Medallia, Inc. (MDLA) CEO Leslie Stretch on Q1 2021 Results - Earnings Call Transcript
Medallia, Inc. (NYSE:MDLA) Q1 2021 Earnings Conference Call June 2, 2020 4:30 PM ET
Leslie Stretch - Chief Executive Officer
Roxanne Oulman - Chief Financial Officer
Conference Call Participants
Brian Schwartz - Oppenheimer
Sui Ying Cheong - Bank of America
Brad Zelnick - Credit Suisse
Phil Winslow - Wells Fargo
Bhavan Suri - William Blair
Chad Bennett - Craig Hallum
Scott Berg - Needham & Company
Tom Roderick - Stifel
Walter Pritchard - Citi
Richard Baldry - Roth Capital
Welcome to Medallia's First Quarter of Fiscal 2021 Earnings. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. Please be advised today's conference is being recorded. [Operator Instructions]
And I turn the conference over to your speaker today, Roxanne Oulman, Chief Financial Officer. Please go ahead.
Thank you, Jassi. Welcome to Medallia’s first quarter fiscal-2021 earnings call. We issued our earnings release a short time ago and furnished the related Form 8-K to the SEC. To access the press release, please see the investor relations section of our website.
With me on the call today is Leslie Stretch, President and CEO of Medallia. Before we begin, please remember during the course of this call, we may make forward-looking statements about the operation and future results of Medallia that may vary and involve many assumptions, risks, and uncertainties, including those related to the Covid-19 pandemic. To the extent possible, our forward looking statement seeks to take into account the impact of Covid-19. However, the crisis that this pandemic has created is very fluid and the situation is constantly evolving.
If any of these risks or uncertainties related to these forward looking statements of Medallia or any of the assumptions related to the forward looking statements proved incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. For a discussion of our risk factors associated with the forward-looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the SEC including our Form 10-K dated March 19, 2020.
We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed today are non-GAAP unless stated that that measure is a GAAP number. Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.
Additionally, in conjunction with the release of our earnings report, we have posted on our website at medallia.com under the Investor Relations section, additional charts that identify trended metric performance that we believe will aid in understanding and evaluating our performance over time.
Now I'll turn the call over to Leslie.
Thank you, Roxanne. Good afternoon. I'd like to begin my prepared remarks by wishing everyone a safe and healthy year ahead. I'd especially like to thank each and every Medallian for their responsiveness and flexibility through Q1 as we saw the pandemic in full effect. Notably, hospitality, travel, and bricks-and-mortar retail business segments were the hardest hit and the shock came quickly and cannot possibly be overstated. However, our company pivoted to work remotely in one day and we began serving our customers completely virtually. We beat our outlook and our Q1 revenue was a record. Our operating income was well above our forecast too. Our performance was backed up by solid cash collections and long-term renewals. Our digital signals increased in importance and some sectors grew daily use and feedback volumes significantly.
As you know, we previously shared with you that last year we generated approximately 6% of bookings from Medallia's existing customer base. It's easier to sell to existing customers who've seen our seen the ROI and the value at the Medallia provides. So we pivoted some of our go-to-market efforts to focus on up-sell and cross-sells through our existing customer base as you'd expect. Other sectors which were frankly on life-support in March and April saw customer feedback decline with business activity as you'd expect. I believe working alongside those sectors most deeply affected will bode well for the long term, however, whilst we address the heightened appetite for feedback and connection and work from home e-commerce, telco and media and other organizations engaged in virtual business.
Our own usage metrics reveal some important trends that I'd like to highlight. For example, from early March to the end of May, we had seen an increase in overall feedback in the retail, insurance and healthcare verticals, with retail digital volume increasing over 140%. In addition, 50% of our conversations customers have seen an increase in messages during this timeframe. We also completed 40% more deployments in Q1 over the year ago quarter proving our team's ability to successfully deliver for our customers remotely. Our remote working capability coupled with the increased automation and our vertical best practice packs enables customers to get live quickly with sophisticated operational feedback systems.
Turning to review our direct Covid-19 initiatives. We established the pandemic topic set in our theme explorer technology for every major customer to produce a heightened detection capability to surface Covid related issues, concerns and ideas feedback data. We established the idea and crowd sourcing platform in the UK for testing methods 2020 in just 24 hours and implementation that would normally require six weeks of set-up work. Lord Bethel, the Undersecretary of state for National Health Service said and I quote; this particular project has been one of the most successful routes to making innovation in Covid testing succeed. We provided Medallia experienced cloud to the World Health Organization and the International Chamber of Commerce to call 45 million businesses on Covid-19 issues and reopening and startup plans.
To date, WHO has received more geographically dispersed feedback than ever before in its history. We also joined a partnership with a public sector Commission in Western Australia to create I Think for employees to collaborate on projects that benefit communities and civic life in the region. The I Think community has now become a key tool in Western Australia's fight against the pandemic. More than 4,000 people are actively engaged in collecting Covid-19 problem solving. We've seen traction the public sector, sector healthcare and life sciences. These initiatives are new from Medallia and come at just the right time. We also enhanced fleet to address the new normal. Our customers are using Zingle to provide contact with services and our digital technology to enhance and gather feedback through their websites and mobile applications.
A new market insight suite combining LivingLens and Crowdicity replaces the old school customer focus group. In this socially distant environment, this virtual capability provides great return on investment. This is one of the many activities that I believe will endure both today and tomorrow. Now with these technologies companies can make their entire customer base their focus group and see and hear not just read their feedback. With the acquisition of Voci, we introduced Medallia Speech incorporating Voci's best-in-class technology into our experience cloud platform, creating an industry-leading speech solution combining call transcription, speech analytics and artificial intelligence. It opens up a whole new market in the contact center that is important for our enterprise customers.
We're seeing early traction and pipeline development and in Q1, we launched Quick Start Solutions which are enterprise-grade, prepackaged offerings which can be deployed in days without IT support. We currently offer several versions to understand customer employee experiences, as well as specific interactions tailored to specific use cases across multiple industries. These offerings are clearly differentiated as they include predefined signal capture and reporting, as well as text analytics and video feedback. They also offer an easy upgrade path to our enterprise offerings. As you know, Medallia primarily serves the large and medium enterprise market and although even the largest companies are not immune to the current economic environment, we believe they are well positioned to weather this downturn.
At the same time, we do see strength and opportunity in the mid market. Turing to our recent new logos in the quarter. Selected recent wins include Arnott’s Biscuits, Eni Gas in Italy, Hitachi Vantara, Hyland Software, Maersk in partnership with Ipsos, MSA Safety, Pandora Jewellery, Panera Bread, Pinsent Masons, QAD and Shipt amongst others. One of our new customers I'd like to highlight here is Shipt, a membership-based shopping and delivery service. Shipt business has experienced a rapid acceleration and this moment Shipt is embedding Medallia and their mobile application as they recognize that it's mission-critical to effectively manage and invest in the experiences they deliver to member and shoppers.
We're thrilled to be a key partner in this mission and look forward to delivering great ROI. Expansions in the quarter included BAC Credomatic in Latin America and Chart Communications in the US.
Turning to a review of our experience conference in our ongoing digital market. [Tech Difficulty] experience for over 7,700 participants, prospects and customers continue to view the virtual content generated by the event. I was pleased with the production quality and the impact of this event. The generated posted pipeline and awareness of our new initiatives and new products. At the conference, a number of marking customers shared their return on investment stories including Bank of America, IBM, State Farm and the Veterans Association.
Moving to a quick review of our channal and alliances. Our alliances business focuses on partnerships with systems integrators like Accenture and Deloitte. Strategic cloud businesses like Salesforce, ServiceNow, Adobe and Workday and vertical players now like Amadeus, Veeva and our important market research partnership that I mentioned with Ipsos. In the quarter, we are pleased to extend our relationship with our newest partner Microsoft. Medallia went live on the Microsoft Azure application gallery. We also announced recently a partnership Veeva. In May, Medallia joined the Veeva technology partner program for a tight integration between our experience management platform and Veeva CRM. This partnership between the two leading platforms and their respected categories has the potential to drive significant value for the life sciences industry.
In May, we joined the Guidewire partner Connect Solutions Alliance program which provides property and casualty insurers running Guidewire access to a curated group of third party solutions. We recently integrated LivingLens with Zoom. This integration provides a valuable video asset management platform allowing companies to video record research sessions, enabling the researcher to generate show reels for sharing. During our experience conference, Atlassian demonstrated how they are using this powerful combination to provide a single secure home for recorded research sessions, allowing them to organize data and perform fast search on valuable video assets.
I want to spend a little bit of time talking about communicating return on investment in the virtual world. Solutions to demonstrate clear and sustainable ROI are our maniacal focus at Medallia. Navigating the virtual world, we pivoted to selling and implementing remotely as I mentioned. My own customer interactions have increased saving time and money as I travel the world virtually and we no longer have to wait for a country tour to penetrate overseas markets. I'm very pleased with our team's ability to sell virtually. Salespeople who are waiting for a return to pre Covid conditions and who depend on physical meetings will not do well in the New World Order. And I'm happy to report that our sellers have embraced remote working and virtual selling and we've already seen entire campaigns developed and closed virtually. Customers who actively listen to as many sources of feedback as they can as you use intelligent technology to analyze feedback at scale establish strong relationships. From relationships underpin healthy economic activity leading to material return on investment.
Let's now turn to look at our outlook. It's actually exciting to see some of the most challenged businesses showing early signs of recovery, including improved occupancy, increased travel and more digital transactions. In Q2, whilst will see some continued pandemic impact, we do benefit from the predictable recurring SaaS business with a broad solutions portfolio and diverse vertical and geographic markets. We have a number of situation relevant propositions, single messaging, LivingLens video and Crowdicity for ideas. Our new Medallia Speech Technology is proving mission-critical in contact center situations and other speech-to-text applications. Whilst April was negatively impacted, we have had a stronger start in Q2. We've already closed several deals that pushed out of April into May, including a financial services business that renewed a five-year $40 million deal including a small up-sell component and a global retailer that renewed a seven-figure contract alongside again a small up-sell component. Both of these deals included employee experience, emphasizing the return on investment of staying connected to your teams at this time.
We still expect some challenge customers and also challenges around new business acquisition as everyone becomes more accustomed to building and sustaining virtual relationships. However, I am personally excited at the velocity and volume initiatives that are possible in virtual business engagement. On the bottom line, we're benefiting from much reduced travel expenses, we see more value in carefully crafted digital marketing, Medallia masterclass, and Medallia expert on demand and so on customer webinars and we'll continue to invest in these initiatives. At the same time, we're critically reviewing our present and future real estate needs as the opportunities of virtual work become fully realized. We think the full-year picture is still hard to predict and whilst we're hopeful of a solid second half of the year, we think it prudent to guide quarter by quarter for now.
Last year, we added 40% productive sales capacity over the prior year. We will continue to selectively hire sales talent, with product and vertical market skills through the year. I do believe we can maintain our profitable growth profile through this financial year and beyond. Our teams are fully staffed and we have plenty of products to sell. For now and for the remainder of FY21, our focus is on execution and the support of our customers and our critical employees. I will now hand over to Roxanne for more color on the financials.
Thank You, Leslie, and good afternoon, everyone. We reported strong financial results in Q1 including record total revenue and record subs revenue. As a quick reminder, unless otherwise noted all numbers except revenue mentioned during my remarks today are non-GAAP. You can find reconciliation from GAAP to non-GAAP results in today's press release. The total revenue for Q1 was a $112.7 million, an increase of $19.1 million or 20% over Q1 of fiscal 2020. In Q1, subs revenue was $89 million, an increase of $17.3 million or 24% year-over-year. Recurring revenue consisting of subs and managed services continues to be at 9% of total revenue.
Professional services revenue was $23.7 million per quarter which increased 8% year-over-year. Our professional services teams have worked -- always worked in a remote environment, so the work from home restrictions did not impact our services organization's ability to implement our platform. As Leslie noted, we completed 40% more deployments in Q1 over Q1 of the prior year. Recurring managed services revenue accounts for more than 50% of our total professional services revenue, which has been consistent.
Turning to some key metrics. Our new customer growth is strong. We ended the quarter with 782 enterprise customers, an increase of 38% year-over-year. Medallia provides a high ROI to our customers as evidenced by our strong renewal rate. For the 12-months ended April 30th, 2020, our dollar based net retention rate was a 117%, a slight moderation from 119% in Q1 of the prior year. This metric has varied slightly quarter-to-quarter; however, it consistently remains in the mid to high teen. We believe our strong retention rate underscores the ROI our platform provides and our ability to retain and steadily expand business with our existing customer base.
I'll now turn to our non-GAAP gross margins and operating expenses. Subs revenue gross margin was 83% compared to 82% in the year ago quarter. We believe our SaaS margins are among the best in class for subs companies. In Q1 professional services gross margin was 18% compared to 15% in Q1 of last year due to higher than expected utilization rate. We continue to focus on driving more professional services to our ecosystem along with subcontracting some additional services. And we anticipate professional services gross margin will range between 10% to 15% for the remainder of the year. Sales and marketing expenses in Q1 were $41.5 million, or 37% of revenue. On our last earnings call, we anticipated that we would incur approximately $3 million of termination fees related to our physical experience annual conference.
I am pleased to note that we are working closely with our vendors; we did not incur termination fees. R&D expenses were $20.1 million for the quarter or 18% of revenue. R&D remains an important investment area as we expand our platform with new features and capabilities each quarter.
G&A expenses were $12.9 million or 11% of revenue in the quarter. We expect additional leverage on the G&A line over the longer term.
Non-GAAP operating income in the first quarter was $3.5 million compared to $2 million in Q1 of fiscal 2020. Similarly, non-GAAP operating margin in the quarter was 3.1% compared to 2.13% in the year ago quarter. Non-GAAP net income was $3.1 million compared to $1.5 million in Q1 of last year. We incurred a non-GAAP income tax expense of $636,000 in Q1 which is in line with the same period last year.
Our GAAP income tax benefit of $60,000 includes a benefit due to stock option exercises in Q1.
Now turning to the balance sheet, we ended Q1 with $407.5 million in cash and equivalent, an increase of $63.8 million from the prior quarter, driven by cash generated from operations and we drew $43 million from our line of credit in anticipation of funding the acquisition of Voci that we subsequently closed in Q2. While we have a strong cash position, the rates from the revolvers were extremely attractive and this allows us additional flexibility.
SaaS deferred revenue was $192.9 million, an increase of 23% over SaaS deferred revenue in Q1 of the prior year.
Let's move on to discuss SaaS calculated billings which we define a SaaS revenue plus change in sequential SaaS deferred revenue and contract assets. As you know, there are a wide variety of factors that influence this metric. Therefore, quarter-to-quarter fluctuations in calculated billing should not be taken as an indication of changes in future revenues. For example, billing will fluctuate quarter-to-quarter due to the timing of renewals and annual contracted billings. As we have communicated to you, we believe that the 12-month trailing factorings growth rate is a more meaningful measure of our performance. For Q1 of fiscal 2021, our trailing 12-month SaaS billing growth rate was 23% compared to 30% in Q1 of the prior year. There is some variability in this metric as in Q1 of last year we benefited from the changes in our go-to-market strategy that Leslie instituted upon joining Medallia.
Now moving on to RPO, or remaining performance obligations. As I've shared with you before, our RPO metrics may be impacted by contract duration and extension, as well as timing of renewals for large multi-year contracts. So while RPO provides for strong visibility, it may fluctuate from quarter to quarter. At April 30th. Our total remaining performance obligation or total RPO was $631 million, an increase of 35% year-over-year. Our non current RPO grew 53% year-over-year. This is the result of the large number of multi-year contracts we've signed over the last 12-months. In addition, current RPO which is the amount we expect to recognize as revenue over the next 12-months total $323 million, an increase of 21% year-over-year. We expect to recognize approximately 51% of total RPO over the next 12- months.
Please note that the two large deals that Leslie mentioned which closed in May are not reflected in our Q1 RPO metrics.
Turning to cash flow. We generated a positive $23.1 million cash flow from operations for the quarter, representing an operating cash flow margin of 21%, an increase from the 19% we generated in Q1 of the prior year. As a reminder, we've historically experienced seasonality in cash flow from operations given that 40% of our billings occur in the fourth quarter. As a result, our operating cash flow has been positive in Q1 and Q4 followed by cash flow from operations being negative in both Q2 and Q3 as it has been for the past few years. We anticipate the seasonality to continue this year. Despite the current economic uncertainty, we believe we can continue to drive operating margin expansion in fiscal 2021 over the prior year.
We're pleased to have a strong balance sheet and liquidity as we navigate this environment. Relative to companies that rely on large amounts, new business from new customers, Medallia is in a better position given our overall news business has traditionally been driven more by our existing customers who expand their use of Medallia. And Leslie noticed, it's easier to sell to existing customers who have realized ROI and the value Medallia provides.
Now turning to our outlook. The current economic environment is clearly uncertain for the businesses across the globe. As a result, we are withdrawing our previous annual guidance. However, based on Q1 performance and Q2 quarter-to-date, coupled with our strong level of revenue visibility, we will be providing our outlook for the second quarter of fiscal 2021. With our extended technology portfolio, there are many ways that we can work creatively with our customers to engage their employees and customers. However, there are certain customers that have been more financially impacted than others. The majority of our contracts are multi-year, irrevocable includes contracted minimums and we expect their customers to honor their agreements. For a limited number of special case customer cases, we have offered and modified subscription or flexible payment terms in exchange for extensions of their existing contracts. On average, the extension period has been one additional year. As a result, we anticipate that Q2 SaaS revenue will be impacted negatively by approximately $1 million due to those modified subscription terms.
Medallia is strategic to our customers who've view us as essential to reducing operating cost, drive revenue and improve customer retention. We believe strongly in partnering with our customers and believe we will emerge stronger together. For Q2, we are projecting total revenue to be between $109 million and $111 million. We expect SaaS revenue to be between $89.5 million and $90.5 million representing growth of 20% to 21% year-over-year.
For Q2, we expect non-GAAP operating income to be in the range of $1.8 million to $2.3 million. We expect other income and expense to be between negative $500,000 to negative $1 million, primarily due to the reduced interest rate environment and we expect income taxes to be in the range of $500,000 to $1 million. We expect basic weighted shares outstanding to be approximately 140.5 million and fully diluted weighted shares outstanding to be approximately 173.5 million. Finally, we anticipate our capital expenditures to be in Q2 approximately $5 million primarily related to enhancing our data center capabilities to meet our customer demand.
In conclusion, we will balance growth and profitability by continuing and financially disciplined approach. We are committed to be a profitable business, while maintaining our innovative edge and optionality to invest in R&D and go-to-market efforts. For the full fiscal year 2021, we're committed to marginal non-GAAP profitability on an operating income basis. We continue to focus on breakeven cash flow from operations for fiscal 2021. However, as I discussed earlier, our priority is to partnering with our customers in severely impacted industry to allow for flexible payment terms where necessary which will impact cash flow from operations.
In closing, we are confident in the strength of our business and believe we are well positioned to execute during these uncertain times and emerge in a better, stronger company. Our customer and employee experience solutions are even more relevant in this new environment. Leslie and I will now take your questions. Operator?
Your first question comes from Brian Schwartz with Oppenheimer. Your line is open.
Yes. Hi, thanks for taking my question this afternoon. Leslie, can you provide a little more color in regards to what that customer bought on that $40 million deal? We usually don't hear about on that size of a deal. And I was also curious if that deal closed virtually in terms of the deal process. And then, Roxanne, can you share at all in terms of the duration of the deal or just thinking about how that will be recognized on the financials over its life? And then I have a follow up.
Thanks Brian. So it's a five-year $40 million total contract value over five years. It's employee experience and there are some other technology elements to it. There was an up-sell piece to it. There was renewal after a customer's really sort of try for a year, so it was a really successful implementation and they came back and it was closed entirely virtually.
And, Brian, I'd like to share that as we shared in our remarks the up-sell portion of it, the expansion was a small portion in the total renewal.
Thank you. And then the one follow-up question that I had and then I'm happy to pass it along is, Leslie, you talk to little bit in terms of kind of comparing and contrasting what you've seen from the business and the demand in May versus April versus March. Can you maybe elaborate on that and maybe any thoughts on over the next several months? Thanks.
Sure. So I mean if we remember, we had a blowout Q4. We did very well and we were standing up for a nice steady beat and raise and an acceleration story. And then Covid really took on momentum from the end of March. So in a different place now. April was a tough month, no doubt about it especially for hospitality and transport, but also for bricks-and-mortar retail as I mentioned. May has been a much better month thankfully. It's still unpredictable. We don't know how things will play out. We have other issues, macro issues coming on the scene and our solution is a sophisticated customer feedback platform that requires careful thought and careful planning. But implementations are virtual. We've been able to implement everything virtual, implemented and went live with more situations in Q1 this year than we did last year. So I'm super confident we're able to operate the company virtually as we are but most importantly to sell not just to existing relationships but to make new relationships virtually. And also to capitalize on the efficiency that this operating model brings getting to see more customers, getting to deal with more opportunities and more situations and doing good land and expand deals.
And so I'm actually quite optimistic, quite excited about the remainder of this quarter. And actually the back half of the year but it's an unpredictable environment out there. So let's not get too ahead of ourselves.
Roxanne, can I ask you one last question too because it's certainly going to be topical in regards to the acquisition contributions in the quarter. Leslie talked about the uptake in the adoption of the Crowdicity and Zingle and LivingLens, is there anything that you can share with us in terms of either the contribution to revenue or deferred revenue or billings? That's all I have. Thanks.
So as we shared previously with you, the contribution from the acquired revenue for these acquisitions is very immaterial. We're focused on buying best technology and bringing it to our customers. So we are very pleased to have these technologies. We feel that LivingLens and Crowdicity as we shared in our remarks have brought additional signal capture and additional functionality to our customers that we didn't have and then in the beginning of Q2, we added Voci and Voci is also very important for our enterprise customers and it gives us a gateway into the contact centers.
Your next question comes from Terry Tillman of Suntrust. Your line is open.
Hey, guys. This is actually Nick on for Terry. Thanks for taking our questions. So I guess just to start, I know at the user conference, you mentioned some analytics capabilities that you announced. How those capabilities resonating with customers? Is this potentially led to increased platform usage or adoption? Just -- I guess just how should we think about those?
Yes. Great question. While the speech to text capability was the highlight that's brand-new. So we have a very exciting pipeline, but it's brand new. So we need to see how execution plays out, but great opportunities to extend our footprint. Video is really very topical at the moment, obviously and LivingLens is a very exciting situation for us from a small business, standard ideas been the Crowdicity. So actually very pleased with their contribution to pipeline and their contribution to business on the quarter and cross-sell and up-sell opportunity is very significant. And the main thrust of what we're doing is moving Chrome or setting out our store as delivering understanding. Surveys are old-school text ways of getting to validation. We're about capturing video, voice messaging, all of those signals that deliver understanding. Survey too but together and combined they deliver the understanding of where a customer is going, what they're going to buy next, what they're not going to buy, why they stay and why they leave. That's the proposition that's really resonating with customers who want to stay connected now to their customers whatever shape they're in and also their employees. So that's what's really going on in every discussion right across the verticals.
Got it. That's helpful. Just as a follow up, could guy touch a little bit more on just partner engagement over the past few months? I guess how is engagement overall been tracking recently. And then I guess should we think about activity with some of your newer partnerships with Salesforce and others? Thanks.
Yes. Sure. I'm really pleased with the ISP segment in particular sort of acquired player Salesforce, Adobe ServiceNow and so on. Microsoft is new, so we'll see how that plays out, but as I mentioned on our prior report, I'm really excited about these vertical partners like Veeva and Guidewire. That's a new dimension for us. We have a lot of target customers and prospects in common and working together with those players. I think is good and I'm very happy with what our channel, the way our channel business which in its current form didn't exist really a year ago. I'm really pleased with the progress that we made and I think we'll see a good contribution to pipe from them.
Your next question is from cash Kash Rangan with Bank of America. Your line is open.
Hi. This is actually Ying Cheong on for Kash. You guys have shown strong net new customer adds over the past 4 to 5 quarters. I'm just wondering how much of this was driven by the sales reps ramping up versus marketing and inbound efforts. And how sustainable is this?
I think it's very sustainable especially now that we see some of the more challenged sectors showing some improvement. I'll just give you one start. I was talking to a CEO of a hotel chain a couple of weeks ago who was celebrating 43% occupancy eight weeks prior he had 5% occupancy, really interesting since that's an important although not a massive sector for us is high profile for us. And it's very important so I think it's really all of those things we've done. I think our marketing team did a great job with a very real broadcast quality virtual conference with great customer engagement and super feedback that we've had on it. I think that the new salespeople are ramping. They are not all fully ramp by any means. We added a lot at the end of Q1 and so those people are beginning to come on stream. And they're excited about what they're selling in the proposition and about the way that they've embraced actually the proposition value of the pandemic situation. It really gone for it and pivoted beautifully. So I think it's all those things. It's inbound. It's marketing story and the way that we present the story and it's also the execution of our field.
Got it. And then if I could have a follow-up. You talked a little bit about existing customers expanding spend. What are customers buying in this moment? Are there particularly some modules that are more mission-critical to them? Are they buying more suites? And then also, what percentage of your existing customers has asked for help in terms of like flexible payment plans?
Yes. So I'll start and I'll let Roxanne talk about it, she can dimension the flexible payment plans. And I think the headline on that really is we don't have a stall out there that says and get your flexible payment plan. But we are prepared to work with really very challenged sectors who have had in some cases no customers and no revenue, right. But actually we have contracts and we expect them to be honored. We've honored every single one of our contracts. So but I'll let Roxanne fill in the details.
So in regards to concessions that we made with our customers, we're looking at it on a case-by-case basis and we're taking multiple factors into account. And so this is really on a limited basis. Even you look at our brick-and-mortar retail customers. Some of our bricks-and-mortar retail customers are thriving while some of the other ones have fully had to pivot to digital. So we work with it -- we're working with everyone on a case by case basis. We shared with you what we thought the expectation would be in Q2 from the revenue impact and then in addition to that, we're still focused on the fact that we will be operating cash flow positive for the year. However, we do believe that some of the specific situations with some of these customers will have an impact on our cash flow. But we're working together with the customers because ultimately we feel will be stronger I'm coming out of this,
Got it. Perfect. And actually, could you comment on the existing customers' expense then in terms of what the exactly they're buying?
Yes. Sure. Sorry, forgot that. It's really, we have a broad portfolio but really whole interest in LivingLens, so video feedback as you can imagine. If you can see and hear and analyze that it's much more exciting than a textual response to a survey, which is only one dimensional. Clearly, we are very excited about the speech-to-text technology, but it's too early to make a report there. But we will be making I believe a very interesting report in coming quarters and our ideas platform, but it's the fact that we take the data from ideas from messaging from video and ultimately now speech-to-text to combine that with other feedback sources like survey, like social listening to create this understanding that's so powerful. That's where the ROI is knowing where your customer is going to go next. So each time we sell one of those additional modules really on a journey to get them to that complete understanding suite. That's where we really want to get them to and then they get that. They totally get it. It's crystal clear the ROI is obvious, but I would say those are the hot things you've got to expect people when they see the ability to have a show real of customers or employees and do a video calls. It's infinitely more valuable and more exciting than a survey. So that's red hall. And we've enabled customers to take it on trial it and really try things out in a way that you hadn't before. And now it's turned out to be a very exciting move in the business. And I think we're actually in the very early stages of that approach to selling. I think it's going to be very successful.
Your next question is from Brad Zelnick with Credit Suisse. Your line is now open.
Excellent. Thank you so much. Maybe I'll start, if I may with Leslie. Leslie, we noted a lot of emphasis out of Medallia on employee experience during the crisis and today we talked about this $40 million mega deal. Congratulations on that. Can you maybe just talk about the growth and the opportunity here? And are you seeing more customers who previously weren't looking at this type of solution adopting it? And is it as simple as with working from home? My employees are now distributed and it's even more critical to be in touch.
I think it almost is Brad as simple as that. And I think that the annual survey has gone the way of the dodo. It's a waste of money, right and people get annoyed when I say that but frankly it's a waste of time and money. At the current time, you want to know how your people are faring, how they're dealing with all kinds of crises that we're facing, how they're equipped to do their job and how they're equipped to serve your customers. That's the thrust of the understanding platform for employees and that's why we saw that transaction and the other one I mentioned in the retail space, which was another proving transaction where we did replace conventional survey technology. So that's important and I think we are at the very early stages of a massively untapped opportunity in connecting employees and connecting customers to employees and through employees to the customer as well. That's very important. That junction between employee customers where it's at. Frankly, we couldn't have enough people selling and servicing and building product around and ideas around employee experience. I think the Crowdicity platform has proved to be a game changer too because we present the ability to create ideas to create challenges cross-reference that with feedback in a way that other people can't do. Nobody in our space can do video; can do voice-to-text; can do ideas and can do messaging for connectivity. I think it's huge right now in the current environment, but I think it's permanent. I think many aspects of this a permanent. We can see that value and companies that are doing annual surveys. We've been posting our own people with videos and with quick surveys on an ad-hoc basis throughout the crisis. Companies that depend on an annual survey are toast. I mean that it's pointless. And it's not cheap and it costs a lot of money and there are companies -- other companies that realize that and they're trying to get to this understanding point and looking at a sequence of your own people on video expressing their needs, expressing the way they serve customers is way more powerful than a simple survey.
Thank you so much for all the color. And maybe just a follow-up. You increased your sales capacity by 40% last year. How are you thinking about headcount growth this year given the pandemic? And how are you able to track the productivity of last year's hires and the ramping of that productivity just given the unusual circumstances in the world?
That's a great question. I think at the same time as we run the hiring, we did ramp our investment and enablement of technology. We're using great enablement technology. We're using good work from home dashboards and technology to understand contribution and productivity. I won't enumerate. We know exactly who did a deal in Q1 and who was challenged. We know the breakdown between renewals and new business. We know the breakdown between up-sell and cross-sell. So we're tracking those metrics almost constantly on a daily basis actually as it should be. And so we like other companies we see all of that data now digitally. It's crystal clear. Now I think that in terms of the rest of the year, we keep people don't want me to say picking off but I think we're able to pick off talent. We've seen some of our competitors extremely compressed, cash-strapped or consumed by a big organization and unable to be agile. We've seen them unable to enable their entrepreneurs in the field. Every one of our salesperson is a Chief Experience Officer. They're CEOs. They're out there in the field with their own businesses and their own territories. Our job is to empower and enable them very, very quickly with insight on their customers from our own platform, right? And so I don't see other people doing that.
So I think we are going to pick off talent through the rest of the year. We've got plenty of production capacity right now. We're going to keep -- we want it -- we're going to grow. We're not going to save and cut our way to growth. But we are going to manage the bottom line financially from IPO we said we wanted a profitable growth story and that's now emerging slightly ahead of where we originally predicted which is a good thing.
Your next question comes from Phil Winslow with Wells Fargo. Your line is open.
Hey, guys. Thanks for taking my question and glad to hear that all of you are doing well. I hope the same is true for your family and your team. Leslie question for you about what colors you'd change in tone from customers because obviously if there's a lot to talk about right now about reopening the economy. And I would have to thank experienced and management whether it be employee or customer is pretty key in the reopening process. Have you heard that sort of change in tone from your customers and some of your conversations with those and then just one follow-up?
Well, I think that's a great question. I was discussing that with another CEO actually this morning with one of our prospective customers. He knows who he is and he is going to become a customer I should say that. But this is really important. I think that a lot of checklists need to be built to reopen safely and successfully and when someone enters the plane, enters the restaurant or enters the store and that checklist hasn't been followed through, they need to immediately signal that to the company that they're dealing with. And so our platform can help them with that through Zingle messaging, through video feedback as we just talked about all the other feedback mechanisms that we have. That's what's going to be happening, right. And so I think that's absolutely vital to create that connection that communications channel which is sophisticated and can be analyzed at massive scale. You cannot possibly read individual survey responses from customers; machine has to read the signal field. And that's what we specialize in.
So I think it's very important and I think a thought -- it's a thoughtful way to look at the reopening, but we are seeing signals. I will remind everyone. I should remind you we don't charge by the drink, right. And people would say maybe you should. But when you look at the growth in our digital signals in the sectors that are reopening first and also in the work from home sectors as we mentioned in the prepared remarks. They've grown very significantly. That's a great portent of what can happen here. And so I'm excited about the near term. It's a lot of challenges around right, but I am excited about what's going on.
Great and then after just a follow up, Roxanne. Just looking at total customer count, obviously, it continues to grow in the high 30s pretty acceleration of the past three quarters. I wondered if you could break that down for us. How much of this is coming from that bid market push versus let's say you're going to more land and expand but inside of it larger customers? Just help us unpack that metric. Thanks.
Phil, that's a great question. So first of all, obviously, these are new logos, so they would not be a, land and expand and then we just entered into the mid market in Q2 of last year and brought the team on board. And so these are enterprise customers. These are larger customers who are either buy the entire Medallia platform or they decided to buy a portion of the platform and then continue to expand onto the platform.
Your next question comes from Bhavan Suri with William Blair. Your line is open.
Hey. guys. Thanks for taking my questions. So I want to talk a little bit about sales productivity. You talk about it, Leslie, in detail before and I'm trying to understand given the environment today as you think about that a, what does sales hiring look like and then how did productivity fall out in the last few months given Covid? Just as per expectations, below expectation. The work from home is that playing out or productivity is slower?
So April definitely below expectations and May nice start. I'm pretty pleased actually and as I mentioned I think I earlier in some of my prepared remarks entire campaigns with the key test is, I hear a lot of people saying getting relationships and maintaining relationships you already had virtually is one thing; getting new relationships virtually is another. It's very challenging and we all know there are all kinds of websites out there were people form personal relationships and conduct them entirely virtually, all right. So but in the selling mode, we're seeing people start and finish campaigns virtually. If you think about our inside sales group, that's all they did right. And now we're seeing high-touch, traditional high touch, big ticket sales people conducting campaigns very smartly over Zoom, WebEx whatever it may be right. And the associated collaboration tools, right. Think about it, you don't have to make an appointment. After time, I don't care what the high end sales people say after time they're using their valuable time to make appointments, physical appointments with customers and with executives. They don't have to do that anymore. You don't have to align diaries in quite the same way all right. You can get on to things quicker. You don't have to wait to fly into a country. Our teams are here; our product teams and sales teams and myself can be doing calls at midnight to Germany. We did one to Aon; in fact, the other week to Germany at midnight in what is essentially a new business situation.
So I'm actually very confident now. I wasn't in April but I'm very confident now about our team's ability to conduct business virtually. And also we've got good price points in place. We put trials in place. We put simple three click try and buys in place for some of the products right. And so we've completely pivoted to that way of doing business. I think it's for the better permanently frankly. I think we're going to get more done. So I'm pretty excited about the capacity for production. But even in Q1, if we look at the number of people who did a transaction and/or a renewal actually it was better than I thought it was going to be, but April certainly tough, May much better.
Got you. And one more -- that was very tactical but one more strategically. When you think about content, right and survey is sub 20% of your ingestion business, but there is this idea of paid advertising content and there's the idea of non paid content, content generated by a firm or a business that's not paid. It's not necessary marketing but content and when you think about that and the growth and that easily the paid stuff, helps me understand and help us understand how that drives growth for you? Because it should right like ultimately that should be a growth driver for you ingesting all this stuff especially the social product and the social integration like, hey, lot of stuff being posted on Facebook has not paid, but still a sense businesses from a brand and a CH perspective. Are you seeing the benefit of that or am I early? Love strategically thinks about how you think about that?
No. I think that's a great question. And I think our social listening capability combined with feedbacks a very powerful proposition that many of our customers are using today. Our ability to run theme, explore over that social listening data is very important, but again very valuable when you combine it with feedback, but the way we charge for the product is on an annual subscription basis. So we don't charge by the drip. So whether it's paid or unpaid content maybe way we think about it is a lot of that social content is anonymous and anonymized combine that with your direct feedback from customers and our employees combine that with survey; combine that with video, combine it with voice; combine it with messaging, combine it with ideas and you have the understanding picture that every customer is seeking. It's getting to that point of understanding and so we've seen and I gave some stats in the prepared remarks.
We've seen in some cases a very significant uptick in social listening and grounding data from social listening in digital and in messaging. But we charge on an annual contract basis. We don't get the benefit of a metered deal but then we don't get the downside of a metered deal either. And so I like that model. I think it works. I think it's a very strong value proposition for our customers.
Your next question comes from Chad Bennett with Craig Hallum. Your line is open.
Great. Thanks for taking my questions. So maybe for Roxanne. So Roxanne based on the Q2 guide, it appears at least based on back end of the services number which is straightforward that services likely decline on a year-over-year basis. I guess should we expect, I know, you're not guiding for the full year, but modest to no services growth is that to be expected I guess for the next several quarters?
So, Chad, the first thing I want to highlight for you for services is that if you look at Q2 of last year versus the current year it was also flat or down because most of our bookings occur in Q4. So we have a strong services quarter typically in Q1. As we have been sharing, we are not focused on growing this cute, robust professional services revenue and professional services organization. One of the things that we are proactively working on is continuing to build out our partner programs. So, yes, we're not giving guidance on a full year basis from a revenue perspective because due to the uncertainty I just don't think that that would be a prudent decision at this point in time, however, with that said I think you can expect that we will be productive in our ability to moderate some of our services activities and move these to some of the partners this year.
Okay and then based on your overall revenue guide, overall revenues are in rough -- from a growth standpoint are in the mid-teens call it 15% -16%. Again considering the situation we're in at least for the remainder of the year, if you just look at typical seasonality of your subscription business, it sounds -- well, at least it appears to me mid-teens in overall growth seems to be appropriate way of thinking about things for the rest of the year.
So we're not giving you guidance for the full year. We're focused on guidance in Q2 due to the uncertainties that are out there. I do want to highlight in Q2 through the better guide our growth rate from a SaaS perspective is in 20% to 21%. So I wish I could help you some more Chad in regards to the overall year, but with all the uncertainties that are out there, I just don't think that would be a prudent decision at this point in time.
Okay. Maybe last one for me just on for Leslie. So you talked about in the prepared remarks pivoting towards an expansion in the base in this environment, which is hopefully a quicker and somewhat easier sell. Net retention I guess considering that net retention of 117% with the refocus on the base, should do you believe that number can be stable here or is there some risk in the net retention number going forward? Thanks.
Look, I think it can be stable and I think when we see a return of some of the more challenged sectors, we'll bring that back and actually in our case there were a very couple of very specific reasons why that came down. And so maybe Roxanne could give you the color on that. But I believe that we should maintain our aspirations wish for higher net retention and we should maintain our accelerating growth aspirations, but this time right now it's a time for our sales team to put bread on the water in the market, take territory to land and expand and to not let anything getting, get in the way of them bringing on new logos. And so that's how I am viewing the current time. It's all about investment right. The market is there, the demand is there; the customer interactions are certainly there.
So, Chad, our net retention rate does fluctuate in the mid to high teens and I would anticipate, I don't know what's going to happen here but I would anticipate that it would continue to fluctuate in that range. Now one thing I will highlighted through that we did have one customer who chose not to renew because they were having financial issues and ultimately that customer has filed for bankruptcy and if we were to adjust our net retention rate for that customer, our net retention rate would be a 118%.
Your next question comes from the line of Scott Berg with Needham. Your line is open.
Hey, Leslie and Roxanne. Thanks for taking my questions. I have two of them. I guess, Leslie, wanted to dig into your second quarter or I guess you made comments just a little bit with regards to a couple moving parts. You said you've seen some strength return, would you qualify that statement more on some of the up-sell initiatives that you're doing or some of -- some more new logo traction and then as a part of that same question is the incremental traction more of your traditional CX experience management solutions or is it more revolving around this newer QuickStart programming that you're trying to leverage?
It's really great, Scott it's really all of the above. There's new business in the mix. There's renewal up-sell and cross-sell I mentioned the two big ones that slips into April. And I think they came through because of renewed confidence in those businesses. And so it's all of those things and then the video signal field is very exciting. It's too early to make any sensible predictions there, but very exciting pipeline build great engagement and great initial customer deployments. We mentioned one of them on the call on the call, the Atlassian deployment. So very excited about that also idea platform but I'm most excited about the combination. Why wouldn't you want to know more about your customers and your employees and tensions and their needs? Why you wouldn't know want to know more and I think you get that understanding through the combination of very rich video voice to text messaging ideas and feedback.
And I think that's where everybody is headed.
Got it, helpful. And then for my follow-up is on your comments about somewhat moving into the contents, contact center arena with some of your recent acquisitions. I guess from a higher level perspective that's a competitive end market, a lot of established vendors in there and some of them are doing or at least attempting to promote some of the similar type of functionality. What it is Medallia's perspective bringing like speech-to- text in that environment the right solution versus maybe what some of the contact centers vendors are trying to do? Thank you.
Yes. That's a great question. I think there's a lot of long term and maybe long in the two established players they're doing very vanilla things. And they're not effectively combining those data streams and other data streams like Chat Bots and so on with data in analytics platform where we can look at feedback carefully in combination. And that's what our proposition is. It's actually to run our theme exploration technology across the text that has come derived from speech right. So that's really our proposition and I also think we have a better economic and total cost of ownership story there emerging with Medallia Speech with Voci and so I think we're going to let that play out.
We don't have the cost base around that technology that those other companies have. And we have a new perspective. What are the -- financial institutions have to record all of those conversations. What's the point of having that if you can't analyze it and understand what customers are really looking for and what they need, right? And so that's the power of the combination with Medallia. So I think it's very exciting.
Your next question comes from Tom Roderick with Stifel. Your line is open.
Hi, Leslie. Hi, Roxanne. Thanks for taking my questions. So this is going to build Leslie just a little bit on a couple earlier questions but we keep hearing the thematic of digital transformation everyone's talking about it, perhaps the pandemic is actually accelerating it even in the enterprise. Would love to hear about your conversations at the C-level because I think we all get it that the first the spring here was spent on a lot of projects for work from home mobility, networking and customer facing logically sort of put on the back burner. But as you have conversations in real time, we'd love to hear what CEOs, CIOs, CTOs are sharing with you about their plans as they think about 2021 and their own digital transformations and where CX sits in their spending priority.
Yes. I think that's the central discussion actually. It's really digital disruption now in force and people that had measured sensible, well-planned projects with have been forced to execute in part, in some or in part those initiatives quickly in a disruptive way, grabbing technologies to enable remote working and so on. In our own company, we were already -- the field was already remote. We were already using Zoom, Smart Sheet and other technologies to collaborate and I'm absolutely delighted with the way our company pivoted very quickly, but this is an opportunity for people to do business differently and faster and it's an opportunity to serve people quickly. If you think of the whole contactless arena everything that's a digitally disruptive essential net right. We have to be able to get on the plane with as few steps as possible but we have to check list that it's safe; we have to -- we can check in with single in a contactless way. We don't have to go near a reception. We'd have to pick up a phone in a hotel room. We can pick up our food at the curbside or even order and sit in the restaurant and reduce and reduce those points of unnecessary physical contact that put us at risk.
Actually that way in the future I believe that's going to be translated into speed. I don't need to do those things anymore. Those physical things that took time in the pandemic. They put you at risk in the future. They just soak up your time. So this is for me digital disruption is the key word right now and everybody's at it. Everybody's at it and they're looking for ways and to navigate back to customers to maintain and grow and expand exciting economic activity and you can see it -- you can just -- it's actually palpable now in our key markets. I gave the example of one of the hotel businesses we actually did a deal yesterday with a hotel business that is seeing really quite significant uptick in demand. Do you think we're not going to do that anymore? I think we're not going to go to a rock concert anymore, not going to go to a bar.
I mean there are so many things the pent-up demand has to be safe; it has to be check listed and all the rest of it and all that's going to be enabled by connecting with customers through this technology. And when it goes wrong you're going to -- it's going to be filmed and you're going to hear about it on video right. You're going to be using LivingLens to give your feedback and Technicolor and we're going to analyze that and understand massive scale cohorts of customers what is really happening in that service space. And that's what's exciting about this situation. We've clearly compressed by the future and that's how we're looking at it and that's what I'm hearing from all of my customers.
I think massive big projects, big challenged right. So don't wait. So we're not waiting for the big deal to return if that's what we were following in a campaign. We're certain as you heard we're doing big deals. But we're not waiting for that, right. Our mantra is take a deal there's something that the customer needs. They need video; they need ideas. They need basic survey, without experience cloud they need feedback. And so there's plenty that we can give them to create these connections and now we built up some very powerful use cases to illustrate that with nice ROI, nice sensible return on investment.
So I'm excited frankly and it's a really important time for the company and a very important time to invest in our people in the future. Big opportunities here.
That's really helpful. Thank you. Thanks for that Leslie. And Roxanne, I gather this is a little bit of the weeds, but you mentioned that one customer didn't renew and in the context of the second quarter guidance I think the number was maybe a $1 million reserve against I don't know if those two items are related, but as we think about the quarters past Q2 should would it just be sort of wise to model out a $1 million reserve in perpetuity assuming that that customer does not come back on. Can you just sort of provide some clarity with matching those two items up? Thanks.
So those two items were two independent factors. In regards to the concessions and we shared with you that we anticipate that the impact to revenue in Q2 will be about a $1 million associated with concessions because this is a fast model that is a safe assumption that you would anticipate that would continue through the end of the year on a quarterly basis.
Your next question comes from Walter Pritchard with Citi. Your line is open.
Hi. Thanks. Just one question here on the CRPO, Roxanne, I'm wondering how we should think about that especially as we look at next quarter and looking at those trends year-over-year it seem they're a bit weaker but understanding what you're saying about some of the trends in the market. Just want to make sure anything sort of one time or any expectation is set around that in Q2.
So, Walter, that's a great question because last year as we shared with you on the last call nearly 50% of our customers that renewed, renewed for multiple years and we don't think Q2 specifically last year you'll see that we had a significant uptick in RPO because we had several customers that had multi-year originals. I mean as we professionalized our organization we were very focused on multi-year renewals. So we're very pleased with the large renewal that we've had this year which is a multi-year renewal once again but I think you will see some flexibility or some fluctuation in the growth rate in the RPO specifically because of the impact that some of these large multi-premiums have.
Question comes from Richard Baldry with Roth Capital. Your line is open.
Thanks. I'll keep mine pretty easy. Sort of curious any change to your strategy around acquisitions or a pacing valuation sensitivity, willingness to use cash or debt given the external environment. I guess it's hard to do deep due diligence obviously on site but any updates around that kind of given your focus on sort of cross-selling new things to customers should be helpful. Thanks.
I think it's great question and we think about it a lot. We closed the Voci acquisition virtually, but of course we did get to know them in the first phases here. So there was a lot of interaction physically but actually you can do so much virtually. It's incredibly powerful. So I'm not worried about that aspect of doing deals. Here's where my mind is really at we have a great set of products and solutions to provide our customers with the rest of this year is all about execution. It's all about it. Never say never, right. And private valuations have to be sensible. We did the deal with Voci because we got a sensible response when the pandemic hit. There were sensible people to be totally candid with you.
Going forward, we need to see the people have a sensible view of the world before we pick them up and tuck them in. I don't see anything major or big but never say never right. You never say never in this case. We've got great cash balance. Now's the time to execute. I don't know how the way we'll think about that but I see a lot of people running into converts and other things and this is our fourth public quarter report, we are young as a public company, great cash balance. We're now looking at a decent bit of cash run through here and we're looking at non-GAAP income positive ahead of schedule. We also have latitude to invest right. We have good latitude to invest in sales and marketing because we're not spending money on premises and on T&E. We want to spend that money in our people and invest in great sales and great products and so on.
So I feel for the rest of this year let's focus on execution, right. If there's something absolutely brilliant that our customer points to and we think is great and there's a nice sensible tuck-in, we're going to have a go at it all the time. Keep that going but right now it's about execution through to the end of January really nailed this return to work; nailed the new normal; nail the digital disruption that we just talked about. It's a phenomenal opportunity. There are sales people here that are going to make their careers. And they're going to do pretty well. This is a great year. That's an inflection point for everybody, but it's a great year for the company.
I'm very excited about what we have. We have a great set of products, right. So there's nothing that's glaring or troubling to me and our build road map is as strong as it ever was.
And there no further questions at this time. I turn the call back to presenters for any closing remarks.
Well, thanks very much for joining us. Stay safe and look after yourselves and look forward to talking to you all soon.
That concludes today's conference call. You may now disconnect.
- Read more current MDLA analysis and news
- View all earnings call transcripts