Good afternoon and welcome to Samsara's Second 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, August 31, 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 second quarter fiscal 2023 financial results. We'd 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 with the press release and 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 strong quarter, surpassing $660 million of ARR, growing more than 50% year-over-year. We continued our large customer momentum and ended Q2 with nearly 990 customers with ARR over $100,000. While we saw strength in the business, we recognize that Samsara is not insulated from the current macroeconomic environment. Throughout the quarter, customer demand remained at historically consistent levels, but we saw elongated sales cycles compared to periods of stronger economic growth. Despite macroeconomic headwinds, we continue to see strong demand because of 3 core themes. First, our customers are the critical infrastructure that power the global economy. They span diverse industries that include some of the largest food distributors, chemical companies, energy utilities, freight carriers and municipalities. Many of them have been around for over half a century and have survived challenging economic cycles. Second, our customers are challenged with rising inflation and interest rates, disrupted supply chains, tight labor markets and geopolitical risk. They need solutions that provide a rapid return on investment. Samsara's Connected Operations Cloud is a deflationary lever that helps our customers control costs by running smarter, safer and more efficient operations. And third, Samsara is becoming the system of record for physical operations. Customers are using our cloud as a command center for their day-to-day operations. At Samsara, we focus on building relationships with our customers, solving their problems and delivering a great customer experience. At the center of this process is the Samsara customer feedback loop, where we listen and respond to their greatest needs. In Q2, we hosted our inaugural Samsara Investor Day and our first customer conference, Samsara Beyond. We brought hundreds of our customers together to discuss the future of physical operations to learn from other customers about…

Thanks, Sanjit. As a reminder, please refer to our shareholder letter, press release and investor presentation at investors.samsara.com for additional information on our Q2 results and financial guidance. Q2 was highlighted by strong top line growth and continued operating efficiency improvements. However, the quarter was also impacted by broader macroeconomic headwinds, which contributed to some instances of elongated sales cycles, such as higher levels of required deal approval, longer trial periods and intensified ROI validation compared to periods of stronger economic growth. Having said that, we saw no significant change in pipeline conversion or win rates for most of our core customers, and demand remains robust. We continue to be well positioned to directly reduce our customers' operating costs in an inflationary environment, and our results reflect the importance of digital transformation taking place across the world of physical operations. Q2 ending ARR was $663 million, growing 52% year-over-year, and Q2 revenue was $154 million, also growing 52% year-over-year. Several factors drove our strong top line performance in Q2, the first of which was a continued focus on landing and expanding with large customers. We now have 989 $100,000-plus ARR customers, a quarterly increase of 92 and an annual increase of 374 or 61% year-over-year growth. More specifically, we saw strength within our largest customers. We ended Q2 with 41 $1 million-plus ARR customers, a record quarterly increase of 7 and almost doubling over the past year. While the majority of these additions were customer expansions, we also landed 2 new $1 million-plus ARR logos who are now top 15 customers, one of the world's largest crane and equipment companies and a top 10 less-than-truckload transportation carrier. Next, multiproduct transactions continue to significantly contribute to our top line growth, showing the strength of our Connected Operations Cloud in the market.…

Thank you, Dominic. We will now open the line for questions. [Operator Instructions] The first question today comes from Alex Zukin at Wolfe, followed by Matt at William Blair.

Can you hear me okay?

Yes, yes, we can hear you.

Perfect. So look, I think a really strong quarter. Congrats. One of the standout features that I saw at least was how much of the net new ACV is coming from kind of the emerging product category. And I mean you spoke about multiple million-dollar deals where those upsells came together. So I guess for investors that are looking to kind of dream the platform dream longer term, was it -- did you feel like that was more of a focus internally and a push from a go-to-market team? Was it a pull from customers looking to do more with the platform? And is it -- was this an inflection point type of quarter? Was it just a confluence of events? Because particularly on a macro backdrop, that seemed really, really strong. And I've got a quick follow-up.

So Alex, I'll take that one. This is Sanjit. I would say it was probably more pull than push from us. In general, our sales team is a [ generalist ] organization. They're able to sell all the products and really focus on solving customer problems. We saw customers realize that they can digitize more of their physical operations in terms of other nonvehicle fleet assets, for example, trailers, generators, compressors, bulldozers, yellow-iron equipment using construction and so on. So I think now the market is starting to realize that this expands well beyond just fleets of vehicles to all kinds of operational assets. And that pull is what we see reflecting that 17% of net new ACV. We're going to continue to invest in that product line and make sure it's well integrated in our platform and connected across all the reports and APIs. But I think this is a bit more of the market starting to realize you can digitize a lot more.

I think that we've tried to call this out at Investor Day and in the shareholder letter. I think what gets us excited is that while nonfleet applications is over 10% of our ARR, we're seeing a much higher customer adoption. So almost 50% our multiproduct core customers and almost 2/3 of our multiproduct large customers are already using a nonfleet application. And we called out in the letter, a lot of these are coming through expansions. And so our -- 1 of our top 5 customers who was already using us for telematics and for safety and equipment has decided to bring some additional nonvehicle assets online, and it was an expansion to a large customer. And so I think we're -- based on the adoption that we're already seeing, we're really excited about the ability to go back to our existing customers and bring online a broader set of assets.

That makes a lot of sense, and it's great to see. I guess just a follow-up, Dom, for you. Just want to understand when you think about -- when you see the macro sensitivities that you talked about, the elongating sales cycles, clearly, net new ARR in the quarter was very strong. Did you feel an impact or a headwind from those things on net new ARR? Would it have been stronger if not for that? And/or what's the right way to think about comparing net new ARR seasonality, linearity on a go-forward basis with that macro backdrop?

Yes. We are definitely seeing elongated sales cycles. And so customers are using more rigor as they're going through the process of signing the contract. They are really making sure that they're nailed down on the ROI analysis. They're at times asking to do longer trials and making sure that they've got the right internal resources to go through the deployment and so that they're getting the ROI as quickly as possible. And so we definitely saw some elongated sales cycles, and that probably had some impact on the top line. I think specifically, we were a little stronger in some areas. So we called out nonfleet applications. It was a pretty good international quarter. We talked about the large customer momentum. It was a strong renewals quarter. We were a little softer in some other areas. And really, that came in with our smallest customer. Small customer segment is a little bit more impacted by macro. But I think we're also excited that for the year, we're ahead on our profitability goals, and that really allowed us to move up our full year guidance. And so we've got some really good kind of levers where we can make adjustments to how we're spending money based on what we're seeing from top line performance.

Perfect. Congrats on a great quarter.

Our next question comes from Matt at William Blair, followed by [ Bob ] at Morgan Stanley.

Great quarter. Wanted to first ask on the 2 $1 million-plus new logos that you added in the quarter. Have you ever signed initial deals of this size? And then with these customers, are they just larger than some of the customers that you've added in the past, and that's what drove the large deal size? Or are there other factors that made these customers feel comfortable committing to that large of a deal initially?

Yes. I mean so we called out we now have 41 customers paying more than $1 million of ARR. Several of those landed as new logos at more than $1 million of ARR. Though it tends to be that the majority of those were expansions to existing customers that have added more assets over time, I think we did -- out of all of last year FY '22, throughout the entire year, we did 2 $1 million-plus new logos all year, and we just did 2 in Q2, and I would expect more to come in the back half of the year. And so we have the ability to land at that size or have customers kind of expand. And I think it's just a testament to the investments that we've made and really going after the enterprise segment, going after large customers. There's a lot of go-to-market investment required. There's a lot of R&D investment required. And these deals just take time to come together. And so we're really happy to see those investments and that effort paying off in Q2.

Okay. Great. And just a follow-up on the margin guidance. So the -- it implies the back half being a lower margin than the second quarter. Is that just a strong hiring quarter in Q2 layering on in the back half? Or are there other factors that we should think about?

Yes. I think it's 2 things. One, while Q2 was a record hiring quarter for us, a lot of it was back-end loaded. So you'll see more of that expense hit in Q3. And there was also some timing of expenses that we had thought would hit in Q2 that ultimately are going to happen more in the back half of the year. I think what we would just focus investors on is really the full year guidance was minus 20% for operating margin is now improving to minus 18%. And we effectively -- the entire implied operating profit beat in Q2 is effectively flowing through to have that full year margin go up to negative 18%.

Our next question comes from [ Bob ] at Morgan Stanley, followed by Michael at Wells Fargo. [ Bob ], I think you're on mute.

Sorry. Can you hear me now?

Yes, we can hear you.

Okay. Sorry. Again, congratulations on a solid quarter. Most of my questions were answered, but just one quick question on your ARR for $1 million-plus customers. Understand that most of those deals take a long time to come to fruition. Are there any large deals on the horizon, let's say, in the next 6 months, that could dramatically impact your ARR growth trajectory going forward? And do you see any macro impact on those large deals in the second half?

No. I mean I think if you look at our overall customer base today, we don't have any massively large customers that are driving a significant portion of our ARR. And so I don't expect there to be any sort of large material swing deals that could have a material impact on the trajectory of our ARR for the rest of the year.

Our next question comes from Michael at Wells Fargo, followed by Kash at Goldman.

Nice job with the Q2 results. I mean it's been fairly consistent. You're adding 90 -- more than 90 customers consistently each quarter on the $100,000 customer metric. You mentioned 60% of the expansions there with existing customers. Maybe you could just, Dom, touch on the visibility you have into that expansion path with the existing customer base. And is there anything that you're seeing that would suggest a change at all on how you'd expect the trend on net new versus expansion mix to trend from here?

We've got a really nice balance right now of our net new ACV coming from -- about half from expansion to half from new logos, and it's been pretty consistent over the last several quarters, over the last year. And so I would expect that to ultimately roll forward. There's such a large opportunity in front of us of landing new customers. And the typical buying pattern is a land and expand. So they'll start with one product or a certain set of assets, and maybe they'll start with -- in one subsidiary or one geography, and then they'll roll out more over time. And as they get value out of the Samsara platform, they'll add more assets onto the platform. And so we think that, that motion -- that customer adoption motion will continue.

That's great. And just the smaller follow-up on the op margin versus free cash flow margin relationship. You did a good job in providing us with some useful disclosure at the Investor Day around the dynamics there. The commentary suggests that supply chain impacts may be starting to normalize on the margin, and that gap is starting to shrink. Can you just walk us through what you're seeing there currently and how we should think about modeling a few scenarios there? Or anything to be mindful of just in the back half of the year as we kind of layer some of these new assumptions on?

So Michael, why don't I start with the kind of context on the supply chain, if Dominic wants to add on any details on free cash flow versus operating margin. We are seeing improvement in our upstream supply chain. So it's been fairly consistent over the last couple of months. Our key components, we have greater visibility into. A lot of the smaller passive components are more readily available on the market. And the automotive components have been actually the most challenging to procure. And we're seeing signs of recovery, especially as we look forward to early calendar year '23. And then on top of that, we've been able to manage our costs a little bit better in terms of stabilizing and shifting more of our freight to ocean as opposed to by air. So I think the way that we're thinking about it is while we're not out of the woods yet, costs are still elevated from where they were a couple of years ago. We are seeing that recovery happen in the supply chain, and that's showing through in the cash flow.

Yes. And I would just, again, point to the shareholder letter and the investor deck, where we've got the chart with the gross margin, operating margin and free cash flow margin at the bottom. We have this table that shows kind of the difference between operating margin and free cash flow margin. And you can see like in Q2 of last year, the gap was 16% at Investor Day. And in Q1, we talked about the Q1 FY '23 difference was 18%. And now it's down to 12% in Q2. I would expect that gap to continue to shrink in Q3 and Q4. As to Sanjit's point, we get more visibility over supply chain and operate in a more kind of normal environment.

Our next question comes from Kash at Goldman, followed by Matt at RBC. Kash, you're on mute. Okay. Let's move forward. Let's go to Matt at RBC.

This is Anushtha for Matt Hedberg. Can you hear me okay?

Yes, we can hear you.

Yes. So I wanted to ask about -- just a follow-up question on the elongated deal cycles that you noted. Did you see that play out in any specific industries? Or was it more or less broad-based?

I would say the effect we've seen has been broad-based. It's not any particular industry, whether it's transportation or energy utilities or even the local governments we serve. I would say everyone is making sure they've got that ROI case lined up and that they have their teams ready to deploy. And I think Dominic highlighted that's the sort of underlying reason. That's, again, not specific to a single industry.

Got it. And then could you talk about how sustainable the digitization trend in physical operations has been in an unstable macro environment? How do the customer conversations evolve in such an environment?

So I would say this trend towards digitization has been a kind of long arc, and it's continuing. They're actually seeing more opportunities and business reasons to drive the digitization. As you think about challenges in the supply chain, I mentioned it a little bit earlier in the call, but it's hard to procure trailers. It's hard to procure equipment in this environment. And so we see customers trying to be more efficient with their asset utilization. I think they're also thinking about their own cash and can they take some of those underutilized assets and remarket them, sell them off, in other words, to raise cash and reinvest in their business. We also see fuel prices have fluctuated quite a lot over the last quarter and really over the past year. We've seen some recovery now. But even if you take a closer look at the price of diesel, it's elevated. And so many of our customers are saying, can we become more efficient and more sustainable? In other words, use less fuel using all of this data. So I would say these are all the sort of tailwind effects that we have that are in favor of digitization. It just is, simply, these customers are going through a transformation. It's new for them.

Our next question comes from Derrick, followed by Kirk at Evercore.

Congrats, guys, on a strong quarter. Sanjit, you mentioned that you guys hired a new Chief Product Officer, came from ServiceNow, ran the IT operations portfolio. Are there any new product strategies to call out or anticipate coming down the pike? And in particular, just this notion of maybe having tiered pricing and going after new monetization strategies. Just any thoughts to share on potential new pricing or packaging strategies?

So Derrick, for us, this is about -- it's a building for the long-term kind of view. And we're really excited to have Jeff on board because he has seen the scale that we're approaching now as we continue to grow as a company. We're also serving many more of these larger, more complex customers who have these $1 million-plus ACV footprints. And there's an opportunity there to continue layering on new products and new innovation. We don't have any specific pricing model changes or new packages to announce on this call, but it is something we are thinking about, which is as we continue to invest in R&D, what's the right way to package and price those innovations. And so that's something that Jeff will work on in the next couple of years.

Great. And Dom, one for you. Just in terms of your assumptions within guidance in regards to the macro. I mean are you expecting conditions to stay the same through the year, a slight elongation of sales cycles but no material impact to demand, I guess, maybe a little slower weakness at the lower end, better durability at the upper end? Any thoughts on what inputs you put into the guidance for second half?

Yes, yes. So I think our view is that for the second half of the year, we think that the customer demand, the pipeline, the win rates, all of those things, we expect to remain strong because of this trend, digital transformation in the world of physical operations. We don't think that's going away. And again, this is a solution that plays really well in this type of environment where we can help customers directly reduce their operating costs. We also do expect that the macro headwinds, broader uncertainty are going to continue, the elongated sales cycles. We expect that, that will continue as there's kind of economic uncertainty. I think the way that we view it, though, is like while we can't control the broader macro impact, we are really using this as an opportunity to drive even more profitability. And so that is something that is really within our control. And we'll balance the way that we kind of spend money based on what we're seeing on the top line. We were able to raise our operating margin, our free cash flow margin for the rest of the year, and we're continuing to look for ways to find other efficiencies within our business.

Our question comes from Kirk at Evercore, followed by Ella at JPMorgan.

This is actually Peter Burkly on for Kirk. So obviously, you're getting a lot of questions about the macro. So kind of just following along that train of thought. Intuitively, it would make sense that the telematics piece of the business would sort of hold up better given companies are looking for ways to rein in their spending. And so having the ability to make more informed decisions regarding fuel efficiency and the like would be helpful. So just curious, is that a fair characterization? And if not, is there anything that you guys would call out as it relates to strength in any other products specifically?

So Peter, this is Sanjit. It's interesting. I was just on a customer tour where Jeff and I visited probably 8 or 10 customers in a pretty short time span. And there was a lot of interest not just for telematics but also our safety products. Turns out people get into accidents regardless of the interest rate. And so they are thinking about how do they manage those insurance payout costs. That's a very real business problem for them. We talked about some of the value proposition of connected equipment, getting better asset visibility. So I would say it's really all of these pillars are working in favor. And we're seeing that as we land new customers, they're landing as multiproduct transactions. So we hear from our customers. They are investing in that platform and digitization across their operations, not just specifically telematics. And that's exactly what we're building towards.

Okay. Great. That's helpful color, Sanjit. appreciate that. If I could sneak in one more maybe. You guys obviously have a pretty impressive growth trajectory. But again, just curious, given the dynamics in the macro today, how you're sort of thinking about that ramp to profitability. Just wondering if there's any levers in particular that you'd call out. Or is it more kind of on the flip side still, sort of full steam ahead from your guys' perspective in terms of just investing for growth?

No. It's definitely the former. I mean this has become a big priority for us internally. We've got a number of projects underway to really accelerate our time line to breakeven. I think -- and we've shown that our operating margin improved by more than 50% year-over-year, more than 20 percentage points of free cash flow improvement. And so it is a big focus. We expect to see continued leverage year-over-year, and we're focused on marching toward -- for breakeven.

Our next question comes from Ella at JPMorgan, followed by Kash at Goldman.

My first question, I was curious, which verticals are you seeing particular strength in right now? And where might there be possible weaknesses?

Ella, this is Sanjit. I would say in general, we're seeing strong demand across industry segments. I wouldn't necessarily call out a single vertical. And it's -- again, we talked about some of the themes beyond digitization. There are different dynamics at play in each of the markets we serve. Labor shortages are kind of common across the board. But I don't know, Dominic, if you have any other sort of color on that.

Yes. I mean I think just digitizing the world of physical operations like moves across all of these segments. Every industry right now is looking for ways to improve efficiency, to lower cost regardless of industry, and that's really what we're building towards and what we're selling into. And so we're seeing really strong customer demand across all verticals.

That's really helpful. And as a quick follow-up, I was curious, does the profitability of verticals differ materially? Are certain verticals considered more profitable than others?

No. It's the same. I mean if you just think about our overall cost stack, our cloud cost, our cellular cost, the IOT device costs, our go -- the way that we compensate go-to-market, R&D, all of that is the same across all verticals. It's a horizontal industry-wide platform.

So let's try back with our last question with Kash.

Can you hear me okay?

Yes, I can hear you, Kash. Great.

All right. Great improvement in operating margin and free cash flow progress here. I wanted to just ask you, given that you didn't see any big challenges in your business, maybe the value proposition of the product is so high that I wonder that if you're in a position to actually raise prices and that be absorbed well by our market, we should be obviously great for helping the profitability. I'm wondering if you've given thought to that proposition. And also secondly, your input costs. I mean at what point does the supply situation, inventory situation settle down? And we're already starting to hear inventories build up at lower cost. And at what point would that be passed along to you as was you -- potentially, if you want, raising prices, your input costs could also go down? Where are we in that? Or is that too much of a stretch?

Sure. So Kash, I'll start and maybe Dominic can add on. In general, we do look at pricing and strategy every year or so, and that's something that's just been built into the company. As we continue to invest in R&D, you will see us introduce new packages for customers. And we're thinking about different pricing strategies as we go and penetrate the market. We don't have any specific changes that are being announced today. But that is something that's on our mind, and it's something we've always thought about. I don't know, Dominic, if you want to cover input costs.

Maybe on the second one on the input costs. I think the supply chain availability is improving somewhat. You're starting to see again free cash flow margin converge back into operating margin. And again, we expect that to continue in the second half of the year as the supply chain continues to improve. But that is why, I think, we're trying to point investors and analysts to look at non-GAAP operating margin as kind of the leading indicator of where we expect profitability to be because in the longer term, we do expect free cash flow and operating margin to converge. And so that's kind of the leading indicator of where we expect things to be.

And just if I can tack on one more thing. I'm just incredibly proud of how well the team worked together to ensure that we have supply and maintain our gross margins. We've been able to maintain the gross margin profile in the low 70s in spite of all these supply chain issues and fulfill our customer demand. So that's not been an easy task. A lot of creativity required behind the scenes, but I think we manage well through it.

Thanks, Kash. So this concludes the question-and-answer portion. Thank you all for attending our Q2 fiscal year 2023 earnings call. Before I let you go, I have a short announcement for upcoming conferences. We will be participating in the Wolfe TMT Conference on September 7 and the Evercore Technology Conference on September 7 and the Goldman Sachs Communacopia Technology Conference on September 13. We look forward to seeing you at one of these events in person. That's it for today's meeting. If you have any follow-up questions, you can e-mail us directly at ir@samsara.com. Thanks again. Bye, everyone.