Data analytics software provider Amplitude (NASDAQ:AMPL) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 16.6% year on year to $67.8 million. Guidance for next quarter's revenue was also optimistic $70 million at the midpoint, 4.5% above analysts' estimates. Amplitude made a GAAP loss of $27.8 million, down from its loss of $24.6 million in the same quarter last year.
Amplitude (AMPL) Q2 FY2023 Highlights:
- Revenue: $67.8 million vs analyst estimates of $66.9 million (1.31% beat)
- EPS (non-GAAP): $0.02 vs analyst estimates of $0.02 (16.1% beat)
- Revenue Guidance for Q3 2023 is $70 million at the midpoint, above analyst estimates of $67 million
- The company lifted revenue guidance for the full year from $267.5 million to $274.6 million at the midpoint, a 2.65% increase
- Free Cash Flow of $19.3 million is up from -$5.84 million in the previous quarter
- Net Revenue Retention Rate: 108%, down from 114% in the previous quarter
- Customers: 2,344, up from 2,175 in the previous quarter
- Gross Margin (GAAP): 74.6%, 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 impressive over the last two years, growing from $39.3 million in Q2 FY2021 to $67.8 million this quarter.
This quarter, Amplitude's quarterly revenue was once again up 16.6% year on year. We can see that Amplitude's revenue increased by $1.29 million in Q2, up from $1.22 million in Q1 2023. While we've no doubt some investors were looking for higher growth, it's good to see that quarterly revenue is accelerating.
Next quarter's guidance suggests that Amplitude is expecting revenue to grow 13.6% year on year to $70 million, slowing down from the 35.5% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 6.7% over the next 12 months.
Amplitude reported 2,344 customers at the end of the quarter, an increase of 169 from the previous quarter. That's roughly the same customer growth as we observed last quarter and quite a bit above what we've typically seen over the last year, confirming that the company is sustaining a good sales pace.
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 108% in Q2. This means that even if Amplitude didn't win any new customers over the last 12 months, it would've grown its revenue by 8%.
Despite falling over the last year, Amplitude still has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
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 74.6% in Q2.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Amplitude's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
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 $19.3 million in Q2, up 137% year on year.
Amplitude has generated $3.72 million in free cash flow over the last 12 months, or 1.1% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Key Takeaways from Amplitude's Q2 Results
With a market capitalization of $1.25 billion, Amplitude is among smaller companies, but its $290.4 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Amplitude's strong user growth. We were also glad that next quarter's revenue guidance came in higher than Wall Street's expectations. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $10.69 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 impressive, though we don't expect it to maintain historical growth rates. Unfortunately, its gross margins aren't as good as other tech businesses we look at.
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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