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Edited Transcript of PLAN.N earnings conference call or presentation 26-May-20 12:30pm GMT

Q1 2021 Anaplan Inc Earnings Call

SAN FRANCISCO Jun 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Anaplan Inc earnings conference call or presentation Tuesday, May 26, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David H. Morton

Anaplan, Inc. - Executive VP of Finance & CFO

* Edelita Tichepco

Anaplan, Inc. - VP of IR

* Frank A. Calderoni

Anaplan, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Aleksandr J. Zukin

RBC Capital Markets, Research Division - MD of Software Equity Research & Analyst

* Brent Alan Bracelin

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Heather Anne Bellini

Goldman Sachs Group Inc., Research Division - MD & Analyst

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Equity Research Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Stan Zlotsky

Morgan Stanley, Research Division - VP

* Stewart Kirk Materne

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* Taylor Anne McGinnis

Deutsche Bank AG, Research Division - Research Associate

* Yun Suk Kim

Rosenblatt Securities Inc., Research Division - Senior Software Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Anaplan First Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Edelita Tichepco, Vice President, Investor Relations. Thank you. Please go ahead, madam.

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Edelita Tichepco, Anaplan, Inc. - VP of IR [2]

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Good morning. Thank you for joining us on today's conference call to discuss Anaplan's First Quarter Fiscal Year 2021 Financial Results. Joining me on the call are Frank Calderoni, our Chief Executive Officer; and David Morton, our Chief Financial Officer. On this call, we will be making forward-looking statements, including financial guidance and expectations for our second quarter, anticipated future operating and financial performance, strategies, customer demand, product and technologies. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to documents we file with the SEC, including the Form 8-K filed today with today's press release. Those documents contain risks and other factors that may cause our actual results to differ from those contained in our forward-looking statement

These forward-looking statements are being made as of today, and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not be current or accurate.

We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Unless otherwise stated, during the call, all references to our gross margins, expenses and operating results are on a non-GAAP basis. For historical periods, a reconciliation of GAAP and non-GAAP results is provided in the press release and in supplemental financial information on our website.

And with that, I'll now turn it over to Frank Calderoni.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [3]

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Thank you, Edelita. Good morning, and thank you for joining us today. As I discussed last quarter, we had several changes in our sales leadership, including the departure of our Chief Revenue Officer and the introduction of new talent in the Americas, which impacted our fourth quarter performance. Our top priority in the first quarter was to focus on improving sales execution and performance, specifically related to optimizing pipeline around opportunities and customers who have the highest propensity to buy. While we have made good progress in our sales execution, such as driving stability across the teams, retaining key talent and focusing our efforts with larger enterprise customers, we still have more to do, and we have great confidence in our sales team.

For our first quarter results, we had a strong start in February. We were able to convert some of our Q4 deals that had not closed last quarter. While we were seeing good traction through the first half of the quarter, COVID-19 became a much more substantial impact to our customers. And as a result, this affected our deal flows as customers delayed budget decisions related to spending on new projects.

This is evident in our first quarter billings, which only grew 10% over the prior year. From a total revenue perspective, Q1 revenues were $104 million, up 37% year-over-year, and subscription revenues were up 44%. Our remaining performance obligation, or RPO, balance exiting the quarter was $647 million, up 37% over last year.

To recap how our business operates, we predominantly serve large enterprise customers with a focus on significant investments with enterprise-wide digital transformation deals with a top-down selling motion. Our sales cycles can be lengthy, depending on the scale of the project, and these transformational data monetization deals will typically involve a variety of different stakeholders across several functions, and this can drive variability in the timing of deals. The absolute volume of new deals booked this quarter was lower as a result of the impact of COVID-19, which delayed decisions on deals. As you would expect, customers began to pause on projects as they refocused investments to manage the immediate impact of COVID-19, such as ensuring their teams could work remotely or working through disrupted operations.

We entered this quarter with a pipeline where late-stage deals were more heavily weighted on new logos versus expands, which is similar to what we saw in the first quarter of last year. As customers began to pause projects due to COVID-19, new logo deals were most impacted as customers deferred decisions on these new projects.

In this uncertain environment, especially with large digital transformation deals, it can be challenging to get all the stakeholders to make decisions quickly, which means that a deal can take longer to get these through the cycle.

While virtually every vertical was impacted due to COVID-19, we saw a greater impact in hospitality and travel where businesses essentially came to a standstill. In other cases, companies in health care and certain types of retail had to deal with unprecedented demand and capacity constraints. Our sales cycles were reflective of this environment. For example, in the energy sector, we had a large global oil and gas customer decide to delay a supply chain initiative to later in the year. In the travel and hospitality sector, we had a large European airline delay an enterprise financial planning project due to budget constraints. In the automotive sector, we saw multiple deals placed on hold, both at automotive manufacturers and Tier 1 suppliers, such as a European supplier for automotive safety systems.

In summary, COVID-19 impacted our business this quarter, while, at the same time, we were continuing to improve our sales execution. Deals where customer decisions have been delayed remain an opportunity for us, as there continues to be no change in competitive dynamics.

We are also pleased to see the level and type of pipeline generated over the recent 4 to 6 weeks, which tells us that the demand and interest in our platform and its core capabilities to drive significant agility and planning has not been impacted. This underscores our longer-term market opportunity that Gartner, in its new cloud financial planning and analysis solutions report, states that by 2024, 70% of new FP&A projects will become planning and analysis projects extending beyond finance into other areas, essentially Connected Planning. Our platform has always been mission-critical, but this uncertain environment makes this even more relevant to our customers, which brings me to how our teams have responded to our customers' needs.

What's been most impressive to me is seeing how our solutions are helping our customers adapt quickly. Over the last 2 months, our community of experts, certified Master Anaplanners, quickly responded by creating 17 production-ready models that can be downloaded and deployed at no cost by any Anaplan customer. These models address COVID-19 specific use cases, like hospital bed planning, PPE redistribution and FEMA-type expense tracking.

We also launched a 90-day free trial and met with various nonprofit organizations, governments and customers to help them address their urgent challenges related to COVID-19. We've seen increased interest in our platform with a number of app downloads up about 80% higher than the monthly average. The most visited page on our website in April was Deloitte's dynamic clinical staffing model built on the Anaplan platform.

Our platform has helped our existing customers revise and generate updated scenarios at high speed. For example, one of our media communications customers has used Anaplan to reforecast scenarios for revenue and cost at the detailed brand and client level over 30 different times in the past several weeks without the need to add resources or incur additional costs.

Another trend we're seeing is the need for companies to focus on reskilling their workforces now. We're proud to be contributing to the advancement of our professional community. This quarter, we continued to grow the number of certified Master Anaplanners, now up over 100% year-on-year. In addition, there has been a surge in the number of training sessions completed, as people focus on developing their skills during this time. Our ecosystem of Anaplan users know these skills are in high demand, and this will give them the advantage to continue to drive value for their company and also for future employers.

Moving on to a few customer and large deal highlights this quarter. One of our new customers is one of the largest insurers in the U.S. The customer selected Anaplan to enable faster insights through our highly flexible what-if analysis, coupled with the automation of key manual processes. In this particular implementation, Anaplan will be part of a broader technology modernization initiative involving the decommissioning of legacy modules. In this case, we also served a complementary solution helping to simplify upcoming large-scale system upgrades. This is an example of how Anaplan is winning in the larger digital transformation deals.

Another strategic deal this quarter was with one of our existing Fortune 50 customers. This large health care company was already using Anaplan for commercial forecasting and long-term supply chain capacity management. This quarter, we signed a deal to expand their use of the Anaplan platform across different functions and businesses within the company. The extended use includes R&D project planning, biomedical engineering planning, CapEx planning and in the areas within supply chain finance, such as price-volume mix analysis across different products and channels. This was a platform implementation, indicative of how our solution can be used in data modernization projects. These types of deals are typically significant in dollar size and require top-down sponsorship. This is an example of the type of major accounts we are focused on, which can take longer to close and experience more variability in timing.

In our partner ecosystem, we have continued steady progress for the past 7 quarters. The number of partners contributing to building pipeline has increased, and we're seeing more of our pipeline pivot toward inclusion in the larger, more transformational deals. We also onboarded Genpact as a new partner, a leader in driving finance transformations with over 90,000 global consultants.

Finally, I'm pleased to share our partners added another 500-plus Anaplan certified resources into the market during the quarter. And in many cases, we are seeing them ramp ahead of schedule, an indication of their intent to continue building new Anaplan pipeline.

Looking ahead, while we cannot predict the extent of disruption to our customers, we do anticipate slower new business activity through the year. We are aware of the near-term impact that economic uncertainty may have on the new deal volume over the next several quarters. However, we are well positioned with a strong balance sheet, solid customer base and value proposition.

Finally, we know every business will need to forecast differently and adapt to real time critical changes related to new demand and supply reality. We are seeing this demand in our pipeline, and we are confident in our long-term growth trajectory once budgets reopen.

Now let me turn the call over to Dave, who will address our first quarter financials and provide our outlook for the second quarter. Dave?

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David H. Morton, Anaplan, Inc. - Executive VP of Finance & CFO [4]

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Thank you, Frank, and good morning, everyone.

Anaplan's first quarter top line results were impacted by COVID-19 and our ability to close new business deal pipeline and expand existing customers. These challenging business conditions negatively affected our multi-quarter top line net new ACV and remaining performance obligation momentum and calculated billings growth. Due to the ratable nature of our SaaS revenue model, we saw lesser impact to our F Q1 revenue results.

Total revenue for the first quarter was $104 million, up 37% year-over-year. Within this, subscription revenues grew 44% and comprised 90% of total revenue. Service revenues were $10 million, down from $11 million in the first quarter last year. Calculated billings for the first quarter were $96 million, up 10% year-over-year. RPO exiting the first quarter was $647 million, up 37% over last year. The portion of RPO that is expected to be recognized as revenue over the next 12 months is $330 million, up 20% over last year.

The number of customers with greater than $250,000 in ARR was 367 this quarter, up 32% year-over-year. Our dollar-based net expansion rate, or NRR, was 117% this quarter. Historically, this has been above 120%. This reflects the lower percentage of booked deals coming from expands this quarter as well as churn resulting from one major account where there was a change of control due to M&A.

Turning to our profitability metrics. Total non-GAAP gross margin for F Q1 was 78%, up 5 percentage points year-over-year. Within this, subscription gross margins were 85%, up 117 basis points year-over-year, and services gross margins were approximately 10%, up 310 basis points year-over-year.

Total non-GAAP operating expenses for the first quarter were $94 million, up from $75 million in the prior year, primarily for go-to-market investments. Given the business environment that developed through the quarter, like many other companies, we pulled back on variable spend in facilities, entertainment and travel, outside contractors as we've reprioritized projects and prioritizing core hires within sales and engineering. Driving leverage in Anaplan's financial model has been a consistent focus. And over the past 8 consecutive quarters, we have improved operating margins on a year-over-year basis.

F Q1 operating margins were negative 13%, an improvement of approximately 13 percentage points compared to negative 26% in the same period last year. Net loss per share in the first quarter was $0.10 based on 136 million weighted average shares. Free cash flow for the first quarter was negative $6 million. We exited the quarter with $303 million in cash and cash equivalents, and our capital structure remains well positioned.

Turning to our outlook. The future impact of COVID-19 on the global economy is unpredictable, and we cannot be certain how long and to what extent this pandemic will affect our business opportunities in the coming months. While we remain highly confident on long-term digital transformation trends and the relevancy of our platform across all industries, due to the uncertainties of global market conditions, we are withdrawing our annual revenue and operating margin guidance for the fiscal year of 2021.

Like most companies managing through uncertain conditions in their business, we've reviewed several business demand scenarios internally, assuming variable economic recovery time lines. Even under the most conservative assumptions, the nature of our annual recurring revenue from our existing customers provides us with a baseline of double-digit year-over-year subscription revenue growth for FY '21. The stable revenue and our strong balance sheet gives us confidence that we will be well positioned to capture our long-term market opportunity.

For our second quarter guidance, we anticipate revenue to be in a range of $103 million to $104 million. Within this, we expect services revenue to be in the range of $8 million to $9 million.

As we are withdrawing our annual guidance, we'll provide a baseline for second quarter billings, which we expect to be in the range of $98 million to $100 million. Variable expense control remain in place and will continue to support the growth drivers in the business with targeted investments in hiring in our go-to-market and technology platform business functions.

We expect our non-GAAP operating margin to be in the range of negative 15% to 16%, which represent approximately 400 basis point year-over-year improvement at the midpoint. Weighted average share count for the second quarter is expected to be approximately 138 million shares.

In summary, Anaplan has the capabilities and resources to manage the near-term market demand conditions and the long-term opportunity to serve an even greater customer ecosystem in the next phases of global planning requirements.

I'll now turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Raimo Lenschow of Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [2]

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The question I had, Frank, was on the sales reorg situation, like, if you go through this process, it's kind of always a journey. It's not like a one-off situation or one-off thing. Like if you take the analogy of, like, a baseball game, like, where are we in that? Or where do you think you are in that kind of getting it back fully on track and being fully kind of optimized where you want to be?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [3]

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Raimo, thanks for your question. So I would say that I would agree with you. It's a journey. And as I said a few minutes ago, I think we're making real good progress as we work through this past quarter. The key thing that we've been focused on right now across the go-to-market team is really driving stability, especially in Americas. I know we highlighted that last quarter. We've been able to retain the key talent, continue to focus their efforts on really the laser focus on some of the enterprise customers that I talked about and really optimizing pipeline. I mean some of the things that, if you think about from an execution perspective, which is going to enable us to be successful in the short term and long term, it's really making sure that we can focus around the opportunities right now as well as in the future that works well for Anaplan. And as we said, it's mostly looking at enterprise transformational data modernization. It's where our platform has a sweet spot. And we're making those strides from that perspective, working not only with our own team, but also with partners and having that alignment kind of work together.

So it takes time. I feel good about where we are. Is this an ideal thing right now? No, but it's part of the maturing of an organization and really a maturing of the company. I mean if you think back, last year, we were growing in excess of 50%. And just keeping up with that and making sure that we can make the investment in our people and our process, to know that we have the ability to go after the opportunity that's out there, which I strongly feel very confident in is important.

So I think we're making good progress. I don't want to pick an inning or so, but really good progress. We're going to continue that going into the current quarter. We've had quite a few activities already underway, again, like I said, with various efforts around pipeline. As I mentioned, we're seeing good results. We saw our pipeline generation increase over the past 4 to 6 weeks, which, again, is an indication of how well everyone is getting aligned, but also from the perspective of the opportunity that we see out there. Some of it is not -- some of it is immediate, but more of it is as we think about later in the year, and so that's a good sign.

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Operator [4]

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Your next question comes from Alex Zukin of RBC Capital Markets.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division - MD of Software Equity Research & Analyst [5]

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Frank, maybe can you talk about what exactly did you see later in the quarter from both kind of a velocity of existing deal execution and new pipeline creation? And what are some of the underlying assumptions around some of those deal delays that inform the billings growth guidance for the second quarter?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [6]

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So as I mentioned, it's sort of like when everyone kind of went into lockdown toward the middle of the quarter and as we got into April is where we started to get some of the headwinds with, really, customers across the board, initially from the perspective of just pausing to figure out where things were going for them. And then secondly, as they were making certain decisions, some top-down decisions coming from CEO, CFO, even Boards, there was directives that were put down where, first of all, new projects were pretty much put on hold, and decisions on those projects were being deferred. And that was fairly consistent across all geographies, and that was within the first few weeks of really the lockdown. So we're kind of seeing through that. So we had to work through all that.

As I said, some industries clearly were more heavily weighted than others. We tended this quarter, which we do see at the beginning of Q1, more about -- we normally see kind of a 50-50 split in pipeline between new and expand. This pipeline coming into the quarter was more heavily weighted towards new accounts. Of course, new accounts require a more extensive review and approval within companies. So that was a bit more of the impact. But the good news, if I would say this, is that none of the projects have been lost. We're continuing to work through some of them. They've been -- some have been rescheduled into Q2. Others are still on pause for further decision as companies are working through the COVID situation. So we'll continue to work through that.

But at the same time, in April, and even in the several weeks in May, which is, as we continue to work on pipeline generation, new projects as well as expand projects have been coming into the pipeline. And our focus now, since we know, as we look at Q2 and Q3, we have a higher propensity to close expand deals. Our pipeline in Q2 is much more oriented towards expansion rather than new, and so that's helping. And we've also done quite a bit of work with our planning AI technology to really look at those customers, let's say, that have more chance of working through projects.

And so we're spending more time with those customers. Some of them have to do with more COVID-related, like on the front line. Some of them have to do with working with certain government agencies, and we've had a program to put in place from that perspective, which you've seen some traction. And then others are just focusing on companies and industries that are less susceptible to some of the initial COVID challenges that all of us have seen over the past 2 months.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division - MD of Software Equity Research & Analyst [7]

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Perfect. And maybe just one follow-up for Dave. Can you talk about -- I think there were some -- if you look at billings from a cash flow perspective, they were a little higher than they appeared on the balance sheet. And I'm curious if you could just go through what the major differences were, were there any FX adjustments? And how should we think about cash flow billings for the second quarter if there's going to be a difference there as well?

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David H. Morton, Anaplan, Inc. - Executive VP of Finance & CFO [8]

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Yes. Thanks, Alex. We got a minor tailwind from some of the FX, which is not anything different than we've experienced in the past with some of the headwinds coming into previous quarters, so that will always play a point or 2. As we think about coming into this next quarter and our specific guide, we're keeping things relatively flat in regards to FX and just really focusing on the key operational activity at hand, as kind of what Frank oriented around.

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Operator [9]

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Your next question comes from Heather Bellini of Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [10]

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Great. Frank, one question was you mentioned a control -- change in control due to M&A as impacting your net expansion rate. I'm just wondering if you could share with us what it would have been excluding that, if that's something that you could talk about? And then also just kind of following up on Alex's question. The first month of the quarter, just kind of how are close rates tracking versus what they might typically be in a first month of a quarter? And just anything you could tell us about the conservatism and your close rate assumptions for this quarter as well.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [11]

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Sure, sure. So I'll take the second part first, and then I'll come back to the question on NRR. And maybe Dave can kind of jump in on that as well.

So Heather, as far as the first half of the quarter, as I mentioned, we came into the quarter strong. Of course, we had our kickoff at the beginning of February, so everyone was really excited about what we laid out for the year. I think also, we had a couple of -- we came in with a good pipeline for the quarter, so that really helped. And as I said, more heavily skewed towards new, but a good pipeline of both new and expand. And then we also had some of the deals from Q4 that were kind of coming into the quarter as well. So February had a combination of all that. We did close some deals from Q4. I would say we closed about 25% of the deals from the first -- from the fourth quarter in the month of February, which was healthy.

Second, we started to move on some of the expand business, and that worked out well. And I think, also, we got a good start with our partners. So they were really energized and also very forthright in working with us in not only teeing up, but also closing some opportunities. So it was a good month. And actually, the month of February was better than the February last year. We actually had growth in business close rates in the month of February on a year-on-year basis, and really kind of going into the early part of March as well.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [12]

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Yes. And I'm sorry, Frank, I was more referring to kind of if you could share with us the first month of May -- first month of this quarter.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [13]

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I'm sorry, I'm sorry.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [14]

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Sorry about that. I wasn't clear.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [15]

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My misunderstanding. So May is looking -- as I said, we're building pipeline generation, so that was in April and May. That's continuing through the first 3 weeks of May. And we've also had deal closures. So I would say May right now is looking okay. I mean we're -- from a May perspective, I'm feeling good about the traction with the understanding of the backdrop of COVID, right? So I'm using that as a guideline. And I'm seeing a bit more of, let's say, stability from April. And I would say -- as I said, we're seeing pipeline generation build and that pipeline generation again for this quarter as well as future quarters. Dave, do you want to jump into the NRR?

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David H. Morton, Anaplan, Inc. - Executive VP of Finance & CFO [16]

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Yes. The NRR, we called out that one item due to really a change of control, and it's unfortunate that it happened. And clearly, a lot of our churn in the past, as we've always articulated, has come from side events such as that. On a normalized rate, if you excluded that item, NRR would have been closer to 120%.

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Operator [17]

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Your next question comes from Bruce Bracelin of Piper Sandler.

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Brent Alan Bracelin, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [18]

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This is Brent. I guess, Frank, just wanted to drill down into kind of how you're optimizing the pipeline. If you could just kind of walk through the changes to go to market, specifically around maybe the direct field sales, just given travel restrictions. Any color on the pivot you're making on the direct sales side just given the current environment would certainly be helpful.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [19]

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Sure. So like all companies, middle of the quarter, for us, we did have a pivot in working from home, dealing with the lockdown around the globe. I would say I was very pleased with how our team was able to respond pretty quickly. The good news about the Anaplan platform is that we're able to work with customers remotely, one, through the selling cycles as well as [motion] and even part of the implementation. So from that perspective, in the quarter, the selling motions as well as the implementation with ourselves and with our partners, we were able to pivot pretty quickly and be able to do that remotely.

One of the things that came up -- of course, it's not always ideal. One of the benefits that we have from an Anaplan perspective is our whiteboarding when we're selling and usually doing that with a team, including Anaplan, a partner as well as with various members at the customer. Doing that remotely is a little bit more challenging, but we're working through that.

The other thing is that we did a significant outreach to our customers in the month of April really just to, first of all, understand and appreciate what they were facing around COVID and not so much even selling, but just engagement and offering help. That's kind of where some of our programs on Anaplan Helps, some of the hackathon work that we did where we tried to make models available in certain situations free of charge.

We did spend a good amount of time in April, and we're still doing that this month, in helping customers modify some of their models to meet some of their near-term needs, especially as it relates to cash management, zero-based budgeting. These are some of the things that we're working with existing customers, and then we're also teaming up with new customers in the current environment. These opportunities with existing customers tend to be more free of charge. For new customers, they tend to be smaller in nature, but it allows us to start to plant some of the seeds.

From an execution perspective, again, it's the discipline and focus around the types of customers in certain industries, in certain environments that we pivoted to as well and allowing us to spend more time, more effort in using our time most effectively as it relates to prospecting new as well as expand opportunities. And as I said, that's tended to work quite well for us over the past number of weeks.

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Operator [20]

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Your next question comes from Taylor McGinnis of Deutsche Bank.

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Taylor Anne McGinnis, Deutsche Bank AG, Research Division - Research Associate [21]

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Could you maybe talk about the net expansion rate that's embedded in the 2Q billings and rev guide? And how that might compare to the 117% or 120% normalized that you just mentioned in the quarter? And if there's anything that you can share on expectations for how low that net expansion rate could go near term or at least what you're seeing today.

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David H. Morton, Anaplan, Inc. - Executive VP of Finance & CFO [22]

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Frank, I can start off and then -- yes. Sure, sure, sure. So Taylor, with our billings, we did it more from a bottoms-up forecast and then we took some appropriate measures for some assumed churn. The NRR will really be an output of both how much expands within that specific cohort, so it's not that our billings number is actually solving for specific NRR, if that makes sense. So as we went off and examined and did the bottoms-up forecast, that's where we came up with that solid forecast that we've provided for this specific quarter.

In regards to NRR, and as we think about things and this level of uncertainty, I think it's fair to say that if things were to continue as is with the shelter in place and kind of some of the prudent guidance we've given, there are some bookend cases that you could see rate going as low as 110%, but that still provide some moderate levels of expand and even if you tick up a little bit of churn coming into the next quarter or 2. But all things said, I would see that as kind of a new floor as we continue to navigate the uncertainty that we're looking at here in the very near term.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [23]

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And the more that we can, as I said, focus on expansion capabilities and then the higher mix of expand, which is kind of where we're working on right now, the better we're going to be able to kind of see more of that kind of follow-through on the NRR.

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Taylor Anne McGinnis, Deutsche Bank AG, Research Division - Research Associate [24]

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Got it. And then just maybe a quick follow-up because you said before that for the pipeline that the split tends to be between new business and expansion 50-50, and you said 2Q being a little bit more weighted towards expansions this quarter, any idea on how you're expecting like that, that split to look?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [25]

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So in Q2, our focus right now is to -- is more like the balance to get back to like that 50-50. And even if we can skew it more toward expand based on, again, more of the challenges on bringing new business to closure, that's the objective. And the pipeline that we're building or creating as we see it now over the next number of months is showing that shift.

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Operator [26]

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Your next question comes from Pat Walravens of JMP Securities.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Equity Research Analyst [27]

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Great. So Frank and Dave, one of your competitors is going to be reporting tomorrow night. And given that we're going to have that sort of additional context, I would love to hear your thoughts on if you look at your billing miss internally, whatever that amount was, how much of that would you say was because of COVID-19? And how much would you say was because the sales execution isn't where you would have wanted it to be?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [28]

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It's -- Pat, it's hard to say. I mean it's sort of like this quarter coming in, as I said, with the backdrop of Q4 was not the ideal situation to have. We made the best of it in the early part of the quarter, as I said, really getting everyone to a fast start, closing transactions, but also spending the time on further focus and diligence in maturing some of our processes as we think about more of the long term, as I said before. So working through that, there was -- and as I said before, we're not through that. I said this back in the February time frame when we were closing out Q4 that these take time.

And so we're working through that. And now we'll continue to get progress as we think about the next couple of quarters. But again, COVID came right on top of that. And so we had, if you want to say that, double whammy from that perspective. And we work through it. Most of the deal activity as far as those decisions that were put on hold were more skewed toward COVID-related and budgets and things like that. The environment is tough, right? And being able to kind of work through it, Dave mentioned earlier, some of the decisions that we made within Anaplan, I think, were somewhat typical of a lot of companies, right, pull back on some of the procurement spend, some of the contracts, especially new contracts, so kind of working through that.

But again, I do want to highlight this. I mean having the ability to develop more models that are COVID specific on the front line has been very helpful, the hackathon, the 17 models that were developed and now are available to customers. And then also, right now, I've mentioned this briefly before, we're leveraging -- we had a deal that closed at one of the states in the Northeast. They were working through the pandemic. We're now looking to replicate that and make that available to other states across the U.S. and see if we can get some more leverage from that.

So we're honing our efforts, and this is both from a process as well as from the pandemic environment, to see how we can continue to make Anaplan's platform helpful to customers. And the most important thing is drive value. If we drive value, we have a higher chance of getting through budget challenges and working through that. And that's where we're putting both the emphasis again on process as well as also mining the opportunities a bit more and highlighting those where there could be a higher propensity for them to buy Anaplan.

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Operator [29]

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Your next question comes from Kirk Materne of Evercore ISI.

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Stewart Kirk Materne, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [30]

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Frank, how have your conversations with clients maybe changed a little bit in terms of just the vertical functionality that you provide? Meaning in terms of what's going on right now, I'd imagine more focus on budgeting, helping companies save money versus maybe sales planning. I was just kind of curious. Can you give us just a sense? I imagine it might get deferred and things like that.

So can you give us a sense on that and then just to maybe put a finer point on one of your earlier comments? I assume the biggest sort of bottleneck right now is clients going from pipeline to bookings is just budget approval. I just want to make sure that's kind of what you're saying. So as business confidence gets better, you feel like that bottleneck will hopefully thin out a little bit.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [31]

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Sure, sure. So I will say, if I look back and think back over the last 2 months, more and more of our conversations, myself included, in the customer outreach that I did for several weeks from my home was really to talk to finance executives, a lot of CFOs, various members within finance organization because, again, they were dealing with this change, this sudden change to their business, and they were looking for ways of trying to pivot. And so that's where, again, we spend some time with them, again, offering help and assistance on helping them redesign or modify some of their models to give them the ability to have more intelligence. And that's not only from my perspective, but I would say across the organization.

So specific solutions on the point of liquidity, as I said before, zero-based budgeting. Part of that was also workforce because, as you would expect, companies started to look at their workforce and start to figure out different things. Some were hiring very aggressively and, therefore, they had one dynamic they had to deal with. And I talked to one CFO, who was just couldn't keep up with the volume of the hiring because of how things were shifting for them. And then I talked to other CFOs where they were making tough decisions related to workforce reductions. So I would say the predominant conversation has been with CFOs and finance organizations.

Pivoting from that, the other side of the equation was supply chain. I was personally involved, I would say, with quite a few transactions, and still in this month, on supply chain, visibility in supply chain, again, modifying, being more agile in supply chain. And so again, we're able to kind of talk about the value that we can provide in supply chains to allow a much deeper analysis and a much -- a more agile process for them to get information, make decisions and move on from that perspective. And actually, the -- one of -- I didn't mention this deal, but one of the critical deals that we had that closed in the month of April was a technology company that was actually working through modifications in supply. And I was really pleased to see that really come together, even in the midst of what was going on in April.

Now your last point as far as budget approvals, yes, the -- I can't say that's going to be solved everything. But I think, right now, that's been somewhat of the Achilles heel in most of these transactions. So as budgets start to free up and things start to relax, yes, I would expect that hurdle to be somewhat lifted.

But again, we're trying right now. We're all on a situation of -- it's an unknown environment, how fast the recovery -- are we really into a recovery, how fast that recovery will be and when companies will start to free up some of their investment dollars. We're also being, again, as I said, prudent. We're still making investments. We've got critical hires that we're still considering and going through in the sales and engineering. But other projects from that perspective had been put on hold for us. So it's really kind of working through that balance.

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Operator [32]

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Your next question comes from Yun Kim of Rosenblatt Securities.

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Yun Suk Kim, Rosenblatt Securities Inc., Research Division - Senior Software Research Analyst [33]

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Great. Quick question. Given the current status of the spending environment out there, is there a plan to focus more on smaller and faster deployment opportunities rather than your traditional larger ones?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [34]

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The answer for that is, yes, at the moment. I mean like I said before, we're pivoting where we can help customers. And sometimes, it's modifying existing models. Sometimes it's creating new models that they can deploy within a week or 2. Sometimes it's leveraging some of the 17 models that were created through our hackathon. Those opportunities, just to give you an idea, we kind of ballpark that. It's -- some of them can be worth anywhere from $50,000 to $150,000, so it just kind of gives you an indication of a smaller business. And we did see more of that in April, and we're seeing some of that in May as well. But that's not enough to offset some of the bigger transformational deals that do take longer to close and are in the midst of budget decisions being on hold. But yes, we're looking for all ways to -- and again, those also plant seeds for other opportunities further down the road.

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Yun Suk Kim, Rosenblatt Securities Inc., Research Division - Senior Software Research Analyst [35]

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Okay. Great. If I can squeeze in one more. So with the free trial offers and such, are you somewhat embracing the bottoms-up sales approach as well, in addition to your top-down approach?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [36]

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Well, that's a whole different -- yes. So top-down is important when you're doing transformational data modernization projects because they require higher levels of executive approval. There's much more that goes on. It's not just buying Anaplan, but it's also sometimes the consultancy around that. When you're selling some of these other transactions or making, let's say, the platform available during the trial, yes, that can be at lower levels in the organization, again, to start to help, but also start to provide some potential prospects for the future. And as I said, we mentioned on the call, the amount of activity we're getting through the App Hub, just interest in learning more about that, has been pretty strong. And we are more than likely going to be announcing an extension of that 90-day free trial because, again, we've seen it to be very helpful for us, and we feel that the COVID-19 is not over. And so we want to make sure that we can extend it beyond and continue to work through some of those opportunities.

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Operator [37]

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Your next question comes from Scott Berg of Needham.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [38]

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One for me just on partner contributions. Dave or Frank, can you maybe give us some color on partner contributions to bookings in Q1 and how that kind of fared relative to maybe what you saw in '20 -- or fiscal year '20 and then maybe what your assumptions are for partner contributions as you kind of get through the next quarter or 2 to bookings?

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [39]

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So partner contributions, from the standpoint of working with partners, has been about 50% and increasing. Over this past quarter, again, similar to the outreach that we had with customers. I and others on the team did outreach to the partners as well, the GSIs as well as some of the others: one, to touch base environment for them, but also what they were hearing from clients, which is very helpful in us jointly planning; secondly, was to think about some of the pivots that I mentioned before as far as -- I talked about the Deloitte joint offering through the Anaplan Helps that's getting a tremendous amount of traction, so how we can do things like that; and then third, we also have been working through, and I know that's out there because I've heard some comments about it, working with partners on this $100 million in 100 days really to kind of put objectives with ourselves, joint objectives with the partners on creating and helping to drive new opportunities, not immediately, but also from the standpoint as we think about the next couple of quarters. It helps us better align with them and then also figure out the joint investment that we're making on both sides for that opportunity.

So all of those, despite what we've dealt with, with COVID, has been moving forward. And the partners, I mentioned this in the prepared remarks, we saw an increase in over 500 partner consultants just in the second quarter alone, which is a continuation of what we saw in previous quarters. So that was good that they do see the value in Anaplan longer term, and they do see the need for agility in planning and scenario planning. And so that's helpful.

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Operator [40]

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Your next question, the final question for today comes from Stan Zlotsky of Morgan Stanley.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [41]

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Perfect. Two questions from my end, one for Frank, one for Dave. As you're redoing your sales plan and sales hiring planning for the rest of the year, you mentioned you're still hiring in some key strategic areas. How are you thinking about your sales headcount for the rest of the year? Maybe compare it versus the double-digit expectation for revenue growth for the year. And then a little bit of an explanation question. On billings, are you seeing changes to customers asking for concessions or maybe changes to their billing terms going from annual, typical annual prepayments maybe spreading those out into maybe quarterly or semi-annual payments and if that had any headwind in the quarter on your reported billings number? That's it for me.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [42]

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I'll take the first one. Dave, I'll let you take the concessions. So on the hiring stand, again, we're looking at critical hires only at the moment, and that is technical ones on the engineering side. And then on the sales side, it's specific mostly in areas where we feel that there's opportunity, let's say, later in the year that we need to make the investment now. We are now hiring under our plan for this year just based on the environment, more so than anything else, not that we see a lack of opportunity. It's more a reflection of trying to balance the spending. So we pulled that back. But again, we're still doing some critical hiring in the U.S., but in other regions as well. And we'll continue to monitor that and see how -- when we feel, based on that balance, we can open that up a little bit more.

But again, we see growth potential longer term, and we want to kind of strike that right balance so that we don't just stop everything. And the offset of that, as I said, there's been some other procurement spend and things like that, travel and so forth that we've been able to clearly pull back on to allow us to have some investment capability in these 2 critical areas.

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David H. Morton, Anaplan, Inc. - Executive VP of Finance & CFO [43]

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And just dovetailing on Frank's comments on some of the pullback on -- from spend. You can just imagine that the various other enterprise customers that we engage with on the commercial aspect, their procurement organizations are doing just the same thing. We've had some moderate request in regards to whether for its payment extension or split billings, but our opportunity is really selling into improving our value, why we should try to keep things as close to normal with the 1-year payment upfront. But there've been some limited concessions last quarter, and there are some assumptions coming into this quarter as well.

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Operator [44]

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Ladies and gentlemen, that was our final question of the day. I will now return the call to our presenters for closing comments.

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Frank A. Calderoni, Anaplan, Inc. - Chairman, President & CEO [45]

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Thank you, operator. I want to thank everyone for joining our call today. I just want to thank all of our customers, our partners and our shareholders and our team members for the continued support. And we look forward to talking to you again next quarter. Have a great day.

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Operator [46]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.