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Edited Transcript of MDLA.N earnings conference call or presentation 5-Sep-19 8:30pm GMT

Q2 2020 Medallia Inc Earnings Call

PALO ALTO Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Medallia Inc earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leslie J. Stretch

Medallia, Inc. - President, CEO & Director

* Roxanne M. Oulman

Medallia, Inc. - Executive VP & CFO

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Conference Call Participants

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* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Brian Jeffrey Schwartz

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* James Paul Rutherford

Stephens Inc., Research Division - Research Analyst

* Kasthuri Gopalan Rangan

BofA Merrill Lynch, Research Division - MD and Head of Software

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Richard Kenneth Baldry

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Terrell Frederick Tillman

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Thomas Michael Roderick

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Walter H Pritchard

Citigroup Inc, Research Division - MD and U.S. Software Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Medallia's Second Quarter of Fiscal 2020 Earnings Conference Call. Joining us today for today's call are Medallia's CEO, Leslie Stretch; and CFO, Roxanne Oulman. (Operator Instructions)

Thank you. With that, I would like to turn the call over to Roxanne Oulman for introductory remarks. Roxanne?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [2]

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Thank you, Chris. Welcome to Medallia's Second Quarter Fiscal 2020 Earnings Conference 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. The primary purpose of today's call is to discuss our second quarter fiscal 2020 financial results.

Before we begin, please remember, during the course of this call, we will make forward-looking statements about the operations and future results of Medallia that may vary and involve many assumptions, risks and uncertainties. In any of these risks or uncertainties develop or any of the assumptions prove 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 Securities and Exchange Commission, including our prospectus dated July 18, 2019. 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 are non-GAAP unless stated that the 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 will identify trended metrics, performance that we believe will aid in understanding and evaluating our performance over time.

Now I will turn the call over to Leslie.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [3]

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Thanks, Roxanne. Good afternoon, and welcome to the first Medallia earnings call. Before I begin my prepared remarks, I would like to thank all of our employees, our customers, our partners and our investors for the hard work and dedication in helping us reach the important milestone of becoming a public company. I believe that as a New York Stock Exchange-listed company, we've already seen increased awareness and interest in customer experience generally and specifically in what Medallia can do to help improve businesses of all sizes.

I was very pleased with our performance in Q2, accelerating year-over-year revenue growth off of a higher base and signing new banner customers. Roxanne will discuss the details of the quarter's financial performance in a few moments, but first, for those of you new to the Medallia story, I'd like to give a quick recap of our business, our platform and our market opportunity.

Let me first talk about the need for Medallia. Customer experience is at the center of digital transformation. I believe this to be the #1 priority of organizations across the globe. The need for Medallia comes from the wholesale transfer of power to customers. Today, consumers, patients, citizens all have the power to partner with organizations that sell or provide services to render the best experiences. Organizations that recognize this engender an increased loyalty and can achieve better results.

To enable this collaboration in the moment, Medallia has created a new category of enterprise software, customer experience management, and we are the market leader. Medallia helps companies manage experiences on a massive scale, with robust platform security and reliability and deep customer experience domain knowledge. Our platform captures experience data from a massive and expanding signal field beyond the traditional post-experience survey. And then we use our proprietary machine learning technology to analyze structured and unstructured data to explore vital experience [themes] and to deliver powerful and specific predictive insights that drive impactful actions to the right people at the right time. Using our technology, enterprises can reduce customer churn and turn detractors into promoters. With Medallia, companies can create immediate cross-sell and up-sell opportunities and generate significant returns on investment.

What sets us apart? Capturing feedback through a post-experience survey is always important, but it is only one dimension of what we do. Today, enterprises seek to understand the behavior and intent of all customers, not just those that answer survey questions. The best brands expect technology to play a major role in capturing all of the signals emitted by consumers and customers, patients and citizens, as I said. So text messages, social media interactions, WhatsApp, WeChat, transactional information, phone calls and voice messages all combine to not only capture a customer's sentiment, but map the many and varied customer journeys across all moments that matter. Performing predictive analysis and generating invaluable insights is central to this technology approach. Creating powerful action agendas is possible, and such action agendas can be distributed to the right people at the right time with speed and accuracy to mitigate customer loss or act on cross-sell and up-sell opportunities, for example.

To do this at scale whilst maintaining a high level of privacy and security requires a robust platform approach. We've invested over 10 years in building our platform, a platform with a proprietary, patented and memory analytics engine that makes realtime analysis of massive amounts of data possible. We believe this level of investment, domain knowledge and processing of massive amounts of data is unrivaled, and that our platform is the most scalable, most secure and most [performance] machine learning customer experience platform in the industry. It's this technology that enables Medallia to operationalize all aspects of the customer experience processes.

As such, Medallia's platform has helped transform many of the world's iconic brands, and we believe our platform is mission-critical.

Let me talk about the adoption of our platform. The Medallia Experience Cloud today has over 4 million users worldwide. This platform captures and analyzes over 4.9 billion experiences annually and has performed 8 trillion calculations in a single day to drive business decisions. Our products have high adoption and are used extensively from the frontline to the C-suite, enabling users to improve experiences in live time. Over half of our customers have more than 1,000 employees using our platform, which we believe is a significantly higher adoption level than any other experience management solution available on the market.

Significantly, approximately 80% of our customers use our platform across multiple lines of businesses and channels. Perhaps even more importantly, organizations use our platform daily to drive their businesses, with 50% of our mobile monthly active users using our mobile applications on a daily basis.

We've said many times that the world is moving beyond survey. Further evidence is the rapid increase of mobile messaging enabled by our Conversations product. For example, during the quarter, organizations used our Conversations product to contact nearly 20 million end-user customers, engaging in over 60 million mobile messages, 3 times the volume of messages in the prior quarter.

Let me talk a little bit about our total addressable market and some of our new customers. In terms of our total addressable market, based on industry data and an analysis of sales to our existing customers, we estimate the TAM to be over 60 billion. As of July 31, 2019, we had 613 customers, up from 565 as of the prior quarter. Our customers are the leading global brands, including 33 of the Fortune Global 100. We believe this represents only a fraction of our total potential addressable customer base, however.

In fiscal Q2, new and expansion wins spanned verticals and geographies. Q2 contracts included Anaplan, Atrium Health, Boston Pizza, Janus Henderson, Kelly Services, Samsung, Sonos, State Farm and Telefónica. I call these out as these were just some of our 6- to 7-figure deals in the quarter.

Let me talk a little bit about our pipeline. This past June, we held our annual customer experience conference, our largest-ever event, with customer and partner attendance up 50% over last year. We had great customer speakers. Business leaders from all over the world attended, and we identified over 300 up-sell opportunities and had 26 total sponsors versus 9 in the previous year. Our pipeline is benefiting accordingly and will support our growth goals.

Looking forward to Q3, we will be present at Workday Rising and we'll host our own city tours in 11 locations around the world, including San Francisco, New York, Mexico City, Paris, Munich and Milan. In addition, we will have a large presence at Dreamforce during our fiscal Q4 in November.

I want to now spend a little bit of time talking about how we grow for this first earnings call to help you with a color on the business. We intend to capitalize on our large and growing market opportunity by executing on several growth strategies. Firstly, we recently expanded our sales force to continue pursuing large enterprises. We intend to continue to deepen our opportunity within existing verticals and to expand to new verticals. Hospitality, travel, retail, financial services, telco and media all contributed in Q2, and we saw our first significant health care insurance deals in the quarter.

I believe we'll become the de facto standard for customer experience in the senior enterprise market, and that this category leadership will benefit our broader mid-market initiatives.

So secondly, we've created a mid-market product and sales capability under Rory Cameron's leadership to exploit the opportunities presented there. We've done this because we see significant demand for our capabilities in organizations of all sizes.

Thirdly, we're developing deeper relationships in our partner ecosystem. These partners help Medallia extend our geographic and vertical coverage, accelerate the usage and adoption of our platform, augment our platform with complementary technology, promote thought leadership and provide additional implementation resources. We intend to deepen our relationships with global and regional services partners as well as a range of complementary technology and go-to-market partners. Examples of this are our recently announced partnerships with Accenture, Deloitte, Salesforce.com, ServiceNow and Workday. We also recently became an Adobe Premier partner in the Adobe Exchange Program. These players recognize that customer is at the center of digital transformation, and they are ideally suited to partner with Medallia.

We recently sponsored 7 Salesforce.com World Tour events and were sponsored at the Adobe Summit in North America and in Europe. We also have an emerging partner ecosystem that today sees a small number of providers using our platform to serve small businesses such as individual gyms, small hotel chains, sports venues and so on. This business is enjoying good growth and proving our products' applicability across all levels of the market. These customers are not included in our enterprise customer count.

(inaudible) we will broaden our international expansion. We intend to continue making investments in building global sales and marketing, service delivery and customer support capabilities to grow our business outside of the U.S. We've added new senior leadership in APAC and EMEA in the last few months, and I've just returned from a very successful trip in Latin America, meeting with our super customers' prospects and partners in that region.

Fifth, we have an emerging network effect business, where the "powered by Medallia" brand is getting visibility in key verticals. To give an example of what I mean by network effect, we have an ability for our customers' customers to promote their reviews to independent websites, giving visibility to our brand on a massive scale. We have made the most progress in hospitality, but every vertical has a network effect opportunity, from health care to automotive. Just as an example, approximately 50% of reviews that are promoted to TripAdvisor by paying customers come from Medallia.

Sixth, we have a strong history of innovation and offer a comprehensive platform that addresses experiences for enterprises of all sizes across multiple industries. We intend to continue to invest in building new products and features, while bringing the power of experience management to a broader range of enterprises, industries, geographies and use cases. Our machine learning models, our ability to handle massive scales securely and our perspective of platform and signal sets us apart from the traditional survey-based feedback offerings.

Finally, our M&A strategy is focused on capturing all the signals of customer experience and developing and deepening our machine learning and customer journey mapping capabilities. Our customer success, promoter technology and customer journey solutions are just some of the recently acquired thought-leading elements that our customers love to see combined with our platform capability.

And finally, we recently added 2 new independent members to our Board: Mitch Dauerman, a former Chief Financial Officer of Ultimate Software; and Rob Bernshteyn, the Chief Executive Officer and Chairman of the Board of Coupa Software, have just joined. And for both Mitch and Rob, this was their first public company Board seat, and we're delighted that they have joined forces with the Medallia team.

Now let me turn the call over to Roxanne to give some more color on the second quarter financials.

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [4]

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Thank you, Leslie, and good afternoon, everyone. I'd like to express how pleased we are with the level of interest we have received from our analysts and investors. We look forward to getting to know you and keeping you updated on our performance. Today, I will provide a brief overview of our second quarter 2020 financial results and discuss guidance for our third quarter and full year of fiscal 2020. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results in today's press release.

It is important for investors to understand our business model in order to put our results in proper perspective, along with evaluating our future performance. The largest component of our revenue stream is recurring subscription, or SaaS revenue. We also generate revenue from professional services. Our professional services revenue consists of 2 elements: managed services and implementation services. Our managed services offering is recurring and provides enterprises with a value-creation expert who helps them develop deeper analysis and obtain additional benefits from our platform. Revenue for managed services is generally recognized ratably over the contract term, and as such, over 90% of our total revenue is recurring in nature, offering us strong visibility.

We also have long-term revenue visibility from our existing customers as a result of our multiyear contracts and strong renewal rates. We have a history of driving expanded use through up-selling our platform across the enterprise and cross-selling through the subsequent deployment of additional products. We believe there is a significant opportunity available to cross-sell our various product offerings to existing customers. Our platform provides at least a 3x cross-sell opportunity with multiple incremental offerings.

Now let me get to our quarterly results. Across the board, we delivered an outstanding first quarter as a public company with year-over-year strength in financial performance, including total revenue growth, SaaS revenue growth, operating income and operating cash flow. We ended the quarter with 613 customers, an increase of 26% year-over-year. Total revenue was $95.7 million, an increase of $20.2 million or 27% over Q2 of fiscal 2019. In Q2, SaaS revenue was $74.5 million, an increase of $14.4 million or 24% year-over-year. Our SaaS revenue growth rate improvement reflects our new go-to-market initiatives we instituted over the last year. Our acquisitions during the quarter were technology-focused, therefore, our SaaS revenue and SaaS deferred revenue included negligible amount, if any.

Professional services revenue was $21.1 million for the quarter, which grew 38% year-over-year. During the quarter, our services revenue benefited from the recent change in leadership in our services organization in fiscal Q1, where we have seen solid improvement in utilization. As a reminder, services revenue ebbs and flows based on a variety of factors. We view services as an enabling function that is ancillary to our SaaS offering. In addition, as Leslie outlined earlier, we're focused on enhancing our partner channel as part of our growth initiatives. This includes transitioning more services and assisting our partners in expanding their consulting practices. This may impact our professional services revenue and margins in the future.

International expansion is another key initiative for growth. Revenue in Q2 generated outside of North America contributed approximately 25% of total revenue. We believe that Medallia is in the early innings of beginning the Medallia -- bringing the Medallia Experience Cloud to customers around the world.

Medallia provides high ROI to our customers by changing their customer's experience in live time and allowing insights into why customers buy more and identify potential churn. During the 12 months ended July 31, 2019, our dollar-based net retention rate was 119%.

I'll now turn to our non-GAAP gross margin and operating expenses. SaaS revenue gross margin was 82%. We believe our SaaS margins are among the best-in-class for SaaS companies. We will continue to invest prudently in additional data center capacity in order to serve our growing customer base across the globe. Therefore, SaaS gross margins may tick down slightly in the second half of the year.

In Q2, professional services gross margin was 17%. Looking towards the second half, we will be subcontracting additional resources with our partners and we will be adding new professional services personnel who will take time to ramp. Therefore, we expect services margins to moderate to around 10%.

Sales and marketing expenses were $38 million or 40% of revenue in Q2. As a reminder, Q2 expense includes our largest pipeline generation initiative, the Medallia Experience Customer Conference. As Leslie mentioned, on the sales and marketing side over the past year, we have instituted best-practice enterprise go-to-market initiatives and we have unleashed the sales force to meet the customers where they are. With this in mind, you can expect us to continue to invest in productive sales capacity to support fiscal 2020 and beyond as we see continued market momentum.

R&D expense was $19 million for the quarter or 20% 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 $10 million or 10% of revenue in the quarter. While we've made investments to be IPO-ready, we believe there will be incremental expenses associated with being a public company. However, we expect additional leverage on the G&A line over the longer term.

Non-GAAP operating margin in the quarter was negative 2%, a dramatic improvement from the negative 28% in the year ago. We're pleased that our more disciplined approach has driven a meaningful uptick in operating margin. Similarly, non-GAAP operating loss in the second quarter was $2.4 million compared to a loss of $21 million in Q2 of fiscal 2019, an improvement of over $18 million. Non-GAAP net loss was $2.6 million. During the quarter, we generated $431,000 in other income and incurred $678,000 in non-GAAP income tax expenses. GAAP income tax expense of $263,000 included a onetime benefit of $416,000 related to an acquisition.

During the quarter, our weighted average basic share count was 44 million shares. Because we had a net loss on a GAAP basis, our diluted share count was the same as the basic share count for both GAAP and non-GAAP EPS calculations.

Now turning to the balance sheet. We ended the second quarter with $417.4 million in cash and cash equivalents, up $285 million from the end of our first quarter, driven primarily by the net proceeds from the IPO and private placement.

Now let's move to SaaS calculated billings, which we define as 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 billings should not be taken as an indication of changes in future revenue. For example, billings will fluctuate quarter-to-quarter due to the timing of renewals and annual contracted billings. As a result, we believe that the 12-month trailing SaaS billings growth rate is a more meaningful measure of our performance. For Q2 fiscal 2020, trailing 12-month SaaS billings growth rate was 33%.

Our remaining performance obligations, or RPO, totaled approximately $548 million. We expect to recognize approximately 52% of the RPO over the next 12 months. RPO in Q2 benefited from a handful of large multiyear renewals that we closed in the quarter. Please note that the RPO metric may be impacted by contract duration and extensions as well as timing of renewals of large multiyear contracts. So while RPO provides strong visibility, it may fluctuate from quarter-to-quarter.

We generated a loss of $20.9 million in cash flow from operations for the quarter. From a cash flow perspective, our operating cash flow fluctuates based on seasonal patterns that we have experienced historically due to booking and cash collections timing. On an annual basis, however, we do expect to trend positively and see operating cash flow positive for the full year of fiscal '21.

Now let me turn to our financial outlook for Q3 and fiscal year 2020. We are penetrating a large addressable market. And while we are very excited about our opportunity, we want to be prudent with our guidance. For Q3, we are projecting total revenue to be between $95 million and $97 million, representing a 17% to 20% growth over last year. For Q3, we are projecting SaaS revenue to be between $76 million and $77 million, representing a 20% to 22% growth over last year.

For Q3, we expect non-GAAP operating loss to be in the range of $3.5 million to $4.5 million. For Q3, we expect basic weighted average shares outstanding to be approximately 128 million. As a reminder, in periods where we have a net loss, the basic and diluted share count are the same.

For the fiscal year 2020, we expect total revenue to be between $385 million and $388 million, representing a 23% to 24% growth over last year. We expect SaaS revenue to be between $303 million to $305 million, representing growth of 23% to 24% year-over-year, an acceleration from the 22% growth rate in fiscal 2019.

As we shared with you during our roadshow IPO, we are keenly focused on driving SaaS-accelerated growth on an annual basis. However, there will be quarterly fluctuations in our year-over-year growth rates. For 2020, we expect non-GAAP operating loss to be between $9 million and $10.5 million. We expect other income and expense to be over $500,000 for each quarter, and income taxes will be a little over $1 million per quarter. For the year, we expect basic weighted average shares outstanding to be between 83.5 million to 84 million shares.

Finally, for the second of this year, we expect capital expenditures to be approximately $20 million related to data center expansion and the build-out of our customer briefing center in downtown San Francisco.

In conclusion, we are very pleased with our second quarter performance.

Leslie and I will now take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Kash Rangan with Bank of America.

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [2]

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Congratulations on your first quarter as a public company. Superb results. Leslie, a question for you. With respect to the new customer count that comes in very, very strongly, and Roxanne, you talked about RPO growing also very, very strongly, so relative to when the company went public and certainly, the message was that, look, this is an [actuating] growth story, how much more confidence do you have in that overall hypothesis based on the customer add trends and what seems to be really a very, very solid RPO add in the quarter? Does that leave you feeling just about on par with the quantums that you had at the time of the (inaudible) certain things in the quarter, as they unfolded respectively, these 2 accounts, that make you even more confident than you were at that point?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [3]

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Great, great, great. Thanks, Kash. Great question. So I think the other -- there's several aspects to that. The partner business is really new. The mid-market business is really new and we see traction. And I've just come back from a tour of Latin America, where, out of 20-odd meetings, I had 5 CEO meetings with some of the biggest companies in Latin America. And we are clearly seen as the platform story, as the modern machine learning customer experience transformational story. And it's exciting. I'm more confident, actually. I feel great about our prospects as we've been adding salespeople at a decent clip rate. It's getting the add backs and having more salespeople in that leveraged channel.

And I'm quite pleased with the mid-market progress. It's pretty clear that our product has applicability across the range, spectrum, strata, size of customers. So I'm very pleased. And then the new leadership in APAC and EMEA is new. We need to see that unfold. Those are strong businesses for us, but we're expecting some improvements, some turbo charging from that leadership. So I feel even more confident and I'm very pleased to be back at work and taking the opportunities. And I think competitively, the distinction between us and the survey players is becoming very marked. That's very clear to me. So I think I'll stop there.

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [4]

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So Kash, I wanted to comment on RPO. So RPO was very strong in the quarter, and we're at 52%, is current. But one of the things I do want to highlight for you from an RPO perspective is we have some very large long-term contracts. And when we renew multiyear contracts that are several million dollars, you will see fluctuations in our RPO on a quarterly basis. But with that said, I am extremely pleased with our performance, and we are very focused on a 25% to 30% SaaS revenue growth rate on a long-term basis. And we think that is something that is achievable and we're executing towards.

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [5]

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Wonderful. And one follow-up for you, Roxanne. The professional services revenues came in better than expected. Just curious what drove that? And when do you get through the investment and recoup the margins in a couple of quarters out?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [6]

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Now that just reflects the increased number of implementations. We still expect our partners to take a heavy load there, but that reflects the increased activity in the prior quarter as well.

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [7]

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And from a margin perspective, as I shared in our prepared remarks, we are very focused on building out our partner ecosystem. And so that includes multiple things, which includes our partners doing more on their paper, and also, as we introduce new partners, working with them in a subcontracting capacity. And so you'll see a downtick in our gross margin in the back half of the year.

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Operator [8]

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And your next question is from Walter Pritchard with Citi.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [9]

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First question, just wondering if you could update us on the mid-market investments that you've been making around trying to get customers to be able to enter your product portfolio at a lower entry level.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [10]

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Yes. So I think I mentioned in the prepared remarks we have a business that is addressing very small businesses, that is a number of intermediaries that are signing up individual businesses onto the platform. And that is a great growth. But also, there is a product I mentioned to the mid-market. Our digital product can be sold stand-alone. Some of our other products can be sold stand-alone. And we added some -- we were only able to mention a few logos, but we added Anaplan, Boston Pizza and Sonos. They don't -- maybe they don't think of themselves as mid-market, but those size of deals, those type of deals are becoming more common for us because the survey players just fall short. People want the forward-looking platform, they want the messaging capabilities, the live time capabilities that we've talked about. Still early days for the mid-market business, and Rory's only been with us for 2 quarters, but I'm very excited about our potential there.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [11]

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And then, Roxanne, just I understood what you said on the billings and the fluctuations there. I guess that was just probably a bigger fluctuation in deferred revenue than we were expecting, especially given the performance in RPO. Is it just as simple as you expect some of the billings and collections to come in on those large signings in the subsequent quarter? Or is some other trend there in terms of volatility that's new?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [12]

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The RPO portrays the high -- a level of confidence. Our customers have an extremely high level of confidence in us, and as a result, they are signing large multiyear renewals or expansion deals with us. So you'll see that, as our customers continue to sign multiyear renewals, that we will see fluctuations in our RPO. So we're very pleased with the RPO for the quarter.

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Operator [13]

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Your next question is from Phil Winslow with Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14]

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Congrats on a first quarter out of the box. I just wanted to focus in on cross-sell, up-sell. Wonder if you can give some color in just what momentum you're seeing in any of the specific add-on modules versus maybe your expectations. And also, just at the Experience Conference, you launched a lot more. Obviously, it's still early days on those. But what's been sort of the early feedback on some of those newly launched add-ons?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [15]

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Great. So I mentioned the Conversations product in the prepared remarks, which is really taking off. It's early days with the promoter technology, that's brand new. Customer success, actually, we did a number of new deals in the quarter with the customer success module, Strikedeck, that we financed at the conference. So I'm really pleased with the progress there. And those deal sizes are getting quite interesting for us as well. So a good first quarter out of the gate with the new products. And our road map is dynamic, and we expect to be bringing some more to market in the upcoming quarters before the end of this year.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [16]

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Got it. And then one of the conferences you'd mentioned was Workday Rising coming up. I wonder if you also could just give us an update on employee experience.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [17]

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Yes. Employee experience I'm very happy with. I'd classify that as a new solution. It's been run a little bit longer than some of the others we just talked about. But I'm very pleased with the reception of our proposition there, which has been employees and teams should be on the same platform as customers. They should have the same level of sophistication, the same communication capabilities and actually resonating with our customers of all sizes. And some of our customers, actually new customers, have actually started with team-first and employee-first, so getting great traction there.

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Operator [18]

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Your next question is from Brad Zelnick with Crédit Suisse.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [19]

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Leslie and Roxanne, congrats to you and the team and all the success, great quarter. First question I just have for Leslie, the volume of mobile messaging you talked about in your prepared remarks is simply staggering. Can you maybe expand on the value prop for messaging? And the type of engagement and outcomes your customers are seeing when they engage via this channel?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [20]

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Yes. I mean, it's a new channel for us. And so we have no predictions about those volumes. We were prepared for scale, so technically we were prepared, which is important. I think that this is an unfolding story for us. And it backs up our whole thesis that the world is moving way beyond the survey. And as I said, the post-experience survey is very important, it's critical. But the world is moving to live time messaging in every dimension. I went through some of the channels, WhatsApp, WeChat, Facebook conversations and so on and we expect [things] to continually expand those channels. And the appetite in our customers for those signals is incredible. You think about those -- that number of messages that I quoted, there are data elements that -- that's information about our customers, customers that they never had. It's very powerful. And all of the benefits that flow from our traditional capabilities flow from the messaging signal, so we can understand sentiment, we can use that data to analyze themes just as we could traditional survey data, and so that's very powerful. Still very early days in the journey. And actually, we expect to talk about some more product enhancements around messaging in the coming quarters that are going to be just as exciting.

Early days, let's see how it unfolds and understand fully the implications. But I don't see why any of our customers -- I don't see how actually they can really live without the conversations technology. But it's pretty clear, there's nobody, there's no domain, no business, no division within a company that won't see benefit from that live time communication capability.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [21]

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Sounds very exciting. And maybe just for Roxanne to perhaps put a finer point on Kash's question and Walter's questions. How much of the customer growth that you saw this quarter is coming from mid-market versus enterprise customers?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [22]

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So it's early days from a mid-market perspective. So we've seen a handful of customers come from the mid-market in the quarter. They are still primarily enterprise. As Leslie commented, Rory's been onboard and we've been focused on this new market initiative for a couple of quarters. We are really optimistic. In Leslie's prepared remarks, one of the things he talked about is the broader ecosystem that uses our product for smaller hotels, venues -- sports venues and other things like that. And those customers are not in our customer count at this point in time, but that represents another opportunity we have to continue to expand our customer base.

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Operator [23]

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Your next question is from Brian Schwartz with Oppenheimer & Co.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [24]

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Congratulations on a great first quarter of results here. I had a couple of questions for you. Leslie, first, I want to talk about the acceleration in the business here, maybe look at it from a different angle. I was wondering if you could share with us a little bit about the ramp of the quota-carrying sales reps. I know you've obviously made big investments there over the last year and this year. But can you talk about how the growth in the ramp sales head count, how that's trending and if you have any thoughts on how we should think about the growth for the entire year versus, say, last year? Even if you can't give us a specific number, maybe if you could just talk about the magnitude. And then I have a follow-up question.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [25]

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Yes, that's a great question. I think that my big issue is getting to add (inaudible). When we get to add (inaudible), particularly in the large enterprises, we win. There's just nobody that offers our proposition and our value at this level or the technology, just no one. So it's getting to add (inaudible). So we've added -- we're about 33% up in terms of quota-bearing sales capacity at the moment. And we said during the roadshow that we'd add 40% productive sales capacity this year. We're at least going to meet that. The opportunities there, it's within our financial envelope that Roxanne's managing pretty tightly, so we're going to continue the investment through the rest of the year. We're on pace -- and quality, we're getting quality sales talent from other cloud companies. We had somebody recently come onboard, and in the first 6 weeks of coming onboard, did their number for the year with a brand-new business cloud transaction, so very happy with that. It's a real number. So that type of thing is there for us. So we're going to continue to invest and do that 40% growth that we committed to.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [26]

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And then the follow-up question I had, Leslie, I just wanted to ask about the overall market adoption trend. So when we look back at the business, clearly, the business is focused on the end-user experience. You've done it with consumerization. You have the realtime behavioral analytics and prediction engine. And mobility is very front and center in the platform. And I noticed, and you did mention in your commentary that Medallia is unrivaled by the competitors for really proficiency and scale. And so the question I wanted just to ask you from your vantage point, are the survey vendors, the legacy software vendors, or any of the incumbents in this space, are they still stuck on focusing on a single data source or focusing on power users, which really hasn't worked for them in other categories. And just wanted to kind of get a broader update on the adoption trends as you're adding these new logos and what you're hearing within your install base?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [27]

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Yes. I think the survey vendors, whenever we see survey vendors present in an account, it's always a good sign because at least the customers made a first step. And they can kind of pave the way for us to come in and then offer the fully fledged platform and capture all the modern live time signals. And that takes big investment, and Medallia had already made that huge investment in the platform, and that's beginning to pay off. And the other thing that I see is I see them following us. I see them following our language and talking about some of our innovations. But actually these innovations are deep technical innovations that take time to cease and then work effectively at scale, preserving privacy and security. And I don't think they really understand the cost or dimension of that. But some of them do a good job in market research, and that brings those customers to us. So I'm always happy to see a successful survey implementation in a customer, whether it's our survey technology or somebody else because then that leads people to the platform. But look at the messaging growth that we talked about, that's where the whole story is going. It's live time communication, taking all of that data, putting it into the platform and then running our theme exploration technology across it to surface themes and intents of customers. That's where the heat of this business is today.

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Operator [28]

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Your next question is from Terry Tillman with SunTrust.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [29]

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Congrats from me as well. The first question, just maybe for you, Leslie. You talked about -- and we know that historically, hotels and hospitalities was where the company got started and had a solid momentum, but I think you mentioned health care and insurance. So I'd like to maybe hone in on that. You called those 2 segments out. What was kind of the tipping point there or kind of why emphasizing that in terms of maybe those are some newer emerging verticals where the businesses are ramping? And then I had a follow-up.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [30]

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Yes. Okay. So I think having a solid geographic coverage is important for us, but the vertical model, which is relatively new, is really beginning to yield great dividends. Health care, I call out for several reasons. One that it's new, and we had several really good size transactions, head-to-head transactions in the quarter, new business deals that we're very happy with, proving our proposition there. But the second reason is that some verticals, I'd say hospitality and health care, have a disproportionate network effect. That is to say that when people use health care services, when they see the "powered by Medallia" feedback technologies, that branding in the hands of those consumers have a particularly potent effect is what we're seeing. And so the network effect in hospitality, the promotion to review sites and so on, is very pronounced. The network effect in health care also because you think of some of the health care consumers, executives, corporate leaders, you see your branding and understand the impact that your technology can have in their business, that network effect for this category is something that's -- I think is unique. I think we will see the same eventually in financial services and retail and transportation and travel. And travel, the network effect we see is where certain partnerships take place, loyalty partnerships take place between airlines, car rental companies, hotels and so on. And surely, they want to enjoy the same type -- the same levels of feedback and sort of having the confidence to move around those areas and to offer our proposition to those linked companies. You can name some of them, the obvious ones that have clear partnerships with different businesses, all lining up the customer journey. That's where the network effect can be really potent for us. So -- but that's why I called out health care.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [31]

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Got it, got it. And I guess, Roxanne, follow-up question relates to subscription billings, and you pointed out [a while] earlier in terms of just 1 quarter at a time could get you a lot of volatility. So [TTM] is equally important, if not more important. I am curious, though, it does look like we have a tough comp for 3Q. I guess it's more of just an observation. But then as you see the business, does it still feel like there's -- the seasonality is most pronounced in the fourth quarter on billings?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [32]

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Yes. Thank you, Terry. So from -- as I highlighted, from a SaaS billings perspective, one of the reasons that we do look at the trailing 12 months is I just think that's a better indicator of SaaS revenue growth rate. And yes, we do have tougher comps in the back half of the year, so thank you for highlighting that. And what was the last part of your question, Terry? I apologize.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [33]

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No, no worries. You'll get used to me. I usually have a 3- or 4-part question, but it just relates to you all are putting in, instituting a lot of like go-to-market best practices, plus expanding sales capacity. But until some of those kind of irons in the fire really play out, should we think about the billings progression typically still being more back-end loaded, where it's a big fourth quarter seasonal surge?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [34]

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Yes. So that's a great point, Terry, because 40% of our billings occur in the last quarter, and that's based on our historical performance. As we become more effective in the mid-market, and as we ramp up the productivity of our sales force, you will see over time, and it will take a while to do this, that we will hopefully see less seasonability around our billings.

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Operator [35]

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Your next question is from Bhavan Suri with William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [36]

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I'll add my congratulations here. I guess I want to touch a little bit on the managed services business in conjunction with the partner strategy. I understand it's early. But Les, as you think about how that plays out, do you think that the partners -- [there's a] set of partners that end up doing a sort of managed services? You alluded [to this] a little bit in terms of the mid-market, but I wonder if it plays out in the enterprise too for some guys that want someone to sort of manage and deal with the whole process as this transition from just basic sort of initial customer experience to post activity, post actionable intelligence happens. I'd love to get your thoughts of sort of like is there a managed services play for these guys? Because obviously that then enhances their ability and their willingness to go sort of sell and propagate and drive reach for the solution.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [37]

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Yes, Bhavan. I think that's a key to our growth. I think already we have several key partners directly and on a subcontract basis doing some of those managed services. I think we have to shine a light on the potential there. And our customer momentum is such that we can't possibly cover all the opportunities. So we're tooling up with Accenture and with Deloitte, and with a number of boutique partners that can help us that are really superb. And regional partners, I was just with our [partners' CX] team down in Latin America, fantastic partner down there. We couldn't cover anything like the territory that we do without our partnerships. So I expect that to continue to grow over time, yes.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [38]

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Great. And I just wanted to -- I know there's a couple of questions asked on the sales or -- and you've obviously made some changes there, brought over talent, realigned territories, et cetera. You're adding quota-carrying capacity. I guess, as you look at it, and you mentioned you had one sales person sort of ramp really quickly. Are you seeing a speed in general of time which they're ramping? Or if you were to look at deal velocity, do you think sort of, given you've rejiggered sort of the size of the deals, sort of the bite-size pieces, that potentially deal velocity has changed at all? I'd love to get some color on how you think about that.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [39]

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I think it's early days. I think, definitely, in the last couple of quarters, we've seen that. I mentioned that example we brought up. It's early days. But just intuitively, the fact that we are prepared to meet customers where they are. And I think I've done a fairly detailed analysis, I should tell you, in the last year of win-loss data for the company, which we always do very rigorously. And there are very, very few situations where there's been a feature function technology loss. It's typically been a poorly handled commercial negotiation or kind of just in the sales [risk] action, and we're just helping our salespeople, coaching them to get better and stay at the table and negotiate effectively and don't lose for silly commercial reasons, be sensible with customers, meet them where they are. That's definitely changed the velocity, there's no doubt about it. And the fact that we've modulized the products, I can sell individual products, is really changing the trajectory, the timing of deals. But again, let's keep our feet on the ground. Early days, but I'm very pleased with the progress, yes.

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Operator [40]

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Your next question is from Scott Berg with Needham & Company.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [41]

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Congrats on the big quarter. I have 2 questions. I guess, Leslie, to start off on the international side. Roxanne mentioned 25% of your revenues are coming internationally outside of the U.S. [here today]. But are you seeing the use cases in those international customers be the same here as you do your domestic customers? Or do they use the technologies differently today?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [42]

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I think we're seeing very similar use cases now across industries. We did some great telco transactions in the first half of the year in Europe. In Europe and in Germany in particular, we're seeing the same use cases that we see here. We -- it's really important that we have -- and if you look at the deck that was issued today of slides, you will see the category leaders that we have as customers. It's much -- I think it's never easy, but it's much easier to have the category leaders as real customers. I don't mean just tiny little deals, but real customers are really using the platform in [Angers] much easier than to go into the other, -- if you go -- if you have the top 3 or 4 banks, top 3 or 4 insurance companies, that story is much stronger for salespeople than having the bottom 3 or 4, right? And so I think that just helps us in Europe, in particular, but also I mentioned in Latin America. We got great traction with some of the best brands in Latin America. There's great opportunities there, very underserved by this category. And then with our new leadership in APAC, we've been doing some great business. We're doing some of our first decent deals in Japan, very excited about the progress that we're making there.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [43]

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Got it. And then just a follow-up on the net dollar retention rate in the quarter. I know, Roxanne, you had mentioned it was 118%, which is above last year's number, at least for the annual number. But is there any difference in composition of the up-sells maybe today versus a year ago? Is it truly just seats on the same customer experience module? Or are you seeing customers maybe more frequently expand their offerings into the 3 others [suits] they have?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [44]

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So historically, we were more focused on expanding across the channels for the business from a -- within our current customer base. And as we've put some of our new go-to-market initiatives in place and we've expanded additional product offerings, as Leslie's talked about, our conversations product, our CX 360 product, so on and so forth, this has really opened the opportunities for us to go beyond the current -- go beyond just cross-selling to the divisions, but also selling them additional products. So we've seen a nice blend of both during the quarter.

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Operator [45]

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Your next question is from Chad Bennett with Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [46]

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Great. So it looks like [Jimmy] is working his magic and the service -- in the service business, which is good to see. I guess maybe I think a few analysts have -- took a stab at this. Just I know you don't want to get into -- Roxanne, you don't want to get into kind of quarterly billings and stuff like that. But just from a seasonal standpoint, if we look at the deferred revenue line, both overall and then the SaaS portion, I think, typically, in the third quarter, it's kind of flattish to down. I guess would you expect the same this year, directionally?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [47]

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So yes, as I highlighted, I would expect that our third quarter SaaS deferred would be down slightly. And then in Q4, we will see an uptick because I shared previously about 40% of our billings occurs in Q4.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [48]

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Okay. And then if we look at -- maybe a question for Leslie. If you look at over 50% of your customer base, north of 1,000 employees are users. Can you give us an idea where today they are in terms of either kind of average number of signals that customer base uses or products? And then maybe give us a glimpse of where that could be in the next couple of years or where you at least kind of target that to be in the next couple of years?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [49]

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Yes. So that's a great question. So I think the -- we mentioned on the roadshow, 2 to 3 products on average across the customer base. Intuitively, that's expanding. I think we have 9, 10 useful products that everyone should have, in our view. So our marketing campaigns through to our sales motion are about -- and cross-sell are about adding those products. I mentioned some really -- everybody should have digital combined with the basic survey capability, everybody should have the Conversations technology, in my view. But the whole thesis that we talk about with customers of platform and signal and why would you have somebody providing you with a survey technology, somebody else with a digital technology, it doesn't make any sense because you still going to have to capture those signals and run the theme exploration technology and analysis technology over them. And so it's very compelling for our customers. We just had one very large customer actually send a notice to a number of other providers, including a survey provider and a text messaging provider, and ask them to ensure that those signals, those data elements are incorporated into the Medallia platform that they use as their core customer experience platform. And I think that, that's going to happen again and again and again. It's an important part of our proposition with our customers. So our ambition is to get everybody at full boat. Everything, 10 modules. But right now, we're making steady progress adding tons of cross-sell opportunity.

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Operator [50]

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Your next question is from Richard Baldry with Roth Capital.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [51]

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I got a little challenge joining. So I hope this wasn't covered before. But sort of curious, your thoughts on going beyond 10 products. You've brought in someone to work in [biz] development that you had a lot of experience buying companies with. You've got a lot more resources, both in terms of equity, market cap that's pretty strong and post-IPO cash. So any thoughts on the pace to expect on acquisition, size, scale, strategic, other customer bases, just some things that we should kind of be looking for milestones ahead?

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [52]

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Yes, great. So we've added, I think, 3 tuck-ins already this year. You should expect, I think, 2 or 3 more before the end of the year. They have to be right. They have to be relevant. Our criteria is they have to be solid financially. They have to have decent growth, they have to have customer traction and hopefully customers that we know. But we have a nice pipeline. And then one of the things strategically to point out is that we see other companies that are really aggregations of survey vendors. In many cases, many, many survey companies all glom together into one thing. And that's not -- we don't believe in that. We -- our duty is to innovate. We've already got that technology down pat. We're the best at it. Our duty is to innovate beyond that, give our customers more value through lifetime messaging, better machine learning. These are the types of technologies, without giving too much away, that we are really interested in. So you should expect a couple more before the end of the year and maybe more. And we're not transformational acquirers. Never say never to anything. But you're right, we have a very strong balance sheet. We've got plenty of firepower to get the things that we really want.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [53]

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Okay. And just sort of curious for Roxanne's side maybe. If customers come back and are adding modules for things and re-contracting sort of mid-contract, does that become a renewal on a different time frame then or does it stay with the original? The reason I'm asking is sort of curious if this fourth quarter surge in renewals that really hits the receivables and deferred and then it amortizes off the first half of next year, if that pattern would change at all under a scenario in which there's a lot of people doing add-on modules?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [54]

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That's a great question, Rich, because we see customers who will come in and because they already have a large presence with us, and now they're adding on to it, they may want to take what they're buying and they may want to co-term that to their contract or they may want to go the other way and co-term their entire contract rather than just a new purchase. So that does create some variability. And when you're working with enterprise companies of this size, it's important that we're flexible around that. So that's one of the things. And then specifically back to the RPO piece is that when we have large multiyear renewals, we will see fluctuations because we could have had 3 months left on that RPO and then the customer comes and does a 5-year renewal, so that we will see some ups and downs. The other thing that ties to the RPO and the billings that I'd like to highlight is, as I shared, we do have a 12-month trailing billings growth rate of 33%. But our go-to-market initiatives that we put in place, we really started putting those in place in the back half of last year. So as a result, our comps do get tougher. So I do expect that this overall 12-month trailing SaaS billings growth rate will decline somewhat as we go into the back half of the year just because of these tougher comps. But with that said, as I've shared previously, we are very focused on this being an accelerated SaaS revenue growth rate. You can see that in the guidance that we've given you of 23% to 24% for the year. And we think that the natural growth rate on a longer-term basis is 25% and above.

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Operator [55]

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Your next question is from Tom Roderick with Stifel.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [56]

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I'll echo the sentiments here by offering a congratulations on a very nice first quarter out of the gates. I want to throw my first question here to you, Leslie, and you've got a number of questions regarding the cross-sell and up-sell path. But I'm very curious as to how customers are adopting and reacting to the artificial intelligence you put into the platform over the years and noticed you've now included churn prediction and improvement suggestions that has hold into the platform just more recently. Can you talk about how customers are asking you to include that, how they're embracing AI? And to the extent that it's having an impact on pricing and ARPU in the products that they're buying, would love to hear about that as well.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [57]

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So the overall machine learning capability, we should call -- we should talk about is Athena. And Athena gives us the ability to analyze all of the signals, as we've said, beyond the survey. And I think we're getting real traction in our customer base. It's also a major part of differentiation in new business head-to-head. And I would argue that a couple of the deals we talked about were actually brought to fruition at our Experience event, and that was the big reason for the understanding of how machine learning can process all of that data quickly in live time and create predictive offers, predictive outcomes, predict churn and so on. It is a very powerful proposition and it's not easy to do. We can do it now and we put a lot of time and money into the technology, and we're continually refining it. I think the other dimension that they realize is the sooner they acquire it, the sooner the learning models become mature, more effective. So the longer that you deploy that technology across the data sets that we now consume, the more powerful it becomes. That's the really important point here. And it's important for our salespeople in their selling motions to communicate that effectively to our customers. I can't see a single serious customer that can really do without the technology. And the rate of new innovation is to take it from beyond just looking at unstructured survey responses to look at text messages, WeChat, WhatsApp, whatever the signal may be that we're bringing into the platform.

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Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [58]

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Really helpful. Roxanne, my second question is for you, and I don't mean to beat this RPO deferred revenue topic to death. But it certainly seems that you're getting a lot of questions here around seasonality of deferred and that'll build nicely into the fourth quarter. As you take a step back, and I think all software investors have started learning the importance of RPO, but it differs by company, do you have a preference for which -- for which metric you think is more indicative of the business trends? Would you rather us emphasize RPO? Would you rather us emphasize the longer-term deferred trend? And to the extent that RPO is important, how should we think [of ways that] -- think about how that builds throughout the rest of the year as well?

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [59]

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So Tom, I think that's a great question and (inaudible). In our particular case, we only have 3 data points from an RPO perspective. And I think you have to look at both items together because when I look at RPO, I see -- you see 2 things. One, you see the current portion. But more importantly, you see the longer-term piece. And you see essentially what our committed book of business is. Now when you look at our trailing 12-month SaaS billings growth rate, that is more indicative of the shorter-term and the current portion. So I think you have to look at both of those. And as time goes on and more companies and us specifically have more RPO data, and we're able to look at things over a year-over-year basis, we'll be able to evaluate which metric we think you should look at. But at this point in time, my recommendation for Medallia is that you consider both metrics.

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Operator [60]

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Our last question is from James Rutherford with Stephens Inc.

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James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [61]

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Appreciate you squeezing me in here. A couple from me. First, Leslie, for you, you talked about your investments and growth prospects in the international front. Sounded really positive there. I was just curious what you're seeing in terms of your OUS pipeline. If there's anything in those forward-looking metrics in terms of the macro that would give you any pause or if the secular trends and kind of your go-to-market efforts are strong enough to propel this business despite some of the things that we all hear in the headlines every day.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [62]

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Right, no. Great. So I think the size that we are, there's no excuse in the macro. We are relatively small today with a massive addressable market. And actually, people are more acute about their existing customers, how to understand and retain them and cross-sell to them than ever before. And also customer loyalty is at an all-time low out there in the B2C world because people have more choices and they can act quickly, digitally in the palm of their hand on their mobile. So it's more acute to have a technology that really understands and informs you about your customers. In fact, some companies, although I didn't name any of them, but some companies that we do business with are companies that are recovering positions. They are beginning to turn to growth, they're beginning to look acutely at their existing customer base. So I don't worry about that. And certainly I don't worry about the European situation. We're just too small to have the addressable opportunity impacted at this stage. There's a ton. My biggest concern is being -- having more of (inaudible) and having the right quality coverage through our partner model and through our direct salespeople. That's the key. That's what we're focusing our building investments on at the moment. We need more high-quality salespeople around the world, we need more vertical knowledge, we need more solutions engineers, we need more of everything. The opportunity is huge. And so I think we're in good shape there. I'm going to spend some time in Q4 in Europe. We just put new leadership there. India is a very strong business for us, potential gets just better. I mentioned my Latin American tour, I just returned from there. And then at APAC, we did our first kind of really significant transactions in Japan. We have great growth opportunity in APAC. So we are a size of company where we're growing, we're investing. And we're not kind of ignoring all of the things that happen, but they kind of happen all the time. With the size we are, ton of opportunity.

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James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [63]

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Okay, that's helpful. And then Roxanne, a follow-up for you. I know this is clearly a growth (inaudible) -- I do want to touch on margins, just kind of to help get the long-term model right. You're guiding I see for around negative 2%, negative 3% op margins in fiscal '20. That's a really nice improvement year-over-year. Can you just talk a little bit about the few -- kind of a few of the drivers for that expansion? And just how you think about the [tenure] of that sort of long-term march up to your margin framework of 20% plus over the long term.

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Roxanne M. Oulman, Medallia, Inc. - Executive VP & CFO [64]

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Absolutely. So when you look at the improvements from a year-over-year perspective, we've been very focused on how to redirect the funds that we're spending while becoming much more efficient from a cost perspective. And some of the things that we have done is we did in the first quarter, we did some facility termination of our headquarters, and you'll see that -- I mean you saw that in our prospectus, and you'll see some of that still in our 10-Q when it's filed. And that has had significant savings, and it also has allowed us to redirect and go to market. And we've -- I have a very prudent financial approach. And when I look at things and when I assess things, what I'm looking at is does it enhance our product or does it improve our ability to sell? And those are the things that we are focused on. And we're very focused and we believe that it is important that we become self-sufficient, and that means that we are profitable and we generate cash. And as I shared in our remarks that for fiscal '21, we intend to be cash flow positive. And so those are the things that we're focused on and aligning. Now as you look at longer-term basis at our long-term model, and our long-term model we've projected is over 5 years from now, this will be a gradual uptick to the 20% or above from an operating margin perspective. But when I look at the growth opportunities that we have in this large TAM and our ability to invest in go-to-market, while continuing to show operational efficiencies and leverage, I feel that we will be able to make this gradual uptick into that point. And I'm highly confident in that.

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Operator [65]

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Ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to Leslie for any closing remarks.

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Leslie J. Stretch, Medallia, Inc. - President, CEO & Director [66]

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Thanks, everyone, for joining us today in our first public earnings call. We just begun. We've got a great runway ahead of us. It's very exciting to talk with you all. I look forward to seeing you in the coming quarters at conferences and face-to-face, carrying the Medallia message. Great stuff.

Thank you.

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Operator [67]

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This concludes today's conference call.

You may now disconnect.