Data analytics software provider Amplitude (NASDAQ:AMPL) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 14.6% year on year to $70.6 million. The company expects next quarter's revenue to be around $71.6 million, above analysts' estimates. Turning to EPS, Amplitude made a GAAP loss of $0.15 per share, improving from its loss of $0.20 per share in the same quarter last year.
Amplitude (AMPL) Q3 FY2023 Highlights:
- Revenue: $70.6 million vs analyst estimates of $70.1 million (0.8% beat)
- EPS (non-GAAP): $0.05 vs analyst estimates of $0.03 ($0.02 beat)
- Revenue Guidance for Q4 2023 is $71.6 million at the midpoint, above analyst estimates of $70.4 million
- Free Cash Flow of $7.5 million, down 61.2% from the previous quarter
- Net Revenue Retention Rate: 105%, down from 108% in the previous quarter
- Customers: 2,471, up from 2,344 in the previous quarter
- Gross Margin (GAAP): 75.5%, up from 70.7% in the same quarter last year
Born out of a failed voice recognition startup by founder Spenser Skates, Amplitude (NASDAQ:AMPL) is data analytics software helping companies improve and optimize their digital products.
Digital products are at the center of how companies interact with customers. Think DoorDash or Paypal or Dropbox - each of these commonly used digital products are built by product managers who tend to create innovative new product features on what they think the customer wants. Intuition. Gut feel. As a result, digital products often introduce new features and then employ data scientists to create a combination of user surveys and complex behavioral models to answer questions like – What drives more revenue, subscriptions or on-demand purchases? or Why aren’t my free users converting to paid?
The plus side of the massive adoption of digital products is the generation of lots of product data. Amplitude's proprietary Behavioral Graph connects millions of seemingly random events from a single user to identify patterns and derive data-driven insights on how users are engaging with digital products. Product designers can gain insight from the specific actions end users take within digital products and answer important questions, such as where in the purchase journey do users experience friction, what are the top user paths between signup and trial conversion, and which features increase new customer retention.
As a result, Amplitude allows businesses to save money on utilizing a patchwork of data visualization and marketing analytics products by instead having Amplitude provide an all in one solution. Amplitude has the added benefit of accelerating the pace of innovation, effectively allowing strategic product decisions to be made in near real time.
Organizations generate a lot of data that is stored in silos, often in incompatible formats, making it slow and costly to extract actionable insights, which in turn drives demand for modern cloud-based data analysis platforms that can efficiently analyze the silo-ed data.
Amplitude’s competitors in the digital optimization space include web and marketing analytics vendors such as Adobe Experience Cloud (NASDAQ: ADBE) and Google Analytics (NASDAQ: GOOGL), along with business intelligence solutions like Salesforce.com’s Tableau (NYSE:CRM).
As you can see below, Amplitude's revenue growth has been very strong over the last two years, growing from $45.5 million in Q3 FY2021 to $70.6 million this quarter.
This quarter, Amplitude's quarterly revenue was once again up 14.6% year on year. We can see that Amplitude's revenue increased by $2.9 million quarter on quarter, which is a solid improvement from the $1.3 million increase in Q2 2023. Shareholders should applaud the re-acceleration of growth.
Next quarter's guidance suggests that Amplitude is expecting revenue to grow 9.7% year on year to $71.6 million, slowing down from the 32% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8.7% over the next 12 months before the earnings results announcement.
Amplitude reported 2,471 customers at the end of the quarter, an increase of 127 from the previous quarter. That's a fair bit slower customer growth than last quarter but in line with what we've observed in past quarters, suggesting that the company still has decent sales momentum.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Amplitude's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 105% in Q3. This means that even if Amplitude didn't win any new customers over the last 12 months, it would've grown its revenue by 5%.
Despite falling over the last year, Amplitude still has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Amplitude's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 75.5% in Q3.
That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Amplitude's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Amplitude's free cash flow came in at $7.5 million in Q3, turning positive over the last year.
Amplitude has generated $15.1 million in free cash flow over the last 12 months, a decent 5.3% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from Amplitude's Q3 Results
Sporting a market capitalization of $1.2 billion, Amplitude is among smaller companies, but its more than $321.5 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was good to see Amplitude's strong revenue guidance for next quarter, which topped analysts' expectations. We were also glad its gross margin improved and the company turned free cash flow positive. On the other hand, its net revenue retention declined and its customer growth decelerated slightly. Overall, the results were mixed, but decent - showing the company is stay on track. The stock is flat after reporting and currently trades at $11.15 per share.
Is Now The Time?
When considering an investment in Amplitude, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of Amplitude, we'll be cheering from the sidelines. Its revenue growth has been strong over the last two years, though we don't expect it to maintain that historical pace.
Amplitude's price to sales ratio based on the next 12 months is 4.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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