And welcome to Samsara's Third Quarter Fiscal 2023 Earnings Call. I'm Mike Chang, Samsara's Vice President of Corporate Development and Investor Relations. Joining me today are Samsara Co-Founder and Chief Executive Officer, Sanjit Biswas; and our Chief Financial Officer, Dominic Phillips. In addition to our prepared remarks on this call, additional information can be found in our shareholder letter, press release, investor presentation and SEC filings on our Investor Relations website at investors.samsara.com. The matters we'll discuss today include forward-looking statements. Actual results may differ materially from those contained in the forward-looking statements and are subject to risks and uncertainties described more fully in our SEC filings. Any forward-looking statements that we make on this call are based on assumptions as of today, December 1, 2022 and we undertake no obligation to update these statements as a result of new information or future events, unless required by law. During today's call, some of our discussions will include our third quarter fiscal 2023 financial results. We would like to point out that the company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP except for revenues and revenue growth. Reconciliations of GAAP to non-GAAP financial measures are provided in the press release and the investor presentation. We'll make opening remarks, dive into highlights for Q2 and then open up the call for Q&A. With that, I'll hand over the call to Sanjit.

Thanks, Mike and thank you everyone for joining us today. We delivered another quarter of substantial growth at scale with ending ARR of $724 million, growing 47% year-over-year. We saw record quarter-over-quarter growth in our $100,000 plus customers by adding over 120 net new large customers. We now have over 1,100 large customers, including many Fortune 1,000 companies across a wide range of physical operations industries. We also continued to improve our operating leverage. In the last year, we've improved our non-GAAP operating margins from negative 26% to negative 10%, and our adjusted free cash flow margins from negative 38% to negative 9%. During the quarter, Samsara's Chief Product Officer Jeff Hausman, and I met in person with over 30 customers across North America and Europe. I’m always inspired by the strength and resilience of our customer base. Our customers are the critical infrastructure that power the global economy. And their industries makeup over 40% of the world’s GDP. The span diverse industries that include food distributors, chemical companies, energy utilities, freight carriers, and municipalities. Many of them have been around for over half a century so they are no strangers to the challenging economic cycles. Our customers are essential. They keep the world running and are incredibly resilient. In this macroeconomic uncertainty, our customers are focused on achieving their business goals. They're looking for new ways to maximize every dollar invested into their businesses. Right now, they're focused on asset efficiency, worker availability, and maintaining safe and compliant operations. As a system of record for physical operations, Samsara delivers value across each of these areas by digitizing their day-to-day tasks and workflows. Clear and direct ROI continues to be a priority for physical operations customers. They love investing in technology when it's a clear win. Let's take a look…

Thank you, Sanjit. As a reminder, please refer to our shareholder letter, press release, and investor presentation at investors.samsara.com for additional information on our Q3 results and financial guidance. Q3 was highlighted by strong top line growth and continued operating efficiency improvements. Our durable and increasingly efficient growth demonstrates the large and growing opportunity for digital transformation across the world of physical operations. While global economic uncertainty persists, we exceeded our expectations for key top line and profitability metrics by providing quick time to value and meaningful ROI savings for our customers. Q3 ending ARR was 721 million, growing 47% year-over-year and Q3 revenue was 170 million growing 49% year-over-year. Several factors drove our strong top line performance in Q3. First, we continue to focus on serving large physical operations customers. In Q3, we eclipsed 1,000 large customers and now have 1,113 customers with more than a 100,000 of ARR, a record quarterly increase of 124 and a record annual increase of 398, representing 56% year-over-year growth. Next, Samsara is increasingly utilized as the system of record for physical operations and multi-product transactions continue to significantly contribute to our top line growth. In Q3, 6 of our 10 largest transactions included subscriptions to two or more products. More broadly, more than 70% of core customers and more than 90% of large customers subscribed to two or more applications and more than 50% of large customers subscribed to 3 or more applications. We're also seeing multi-product strength at scale. At the end of Q3, our two connected fleet applications Video-based Safety and Vehicle Telematics each represented more than 300 million of ARR. Additionally, our emerging products contributed more than 14% of net new ACV in Q3, including our third largest ever equipment monitoring transaction. And while just over 10% of ARR…

Thank you, Dominic. We will now open the line, up for questions. When it's your turn, please limit your questions to one main question and one follow-up question. The first question today comes from Bob Wang at Morgan Stanley followed by Sterling Auty at MoffettNathanson.

Hi. Thanks for taking my question. Congratulations on a strong quarter. Maybe if I can just focus a little bit on net new ARR. Last quarter, obviously, you had a much more difficult comp for net new ARR, can you talk about if there were any impacts to net new ARR this quarter, such as macro environment, elongated cycles or anything particular that that could be called out. I'm trying to have a better understanding of what could be the potential run rate of net new ARR going forward?

Sure. Hey, Bob. It's Dominic. So, you know, I'd say a few things. On the Q2 earnings call, we mentioned that we were seeing some elongation of sales cycles that, you know, that the demand was still very strong, the pipeline was very strong, the conversion in one way were really strong, but we're seeing longer free trial periods, higher levels of approval and really analyzing ROI analysis with much more rigor. We continue to see a similar amount of sales cycles in similar kind of length in Q3. So, no real change in Q3 versus where we were in Q2. So, that's kind of the point I would make on macro. And the second is really, again, back to our overall sales capacity. And so, obviously, we've really been focused on hiring this year and building more sales capacity that is ramping that we think will provide more productivity as we get into FY 2024, but is still not as ramped. It generally takes about four quarters for sales reps to ramp. And so that obviously is also having an impact on our Q3 results.

Okay. Thanks. That's very clear. Just for my follow-up on that point, actually. Is it fair to say that the elongated sales cycle is not that customers are cancelling their discussions with you, but rather just dragging out the conversation. And if so, is it fair to assume that in the first half next year or second half next year, that you will see a lot of these to be completed thus resulting in somewhat of a higher than normal growth rate in your deals or in your net new ARR and such?

No. Again, yeah, sort of the pipeline is strong and the conversion win rates remain at historic levels. So, we're not seeing the pipeline reduce. We're not seeing that pipeline not converting. All of that is still happening. It's just taking a little bit longer. And again, I would really categorize that Q3 looked very much like Q2. It did not get worse, but those deals are still closing. And they're not taking much longer to close. We're talking weeks, maybe months. And so, some of the deals that we saw that we thought could have landed in Q2 ultimately closed at the beginning of Q3. So, these aren't things that are pushing all the way into next year.

Okay. Thank you again. Again, congratulations on the quarter.

Our next question today comes from Sterling Auty at MoffettNathanson by Alex Zukin at Wolfe.

Yes. Thanks. Hi, guys. So, just wondering when you look at the big customers that you landed in the quarter, what budgets are they funding these projects out of? And the reason why I ask is, wondering how that prioritization will, kind of carry through into next year given the tougher macro outlook that we that we say?

Hey, Sterling. This is Sanjit. So, our customers are concentrated within the operations organization. It could be VP of Operations or COO. And that's typically the budget that it comes out of. This is the same budget, by the way, that also is related to their accident and insurance payouts, their operating efficiencies, and the capital equipment they're buying. So, for us, there's a direct correlation between adopting our platform and being able to save money and gain ROI in those areas. So, it's that same buyer, it's that same, kind of budget center.

Excellent. And then just the follow-up would be geographically, do you think that there's going to be a different level of impact on demand in-light of the macro headwinds?

We're not seeing that. You know, we have a focus in North America, Canada, U.S., Mexico, and then and then Western Europe. This was actually our best international quarter slightly. About 15% of our net new ACV came internationally and it was pretty well spread, you know, amongst those different geographies. And so, it's not a tremendously meaningful portion of our overall net new ACV, but it is a good chunk and it is growing quickly. And, you know, we're not seeing a lot of change on the international front.

Understood. Thank you.

All right. Our next question comes from Alex Zukin at Wolfe, followed by Matt Pfau at William Blair.

Hey, guys. Can you hear me okay?

Yes.

Perfect. So, I guess maybe just want a, just to better understand again the tone of the macro, Dom, it sounds like the macro, the sales cycle length has been roughly static from your comment previously from Q2 to Q3, but I guess how is it trending in November versus maybe end of October? Because you did have the largest amount of 100,000 customer adds in a quarter while others are calling out difficulty with closing larger deals. So, it's somewhat counterintuitive. And I'm just – if you could comment on, kind of what that trend line is, this is starting stabilize at a kind of net new level or are you assuming it to get worse?

Yeah. Hey, Alex. So, again, I think that our business is holding up really well. We're really pleased with the Q3 results. When we look at our customer demand, the overall pipeline, the conversion rates, the win rates, all of those remain strong. Obviously, we're pleased with the Q3 results. We were able to increase our guidance for Q4 and for full-year FY 2023. And so, we're seeing good strength. We're not seeing it deteriorate. And I think a big reason that we're seeing good momentum is because as we outlined in some of the case studies, we have really fast ROI. Customers are getting paid back within months. And we're – they're using our solution to find real hard ROI savings. They're able to reduce their operational expenses. And then in this environment, you know that that often can get prioritized.

Got it. And then for my second question, it will be a bit of a smart ask question, but given the fact that you called out consensus estimates, as a ruler for next year, kind of being in the right range from a risk or de-risk perspective, I guess, I want to question whether the consensus estimates around margins are also the right way to think about de-risking, and then particularly in the context of your comments about, you know the Rule of 40?

Yeah. I would just say, look, we want to get through Q4. We want to see what are results are. We want to finalize our FY 2024 operating plan, and then we'll come back in three months, and we will give more detailed guidance across top line and margins, but I think you've seen our performance. We improved adjusted free cash flow margin by more than 75% over the last year. This is a really big focus for us. We're really proud of the fact that we got to Rule of 40 in Q3. We need to be able to make improvements to sustain that. But, you know, you can expect us to continue to make improvements on that as we go into FY 2024 as well.

Perfect. Congrats, guys.

Thank you.

All right. Our next question comes from Matt Pfau at William Blair followed by Kirk Materne at Evercore.

Yeah, great. Thanks for taking my questions everyone. Appreciate it. Just two, both related, so I'll ask them at the same time. First of all, if we look at the operating efficiencies that you're achieving, maybe you can just help us understand where exactly those are coming from? And specifically, are there any change to hiring plans that are driving those? And then as we look at the margin guidance for the fourth quarter, it implies operating margin worse than Q3, maybe you can just help us understand what's behind the guidance there for Q4? Thanks.

Yes. Hey, Matt. So, it's Dominic. Again, so on – when we think about, kind of our operating margin improvement for the quarter, obviously, we had some outperformance in revenue, which definitely helped us, we had some savings around gross margin came in a little bit better than expected. And then within our operating expenses really across the board we're focused on just over operating efficiency improvements, but also some non-personnel related spend. So, can we get, you know, can we find software spend that we're not utilizing? Can we think about how, you know, our unused real estate? Can we think about being more thrifty around things like T&E and events? And so, those are all areas of focus and projects that we've built to drive some of the operating efficiency improvements that you've seen. In terms of the Q4 guide, I would really just focus investors on the full-year guide versus the kind of seasonality between Q3 and Q4. And so, overall operating margin for the year was negative 18% previously, now it's negative 14%. We are basically passing through the $14 million of Q3 plus another $6 million for Q4. So, I would really focus investors on the full FY 2023 guidance versus the kind of Q3 versus Q4 seasonality.

Perfect. Appreciate it.

Our next question comes from Kirk Materne at Evercore Materne followed by Derrick Wood at Cowen.

Hi guys. This is actually Peter Burkly for Kirk. Appreciate taking the questions here. So, just to start, you know, you guys are delivering pretty strong NRR rates. I'm just curious how you kind of characterize the balance between, you know, customers starting to go deeper with some of your more ancillary products versus, you know, just as these customers grow and they're adding new vehicles, you know, adding the safety and telematics solutions there? You know, I mean, I would assume a customer adds new vehicles. And if they're using you for safety, you know, that that's just automatic addition right there, you know, just kind of naturally, but just curious, you know kind of how much those ancillary products are driving that, if at all?

This is Sanjit, by the way. So, it's really a mix. We see customers adding additional assets to the platform as they continue to expand their operations and additional applications. So, quite often will land with two or more applications, but in many cases, some of these customers, if they're larger, especially, they have a single project that they start with, might be telematics, or video-based safety or maybe even equipment monitoring. And then from there, once they get familiar with the platform, they see how much value in ROI it drives. They want to expand us, kind of across their entire operation. So, I would say it's a pretty healthy mix between those two cases of expanding the number of seats or assets on the platform, as well as expanding applications with us.

And maybe I'll just add a little more. Just our overall go to market motion in a way that we kind of incentivize the sales reps is really just commission rate tied to overall net new ACV. So, whether that's a new logo or an expansion to an existing customer, you know, they're incentivized to go out and get as much net new ACV as possible. And we're seeing really good balance right now as we mentioned, 55% of our net new ACV in Q3 were tied to expansions to existing customers. And so, really good balance between, kind of net new ACV coming from new logos, as well as existing customers.

Awesome. That's really helpful color. Maybe just a quick follow-up if I could. You know, international still represents a pretty nice area for potential expansion when taking, sort of a longer term view. Just curious, you know, if you're looking at Western Europe or elsewhere, what are the key barriers to adoption in those other regions versus what you're seeing domestically, if any? You know, is it just a matter of getting more reps on the ground over there or just curious about the dynamics there?

So, the used cases are remarkably similar to what we have here in the U.S. and in North America. So, in Western Europe, the customers are still focused on safety, efficiency, and sustainability. There are some region specific features, some language changes that we have to make. There's some different regulatory compliance domains for our workflows. But I would say, you know, 80%, 85% of the product is very similar. And now we're beginning that invest of getting more quota-carrying capacity on the ground and also increasing our base of reference customers. So, I think with time, you'll see us grow into that TAM, but we're kind of taking it slow and we're also focusing on our efficiency as we grow.

Great. Thank you both for your color.

Our next question comes from Derrick Wood at Cowen followed up by Matt Swanson at RBC.

Great. Thanks guys and congrats on a solid quarter. It does feel like the broader supply chain conditions have eased a bit. It sounds like you guys are seeing that with your operations as well. Just curious as companies don't have to deal with the supply chain disruptions, seen over the last couple of years, and maybe as they're kind of recouping some better cash flow and market visibility, how is that impacting, kind of better customer conversations and willingness to do more digital transformation, kind of initiatives?

So, the customer view on this is, supply chain has been an area of focus, mainly because they're trying to get better visibility, but in terms of the value that our platform offers, a lot of it is tied to labor. So, if you think about these industries, whether it's construction or oil and gas or field services, they're people intensive as much as they are asset intensive. And what we're able to do is, help them go find 10%, 15% operating efficiencies out in the field. We're able to help them save money on fuel, which is when they're operating those assets, and then also around things like carbon reporting. So, those are all unrelated to supply chain constraints. So, I would say there's multiple sources of value on our platform, while getting better asset utilization has been one of the many pillars or prongs in terms of the Samsara platform. It's not the only one. So, we still have a very broad-based appeal, and we're able to drive very fast time to ROIs we talked about earlier, across more than just visibility and supply chain.

Great. And, Dom, maybe one for you. I mean, really great to see that the net revenue retention rate on 100K customers is stable over 125%, I mean anything – how do you feel about the durability of this number? Anything to be aware of, of tougher comps or given the macro, do you feel that this is a pretty good sustainable level from here going forward?

We do. Yes, we feel confident in being over 115 for core customers and 125 plus for, you know, for our large customers. And again, we were just seeing a really good balance of net fee coming from new logos, but also more than half of it again in Q3 coming from our existing customers. And you know, and we're seeing a lot of the large customers continue to come back. And once they've realized ROI on one used case or one product continue to add, you know, more products and used cases and find additional ways to save money. And so, more and more of our business is coming from 100,000 plus customers, 47% of our overall ARR is driven from that that customer cohort now, and you can see how that's increased over the last, you know, couple of years.

Great. Well done. Thanks.

Our last question today comes from Matt Swanson at RBC.

Yes, thanks guys. This is obviously Matt Swanson on for Matt Hedberg. I was just wondering if you could kind of net, net the macro impact for us? We've talked a lot about ROI in the prepared remarks. Obviously, the results were showing a lot of durability, but I mean, would you describe parts of this macro as tailwind, I guess? And then how are you thinking about the macro in that Q4 guidance, but also in that early color for 2024?

I would just say, again, we're really pleased with the results for Q3 and the momentum in the business right now that customer demand has remained strong. Again, our pipeline, our conversion and win rates have been really strong. And so, we're very pleased with the results and obviously we reflected that in Q4 as we raised our guidance for that quarter and for full-year. We do recognize that there's a lot of macro uncertainty, and so we want to make sure that we are given a little bit of color into next year, based on how we're thinking about things, as well as going through some different scenario analysis and we feel good with where the, kind of consensus FY 2024 revenue growth rates are right now in the high 20s percent that, you know, we forget about that, you know, based on what we're seeing right now.

And if I can just add one or two things. While we are seeing customers very much focused on cost reductions and efficiency, in the world of operations, these are evergreen problems. They're always trying to find ways to be safer, reduce their costs of insurance. They're trying to find ways to be more efficient, whether that's in terms of how they serve their customers or how much they spend on fuel, and then same thing around sustainability. So, while there is a lot that's front of mind because of the current macro with our customers, I've just been spending a lot of time out in the field spend time with these customers. They're saying these are fundamental challenges in operations, and that's why they're digitizing. They're trying to move from pen and paper to a more modern platform to get better visibility into these kinds of problems.

That's super helpful. And then it was great to see the success that you had upmarket for both the 100,000 customers, as well as the growing percentage of ARR. Is there any difference, I guess on kind of the other side of the market in terms of macro impact or anything else for the smaller deal sizes you ?

No. I think, again, the same problems that the large customers are grappling with, same with kind of our mid-market customers as well. They're looking for ways to reduce cost, lower fuel costs or insurance premiums or, you know, reduce accidents, increasingly meet their sustainability goals. You know, I'd point you to just the overall ARR mix coming from 100,000 plus customers continues to move up, but it's moving up, kind of like a percentage point every quarter, which means that the customers being below a 100,000 are also growing really, really quickly and driving a lot of our overall growth. We're just seeing a little bit more growth from the large customer segment.

I appreciate the color. Congrats on the quarter.

Thank you.

This concludes the question-and-answer portion. Thank you all for attending our Q3 fiscal year 2023 earnings call. If you have any follow-up questions, you can email us at ir@Samsara.com. Thanks again. Bye, everyone.