Ladies and gentlemen, thank you for standing by, and welcome to the Asana Second Quarter and Fiscal Year 2021 Conference Call. [Operator Instructions] I would like to now to now hand the conference over to your speaker today, Catherine Buan, Asana Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Asana's second quarter and fiscal year 2021. We with me on today's call are Dustin Moskovitz, Asana's Co-Founder and CEO; Tim Wan, the company's Chief Financial Officer; and Chris Farinacci, the company's Chief Operating Officer and Head of Business. Today's call will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding our financial outlook, market position and growth opportunities. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in its filings with the SEC from time to time, including the section titled Risk Factors in the company's registration statement on Form S-1. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of use using non-GAAP measures versus their closest GAAP equivalents is available in our earnings release. And with that, I'd like to turn the call over to Dustin.

Thanks, Catherine. Good afternoon, and welcome to our first earnings call. During today's call, Chris, Tim and I will provide details on our Q2 results as well as guidance for Q3 and for the full year. We'll also spend time covering our business and market opportunity as many of you may be new to the Asana story. But first, I'll kick us off with a few of the highlights of our financial results. We had a very strong quarter. Q2 revenue was $52 million, up 57% year-over-year. We have incredible momentum in our business with a number of customers spending $5,000 or more on an annualized basis, up 65% year-over-year. We now have over 82,000 paying customers and over 1.3 million paid users. I couldn't be more proud of the team and would like to acknowledge all of the Asana employees, not only for their performance in the first half of the year but also for the resiliency. It's been inspiring to see Asana's team stepping up for each other, for their communities and for our customers. For those of you who are new to the story, let me tell you a little bit more about Asana. Everything we do here is grounded in a focus on our mission, which is to enable the world's teams to work together effortlessly. We believe that the biggest thing bringing teams down today is that they now spend more time coordinating work than actually doing it. While in the last few decades, powerful communication tools have enabled huge increases in collaboration inside teams, the gains in productivity have been modest. All this collaboration generates a firehose of information, but people like clarity about what's most important and where they should focus their attention. Asana was designed to solve this problem for teams. And…

Thanks, Dustin. First of all, I'd like to thank our customers for their support, partnership and the strong community we've built together over the years. I'm going to focus my remarks on 3 main areas: first, our Q2 business performance; second, our go-to-market; and third, our growth drivers. Starting with our Q2 business performance. We executed very well in the quarter with top line revenue growth of 57% year-over-year. We were very pleased with the progress of some of our key business metrics, including total paying customers and the number of customers crossing our $5,000 and $50,000 annual spend threshold and the respective dollar-based net retention rates. Importantly, across Q2, we saw notable improvements across many of the metrics we used to run the business in the face of the pandemic. In short, we believe that pandemic has provided some short-term headwinds and long-term tailwinds to our business. Like most other software companies, Asana was not immune to the economic repercussions of COVID-19. We initially saw elevated churn rates in customer segments that were particularly affected by the pandemic, including travel and hospitality and small businesses. However, in the latter half of Q2, we were encouraged to see customer activity in most of our segments returning towards normal pre-COVID levels. The pandemic and resulting need for teams to quickly adopt to remote work accelerated awareness and interest in our category and trends in part of our business. For example, we experienced record top-of-funnel traffic as well as free and paid sign-ups as teams looked for solutions to stay organized in their new work-from-home realities. In our direct sales business, we saw increased engagement from IT buyers and centralized purchasers and organizations as they looked to standardize on solutions to bring clarity and alignment to their teams and their organizations. Our…

Thanks, Chris. And thank you to everyone for joining our call today. First, I want to thank all the Asanas for their commitment to our customers, each other and our mission during these unprecedented times. We're incredibly proud of the team's ability to deliver in this environment. As Dustin said, we had a strong quarter in Q2. While there were some short-term headwinds in the quarter due to the pandemic, our overall performance remained strong, and our confidence in the long-term opportunity is greater than ever. Revenue in the quarter was $52 million, up 57% year-over-year. This is a reflection of the value we provide to our customers and our focus on their experience on the Asana platform. We deliver consumer-grade enterprise software that is easy to adopt and can scale across organizations. Let me spend a moment sharing some additional Q2 metrics. We saw strong growth in our number of customers spending $5,000 or more with us on an annualized basis, which grew 65% year-over-year. And we saw even stronger growth in our larger customers. The number of customers spending $50,000 or more with us on an annualized basis grew 160% year-over-year. Subscriptions of $5,000 and over on an annualized basis represented 58% of our revenues in Q2 compared to 47% of our revenue in the year-ago quarter and are up 92% year-over-year. Please note, this represents all customers $5,000 and over, including customers over $50,000. We added 5,000 net new paying customers in the quarter and now have over 82,000 paying customers with over 1.3 million paid users globally. Before I talk more about the quarter, let me discuss our business model. A majority of our paying customers initially adopt on our platform through self-service and free trials. Teams and individuals can try Asana using our free offer,…

Thanks, Tim. Given the unique nature of a direct listing, we're not able to have a traditional Q&A session on this call. But I will tee up some questions that may be top of mind for many of the folks who are on this call today. Also, I'll remind everybody on this call that a copy of this prepared remarks will be posted on the IR website at the end of this call. Okay. Let me start with the first question. Tim, what metrics do you plan to disclose on a quarterly basis? And which metrics do you plan to guide to as a public company?

Sure. On our earnings call, we plan to disclose the total number of paid customers, number of customers with an annual spend of $5,000 and over, number of customers with an annual spend of $50,000 and over, and we will also disclose our overall dollar-based net retention rate and our dollar-based net retention rate for customers over $5,000 in annualized spend. With respect to guidance, we currently plan to guide to GAAP revenue, non-GAAP operating income or loss and non-GAAP EPS and the underlying share count estimate.

Okay. Another question. You added over 2,000 net paying customers in Q1 and more than 5,000 in Q2. This is more than doubling the net adds from quarter-to-quarter. Is there normally that much variability from quarter-to-quarter? And what's the right way to think about incremental customer additions each quarter?

Yes. We will not be guiding customer counts. But to answer your question directly, this year's Q1 to Q2 sequential add rate was exceptional, and I wouldn't model the same sequential growth for the next quarter. I think it's important to share some additional context on Q1 and Q2 so investors can understand some of the underlying dynamics on the net customer adds from quarter-to-quarter. There are many things that can impact the sequential growth rate from time to time. For example, this quarter had the benefit of the introduction of a small team pricing. So from time to time, there will be various factors that impact the sequential growth rate.

That makes sense. Okay. You mentioned the growth rate for next year, FY '22, of at least 30% year-over-year. Will you continue to give guidance that far out on the horizon?

Great question. It's not a standard practice for us to provide color on expected growth rates for the following year on our Q2 earnings call. We do plan to provide formal fiscal year '22 guidance on our Q4 and year-end FY '21 earnings call. However, given the unique nature of the direct listing, we felt it was important to share with the investment community that we believe we can sustain at least 30% revenue growth in fiscal year '22 given our momentum and the large and unpenetrated market.

Okay. The next question, can you help investors think through some of the elements that drive the model, such as paid customer growth, revenue growth per customer and paid user growth?

Sure. We are taking a balanced approach to growth by acquiring new customers, seed expansion with existing customers and continuing to offer more value in our higher-priced tiers. In terms of rank ordering which component is growing fastest, in aggregate, certainly so far this year, average revenue per customer has had the highest growth, followed by our growth in the number of total paying users, and last, our total paying customer growth rate.

That's helpful. Okay. The next question, can you share color on the makeup of your customer base between premium business and enterprise?

We're not going to share the customer count or paying user data across the tiers, but we did share detail in our SEC filings on the combined revenue contribution of the enterprise and business. So just to level set, we introduced enterprise subscription at the end of 2016 and we introduced business subscription in November 2018. These subscriptions have grown to represent 46% of our revenue during the 6 months ended July 31, 2020, up from 24% during the 6 months ended July 31, 2019. With this data, you can derive some revenue growth rates of enterprise plus business versus the growth rate of premium.

Thank you. Okay. Next question. You mentioned that deferred revenue, calculated billings and RPO bookings are not good leading indicators for your business. Can you explain in more detail why?

Sure. The reason why is this: approximately 1/3 of our revenue is billed monthly and thus does not hit deferred revenue. Therefore, a calculated billings metric is not a good metric for us at this stage of the business. Total RPO from subscription contracts at the end of Q2 was $85.4 million, and we expect to recognize substantially all of the remaining performance obligation as revenue over the next 24 months following the last day of our Q2, which was July 31.

Excellent. Next question. Your operating income guidance assumes a huge quarter-over-quarter step-up in operating expenses. Can you walk us through OpEx and share more detail on what you are spending money on?

Yes. As I mentioned, we're investing in growth and believe we have a large opportunity ahead. The primary increase is headcount-related and programmatic marketing, along with some increases related to being a public company.

That's helpful. Okay. Can you help us -- next question, can you help us with all the reconciling items between GAAP and non-GAAP both for Q3 and the fiscal year?

Sure. It's a long answer, so let me walk you through the details. All right. We define non-GAAP loss from operations as loss from operations plus stock-based compensation expense and nonrecurring costs, such as direct listing expenses. For stock-based compensation, while it's difficult to estimate SBC, we expect it to increase as a percentage of revenue from approximately 10% in Q2 into the low to mid-teens as a percentage of revenue going forward. For direct listing expenses, we expect $16.5 million for Q3 and approximately $19 million total for fiscal year '21. We define non-GAAP net loss as net loss plus stock-based compensation expense, amortization of discount and noncash contractual interest expense related to our senior mandatory convertible promissory note and nonrecurring costs, such as our direct listing expenses. We expect the amortization of discount and noncash contractual interest expense related to our senior mandatory convertible promissory note in total to be $11 million for Q3 and $37 million for fiscal year '21. We define free cash flow as net cash used in operating activities, less cash used for purchases of property and equipment and capitalized internal use software costs, plus nonrecurring expenditures such as capital expenditures from the purchases of property and equipment associated with the build-out of our corporate office in San Francisco and direct listing expenses. We are not providing guidance on free cash flow, but we do expect our free cash flow margin to be better than our non-GAAP operating margin, consistent with the historical data we shared in both the S-1 and the long-term model targets we outlined at Investor Day. As a onetime disclosure, we will share some detail on our expectations for the reconciling items to our free cash flow definition in order to help you with your model. So for Q3, we expect the following: capital expenditures of approximately $22 million, of which $20.5 million is related to our San Francisco office build-out, with $1.5 million representing our normal course of business CapEx. We expect capitalized internal use software of $200,000, and we expect our direct listing expenses to be $16.5 million. For fiscal year '21, we expect the following: capital expenditures of approximately $58 million for the year, of which $54 million is related to our San Francisco office build-out, with $4 million representing normal course of business CapEx. We expect capitalized internal use software of $1.6 million, and we expect direct listing expenses to be $20 million.

Okay. That's it for Q&A today. This is just another reminder that these prepared remarks will be posted on our IR website shortly. Also as a reminder, we expect to list our Class A common stock and begin trading on the New York Stock Exchange on Wednesday, September 30, 2020. Thank you to everyone who joined the call today, and we look forward to speaking to you again soon.

Thank you for joining us today, ladies and gentlemen. Please enjoy the rest of your day. You may now disconnect.