AMPL - Amplitude: Performance In Line With Expectations Positive On GTM Progress

2023-12-08 08:13:11 ET

Summary

• AMPL reported 14.6% revenue growth in Q3 2023, slightly lower than expected, but showed strong improvements in profitability.
• Visibility into near-term growth is clearer, with FY23 expected to be in line with guidance and FY24 growth to be lower due to the optimization cycle and refocus on enterprise accounts.
• The new go-to-market strategy and the rollout of the Plus Plan are positive developments, reducing barriers for free-to-paid user conversions and targeting enterprise-level customers.

Summary

Readers may find my previous coverage via this link . My previous rating was a buy as Amplitude ( AMPL ) performed as I expected, and the outlook turned positive with management raising FY23 guidance. I also noted that investors should only size up their position when there is better visibility into FY24. I am reiterating my buy rating for AMPL as the business has largely performed in line with expectations, and I am positive about the results of the new go-to-market ((GTM)) strategy that is in place.

Financials/Valuation

In the quarter ( 3Q23 ), AMPL reported 14.6% revenue growth to $70.6 million. While the growth tracked lower than my FY23 estimate of 15.5%, annualised 9M23 revenue is tracking closer to my FY23 estimate of $275 million. What was notable in the 3Q23 financials is that AMPL showed strong improvements in profitability; non-GAAP EBIT margin improved by 520 bps sequentially and almost 12 pts annually. This is also the first time AMPL has reported a positive adj. EBIT, which could potentially mark the start of a profitable growth journey.

Based on my view on the business, visibility into AMPL's near-term growth is much clearer now where: FY23 growth should be in line with guidance as management guided in November (only about 4 to 6 weeks left that should not move the needle); and FY24 growth to be lower than FY23 as 1H24 will continue to see an impact from the optimisation cycle and some disruptions from the refocus to enterprise accounts. FY24 is essentially the year of change. Post-FY24, my views for FY25 and FY26 have not changed. I believe the rollout of the Plus plan and focus on enterprise accounts should easily support >20% growth (LTM was 21%). In terms of valuation, AMPL is currently trading at 3.5x forward revenue. Although profitability has improved, I would wait for a few more quarters to confirm that this is not a one-off event. Once AMPL shows that a positive margin can be sustained, then I will take a more aggressive stance and assume that the market will attach a higher multiple.

Comments

A good quarter overall, with results tracking my estimates. Recall that in my June update, I talked about AMPL's restructuring efforts and said that it was too early to judge the success of the new GTM strategy. I believe the significant improvement in profitability indicates that AMPL's strategy is working well. Aside from the change in GTM management, I am positive about the rollout of the Plus Plan strategy. I see this as a major game changer as it solves the key friction point that is preventing free users from converting into paid users. Like many free-to-paid conversions, pricing is always a big hurdle, especially if we are talking about tens of thousands of dollars. This was the case for AMPL; the step-up in pricing was as high as $50k, fresh out of the gate after converting. With the Plus Plan, the hurdle to adoption, both psychologically and financially, is heavily reduced, as users can start with just paying $49/month, or ~$600 a year vs. $50k. In addition, I believe there is a strong implication for further upgrades in contract value. As more free users get converted to paid users, they will be using more AMPL features and have more of their workflow processes wrapped around it. My logic is that using more AMPL features will further enhance the growth and operational efficiency of the underlying business, and their perception of the value they are getting out of AMPL will be enhanced as well. This naturally leads to using more features, which leads to a higher contract value. I think management has sort of hinted at this in the 3Q23 call when they mentioned they have already seen conversions from the Plus plan to growth and enterprise plans.

Another part of the GTM strategy was to target more enterprise-level customers. Based on AMPL's historical disclosure, more of their customers have >$1 million in ARR (annual recurring revenue) and an ARR per customer of $110k as of 3Q23. This tells me that AMPL deals with mostly mid-market businesses, and the focus on enterprise will require significant effort and a change in strategy. The positive of this re-focus is that it yields a higher ARR per customer, and the unit economics are going to be much better on a per-employee basis (i.e., efficiency improves greatly). The downside is that the cost structure might elevate in the near term as AMPL needs to hire more sales headcount (enterprise levels require a more direct sales approach). It also takes time for this sales headcount to mature and be productive. Again, this is too early to judge, but based on the results from the change in the GTM approach so far, management seems to be executing well, so there is a good chance they can pull this off as well. I would note that the new head of AMPL's GTM team has a strong background in heading GTM functions, which would be very helpful in this transition.

On the other hand, I am also positive about AMPL's competitive position in the industry as it continues to expand its capabilities in both marketing and experience analytics. This should allow the company to benefit as the IT vendor consolidation trend continues. More importantly, having a wide array of products enhances AMPL's ability to cross-sell products and target a wider group of customers as they can meet different needs. In other words, they have the capability to land a wider range of customers, which gives them more opportunities to expand.

With all the good things mentioned, there is still room for further improvements as AMPL continues to see spend optimisation and churn in the core customer base of digitally native companies. These headwinds caused the net retention rate ((NRR)) to fall to 99% from 101% in 2Q23. While this is a negative point now, there are hopes for the situation to turn for the better. AMPL will finally be free of the burden of legacy multi-year contracts next year. With them off the backs of AMPL, ARR should start to see acceleration as these contracts renew. This should help to improve NRR metrics.

The substantive portion of these legacy multi-year year contracts should be reset by the end of Q2 2024. Taking this into account, ARR re-acceleration should become mechanically easier in the back half of 2024. Source: 3Q23 earnings

Net-net, AMPL is well, in my opinion. I would not view the ARR guidance as a sign of weakness, as I concur that management should maintain a cautious stance as the optimisation cycle overhang will likely weigh on expansion and retention metrics in the near term as large multi-year contracts come due for renewal through 1H24 (this is not a structural weakness). Acceleration in ARR growth and normalised NRR metrics should start to surface in 2H24 as the business laps a period of deceleration and heightened churn activity.

Risk & Conclusion

Attractive pricing on the Plus Plan, which provides entry-level Amplitude features like Analytics and CDP, may cause enterprise users to downgrade as it is cheaper.

I reiterate my buy rating for AMPL as the company's performance aligns with expectations. While 3Q23 revenue growth slightly trailed my forecast for FY23, AMPL showcased significant profitability improvements, marking a potential shift toward sustained profitable growth. Positive results from AMPL's GTM strategy are evident, especially with the introduction of the Plus Plan, which lowers barriers for free-to-paid user conversions. While AMPL's shift towards enterprise accounts may elevate costs initially, if executed well, would enhance the efficiency of its sales team (from a revenue per customer perspective).

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