and Equity Research Analyst)

Yeah, good afternoon. Thanks for taking the question. I wanted to ask you, Spenser, about the Amplitude Warehouse Native offering that you talked about. Maybe you could just give some more examples. Like, what are the new types of use cases and users that you're seeing with that product, and kind of what's the... What does, what does it streamline? What does that kind of unlock for you?

Spenser Skates (Co-Founder, CEO, and Chairperson)

The key thing. Let me explain what it is, and then I'll explain why we've done it, and how it fits in the strategy. The key thing with Warehouse Native is that there's been a lot of companies that have decided to use the cloud data warehouse as their source of truth for product behavioral data. In that world, it's much easier if you have an application that already runs natively on top of Snowflake, and that plugs in directly to that data set without having to, you know, send the data over to Amplitude. We just have a native application running within a Snowflake instance directly on top of that data, and that allows you to get all of the, or a lot of the digital analytics functionality that we have right out of the box.

So think of it as, you know, it takes 10% of the time to get set up if you already have this data in a data warehouse, than with the traditional process of Amplitude implementation. Strategically, in terms of why we're doing it, I think there's, there's two big things. The first is that our expectation is that data is just gonna live in lots of different places. Cloud data warehouse is gonna be one of them. The more prolific we are with the data sources that we work with, the more we're gonna win the overall space, and, you know, the easier it is going to be get, to get on Amplitude. It's all about meeting, you know, a customer where they're at.

The second thing is that Warehouse Native, and I want to make this clear, because there's been a little confusion on this, is that it's an on-ramp to the more advanced capabilities. You can think of it like a light version of Amplitude, and then over time, as you want more speed, as you want more functionality and flexibility, you upgrade to the more sophisticated versions of Amplitude over time. Really, it's a distribution play to tap into currently Snowflake's customer base, but, you know, we'll get to more of the cloud data warehouses over time. That will, again, enable us to work with whatever your data source is, warehouse, CDP, et cetera.

Tyler Radke (Director and Equity Research Analyst)

Okay, kind of broadening out beyond the, the product persona to, with those-.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah

Tyler Radke (Director and Equity Research Analyst)

Additional data sources.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah. A lot of, a lot of. Some companies, the data persona is driving the evaluation of this, it, you know, it helps us fit for those sort of customers for, like, data-led organizations. You have product-led organizations, you have marketing-led organizations, you have data-led organizations, you know, it varies by industry and company size. This is an offering that's really great for ones that have where the data leader has a ton of influence.

Tyler Radke (Director and Equity Research Analyst)

Awesome. For Chris, I wanted to ask you a follow-up. Appreciate all the color around the dynamics in the quarter between the expansions and churn. I guess, as we think about renewal rates today, I think you talked about 85%, which is, you know, below kinda where your target level is. How do you think about that recovering, you know, in the back half, and then as we go into 2024? It sounds like you're still expecting some optimizations, but does that go back into the low 90s? Then, just given the momentum you're seeing in terms of new customers and expansions, do you think the business can accelerate simply from improving renewal rates without kinda seeing that improvement in expansions?

Chris Harms (CFO)

Well, we, we definitely want both. I definitely expect both. Yeah, let's talk about the renewals. Spenser talked about the, you know, his history with the two, the two customers, large ones, that did the optimizations this year. Like, they, we expect them to continue. We are just getting kinda right-sized with that. On a natural level, as that kind of unfolds in this temporary period, I would expect us to get back to GDRs north of 90%. Just as we're getting kind of recalibrated on their levels. As we've said, we think this is a temporary. That will obviously give us some uplift. Inclusive in that is we're getting deeper with these customers at executive levels. We're, we're, we're talking about the value that Experiment brings, CDP.

We're starting to share on a product roadmap perspective, how we both see Warehouse-native Amplitude and others. We think the cross-selling motion will be a really meaningful part of our expand story, that it's not just about kinda volume levels. Look, I look forward to all of that coming to fruition in as short a period of time as possible.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah. I, I also wanna be really clear, like, you know, macro is tough, so that's driving both right-sizing and customers to the low end, but, you know, we're not sitting here, I'm not happy with where it's at, so there's a, you know, it's a, it's a top focus of what we're doing with Thomas and the go-to-market team.

Tyler Radke (Director and Equity Research Analyst)

Great. Thank you.

Yao Ma (VP of Investor Relations)

Great, next question from Michael Turits from KeyBanc, and last question from Nick Altmann. Michael, go ahead, please.

Michael Vidovic (Managing Director and Senior Equity Research Analyst)

I, excuse me, this is Michael Vidovic.

Chris Harms (CFO)

Michael, you got much younger!

Michael Vidovic (Managing Director and Senior Equity Research Analyst)

Just looking at the customer adds in the quarter, are you seeing higher adds due to how recent the MTU pricing change was? We should expect it to potentially slow in the back half of the year, or you think the current level of adds is relatively sustainable here?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I, I think you're gonna see this as an on, on an ongoing basis. We've as part of our kind of Win Simple efforts, we've made that MTU change, as you mentioned, and that's led to big jumps in customer adds both Q1 and Q2, and I think we'll expect that to continue to persist, you know, going forward. We're also not done in terms of the improvements on the product-led growth motion. There's quite a bit more that we wanna do to improve that and optimize that, and that will help us both win the low end of the market, and also just having another entry point in a simpler onboarding process for, for customers broadly.

Michael Vidovic (Managing Director and Senior Equity Research Analyst)

Then just on the... You talked about ramping up professional services. I guess, what's driving that? Is it just longer implementation times at high-end enterprise? I guess, just in, in your perspective, how would you characterize that?

Chris Harms (CFO)

I think we were just under-sourced, just as we were over-sourced on the customer success team, we were under-sourced on the pro services. I gave it just as an anecdotal example of, look, as we see areas that need incremental investment, we're not gonna hesitate to do that. That being fat- free cash flow positive obviously gives us a ton of flexibility about what we're doing, getting to a non-GAAP EPS kind of positive state this last quarter, great milestone, and as I said, we're kind of guiding the Q3 on a profitability standpoint. All I was trying to indicate there is that when we see the areas that need the incremental investment, we're gonna hesitate to do it.

Michael Vidovic (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Yao Ma (VP of Investor Relations)

Thank you. Last question from Nick Altmann from Scotiabank. I think we have you this time, Nick? There we are.

Nick Altmann (Associate Director)

Yeah, yeah, awesome. Thanks. Hey, guys. Just to, just to follow up on Tyler's question on the renewal side of the equation, when you look at the, the gross renewal rates for the enterprise side of the business versus, you know, the more the SMB side of the business, how meaningful is the delta there in terms of the gross renewal rates?

Chris Harms (CFO)

I know that I have it, I'm visualizing the chart in my head, but I don't wanna call it out without having looked at it again. When we do the call back, I'm happy to give you that spread.

Nick Altmann (Associate Director)

Okay, fair enough. Then, earlier, you talked about how actually the second half maybe has less of a, a renewal base, and 2Q is actually a pretty significant renewal quarter for you guys. I guess I wanted to ask how you're sort of thinking about renewals with your customers, and sort of what are sort of the levers that you're pulling to combat those? Is it more discounts? Is it trying to sign shorter-term deals? Like what are sort of the things you're doing on your side of the equation to help maintain customer spend and sort of lift those renewal rates in the second half?

Spenser Skates (Co-Founder, CEO, and Chairperson)

Yeah, I mean, there's a, there's a, there's a ton. It's, it's the top priority from both a product and a go-to-market standpoint. I think there's a lot of different plays. One is actually going towards longer term contracts, but offering more discounting is, is a lever. I think, even in cases where customers are looking to downsell, finding other areas within the business where we can expand to or, cross-sell new products like Experiment and CDP, that's actually worked quite effectively, and we're gonna continue to do that, as more customers become aware of our offerings in those areas. you know, and then cases where, like the crypto company that, that we had mentioned, where it's just like, "Hey, you know, we had to go through a layoff. This is...

We just don't have budget. You know, we ultimately wanna be good long-term partners, so we'll work with them to figure out a level and a rate that, that makes sense, because our expectation is these customers are gonna be with us for long term, and on both sides, you know, we wanna, they know as they get back to growth, and we'll, we'll grow with them and we wanna work with them to, to do that. So I think the other thing I'd call out is our predictability into these cycles has gotten much, much better. Thomas and Nate have just done a fantastic job of driving that. We landed pretty much where we expected within Q2.

As we look to, to Q3 and Q4, those are also within the bounds of, of what we were looking at earlier, and so I think we've gotten still more to go, but a lot better on the predictability front. So that helps us get in front of it much earlier, as well as control it, so that we can make sure to keep those customers.

Nick Altmann (Associate Director)

Great. Thanks, guys.

Spenser Skates (Co-Founder, CEO, and Chairperson)

For sure.

Yao Ma (VP of Investor Relations)

Great, thank you. With that, I'm seeing no further questions in queue. We will be at the Citi Global Technology Conference and Piper Sandler Growth Frontiers Conference in September. Details will be posted on our IR website. Thank you very much for attending our Q2 earnings conference call. You may now disconnect.

Spenser Skates (Co-Founder, CEO, and Chairperson)

Thanks, everyone.