UserTesting Inc (USER) 2021 Q4 法說會逐字稿

Greetings, and welcome to the UserTesting Fourth Quarter and Year-end 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations. Thank you. You may begin.

Thank you, and good afternoon. With me today from UserTesting are Andy MacMillan, Chief Executive Officer; and Jon Pexton, Chief Financial Officer. Andy will begin with a brief review of the business results for the fourth quarter ended December 31, 2021. Jon will then review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter and full year 2022. We will then open the call for questions.

Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our annual report on Form 10-K for the year ended December 31, 2021, when filed.

All material contained in the webcast is the sole property and copyright of UserTesting, with all rights reserved.

Please note, this presentation describes certain non-GAAP measures, including non-GAAP net loss and non-GAAP net loss per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our Investor Relations website.

Now I'd like to turn the call over to Andy.

Thank you, Erica, and thanks to everyone for joining us on the call this afternoon. We're excited to report our first quarter as a public company. I want to extend a special thank you to the UserTesting team for their hard work and focus on our customers throughout the process of going public. I'll start this afternoon with a few highlights from the quarter. Then, because it's our first earnings call as a public company, I want to take some time to discuss our business and market opportunity as many of you may be new to UserTesting.

We reported a record fourth quarter with revenue of $42 million, up 45% year-over-year, resulting in full year revenue of $147 million, up 44% over 2020. Subscription revenue accounted for over 90% of total revenue for the quarter and reached $40 million, an increase of 49% from prior year. Investments in our product, sales and marketing teams continue to drive upside to our results throughout 2021.

We had great momentum in our business in the quarter with our large customers, which we categorize as those spending more than $100,000 in ARR, growing to 305 customers, representing a 61% increase year-over-year. Our Q4 net dollar retention rate increased to 118% from 114% 1 year ago. In total, we now have 2,350 customers on the platform, up 37% from 1 year ago.

Looking forward, we believe the long-term market opportunity ahead remains significant, and we intend to continue investing in market awareness, technology innovation and growth while prudently managing our expense structure. We continue to see good unit economics in a consistent payback period while deploying investments into our sales and marketing organization to capture the near- and long-term market opportunities we see in the industry. We also believe the investments we made in our product over the past several years and the international expansion of our team will continue to drive value.

The market continues to show strong enduring demand for our solution. UserTesting enables organizations to understand what it's actually like to be their customer. We do that with an opt-in, video-first experience testing platform, which we call the Human Insight Platform. Our platform makes it easy for anyone in an organization to get a vivid first-person understanding of an experience. Through the platform, you watch real people engage and share their perspectives on products, apps, services and other digital and real-world experiences providing what we call a customer experience narrative, or CXN. These narratives are critical to enabling companies to better understand and empathize with the experiences they offer and improve them.

UserTesting has customers in over 50 countries. Our customers include more than half of the world's top 100 most valuable brands according to Forbes. We have steadily built up our global network of contributors over the past 14 years and have qualified hundreds of thousands of people who have all opted in to share their perspectives. We are selective in who gets on this network and prioritize quality over quantity. Customers can reach each contributor's feedback, and we continually monitor responses with our software to ensure both quality and speed. Our customers can utilize this network or test with their own customers, prospects, employees or anyone else.

Our focus is on an easy-to-use human insight platform that allows a wide range of audiences to frequently test products, apps, services and other digital and real-world experiences with a range of audiences like customers, employees, prospects, the public, underrepresented groups and even people using competitor products. The main buying centers today are digital, product, research and design, marketing and customer experience. We also continue to see emerging buying centers like HR to optimize candidate, new hire and employee experiences, customer support, training and IT and operations to optimize internal service and communication experiences.

The power of our platform comes in 3 main components: first, the technology to help find specific audiences and get them to perform tasks and answer questions; second, technology to capture and generate customer experience narratives or CxN. These video-based narratives enable organizations to see and hear real people as they engage with digital or real-world products, designs, apps, processes, concepts and brands. And third, machine learning-based technology helps surface key moments of insight within a CxN to help get to the moments that matter faster. Our Human Insight Platform delivers the speed, quality and scale necessary for today's agile business environment.

We see several major tailwinds favoring our business over the coming quarters and years. In addition to the macro digital transformation and customer experience industry trends, there are 2 more recent and growing trends that we see having an impact on our business. First, there are new types of immersive hybrid and third-party digital experiences. Customers using our platform today to test multiple digital experiences, including some of the newer ones emerging, for example, in the metaverse. Schell Games published a post on the Oculus developer blog in July of last year talking about the benefits of testing VR experiences.

Customers are also able to test third-party experiences, meaning they can test a competitor's website or an important third-party digital experience in their value chain. For example, large financial institutions can capture CxNs on emerging fintechs and open banking initiatives. Airlines can test third-party travel booking sites, and quick service restaurants can test to understand how their menu and brand shows up on popular food delivery platforms.

Second, we see a growing trend around consumer privacy. We believe this will move companies to a more honest and trusted opt-in conversation and feedback channel with their customers as opposed to the surveillance and tracking model in place by so many digital and marketing optimization teams today. Importantly, I want to highlight that all of the feedback on the UserTesting platform, every single customer experience narrative, is gathered through an opt-in process. Within this process, the participant sharing their thoughts and screen knows that they are being recorded and knows that they are sharing their perspectives with an organization. Our contributors value that they are being asked for their input. This is how trusted relationships are built and how great companies show they value their customers.

As consumers, we are sick of being endlessly tracked online. We do appreciate being asked. I believe we are at the beginning of this shift away from always-on digital tracking and surveillance. That doesn't mean customers don't want to be heard. UserTesting is providing a way for companies to build trusted relationships with their customers, an honest opt-in relationship, where companies ask for feedback and truly understand a customer's perspective and, importantly, have the tools to listen and act on the learnings on that feedback.

With these tailwinds, we believe that understanding customer experiences using rich human insight provides a broad and underpenetrated market opportunity. To capture this, we are pursuing multiple growth drivers in parallel. First, we are continuing to invest in sales and marketing to continue to acquire new customers, leveraging a scalable go-to-market model to support new customer growth of all sizes. As an example, in the fourth quarter, we landed or expanded with some great customers, including AMC Entertainment, Anheuser-Busch, Hawaiian Airlines, Home Chef, Lowe's, MetLife, Phillips, Phoenix Group, Reddit and Vestiaire Collective SA. We continue to make investments in our growing international presence, including the establishment of a sales office in Edinburgh, Scotland in 2019 and in Singapore in 2020. In the fourth quarter, international revenue increased 76% compared with the prior year period and represented 20% of total revenue.

Second, we continue to innovate and expand our platform and technology. Our ability to use technology to analyze video feedback and highlight key moments of insight is improving at a rate where customers can run larger sample sizes within a research study and get quantitative-level analytics to understand broader-based sentiment, click path activity and other key points of insight and then quickly drill into rich, qualitative video segments to better understand the human experience.

And third, we're in the early phases of building out our UserTesting partner and reseller program. Our focus areas include working with agencies, system integrators and resellers. We just announced a new partnership with Quantum Metric. This partnership will help companies better understand customer needs and quantify the business impact of digital experiences. All of these channels will enable us to achieve go-to-market leverage as we scale, supporting our continued growth.

This is an exciting time to be at UserTesting. Looking ahead, we recognize that our IPO is just one step on the journey of our company. And while we are excited to have achieved this milestone, we have much more to do. We look forward to continuing our momentum in 2022 and updating all of you in the quarters to come.

With that, I'll turn it over to Jon to discuss our financial highlights in more detail.

Thanks, Andy, and good afternoon, everyone. I'm excited to announce the financial results for 2021 today. It was a record year for the company. We saw improvements in many of our metrics, including revenue growth, margin improvement, customer additions and net retention rates. So let's begin with the key financial highlights.

Revenue for the fourth quarter of $42 million increased 45% compared to the prior year. Subscription revenue of $40 million increased 49%. Revenue for the full year of $147 million increased 44% year-over-year behind strong execution of the UserTesting team. Subscription revenue of $137 million increased 46%. Importantly, our performance is broad-based, including growth in customers across all segments, improved net dollar retention rates and continued progress in our international geographies. Specifically, our net dollar-based retention rate was 118% in the fourth quarter, up from 114% in the fourth quarter of 2020. We ended the quarter with 2,350 customers, up 37% year-over-year. We also ended the quarter with 305 large customers or those over $100,000 of ARR, which was a 61% year-over-year increase. Most customers land below that amount and expand into our large customer category over time.

Calculated billings, which is quarterly revenue plus the quarterly change in contract liabilities, was $54 million, an increase of 41% year-over-year. International revenue was $8.4 million in the fourth quarter, an increase of 76% year-over-year, representing 20% of total revenues.

As I talked about operating loss, free cash flow, gross margins, expenses, I'll be referring to non-GAAP measures, unless otherwise specified. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

Operating loss in the fourth quarter was $9.9 million, which compares to $7.5 million in the prior year period. Our operating margin was minus 23%, which improved approximately 300 basis points from a year earlier. This brings the full year operating margin to minus 27%, an improvement of approximately 300 basis points from 2020.

Free cash flow of minus $16 million in the quarter was impacted by the timing of collections in December. We had turnover on our collections team that we are working to right-size. Free cash flow margin for the year was minus 30%. We ended the year with $178 million in cash.

Let's dig a little deeper into the numbers before we go into guidance. Gross margin in the fourth quarter was 79%, an increase compared to 73% in the year ago period. For the full year 2021, gross margin was 76%, an increase compared to 71% in 2020. Subscription gross margin in the fourth quarter was 83% compared to 79% in the year ago period. For the full year, subscription gross margin was 80%, which was an increase of approximately 300 basis points from 77% in 2020.

If you look at our subscription gross margins on a quarterly basis, for the past 3 years, you will see it is highest in the fourth quarter and then declines in the subsequent first and second quarters. The fluctuations are driven, in part, by the seasonality we see with usage and the corresponding payments to our contributor network.

Turning to operating expenses. We continue to invest in our sales and marketing organization to drive global growth and our leadership position in the market. We increased our spending in that segment by 55% in the fourth quarter of 2021 compared to the prior year period to approximately 61% of revenue. When we look at the payback period calculations, I'm impressed at how we've been able to deploy that additional investment while maintaining a payback period in a range we believe is reasonable. It also says something about the state of the market and its willingness to adopt our solution as sales and marketing activity increases.

We saw some leverage in R&D expense in the fourth quarter, which was 22% of revenue compared to 26% of revenue in the prior year period. G&A expense increased as a percentage of revenue to 18% in the fourth quarter of 2021 compared to 16% in the prior year period. The increase was primarily due to investments in people, systems and outside professional services in preparing to become a public company.

As I mentioned before, even with these investments in operating expenses, we were able to improve our operating margin by approximately 300 basis points in both the fourth quarter and the full year of 2021 compared to the prior year periods.

Now on the guidance. We are entering 2022 with good business momentum. For the full year, we are guiding revenue to $194.5 million to $198.5 million, representing a growth rate of 32% to 35%. For the first quarter, we expect revenue of $43 million to $44 million, or a growth rate of 38% to 41%. The growth rate in the first quarter is higher than the full year guidance due mostly to an expected onetime accounting benefit that will increase subscription revenue by $1.4 million in the first quarter. .

This is related to the reversal of a reserve for a potential sales tax liability that was initially recorded as a reduction to subscription revenue in a prior period. The favorable outcome of that reserve contingency will put most of our sales tax remediation efforts behind us.

For the full year, we expect non-GAAP operating margin in the range of minus 31% to minus 29%, which, at the midpoint of that range, implies a decrease in operating margin of approximately 300 basis points compared to 2021. For the first quarter, we expect non-GAAP operating margins in the range of minus 27% to minus 25%, which, at the midpoint of the range, implies an approximate 900 basis points improvement in operating margin compared to the first quarter of 2021. The operating margin in the first quarter is better than the full year guidance due to the onetime accounting benefit I just mentioned that will increase subscription revenue by $1.4 million in the first quarter. We also expect some other temporary favorability in operating expenses as we continue to limit travel and meetings due to the COVID pandemic. We hope we are coming to an end of those restrictions soon.

For example, in January, we postponed our planned sales kickoff event where we bring the global sales team together for planning and training sessions. We now expect to hold that event in the third quarter, which will shift planned expense from the first quarter to the third quarter as a result. So with some of that expected volatility in our quarterly operating loss, I would encourage more focus on the full year operating loss number as a better measure of financial trends.

For the full year, we expect non-GAAP net loss per share between minus $0.39 and minus $0.41, assuming 145 million weighted average shares outstanding. For the first quarter, we expect non-GAAP net loss per share of between minus $0.07 and minus $0.08, assuming 142.5 million weighted average shares outstanding.

For modeling purposes, and in line with our historical performance, we expect calculated billings to decline in the first quarter compared to the fourth quarter of 2021. This is consistent with the normal seasonality that occurs in the business where the fourth quarter is usually our strongest quarter for billings and the first quarter is usually our softest. We also expect subscription gross margin to decline as well compared to the fourth quarter, consistent with the seasonality we have seen in the past. Payments to our contributor network are usually lower in the fourth quarter due to lower activity during the holiday season.

Overall, we are very pleased with the quarter. We achieved record revenues, strong customer growth, particularly with our large customers, improved gross margin, improved operating margins. And we are excited about the market opportunity ahead of us. It is critical for organizations to have great experiences for customers, prospects, employees and others. UserTesting is pioneering a better way to help them do that with real human insight.

With that, we'll open up the call for questions. Operator, will you please prompt for questions.

(Operator Instructions) Our first questions come from the line of Stan Zlotsky with Morgan Stanley.

Perfect. Congratulations, guys, on your first call as a public company. Very, very exciting. So maybe just kick things off. At a very high level, right, what are you seeing as far as the way that companies are approaching the need for UserTesting products? As you went through 2021, what really stood out to you as a big change that's taking place in the marketplace? And how do you expect that to carry over as we go into 2022? And then I have a quick follow-up.

All right. Thanks, Stan. Appreciate the question. I think for us, what we're finding as we went through last year and coming into this year is continued core demand for people wanting to get the kind of feedback that we provide on our platform. But where we see emerging opportunity is more organizations wanting to share and leverage the results they're seeing on our platform more broadly. And so we've started to focus on how we expand out from some of our core use cases in design and sort of research teams and how we're helping product and marketing teams more broadly. Not just self-service for their own question, but to actually work more and more together around feedback they're seeing on the platform. So I think there's an opportunity there that we're leaning into and really gearing up our team to speak to.

Perfect. And then just a quick follow-up. I wanted to dig into net revenue retention, very impressive, 118% result. How should we be thinking about that moving forward? And what are the puts and takes behind that number as we move into 2022?

Yes. One of the things to keep in mind when looking at that is it's a blended number across a wide variety of segments. We sell into small, even pre-product market fit companies to some of the largest enterprises in the world, and it's the case with any SaaS business, those are sort of different models for expected retention rates. But I think what we found was we have made some improvements in our go-to-market motion, our pricing model that helped us get to that sort of 1 17, 1 18 mark. We think going forward, that is a good projected rate for us. Like any SaaS company, we get up every day and try to figure out how to continue to make customers successful, and we're going to continue to try to drive those rates where we can. But I think right now, we feel like there's a blended rate across enterprise all the way down to SMB, where we're pretty happy with where that number is at.

Our next questions come from the line of Mark Murphy with JPMorgan.

This is Pinjalim on behalf of Mark. I'll echo my congratulations to you guys as well. Andy, maybe I could start with help us understand what is driving the expansion of the large customers that you're seeing? It's pretty impressive. Is it largely usage in their core use cases? Are you seeing some of the emerging use cases drive that expansion kind of further into the organization? Or is it just a larger throughput of test that is driving that because of the AI, ML capabilities that allows them to do so today?

Yes, it's really broad-based. I appreciate the question. It is, in part, that we are still largely awareness-constrained. And in large organizations, there's an opportunity for us to drive awareness through the product itself that when teams run tests on the platform, they get this powerful feedback in video format. We're doing more and more things to help empower them to share that feedback across the organization. When people see the output from the platform, they apply that to their own solution. I mean it's one of these things that we talked about being sort of obvious in retrospect.

When you see UserTesting, most people go, oh, that makes sense. I should see people use the thing that I've built that I'm designing, that I'm marketing, whatever that might be. And so that drives all of the things you mentioned. It drives more people on the platform, more seats. It drives more use cases, and that's been one of our focus with templates and other things to sort of highlight all the ways you can use the platform. It also drives more usage of the platform.

If I'm someone using the platform and when I run a test and I get this great feedback and people in the organization rally around it, I do more of it. So I think it all sort of comes back to that core focus area we've had of just driving awareness. And I think being in companies, in our customers and helping drive that awareness as an expand motion is where we're seeing some of that opportunity.

Got it. One quick follow-up. Can you maybe update us on the flex-based pricing? What are you seeing with respect to customer adoption on that front? How should we think about the revenue or bookings mix of that flex-based pricing over this year?

Yes. We continue to still see strong adoption of the new pricing model. Again, as we've spoken about publicly before, it was not really designed to be a price increase or a change in revenue per customer. It's really just designed to be in alignment with how customers want to buy the product. We listened to the feedback from our customers and what they told us was, sometimes they just want to roll it out to more people and I need more seats. Sometimes, the people that have seats just want to run more test volume. And so by enabling our customers to buy in whatever combination made the most sense for them, it really does become the best option for a vast majority of companies when they're selecting the platform.

We did, in the second half of last year, roll that out to all of our segments, as we've talked about publicly before we sort of started with part of our sales team and rolled it out as we went along. And so we ended the year with every one of our sales teams enabled to go sell the flex-based pricing model. We continue to see really strong customer demand for that pricing model and great feedback on it while it's still a bit early days.

Our next questions come from the line of Terry Tillman with Truist.

Yes. I'll echo the congratulations on the IPO and also maybe, Andy, on being a writer now. Congratulations on your book.

Thank you, Terry.

Yes. So my first question just relates to -- you did mention some new customers, and they look like some large enterprise brands. What I'm curious about is just the human insight space evolves and you guys are kind of a market leader. Are you starting to see opportunities to sell higher and get C-level attention? For example, to me, the competitor testing, it sounds like it would be something that C-level executives would actually want to see a lot of.

So I'm kind of curious, are you starting to see the evolution of this market where you can sell higher and get more mind share with C-level executives earlier on? And then I had a follow-up for Jon.

Yes. Terry, I think that's a great point. And it actually connects well to your point about the book, which for those that aren't aware, Janelle Estes, our Chief Insights Officer, and I wrote a book that came out published by Wiley this month. And it really does illuminate some of these use cases, these ideas that not only can you talk with competitors, I think test competitor experiences, which I think is great for executive teams to understand market dynamics, it's also really about how do you, as an organization, align your company culture around what it's like to be a customer.

And so we're starting to see savvy executives think about how do I get my team sharing the narratives, the empathy, the understanding of the transformation maybe our business is going through or what it's like to be a customer in different segments or with different backgrounds. And so I think that is a big opportunity for us. I'll just echo to my previous comment, a lot of what we're doing today is just about driving that awareness. That's at every level and in every segment, and that's where a lot of our investments, broadly in sales and marketing have been around empowering our marketing and sales teams to get into more conversations. And I think to your point, that's at every level in the organization.

Got it. And I guess, Jon, just a follow-up question on cash collection. I'm curious, should we see a quick snapback and kind of reversal to where we see a perking up of working capital benefits? Or how do we think about the first half versus second half post the fourth quarter and what you called out?

Yes. Terry, it kind of popped up on us in Q4, and you'll see that in the DSO number of days going up meaningfully. And we had turnover on our collections team, and we're still working to right-size it. It's hard to hire people during the holidays. So I expect us to get back on track over the next 2 quarters. It's not going to be a snapback in 30 days. It's just -- it's going to take a little bit of time.

Our next questions come from the line of DJ Hynes with Canaccord.

Great start here. Andy, I want to go back to the awareness factor you've cited a couple of times. If I ask you to put it on a scale of 1 to 10, like, where would you say enterprise awareness is today? And what's the most significant thing you can do to increase awareness?

I would say not to try to split hairs on the question, which I appreciate, by the way. I think it varies a little bit by role. I think if you were to go ask someone in a UX research background or maybe a design background, I think that awareness is reasonably high. It might be 6 or 7, and I think you'd find very high positive product affinity with what we do in that audience for those that know us.

What a lot of those folks are telling us is, "Hey, I learn all these things on UserTesting, but I'm trying to get my product team, my marketing team to change what they're doing because of what I'm learning." And so what we're doing is really partnering with those folks to help them tell their stories internally of what they're learning. And together, we're helping drive awareness to those other groups.

So I think if you were to go to product management teams, marketing teams, I think that awareness is still quite a bit lower, and that's why we're investing in this broader set of sort of collaborative solution plays to really help our folks that already know us, champion us internally, which I think is the opportunity.

Yes. Got it. Makes sense. And then I want to ask you a question about the contributor pool. I mean if you look competitively at others in this space, how do you think the pool that you've built, like, stacks up in terms of size, diversity to others in the space? And how easy would that be to replicate?

I think it's maybe a 2-part answer there, too, as well. One is we've been doing this for a while. And so I think we have built up a bit of a marketplace dynamic where this is the place to go give this kind of feedback. And so I think that is a really big advantage when you think about both how we attract new contributors and also how we attract brands and companies on to our platform. But I think the second piece is much more important, which is we've used this running start that we've had over the last 14 years of building up this network of qualified individuals and the volume of customer experience narratives on our platform.

We noted in our S-1 that we'd run 1.4 million CxNs in the previous year. We use those as training data for machine learning models and the technology in our platform, and that helps us rate and score and pull insights out of these narratives. And so I think the combination of the scale of the network, the focus on quality of the network but also what the output of that network has enabled us to build has really helped us build a technology competitive advantage on top of the network effects of the contributor network itself.

Our next questions come from the line of Bhavan Suri with William Blair.

Let me echo my congrats. That was a really solid quarter there. Let me just jump into sort of this concept of use case that you've touched on a little bit, coupled with the new model. So one of the concepts of the new model was sort of to drive broader usage. I'd love to ask 2 questions, sort of A and B, question one, which is how have expansion rates played out with the guys that are using the flex model or that adopted that early?

And then two, have you seen different use cases from those folks where because they're not constrained by budget or per seat or something like that, that product manager has been able to expand it faster across all the use cases? Help me think through both the expansion rate and the types of use cases you might be seeing there.

Yes. Thanks, Bhavan. Let me take the second part first, which is one of the things that we're finding is because we have enabled customers to buy and share capacity across seats and to more easily buy more seats where needed, it's really enabling this motion I was talking about earlier of as people discover the product, it's easier for them to come on board. It's easier for an organization to say, oh, someone in marketing saw some of the CxNs that came out of the product team or they'd like to get access to a seat and kind of come on board with the platform.

And again, I don't think that's any magic in the pricing model. I think that's just removing friction of where we had the model previously, combined those concepts made it harder for companies to sort of mix and match the growth that made sense for them.

Conversely, if the centralized team was tasked with doing a lot more because other folks wanted them to run the platforms, they might need to buy capacity but not buy seats. And so I think what has really enabled us to do is have more customer-centric conversations in the expansion motion that says, yes, we can match to the way that you want to buy the product.

I think that has enabled us, to the first part of your question, you saw a great expansion rate improvement over the course of the previous 4 quarters. We continue to see customers moving to the new pricing model. Again, I think those are related, but I wouldn't say it's purely the cause. I think the cause is we're driving awareness. We've got a good motion in our accounts. I think what we've done is removed an inhibitor of a pricing model that might have made that harder or more complicated.

We might have gotten there in the old pricing model, it just would have taken more time. So I definitely think the new pricing model is helping us do that. I don't think it's the only unlock. I think the fact that we've got a product and a set of motions in our customer base around this upsell, cross-sell has really been the secret.

Got you. Got you. And you guys are executing well, right? So I mean, the question we're asking, I think, around friction or growth. And I'm not saying that you're not growing 35-plus percent. I'm just trying to understand what's holding it back. And so maybe I'll touch on that a little bit more at a strategic level. In the old days, CIOs hated software-as-a-service because they have the systems and the spend and its capital budget and people train in a certain way. And it took a while to get over that SaaS cloud is the right way to do it.

Is there a certain set of folks in organizations or groups or legacy mentality we should use market research firms or our agencies, is there a set of those things that we need to overcome? That will happen over time that the pricing model, the things are helping, but is there some friction there? Is there an obstacle that we haven't thought of that you're seeing that may take time?

And how should we think about sort of the champions and also the guys who are pushing back in organizations? I realize tough question and different for every organization. We certainly saw that in SaaS, and it took a while to play out, but it's playing out amazingly well. And I wonder, is that -- do you get from a 35% growth rate to a 77% growth rate again in 2 or 3 years, as you overcome that or as it becomes a norm? Because once you see the video, it's so obvious. I'm trying to get my arms around that part.

I think, yes, it's a great question. And I would say it's sort of in 2 parts. One is, you're right, it is just raw awareness, right? When you see one of the CxNs come back, people go, Oh, Eureka, I get it, that makes sense. I should see people use it." I think the other thing that we are educating the market on is that you can use technology to solve this problem, to do it at scale and do it quickly.

I think first pass, if all you showed somebody is a video, they go, oh, that sounds like it would be hard to go find the right people, get them to record themselves, have all the technology, have the ability to watch all that content. And so the fact that we have built a technology platform that makes it easy to go find the right people, to have them record themselves and to help you interpret and go through that volume of qualitative, rich data to point you to the right moments, I think that's the other piece. And so I'd say it's sort of a 1, 2, right? One, aware that it's possible; and then two, aware that it's possible at scale using technology to do it quickly and efficiently.

Our next questions come from the line of Brent Bracelin with Piper Sandler.

Maybe one for Andy here. Just as you think about product and market research going kind of back in person, are you seeing any sort of enterprises make that move? Or is there evidence you think this might be more of a structural kind of permanent change in how these brands are conducting kind of product and market research? I love to get any sort of viewpoint on that, just given the return to office that's happening in place right now.

Yes, we haven't seen any kind of structural shift back. I think most folks aren't looking to bring back the expense and complication of trying to do this in person.

Perfect. And then, Jon, if I look at the subscription gross margin, nice uptick here this quarter. Obviously, to some extent, you are facing labor shortages as well. So maybe just walk through how we should think about the contributor costs, subscription gross margins? How sustainable are those subscription gross margins going forward in light of labor shortages? And are you contemplating increasing costs there on the contributor side just given the shortages we see out there?

Yes. So no expectation that contributor costs go up. The margin is seasonal. So I made those comments, and you should appreciate on a quarterly basis that Q4 is always a little bit better because there's just less studies that are being done around the holidays. And then seasonally, we see that reverse. And so I do expect subscription gross margin to come down as it has the last, I think, 3 years, in a row in Q1 and Q2.

But we're range-bound. And historically, it's been 78%, 79%. We're ahead of that right now. And we've said in the past that, going forward, the long-term model target is about 78%. I think we'll be in that range. I think in the next 4 quarters, we'll probably be a little bit above that range. But we've had pretty good stability over an annual basis with our subscription gross margins. And then with some scale and some efficiencies, I think that can float up a little bit.

Our next questions come from the line of Scott Berg with Needham.

Congrats on the fantastic first quarter. I guess we have 2. Andy, when you think about the contributor network, how should we think about the growth of the individuals that are in that network for you? And given the size and just the number and where they are geographically today, do you feel like you have to grow that meaningfully going forward to -- I guess, to give your customers even more options there?

I don't know about growing it meaningfully. I think it continues to grow at the pace of the market demand, and that's sort of the way that the model is built. We continue to see really strong performance out of the network as we've grown. We continue to see fast response times, great ratings from our customers. And so we know that the network is able to continue to expand and grow and meet the needs and demands of our customers on a global basis. So I think we're pretty happy with how the network continues to meet the market need.

Got it. And then my follow-up question is on the improvements in net revenue retention that you've seen really kind of throughout this year and the last 5 quarters in particular. How should we think about those improvements in terms of is it maybe that same individual within an organization or maybe a team using more of your solution versus moving outside to other different departments and other different teams? I don't know if you think of it that way, but any color there. I'm trying to understand are you just going deeper with a certain set of teams or employees or maybe you're making more impact across the organization?

Yes, it's a great question, Scott. I would say it's -- whether it's with the same user or with a broader team, it's often been use case expansion. This is something we talked a little bit about during the roadshow, which was one of the things at the start of the COVID period that we did is we released a bunch of templates on our platform. And what was interesting about that was the template didn't solve a usability problem. It's not hard to create a test on our platform. It takes a couple of minutes. But what it did was illuminate use cases.

When we put together a template to say, "Oh, you can test your food delivery service app experience at a restaurant." Every one of our restaurant customers went, "Oh, that's a good idea. I should do that." And so now we have well over 100 templates deployed. Our sales teams, our success teams are using those to highlight use cases. So whether that's somebody who's already using the product who says, "Oh, I'm going to pull another use case off the shelf and do some more testing," or whether it's the person sitting next to them that says, "Hey, that's a great idea. I'm going to do that with the platform," in either case, it's largely just been around, again, awareness of use cases and things that folks can do on the platform.

Excellent. Congrats again on the strong quarter.

Thanks, Scott.

Thanks, Scott.

Our next questions come from the line of Brian Schwartz with Oppenheimer.

This is Ari Friedman subbing in for Brian Schwartz. Congrats on the quarter. I was wondering, when you go up for like an RFP, are you guys mainly displacing like other softwares like a UserZoom? Or are you also displacing maybe like a focused group company or like a Kantar type of agency? Just trying to understand like where -- what you guys are displacing.

Yes. Great question, Ari. Thank you. It's interesting, I think being a market maker, we answer very few RFPs. I mean I think I can count it on probably 1 hand, certainly on 2 last year. It's just not an established market yet in that way.

What we do see a lot of companies do is displace other less effective spend. So your example of using like an outsourced market research agency, rather than paying for 1 outsourced study, people might take those dollars and deploy it instead as a technology solution to embed this in an agile process. So that's more typically what we see.

That makes sense. And then, I guess, another question I have are what investments are you most excited about going into 2022?

Yes. I think the investments we're excited about, we continue to see great, durable performance out of investment in sales and marketing, which is always good to see in a growing business. But I think in terms of excitement, I'm really excited about the investments we're making in the technology; the work we're doing around some of our machine learning to help people get to the moments of insight; the collaborative capabilities of more people on the platform, getting access to the CxNs; some of the use cases we're seeing on the platform, where we see organizations doing things like deliberately reaching out to more diverse audiences that maybe weren't -- they weren't getting those perspectives before.

I think that's having a real impact on the world and how people use our technology. And then I'd also say just telling our story. I mean everything from the book that we put out to the marketing that we're doing, I think it's really important to the company that we're just out telling our story, whether that's through our expanding field sales team or through the marketing dollars that we put to work.

Our next questions come from the line of Brian Peterson with Raymond James.

Congrats on the strong quarter. So Andy, maybe a higher level one just on the partnership opportunity. So I'm curious how big of an impact the partners are having in kind of new business today. And as we think about the growth opportunities and driving awareness, how big of a factor is that in terms of driving growth and awareness going forward?

Great question, Brian. It's early days for us on partnering, to be honest. It's one of the big growth vectors that we see in front of us. We really had 2 limiting factors previously. One is our old pricing model didn't really lend itself to partnering. For those that will recall, we actually used to sell an unlimited use seat, which actually worked reasonably well for direct customers, but you obviously wouldn't want to give an unlimited use products to a partner that's going to go then sell it a bunch of times to a bunch of customers.

So our new flex-based pricing model actually works much better for things like agency partnerships and SI partnerships that want to use the platform. So one is we've removed that band barrier and are starting to build out those partnerships.

Then the second is on the product side. We continue to see demand from the market of other technology product companies who want to come in and partner with us. They see the value that we're providing. One of the things we did during the last year was start to publish a set of public APIs, which is going to really enable us to take advantage of that interest in product-level partnerships, which I think will be really valuable to our customers. And so it's an area of the business I'm really excited about, but I would say it's still an opportunity in front of us versus something I think we're really leveraging historically.

Understood. And maybe a follow-up for Jon. Just I wanted to understand maybe how sales cycles, how have those progressed over the course of 2021. And anything that you can kind of share on the land size of deals with new customers?

Yes. So overall, the land size has been pretty consistent. So we've increased our team and we've increased our volume and our size. You'll see that the net new growth in customers was the largest we've done on record last quarter. So we're bringing in a lot of customers of all sizes. And we're also landing more 6-figure deals than we've done in the past. But overall, when you blend it all together, still a pretty consistent land. It's definitely a land and expand motion where we're landing people, letting them try out the software and then really a large expansion opportunity.

Our next questions come from the line of Rob Oliver with Baird.

My question was also on the land-and-expand opportunity, but in particular, in international. You guys have seen really nice growth in international over the last couple of years. It's becoming a more meaningful part of the business. And I'd be curious, when I look at historic customers, you guys planned it around that 50,000 and you now have customers doing multiple hundreds of thousands of dollars. What are you guys seeing here early on from those international customers in terms of land and the types of organizations that they are giving you a sense that maybe they could be meaningfully bigger. And then I just had a quick follow-up for Jon.

Yes. I think we generally see it being analogous to what we see in our North America business. Again, it is still driving awareness. I think that's one of the things that makes our business as we expand internationally more similar to our core business than maybe others are used to. We're in an evangelical sale. When we go into new markets, we're evangelizing, it's, in many ways, the same motion. We do also sell into every segment. So you'd imagine large global customers based overseas have a lot of the same needs and demands as our global customers in the U.S. And so we definitely see that as a -- in many ways, a similar motion.

Great. And then Jon, I know Brent asked earlier about the contributor network costs. So I guess maybe I'll just ask in particular about as you guys expand in international, I would assume many of the multinational companies that you're using are just going to tap the existing network, try to get to U.S. consumers and, therefore, leverage that network. But as you sell more internationally, clearly, you're going to be needing to add more contributors abroad? And just wanted to get a sense for how we should think about that relative to costs as well.

Yes. I still don't see any kind of major changes to the overall cost on a per test basis there. We're rolling out different types of tests. So we have a short test and that pays less. We've got standard test, which is roughly $10. And then we've got live sessions, moderated sessions where we could be paying over $100 for some of that stuff. So we have a variety of ways that customers can use the panel, and then we pay the panel in different ways as well. But so far, like, again, as Andy said, the panel -- the demand kind of drives the size of the panel and right now, we're looking for more demand. The panel would love more tests.

(Operator Instructions) Our next questions come from the line of Yun Kim with Loop Capital.

Another congrats on a strong quarter, Andy and Jon and also Erica. Andy, just another follow-up question on the contributor network. Have you expand use case to include a more specialized and higher value CxNs? Can you start charging different rates based on the target audience who may command higher rates to participate in your network?

It's something we have the ability to do technically if we so desire. What we find now is frankly the simplicity of our sort of standard pricing works well in the market. We continue to hear from many contributors. Interestingly, especially as we get into higher income brackets where being heard is actually a lot more important than being compensated. So when you think about whether it's a premium flyer or someone who's a professional, what they really value is that their feedback is going to these brands and these companies.

And so I don't really see right now a need, frankly, for us to be paying a different compensation level for different levels of expertise, per se. I'd also add, one of the things that we've done over the past few quarters is provide the ability for folks to bring their own participants, be that employees or their own customers. And we often see that also in these more maybe B2B kind of scenarios where a company says, "Hey, I have a pool of folks that have this expertise. I just need a technology set to access that."

And they almost use it as a customer loyalty perk of enabling them to be heard. So again, we have the ability to do that should we choose to do so. But right now, I think the simplicity of the entire model is sort of what makes the magic happen.

Okay. Great. And then, Jon, any change to contract link for billings frequency as you sign larger deals? And also, are you seeing a higher number of customers coming back for early renewals or they use up their allotted numbers of CxNs under the new pricing model?

So no major changes. We are doing probably some more multiyear deals, and that will show up in the RPO number that comes out in the 10-K. But basically, the vast majority are still annual deals. And then sometimes, if people want to have a larger bucket of consumption units than by doing a multiyear deal, then they can spread that over the multiyear. So that's kind of been a driver of longer contract terms. But it's still -- the vast majority are 1-year deals. We keep it simple and we want to earn their business every time.

What about the early renewals for those customers under the new pricing model?

Yes. And again, half the contract value is on the platform, so that's not going to be up for early renewal if they need to top off or up reload on some usage credits, then they can do that, not significant in terms of billings or the macro environment.

Thank you. There are no further questions at this time. I would like to turn the call back over to Andy MacMillan for any closing comments.

All right. Thank you to our operator, Daryl. I appreciate the help with the call. Thanks, everyone, for joining the call and for your interest in UserTesting. We really look forward to future calls and continue to tell you more about the business. I just want to say thank you again to our employees, our customers and our partners. It's an honor for Jon and I to share these results, and we're proud to tell our story. So with that, we hope everyone has a great week, and thanks again for your time and to your questions.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.