AMPL - NASDAQ

Hello, everyone. Welcome to Amplitude's Third Quarter 2023 Earnings Conference Call. I'm Yaoxian Chew, Vice President of Investor Relations. Joining me are Spenser Skates, CEO and Co-Founder of Amplitude and Chris Harms, the company's Chief Financial Officer. During today's call, management will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full year 2023, the expected performance of our products, our expected quarterly and long-term growth, investments and overall future prospects. These forward-looking statements are based on current information, assumptions and expectations and are subject to risks and uncertainties, some of which are beyond our control and could cause actual results to differ materially from those described in these teams. Further information on the risks that could cause actual results to differ is included in our filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, and we assume no obligation to update these statements after today's call, except as required by law. Certain financial measures used on today's call are expressed on a non-GAAP basis. We used these non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures are limitations and should not be used in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at [email protected]. With that, I'll hand the call over to Spenser.

Thanks, Yao, and good afternoon, everyone. Welcome to our third quarter earnings call, and thank you for taking the time to join us. For today's Q3, 2023 call, I'm going to cover three main topics. First, our Q3 financial results alongside a macro and execution update. Second, observations on our evolving market opportunity and category. And third, an update on platform developments and some customer stories. Let's start with a summary of the third quarter. We closed the third quarter with $70.6 million in revenue, up 15% year-over-year. Annual recurring revenue was $273 million, up $5 million from the end of the second quarter. We were profitable on a non-GAAP basis and generated another $7.5 million of positive free cash flow this quarter. We now have almost 2,500 customers. To put these numbers in context, I'll provide an update on how we're executing on the state of the macro and on how we see our category evolving. On execution, our new ARR was more broad-based this quarter. We welcomed a number of organizations of all sizes to Amplitude, compared to Q2, which was marked by a couple large expansion deals. Total churn, while still high, was lower than the previous quarter. We also drove an incredible company-wide effort to launch our Plus plan. I'll talk more about it shortly, but the Plus plan gives a self-service options for startups, small businesses, and first-time enterprise prospects. Given it's a product-led growth motion, it also allows us to incrementally redirect our sales efforts towards larger enterprise prospects and customers. The new leaders we brought into the company continue to raise the bar across the board, from discipline and rigorous inspection to elevating customer relationships. We are also beginning to think bigger. We've been able to grow deal scope and deal sizes significantly with some customers this quarter as we start to sell more strategically across different buyers. The macro environment remains challenging on a number of fronts. Our customers continue to recalibrate their own growth expectations under new demand and interest rate environments. We continue to battle the same ongoing themes of optimization and macro driven churn as customer budget pressures remain stubbornly persistent. This will take time to work through. On the digital analytics category, it remains in its early days and we continue to see evidence that our approach is the right one. Adobe, Google, and many others have built great businesses on the back of a web traffic and marketing-centric view of the world. Billions of dollars are currently being spent by companies on legacy software, data scientists, and complex implementations to try to understand the digital customer experience. This approach breaks down for today's realities. Customer data is now more fragmented than ever across multiple data sources and touch points. Growing global regulation and an increased focus on privacy means a heightened importance on first party data. Legacy approaches and point solutions only provide a snapshot when it comes to trying to understand your customer. Amplitude tells you what your customers do and how they behave across the entire customer journey. Market awareness continues to grow alongside increasing customer sophistication. Our platform for breadth resonates with users across multiple departments, product, data, engineering, marketing, and more. As customers understand the criticality of product data, we also see increasing signs of previously siloed pools of spend coming together across marketing, product, and data budgets. We see increasing opportunities for us to grow wallet share and expand our addressable markets. One notable sports gaming customer expansion from the quarter really brings these dynamic to life. Amplitude had been the solution of choice for the leading digital products since 2016. Product teams were historically given their own choice of toolkits. That agility came with the tradeoffs of sprawling costs and unsuccessful implementation. Recognizing the need for a more complete view of the customer journey, their VP of Marketing and MarTech recently took over additional responsibilities for product analytics. Over the course of our relationship, we've worked with them to execute on their vision for one provider across their entire digital product portfolio. This quarter, they went wall-to-wall with Amplitude. Amplitude analytics, CDP, and experiment are displacing several fragmented marketing and point solutions across their products. We're helping them personalize customer experiences, embrace rapid testing, and drive insights to action with one unsingular platform. We think we can help many more of our customers execute on that vision. With that backdrop, let's recap product development. It was an excellent quarter for innovation. We are growing our platform. I'm very excited to announce that session replay is coming to Amplitude early next year. Session replay is a great entry point for companies who are earlier on their analytics journey. It provides video-like replays that give a more accurate picture of how digital products are being used through actions like clicks, cursor movements, and scrolling. When combined with analytics, teams can quickly identify the issues users are having, understand why they're having them, and recommend improvements. With a visual comparison of the before and after, teams will be able to see if a problem like low engagement is resulting from user design or performance issues and how widespread specific issues are. Session replay removes the guesswork behind behavior and improves the user experience across the board. As I mentioned earlier, we launched our Plus plan in mid-October. Plus solves an issue we've been hearing for years, namely that pricing for analytics is challenging. It can be expensive to go from free to paid plans, and if those plans are priced by events, smaller companies either overpay or ration what they track, which undermines the whole purpose of analytics. That is where plus comes in. The plan offers the best of Amplitude analytics, CDP, and experiment starting at just $49 per month. And it's the first digital analytics platform to be launched in a self-service package. With this launch, we are growing distribution and can now serve the low end of the market more efficiently. Early traction is encouraging with multiple five-figure signups in the first few weeks since launch. As it relates to AI, I'll provide a brief update on our recent launch and what we're seeing in the market. Data governance is like physical health. Companies should be proactive about data and cleanup and taxonomy. And we should exercise and eat vegetables every day as well, but few people end up doing it in practice. That is where Amplitude can help. Amplitude's AI data assistant is a friendly, individualized, personal trainer for anyone who wants to get their product data in better shape. In less than three months since launch, our AI data assistant has been a huge hit with hundreds of our customers already using it to improve their governance practices. What would normally take weeks and months of effort is being broken down into bite-sized chunks that can be tackled in minutes and hours. Organizations that use data assistant see a big uptick in data governance scores and more than a 30% average lift engagement. Cleaner data leads to more impactful insights, happier users, and better business outcomes. On to customers. We want to stand out customers in the generative AI space. Amplitude is the platform of choice for some of the biggest, brightest, and best names in generative AI, helping them guide their businesses in ways that our competitors cannot match. Midjourney is a pioneer in AI image generation, revolutionizing art and imagination in the same way ChatGPT has transformed the written word. They have developed and productized text to image generation and are the AI success story in image generation. They are evolving rapidly with their product surface area growing from web to mobile, mobile to multi-surface. With a small but incredibly sophisticated technical team, Amplitude was the right solution to give them leverage on time, resources, and effort. They're engaged with our entire platform from day one across analytics, experiment, and CDP. Amplitude will enable Midjourney to understand free-to-paid conversions, correlate demographics to user patterns, and A-B test changes on their user's experiences. Another one I'm really excited about is Character AI, a neural language model chatbot service. Character AI empowers users to easily create and interact with a variety of characters that feel alive with contextual conversations and human like responses. They're one of the fastest growing AI companies. They've adopted Amplitude for both analytics and experiment and viewed Amplitude as the best long-term partner given their needs to rapidly scale their product. This is just the start. Amplitude has always been able to capitalize on waves of technological innovation. We remained well positioned to benefit from the ongoing swell of AI product and company formation. With a proliferation of digital products and experiences, the need for Amplitude only grows. We had some other incredible wins this quarter. We welcomed Playrix in Q3 as one of the top three mobile gaming companies in the world. Their games are played by 120 million people every month. Previously, they relied on a smaller mobile analytics vendor, which was too outdated for the current needs and couldn't provide them with the right level of flexibility. Playrix is moving to a multi-product strategy. Multiple teams, including product and marketing, needed to simplify the usage of their internal platform to shorten time to insights. Through a highly competitive process, Amplitude stood out as a winner based on both our ease of use and on our unmatched ability to deliver a unified view of their users across different games. We also won another large global sports organization this quarter. Over time, the organization had lost trust in the data provided by their large legacy MarTech provider. Users across data, analytics, marketing, and advertising desperately needed stronger support and more open integrations. With a seamless combination of Amplitude's analytics and CDP, this customer will be able to recommend the best video and articles to their user base and drive engagement. With a blueprint of their user behavior, they can improve their mobile app experience to maximize sponsor revenues and retention. Through this period of change, we are delivering unprofitable growth while balancing thoughtful investment. We are growing alongside our customers and extending our platform. I'm confident the challenges we are enduring in the short-term will set us up to be a stronger company in the longer term. 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.

Thanks, Spenser, and thanks to everyone joining us today. I'm proud of our recent performance. We beat the midpoint of all guided metrics, as well as achieved our commitment of being free cash flow positive for two consecutive quarters. Inclusive, we beat the top end of the range of the revenue guide. And we are raising our Q4 revenue guidance from what was implied in our August guide. I'm energized by what lies ahead of us. We are well-positioned for an increasing portion of customer wallet share. This will become increasingly evident as the role of product increases and importance across different buyers. As legacy approaches break down and as siloed pools of spend continue to come together. Our operational execution is improving. Our medium term visibility has improved from earlier in the year as it relates to both new ARR forecast predictability and ARR turn risk. We're improving capital allocation. Our Plus plan will better serve the lower end of the market while our people led sales efforts will increasingly focus on accounts with higher potential of long term value. Now on to our third quarter results. As a reminder, all financial results that I will be discussing with the exception of revenue and balance sheet figures are non-GAAP. Our GAAP financial results along with the reconciliation between GAAP and non-GAAP results can be found in our earnings press release and supplemental financials on our IR website. Third quarter revenue was $70.6 million, up 15% year-over-year. Total ARR exiting Q3 increased to $273 million, an increase of 12% year-over-year and $5 million sequentially. Here's more detail on key elements of ARR. We again saw sequential growth in customer count and ARR across both our $1 million plus and our $100,000 plus ARR base. New ARR was fairly evenly split between land and expand. Direct contrast to the large expansion driven performance in the prior quarter, this was more broad based. Churn remains elevated and slightly lower in absolute dollar terms than Q2 and in line with our expectations. Teams here have been consistent. First thing, as companies come up for renewals, they're often resetting and optimizing for new expected levels of growth. The substantive portion of these legacy multi-year contracts are expected to be reset by the end of Q2 2024. The second thing, cost pressures persist, particularly with smaller customers. Competitive losses remain rare as these smaller customers are choosing to not use a solution from any provider to preserve cash. In period, ARR dropped to 99%. As stated, land and expand were fairly evenly splinted in Q3, meaning new ARR from expand was lower than the prior quarter. Churn, while down from the prior quarter, remained sizable. Combination of the two factors resulted in the in-period ARR dropping below 100%. NRR on a trailing 12 month base has declined sequentially to 105%. Gross dollar retention this quarter was in the mid-80s. As a reminder, Amplitude includes both ARR reductions from fully churned and lost customers and ARR reductions from partially churned and retained customers in our GDR metric. Gross margin was 78.7% of four percentage points a year over a year, mainly reflecting the improvements made in our unit hosting cost and the margin impact of restructuring our services team in the second quarter, both of which we have covered previously. Total operating expenses were $53 million down sequentially and growing 4% year-on-year. Here, we remain measured around our pace of hiring following the restructuring completed in the second quarter. Operating profit was a positive $2.8 million or 4% of revenue, of 12 percentage point improvement on a year-over-year basis. Net income per share was $0.05 based on $128.1 million on fully diluted shares compared to a loss of $0.03 with 112.0 million shares a year ago. Free cash flow was positive $7.5 million or 11% of revenue. Free cash flow saw a benefit this quarter from higher collections and timing of certain payments. Now onto our outlook. For the fourth quarter, we are raising the revenue outlook that was implied in our August guide, with a Q4 revenue guide between $71.3 and $71.9 million, representing an annual growth rate of 10% at the midpoint. We expect non-GAAP operating income between positive $1.3 million and $1.9 million. We expect non-GAAP net income per share to be between $0.02 and $0.03, assuming shares outstanding of approximately $129.8 million as measured on a fully diluted basis. For the full year, we expect revenue to be between $276.2 million and $276.8 million, an annual growth rate of 16%. We expect non-GAAP operating loss between $4.5 million and $3.9 million, and we expect non-GAAP net income per share to be between $0.05 and $0.06, assuming shares outstanding of approximately $127.8 million as measured on a fully diluted basis. As it relates to 2024, we will provide more detailed guidance on our fourth quarter earnings call in February. However, I do want to provide some additional context for your modeling purposes. We have expressed a zero-add net ARR expectation for the fourth quarter of 2023 in our prior earnings calls, coupled with a net ARR add of $18 million year-to-date through September 30th. This implies a year-over-year growth rate of ARR for the year that is below 10%. There is a high correlation between the current year ARR growth rate and the subsequent year revenue growth rate within our revenue model. We expect new ARR to be relatively balanced between land and expand over the coming quarters. Coordinally, given the magnitude of churn that we have been conveying, we expect in-period NRR to be below 100%. As stated earlier, as companies come up on renewables, they are often resetting and optimizing for new expected levels of growth. The substantive portion of these legacy multi-year contracts should be reset by the end of Q2 2024. Taking this into account, ARR re-acceleration should become mechanically easier in the back half of 2024. In summary, Q3 shows our ability to adapt quickly to the new environment. We're delivering on free cash flow. We're investing appropriately against opportunities that we expect will drive long-term value. Above all, we're committed to improving execution. With that, I'll open for Q&A. Over to you, Yao.

Great. Thanks, Chris. [Instructions] Our first question comes from Koji Ikeda from Bank of America Merrill followed by Elizabeth Porter from Morgan Stanley. Koji, go ahead, please.

Great. Thanks, guys. Thanks for taking the questions. So, in the prepared remarks, you called out Midjourney and a couple of other AI vendors out there. That's so interesting. I'll just - question on how to think about the AI category from an app's perspective. Maybe what is it about this category? Or maybe the right question is, is there something structurally different about the way AI apps are created that makes Amplitude better positioned as a digital analytics company versus others out there?

I think the key thing with AI as a way of technological innovation is that it's all about who has the best user experience for their AI application. Because of that, companies in that category are looking for every single competitive edge they can. That's what led to Midjourney becoming an Amplitude customer. That's what led to Character AI becoming an Amplitude customer. That's what we've seen from AI companies in general. I would compare AI to actually previous waves of technological innovation. We've seen stuff like VR, crypto, mobile, SaaS. All of the new companies that - those categories created ended up becoming day one Amplitude customers from the very start, starting out with a small - growing with us -- us growth with them over time as they continue to scale. And so, AI is very similar in that way, and the digital product is the only competitive advantage you have. And so for us as a platform, given we're the best, most sophisticated, now at the launch of the Plus plan, we also have the easiest entry point. There's no reason for someone to choose anyone else besides an Amplitude. You're not going to choose some of the legacy MarTech vendors. You're not going to choose the smaller companies in the space. You're going to go with Amplitude.

Got it. Thanks, Spenser. On that Amplitude plus, does that potentially open new doors for new types of customers to try out the technology? And I guess how does the upsell process from plus to the broader Amplitude platform work? And then last question on Amplitude Plus is, is there some scale from a revenue perspective that Amplitude Plus customers can grow to?

We've already seen multiple five-figure sign-ups just straight away from the three weeks the Plus plan has been out. So, already very promising in terms of a new channel for growth for Amplitude, so one that I and the rest of the team are very excited about. I think the key part - so obviously customers can sign up. They can start with free. They can go to the pay plans. They can scale with that pay plan over time. But I think an underrated aspect of it as well is just exposing more people broadly to Amplitude. You get more customers signing up for free because they know, hey, this is only going to be $49 a month or whatever it is if I'm at a certain level. And so, I can figure that out without having to go through a whole sales process and talk to someone. And it also is a great way to introduce them to some of the enterprise functionality they may want. And so, we've already seen plus customers that started on plus and then ended up upgrading to enterprise plans. And so we see multiple instances of that already, even though it's only been out for a very short amount of time. So absolutely in terms of a new channel. And it's all about just, okay, no matter where you're at, if you want to start on free, if you want to just pay by credit card and have that be easy, or if you want to use some more sophisticated features, we're going to be the best choice in the space.

Got it. Thanks, Spenser. Thank you so much.

Thanks Koji.

Next question, Elizabeth Porter from Morgan Stanley followed by Nicholas Altmann from Scotia.

Hi, everyone. This is [indiscernible] for Porter. Thank you for taking the question. I wanted to ask on the go-to-market changes. It sounds like leaning into products like growth has been a focus for you as you look to add more customers through a no touch model on free plans and then eventually migrate them to higher value plans over time. So I'm curious if there's any updates to share here. Are you seeing any progress with this acquisition channel bringing new logos into the funnel? And then what are the key hurdles that you're seeing converting these customers from free to paid and how are you planning to address this over time?

Thank you. Yes, for sure, Fiona [ph]. So again, as I said with Koji, like we are seeing new customers come on to free, right out the gate, come on to paid. And then some of those customers upgrade to the enterprise plans. And so it has been successful launch, even though it's only been out there for a few weeks at this point. I think that in terms of, yes, for us is just making sure that kind of no matter where you're at, you're able to scale with Amplitude over time and that we have the most compelling offering. And so, while we don't expect the Plus plan to have a massive revenue impact in the short term, we know that just as a new way to acquire customers out there and have them upgraded, it's going to be a good one. In terms of obstacles, that's something that we've been working on since prior to the Plus plan. So one of the big things that we saw was one of the gates to be able to get started with Amplitude was what we call activation, so being able to send us data from your product. And so, one of the things that we did as part of the launch of the Plus plan was we introduced new ways to do that from a low code or no code fashion, so, being able to put a Java bookmark let in or being able to transfer your existing Google implementation over. And so that's actually increased what we call the activation rate, which is from sign-up to data in multiple percentage points through that effort. So that's been good to see. We're obviously using Amplitude to look at every single part of that customer journey and figure out where we can optimize. And there's still a lot more for us to go.

Thank you.

Great. Nick Altman from Scotia, followed by Clarke Jeffries from Piper. Nick, go ahead please.

Awesome. Thanks guys. The first one is just on the macro. Appreciate the update. Can you guys just maybe talk about what you sort of saw in October and how November has trended relative to 3Q in terms of whether you're seeing incremental pressure. Things get a little bit harrier in terms of the macro or things are kind of stable as 3Q?

I think we've continued to see similar pressures as Chris articulated earlier. It's not gotten significantly worse. It also hasn't gotten better. That's obviously hitting us on the churn side, which we're not happy about. We're doing quite a bit to address, but the macro pressures remain consistent. We expect them to rain consistent as we look through the next few quarters. I think as we get into the later half of 2024, we see some of that potentially alleviating. But again, it's our early to say.

Awesome. And then just the second question was really around. It's for Chris. But you guys sort of talked about there are sort of multi-year customers renewing over the next three quarters. And after you sort of lap that, you'll have a much better sense as to when things can kind of re-accelerate. I guess my question is, when you look at the renewal period of 4Q versus 2Q next year, is there any sort of big delta there? And I guess the essence of the question is, will sort of post 4Q, will you guys kind of have enough visibility to kind of make that call a little bit more firmly? Or I know 2Q is sort of a big bookings period, big renewal period for you guys. So how much visibility will you have sort of post 4Q or will we really have to kind of wait till 2Q next year? Thanks.

Yes. No, no, I can give you insight. As it pertains to the absolute value of contracts that are up for renewal, both in Q4 as it was in Q3 and as it will be in Q1 and Q2, they're all fairly commensurate insights. As we've talked about, one of the things I'm proud about is the operational improvements we've made in our kind of medium term visibility to churn and risk. So against the backdrop of the absolute value of the ARR attributed to those multi-year contracts, clearly that's the easy part of the math and the subjective risk assessment made significant improvements on. What we've tried to convey is that the churn levels that really hit their peak for us in that Q2 2023 period, and then we've tried to convey while still large should be down from that peak as we progress through this quarter Q3 as we progress in Q4, that those are going to stay still at relatively large amounts based on how we're scoping the assessment for optimization and the other elements. But then mechanically, there's just not that same value of the multi-year contracts in our renewal base beginning Q3 of next year. What we will have is much more of the contracts that we did in 2023 up for their annual renewal, and much of what we did this year that has been on a multi-year, we're not going to see those again until 2025 and 2026. So I think we'll be able to, as we're conveying now, on a pretty good view into both the Q4 and to the first half of next year. When we speak again next in more detail into 2024 in February, I think we'll be able to give you a pretty concrete view of what those dynamics are. We'll clearly work that into our revenue guide for the year.

Great, thanks guys.

Next question, Clark Jeffries from Piper, followed by Tyler Radke from Citi. Clark, go ahead, please.

Hello. Hi, Chris, Hi, Spenser. Thank you for taking the question. I just wanted to get a gage sort of on really the cohorts of different customers, the flip between maybe digital natives and new digital builders. I wanted to get an update on sort of any return or change in behavior in sort of traditional industries as they maybe return to the prospect of digital investment? And then what you see as the receptivity on budget at this current point for the digital natives? It's been, I think, a cost rationalization environment for a long time. Just an update there on maybe tone or bottoming maybe in terms of their kind of purchasing appetite at this point.

Yes, I'm happy to take that. Look, I'm going to harking back to, we've made a lot of operational improvements in the last nine months and it's given us increased visibility. So with those additional kind of levels of business insight to us, I'll hit on a couple themes of reiterating at another one. On the digital native, which is still a significant portion of our ARR base, we are experiencing what we talked about from a term. Those large organizations, multi-year contracts, reflective of the dynamics with the pandemic as those contracts are coming up for renewal, we're resetting. So we've seen increasing pressure on the net ARR side of our business that's been tied to the digital native, the other side of that barbell being the small tech, really the VC-backed technology companies as they're just struggling to survive. And that's been just a steady down within the digital native of our net ARR contribution, not from our ability to continue to drive new ARR, but really just the head went from mature. So just kind of validating the themes that we've seen there and very specific to the digital native space, which is really predominant technology industry for companies. As it pertains to the traditional company, really with the exception of Q3, because we did have a large churn, that part of the business has continued to click along really well. Our growth rate within that space has been north of 24% year-over-year growth for the last 12 quarters, 11 quarters. So that part of the business has done well. Now, I think one of the dynamics that we're picking up from some of the other software companies is that some of the technology companies have been at the forefront of the budget pressures resetting. Good news for us. That should be an indication because of our digital native concentration. Perhaps we're closer to that than others. Traditional company perhaps has reflected an increased churn that we saw this quarter. Those are maybe facing a little bit more buying pressure and scrutiny as we go forward. That's the dynamic that we're seeing in Amplitude between those two segments of our business.

Yes, certainly. And then I think just basically an update on the competitive environment. Any update there in terms of whether or not some of the packaging changes you think could specifically change the dynamic maybe in the mid-market and the self-serve offering and whether you think that there are specific opportunity in terms of getting to that insight faster that you think maybe specifically as a competitive dynamic you could take advantage of. Just curious on X Google Analytics, what you see from a competitive standpoint? Thank you.

Competitively, we've continued to do very, very well, particularly against a lot of the point solutions. So if you're a standalone AB test vendor, if you're a standalone CDP vendor, if you're a standalone session replay vendor, it's kind of no real reason not to consolidate that onto Amplitude. One, it's going to be a better experience because you can use analytics to power those things and those things make the analytics better. And two, we can offer a much lower total cost of ownership. You're dealing with less vendors. We can give discounts. And so, we're actually seeing that effect across the base. So it's not just mid-market. We're seeing an enterprise. I was just at our customer advisory board a month or two ago. So this is like our top 20 customers in the U.S. And we presented both the existing products we had an experiment in CDP, our roadmap for session replay, some of the other things that were coming down the pipe. And out of 20 customers, all 20 were interested in expanding their capabilities with Amplitude. So, whether that be an experiment, whether it be session replay, whether it be on CDP targeting. And so I think in particular, we're doing very, very well against the point solutions. And so it's increasing validation of our view of the convergence of the category and the much bigger TAM that's available outside of product analytics.

Great. Thank you very much.

Next question, Tyler Radke from Citi, followed by Patrick Schulz from Baird. Tyler, go ahead, please.

Yes. Hey, good afternoon. Thanks for taking the question. So, a couple of questions on Q4. Chris, I think I heard your commentary just around expecting Flattish ARR, so

Yes. Now, what's been interesting being here now three quarters is Amplitude has not historically had that Q4 pop, which is much more enterprise driven. We've talked about the renewal base being actually concentrated in the first half of the year, Q1 and Q2, just on a historical basis. One of the things I expect will shift with time is having a more concentrated Q4 relative to the rest of the quarters of the year, because being very focused on winning the enterprise, both across the digital native space and the traditional company. But that's not what we have. So that's kind of the inside at a macro level. At the detailed level, we clearly have a pipeline that we're feeling adequate levels of confidence as it pertains to Q4. And we've got, as I said, a pretty good track record and how we're performing on the new ARR. But there are some dynamics that are playing on the churn side that I'm trying to assess. And I felt it was prudent to continue the theme of the zero ARR expectation as it pertains to that contribution to Q4.

Okay. And just to follow up on the first half of next year, so I think it was Q1 of this year where you talked about some of the churn and headwinds that you were seeing in the business. I guess, why wouldn't that have completely normalized in the Q2 quarter? And I guess, as you think about the pathway to reacceleration, I guess, what gives you the confidence that this isn't going to be kind of an ongoing issue as customers come up to renew their contracts, that they continue to optimize and try to shrink their spend? Thank you.

Yes. Now, mechanically, there were some three-year contracts that they're coming up for renewal in the first half year of 2024. So they're playing a role, even though we've been talking about the theme for a while, as some of those two-year contracts were coming up for three years and started the year before coming up as they played through the 2023 year. As it pertains to the second part of the question on what kind of gives me confidence and just the mechanics of it being easier is, we know that customer base is subject to optimization and fairly meaningful right-sizing of their usage of our software that's more commensurate with the levels of customer demands that they're having now that we're resetting. We're able to get that visibility. As I said, we definitely raised the bar on our operational insight across many facets of the business, and this is one of those areas where we've got better delineation into the renewal base itself, the customers that are in play, those that are more likely. And it gives me, as I look into the Q3 and Q4, we don't have that same inherent headwind, and it should just be mechanically easier for us as long as we continue to perform at the same new ARR levels, and some new element of macro-force doesn't leave its way.

The other color out just to give a little more color on it has been that I think I want to give a huge amount of credit to both Thomas and Nate. I think prior to that, we really were only looking at customers that were coming up for renewal in the current quarter or Q plus one. But since the work that Nate has done over the last six months since being here at Amplitude, I think we've really upleveled our view. And so we have much better visibility into what our expectations around the renewal base is as we look at Q1, Q2, Q3, and so on of next year. Now, obviously, there's obviously still risk and all of that, but we have our arms around those in a much better fashion than we've had previously. So yes, it's been a big change in operational execution.

Great. Thank you.

Great. Next question, Patrick from Baird, followed by Rachel from [indiscernible]. Patrick Schultz, please go ahead.

Hey, guys, appreciate you guys taking my question. And I know you guys made some changes earlier this year around sales leadership and just the account ownership process in general. Can you talk about how your sales and go-to-market teams are positioned as you head into 2024, just maybe from a headcount and operational standpoint, just particularly as your PLG motion gains traction and with the recently announced Plus plan, are there any other modifications you guys are looking to make?

I think one of the biggest ones is refocusing our accounting execs on a smaller number of higher potential accounts. And so allowing the PLG motion to do the more kind of rope, you know, if you're going to pay a few thousand dollars or $10,000 or $20,000. You can just self-serve. And that's not a high leverage use of the sales person's time. We want them to be thinking about how can they go after accounts that can be $100,000 or $200,000 or more. And so, as we look at 2024, we're looking at driving increased focus through that. Now, we've been a sales-based motion since the start of the company. You don't expect that to change in a crazy way as we go into next year. But I think the addition of PLG allows the driving of focus to much higher value accounts.

Okay, very helpful. Just a follow-up to from Chris, maybe. You guys have done a great job improving profitability in the past quarters and appreciate some of the color you provided on 2024 and not trying to push for guidance here. But how are you thinking about the trade-off between investing for growth as the macro stabilizes, as you anniversary some of those customer renewals relative to ongoing margin improvement? Just want to get a better understanding of those trade-offs?

Yes. No, look, you've heard me say I have huge conviction in the market opportunity that's ahead of us. I have huge conviction in the operational changes we're making that will be even in a better position to execute upon. I think we have great growth potential as we work our way through this. And I look forward to helping enable Thomas and team to drive a lot of that. If given the choice, we're going to lean towards growth and reinvesting into our organization. We think it's a really sizable market opportunity that's emerging, that's converging in the existing legacy ones. We want to be really well positioned to be the dominant player in the long term. That's where we're going to focus.

Awesome. Appreciate it.

Great. Next question, Rachel [indiscernible] from Blair followed by Taylor McGinnis from UBS. Rachel, please.

Yes, thank you. And appreciate you taking the question. The customer example you guys gave of the deployment was interesting. I'm curious if you're seeing more existing customers leveraging CDP to consolidate the stack, or if it's still mostly resonating with new customers?

Sorry, Rachel, what was that last part, if it's mostly what?

Resonating with new customers.

It's a big play on existing customers. So I mentioned that out of the 20 folks at our customer advisory board, all 20 were interested in some capabilities beyond analytics. For some that was CDP, for some that was experiment, for some that was what we had on session replay. And so, yeah, we see huge growth potential within our existing customer base by allowing them to use the full suite of software, not just the analytics portion and consolidate existing point players. So the wall-to-wall deployment was a great example of that. Midjourney was another great example of that where they bought the whole suite out of the box. So we're seeing it both with our existing customers and with new ones.

Awesome. Just a follow-up on that. Is there any other changes you need to make on the go-to-market motion to improve the cross-sell? Is it more just waiting for those recent changes to continue materializing?

I mean, there is, we are continuing, I think there is quite a bit of education of the team that we're working on. So we've done things like training on some of our new offerings, including an experiment. We trained an experiment a quarter or two ago. We're training on CDP now when we do a launch of session replay. We're going to have to train the field on that. And so then, from there, customers will have to understand. We have these and then adopt them when the right point and time comes in their buying cycle. So obviously, it's not just you flick a switch and then all of a sudden the entire customer base adopts. It's a whole process, but we're well underway with it. And the thing I'm excited about is just it's very promising. Almost, I was just talking with our president, Thomas, who came back from Asia for a two-week trip out there. Every single customer he talked to was interested in one of the new offerings. So it's just, I think, again, a lot of validation of our thesis on the category convergence, a lot of validation of our ability to upsell them. Now we actually have to go and do it, but all the ingredients are there.

Great. Thank you.

Great. Next question from Taylor McGinnis, followed by Michael Vidovic from KeyBanc. Taylor from UBS. Go ahead, please.

Yes. Hey, Spenser and Chris. Thanks so much for answering my question and taking the time. The first one is just, if I look at the gap between annualized revenue and ARR, it looked like it narrowed a bit in the quarter. And then also, if I look at CRPO and Total RPO, I think those were both down sequentially. So was there any deterioration that you might have seen in terms of macro or maybe there was something on the churn side with a larger customer that might have explained some of that at the end of the quarter?

Well, on taking the annualized revenue of where we finished June 30th and dividing it by four and adding $3 million in change, it's usually a pretty good proxy for what our Q3 revenue is going to be, even though I explicitly guided it. And similar mechanics are in play for Q4, right, taking our September 30th ARR, divided by four and kind of adding $3 million for the overages and pro-services that we do routine. That's probably a pretty good proxy to kind of validate that and really rationalize the relationship between the ARR and the revenue. As it pertains to the role of RPO, like that's definitely a reflection of the second half of the year having a smaller renewal base. It has a reflection of those multi-year contracts kind of weaving their way through. It's just the mechanics of the RPO timing, both from a total RPO, kind of a current RPO, as those one-year contracts again are more concentrated in the first half of the year. I wouldn't read anything more on the RPO than just those mechanics of the cyclical nature between H1 and H2.

Perfect. And then, Chris, I know you talked about the level of renewals being pretty similar over these next couple quarters, but in just in terms of the composition of them, I'm hoping you can give a little bit more color there. So as we think about what could happen to optimization levels versus what we've seen, any thoughts that you can give on the level of VC-backed companies that might be in that, some of the more challenged verticals, how that looks for larger customers versus smaller customers, anything composition-wise that you can share?

Well, the composition point that we've been discussing is those are the multi-year, and that those were the ones that had the highest natural inclination for some resetting and some optimization, and that the levels we have for Q4 is relatively commensurate with where we've been in Q3 and Q2, and it's relatively commensurate with where we will be in Q1 and Q2, and that will drop off fairly considerably when we get into Q3 of next year. As it pertains to the other slices, I haven't really given more on those. Other than to give you the flavor, I can lean very heavily or much more heavily on the work that Thomas, Dan, Nate, and team have done around our operational rigor and having much more clarity about, within those risk profiles, much closer to the accounts, up and down a larger stack, being much more precise on our trend forecasting, which is one of the other things I tried to allude to. I'm really proud of how precise our internal outlooks have been for the last quarters, and I expect that they will continue for the next few quarters. While it's a large number, my cup half full is at least where we have great visibility into that larger number and some of the composites around it, but I haven't shared more than that.

Awesome. Great. Thanks for taking the questions.

Great. Our final question comes from Michael Vidovic from KeyBanc. Michael, go ahead, please.

Hi, and thanks for taking my questions here. Just a couple of quick ones on the CRPO. Excuse me, following up on that question. I guess, would you expect the metric to continue to decelerating into the next quarter? Or is that just more of an anomaly called this quarter, and we should see stabilization near term?

I would expect in the February that it'll continue to be what you would characterize as a deteriorating number, but then I would expect it to pick back up in the March 31st and the June 30th numbers just reflective of those contracts kind of getting reset. That's the cyclical nature that I'm trying to refer to as it pertains to the CRPO and RPO in general.

Okay. And then just with the launch of M2+, I guess, do you see any risk around maybe customers that might have been on your traditional call enterprise plan now moving down to that? I'll call it starter tier on a lower price point?

So in absolute terms, we do expect some that are on our growth plans to potentially move down. You try to do the analysis to support that. Thomas and I were very clear on was this is absolutely the right thing for the company. It is going to enable, for all the reasons that Spencer laid out. And then one of the points that we made in the prepared remarks that we haven't really elaborated on in the Q&A is it does really free up a significant portion of the sales team that has been serving that into the market in a direct selling motion and freeze their time to focus on those that have the high potential ARR. There's a really big difference between closing a $40,000 account that maybe 50 at its maximum and a $40,000 account that has the potential to get to $200,000 or $400,000 or over a million. And our ability to profile and identify that latter target customer, that's a lot of the work that we've been doing for the last couple of quarters. And so, I'm very energized by what we're doing. I have conviction around it working and our ability to just drive incremental growth because of the focus of not having chased what I think are smaller and less potential ones. I think it's a big part of our success criteria here.

Great. Thanks, guys.

Thank you so much. And with that, I'm seeing no further questions in queue. We'll be at the D.A. Davidson Technology Summit and UBS Global Technology Conference in November and the Scotiabank Global Tech Conference in December. Details will be posted on the IR website. Thank you for attending our Q3 Earnings Conference call. You may now disconnect.