UserTesting, Inc. (NYSE:USER) Q2 2022 Earnings Conference Call August 4, 2022 8:00 AM ET
Company Participants
Erica Mannion – Sapphire Investor Relations, LLC
Andy MacMillan – Chief Executive Officer
Jon Pexton – Chief Financial Officer
Conference Call Participants
Elizabeth Porter – Morgan Stanley
Joseph Meares – Truist Securities
David Hynes – Canaccord Genuity
Arjun Bhatia – William Blair
Pinjalim Bora – JPMorgan
Brent Bracelin – Piper Sandler
Brian Peterson – Raymond James
Rob Oliver – Baird
Brian Schwartz – Oppenheimer
Yun Kim – Loop Capital Markets
Operator
Good day, everyone and welcome to the UserTesting Second Quarter 2022 Earnings Conference Call. Please note that this event is being recorded.
For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.
Erica Mannion
Thank you and good morning. 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 second quarter ended June 30, 2022. Jon will then review the financial results for the second quarter, followed by the company’s outlook for the third 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 material risks and other important factors that could affect our actual results, please refer to the risk factors contained in our SEC filings available on the SEC’s website and on our Investor Relations section of our 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 quarterly report on Form 10-Q to be filed for the quarter ended June 30, 2022. All material contained in the webcast is the sole property and copyright of UserTesting with all rights reserved.
Please note, this discussion includes 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. We have included non-GAAP measures in this discussion 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 morning on our Investor Relations section of our website.
Now, I would like to turn the call over to Andy.
Andy MacMillan
Thank you, Erica and thanks to everyone for joining us on the call today. We’re doing our call today from our European headquarters in Scotland. Jon and I are here meeting with our team and with some of our customers. Our international revenue grew 55% year-over-year in the second quarter and is now 21% of our total revenue. Our office in Edinburgh is our second largest office globally, and we’re looking forward to spending some time with this team.
We reported a record second quarter with revenue of $48 million, up 36% year-over-year. Subscription revenue reached $45 million, an increase of 40% year-over-year. This represents our sixth consecutive quarter of year-over-year subscription revenue growth of 40% or greater.
Our non-GAAP operating margin of minus 22% was much better than the minus 31% midpoint guidance we previously provided as we managed expenses more tightly in the quarter given the uncertain economic climate ahead.
Our calculated billings were $53 million, up 27% year-over-year; and our net dollar retention rate was 112%, down from 117% in the prior quarter and year-over-year. Broadly speaking, most of the reduction in net dollar retention rate was due to delayed decisions around expansion deals.
Gross retention was stable among our larger customers, but as you would expect, we did see higher churn among smaller customers. In the last part of the quarter, we saw customers broadly reassess their second half budgets, which extended our sales cycles. While we continue to see good interest and need for our platform, concerns about the macroeconomic environment will likely persist for the next two quarters.
Our sales performance over the past two years has been strong. We were able to accelerate our subscription revenue growth rate nearly every quarter since late 2019. Coupled with consistent sales efficiency, we continue to invest heavily in our sales and marketing organization over that time, even though those investments extended the company’s path to profitability.
However, as a result of the uncertain economic environment, we reduced our global employee base by approximately 7% in July, primarily in our sales and marketing organization. This reduction will reduce sales capacity and some supporting functions, but we believe it will accelerate our path to profitability as a business and better position us to weather an extended economic downturn. When economic conditions improve, we expect to shift our focus to scaling the organization as we have done in the past. I’d like to take a moment to thank the impacted employees for their contributions to the company and all of the support they provided to our customers.
Specific to the second quarter, we have some great new wins in growth transactions, including Chase Bank, Minute Media, Pearson, Picsart, Rocket Central, Tailored Brands, Trainline and Woolworths. We are very excited to have these customers adopting and expanding the usage of our Human Insight Platform.
We ended the quarter with 376 large customers, which we categorize as those spending more than $100,000 in ARR, which is a 51% increase year-over-year. In total, we now have approximately 2,550 customers on the platform, up 27% from one year ago.
We continue to invest in our platform and believe it is the leading platform in the market today to help companies understand the driving forces behind customer behavior and deliver actual insights to make smarter and faster business decisions. Our July market release included some great feature enhancements, including Instant Insights, which accelerates post-test analysis by automatically detecting patterns, anomalies and servicing key insights within the video-based customer experience narratives. The Instant Insights are presented in a dashboard, allowing customers to quickly identify important takeaways from their test.
The UserTesting platform is now also available in French for both customer and contributor experiences. Tests can now be conducted in French with French-speaking contributors, giving customers the ability to reach more people around the world.
We also launched a new user interface and a self-service single sign-on to provide better governance for enterprise scale deployments, new card sorting capabilities, so users can give video feedback alongside card sorting metrics and gather more comprehensive understanding of contributors’ mental models, and a new native media asset testing feature that allows companies to test more sensitive media and gather feedback on unreleased assets like video and audio files before launching them to the public.
We also released new templates focused on customer expectations around inflation. The template bundle is ideal for decision makers at consumer focused companies include pre-built test plans that help our customers, one, understand how customers are changing their preferences, habits and priorities in reaction to higher inflation in the market; and second, bolster customer loyalty and make confident decisions on repackaging a product or service by collecting proactive customer feedback on changes.
Organizations can still use UserTesting’s pre-built sample questions as is or customize the templates to address their specific business needs. We now have over 100 pre-built testing templates available on the platform.
Turning to use cases. A large luxury fashion house tested a virtual try-on feature for clothing and used the insights to increase customer interactions and better personalized content and saw an increase in their app store rating to a 4.9. We’ll also highlight a large global meal delivery company that’s now testing 90% of all app and research initiatives through UserTesting. They estimate a 400% increase in the speed of receiving insights and completing research projects.
The speed and quality of insights on our platform allows companies to incorporate external testing of prototypes, marketing campaigns and other experiences into workflow processes to ensure human insight is a regular part of these processes and helps them to achieve greater certainty that they are building the best experiences and achieving their desired outcomes.
So, despite the broad economic climate, we continue to focus on delivering value to our customers and the things we can control. I’ve spent many hours with customers over the past quarter and have been energized by the satisfaction they have expressed to me. Now more than ever, it is important that companies know how their customers feel and why. We are continuously innovating on our platform to help companies gain actual insights so they can make smarter and faster business decisions. The Human Insight Platform helps companies optimize the use of human insight so they can better understand what is driving customer behavior and adapt to changes in the market.
With that, I’ll turn it over to Jon to discuss our financial results in more detail.
Jon Pexton
Thank you, Andy and thank you, everyone for joining the call today. Let’s begin with the key financial highlights.
As Andy mentioned, revenue for the second quarter was a record $48 million, an increase of 36% compared to the prior year period. Subscription revenue of $45 million increased 40% compared to the prior year period. Our net dollar-based revenue retention rate was 112% in the second quarter, down from 117% in the second quarter of 2021. For context, our average net dollar retention rate in 2020 was 110%, in what was a tougher economic year, and then improved to an average of 118% in 2021, which was a much better economic year. So, the 112% is within the historical range of what we have seen during more challenging economic environments.
Calculated billings were $53 million, an increase of 27% year-over-year. As Andy mentioned, we believe concerns around the economic environment resulted in a lower close ratio than what we have seen in the past. And again, this was more pronounced among our smaller customers and with closing new customer wins.
As I talk about operating loss, free cash flow, gross margins and 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 second quarter was $10.6 million, which compares to $10 million in the prior year period. The operating margin was minus 22%, which compares favorably to minus 29% in the year ago period. We continue to show meaningful progress on our path to profitability, and this quarter’s results were better than our original expectations as we started to restrict certain discretionary spend in the quarter with a tightening economic environment.
Free cash flow was minus $1.3 million in the quarter with a free cash flow margin of minus 3%. We ended the quarter with $164 million in cash. We’ve had some volatility in our free cash flow over the past few quarters with changes in our collection rates and some large payments impacting working capital. So, I believe the first half free cash flow measures are more representative of a normalized trend.
For the first six months ended June 30, the free cash flow margin was minus 19% compared to minus 30% for the prior year period. The six-month measures are more closely aligned with our non-GAAP operating margins and also show the progress we have made on our path to profitability. Gross margin in the second quarter was 78% and subscription gross margin was 82%, up roughly 400 basis points compared to the year ago period.
Turning to operating expenses. Sales and marketing was 63% of revenues in Q2 compared to 57% in the prior year period. We have increased spend in this area for a couple of years now, and with the changing economic environment, most of our restructuring efforts have been focused in this area. The reduction in employees will reduce sales capacity of our team, but we believe it will help to make the investments we have made more efficient.
We still have some large in-person events planned in the third and fourth quarters, but we expect to see more leverage in 2023. We continue to see some leverage in R&D expense in the second quarter, which was 21% of revenue compared to 27% in the prior year period. G&A expense was 16% of revenue in the second quarter compared to 18% in the prior year period.
Now onto guidance. We are lowering our revenue guidance for the full year of 2022 by approximately 4% to a new range of $190 million to $193 million, representing a new growth rate of 29% to 31% year-over-year. For the third quarter, we expect revenue of $47.5 million to $48.5 million or a growth rate of 23% to 26% year-over-year.
For the full year, we are improving our expected non-GAAP operating margins by 400 basis points to a new range of minus 25% to minus 23%. For the third quarter, we expect non-GAAP operating margins in the range of minus 29% to minus 27%. For the full year, we expect non-GAAP net loss per share to be between minus $0.31 and minus $0.33, assuming 144 million weighted average shares outstanding. For the third quarter, we expect non-GAAP net loss per share between minus $0.09 and minus $0.10, assuming 144.5 million weighted average shares outstanding.
We expect to incur restructuring costs of approximately $1.5 million in the third quarter related to cash severance. We plan to treat that restructuring expense as an adjustment to non-GAAP financial measures and, therefore, is excluded from our guidance.
Overall, we had some good results for the quarter. We believe the uncertainty around the macroeconomic environment impacted us in the last few weeks of the quarter, and those conditions will likely continue until uncertainties subside.
We have shown the growth potential of our platform with six consecutive quarters of year-over-year subscription growth of 40% or greater and still believe in the market opportunity ahead. It is critical for organizations to have great experiences for customers, prospects, employees and others. UserTesting is pioneering a better way to help companies do that with our Human Insights Platform.
I’ll now turn the call over to the operator for questions.
Question-and-Answer Session
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions]
Our first question is with Elizabeth Porter from Morgan Stanley. Please proceed with your question.
Elizabeth Porter
Hi. Thanks for the question. First, just from a more high level, can you speak to the defensibility of spend for UserTesting? And where does UserTesting really fit within kind of the IT budget prioritization and where those dollars are coming from?
And then second, kind of more specifically, you mentioned churn at the low-end of the customer segment. Can you comment on what you’re seeing in terms of the top of funnel kind of new customer demand, just given some of the IT budgets are coming under greater scrutiny and some of those dollars may be — for User may be harder to come by. Thanks.
Andy MacMillan
Sure. Thanks Elizabeth. I would start by saying, I think a lot of the budget for UserTesting actually tends to come through an R&D team as opposed to more traditional IT spend. And what we see is that R&D teams leverage UserTesting often through either the design, the design ops or some kind of research team, and we tend to be one of the primary tools, especially for our research team to get their job done efficiently. So, I think it is a pretty mission-critical tool for people in those roles, and we tend to see more of those dedicated roles in more established sort of enterprise customers.
And so, I think that sort of speaks to the churn aspect, as we mentioned, with smaller companies, which might have somebody sort of doing this some of the time versus in a scaled organization, where you have a research team or a design research team where this is a key part of their workflow for shipping product that we see it being mission-critical in those environments, and that’s sort of reflected in the numbers.
I think to your second point on demand, we continue to see strong demand at the top of the funnel for the product. I think there is an increased need, if you will, to understand customers’ changing behaviors. We launched some template, as we mentioned on the call, around understanding your customers’ view of impact of inflation on your product. And so, we continue to see really strong demand at the top of the funnel in our marketing channels.
And most of what we talked about was just the slowdown and budgets getting approved, and we found that to be generally true of the budget overall with the organizations we were working with, not with the budget specific to UserTesting. We heard a lot of folks say our whole department is doing a second half budget review. And once we’re through that review — our deal cycle, we’ll go through that evaluation at that point. So, we continue to see good top of funnel demand.
Elizabeth Porter
Great. Thank you for the color.
Andy MacMillan
Thank you.
Operator
Our next question is from Terry Tillman with Truist Securities. Please proceed with your question.
Joseph Meares
Hi, everyone. This is actually Joe Meares on for Terry. Thanks for taking the question. You talked about this a bit in the prepared remarks, but just curious how much of the revenue outlook is driven by less new customer activity versus ARPU weakness? And how is the international business performing? And is the macro more or less impacting the still emerging part of your business? Thank you.
Andy MacMillan
I would say, as far as ARPU versus customer acquisition, I think it’s less driven by an ARPU issue. What we mentioned on the call is that I think the SMB segment — one of the unique things about our business is we sell in every segment. We sell to really, really small companies, all the way to the biggest enterprises in the world. I think it’s typically true of economic cycles. It’s a lot more dynamic at the lower end of the market with smaller companies who might restrict spending as a matter of life and death for their company to survive.
And so, I think in that segment, SMB, kind of small business in particular, we think there will be a tougher logo acquisition for acquisition of all kinds of software products. And so that’s why we reduced our investment in that team as part of our restructuring, and that’s where we see the bigger impact as opposed to kind of a degradation of our ARPU.
And on your second point, we saw a pretty similar impact geographically. We actually saw a strong performance out of our international business overall. And I think it’s, again, more segment driven than driven by geography for us.
Joseph Meares
Super helpful. Thank you.
Operator
Our next question is from DJ Hynes with Canaccord Genuity. Please proceed with your question.
David Hynes
Hey. Good morning, guys. Andy, at the high-end of the market, can you remind us how much customer coexistence you have with firms like Qualtrics? And is there any signs that those buyers are consolidating spend around bigger platforms instead of point solutions? Like I know you don’t solve the same problems, but I’m curious if you’re sensing any kind of close enough thinking in this environment.
Andy MacMillan
Yeah. I mean, we coexist often with some type of tool for doing quantitative analysis, kind of a survey type tool. We often coexist with some kind of analytics or measurement tools, so folks want to know what people are clicking on in their apps and things like that. Those are often even used by different teams in an organization. Our tool is primarily used by a design research team, a UX research team to really get feedback on how people interact with a UI that might not even be in production. We see a lot of prototype testing on our platform, again, which you’re just not going to be able to do with production analytics.
So, for example, you can’t survey your customer base about a UI they’ve never seen before. And so we don’t see a lot of displacement risk from a consolidation standpoint. I think for us, it’s really just around companies continuing to invest in those teams that are supporting the UX research efforts that are going on in their product organizations.
David Hynes
Yeah. Makes sense. That’s helpful color. And then, Jon, a follow-up for you. If we look at sales and marketing spend as a percent of revenue, what do you think is the right level for this business going forward?
Jon Pexton
Well, yes, so we have a path to profitability that we’ve outlined in the IPO. We added a slide back into our investor deck of just kind of our midterm model as well as our long-term model. And we’re on a path to get that to 45% of revenue over X period of time. We’ve seen it increased more recently as we’ve invested in that over the last couple of years. But the efficiency metrics were really in line for all these quarters up until more recently. So, when we saw the softness come in this quarter. We look at the outlook, we said now we’re filing outside of those bands of efficiency that are comfortable for us. We made adjustments. But over time, we want to march that line to about 45% of revenues is our midterm model.
David Hynes
Got it. Okay. Thank you, guys.
Andy MacMillan
Thank you.
Operator
Our next question comes from Arjun Bhatia with William Blair. Please proceed with your question.
Arjun Bhatia
Thanks guys for taking the question. Just going back to the expansion and NRR point where it seems like some of the weakness is coming. Is that purely driven by deals being pushed out? Or are you seeing any signs of down-sell from existing customers that are reducing existing contracts at renewal? And just as a follow-up to that, I’m curious if there’s any specifics that you would point out in terms of customer verticals, if there’s any differences that you’re seeing there?
Andy MacMillan
Yeah. To take the last part first, I don’t think we saw a pronounced difference in any specific set of verticals, at least nothing that sort of jumped out right at the end of the quarter. So, I’d say nothing dramatic there.
In terms of the kind of expansion revenue impact on NRR, it’s tough to delineate that question, because I think what we’ve heard from our customers that didn’t make those transactions was we’re redoing our second half budgets, what we heard a lot of teams say. Much like we did at UserTesting where we restructured a bit for the second half. And so, those teams are basically telling us, as we redo those budgets, obviously, the headcount tied to doing things like UX research require our tools. So, if there’s a headcount impact there, there could feasibly be some impact on number of seats needed or something like that.
But for the most part, on the expansion deals, it was largely just delayed decision. And so, those projects go through an evaluation once new budgets are deployed. We’re only a few weeks into this quarter, but in most of these deals, we’re back into a cycle of ensuring that they understand the ROI of our purchase and sort of trying to get those cycles executed. So, I would say it’s largely delayed decision versus any kind of atrophy of current spend.
Arjun Bhatia
Okay. Got it. That’s very helpful. And then, Jon, maybe one for you just on the guidance. As you’re looking at assumptions for the back half, are you thinking that what we saw in Q2 continues? Are you anticipating that this gets worse — the macro gets worse as we push into the back half? And I’d love to hear a little bit more color maybe in terms of just some of the customer budget restructuring that’s going on in the — that could happen in the back half and in terms of what you’re baking into your assumptions.
Jon Pexton
Yeah. Our guide assumes that the softness that we saw really that came in, in the last few weeks of the quarter. When we started the quarter, we had — our sales team was calling a different number, and the world kind of shifted meaningfully towards the end of the last month of the quarter when we do most of our deals. So, we’re carrying that softness through to the end of the year as our kind of the current assumption that we’ve built into the guide.
And then, what was the other part of that question — on the budget?
Arjun Bhatia
I think — yeah. I think you mostly answered it, but just in terms of —
Jon Pexton
What we heard is, yeah, people are reevaluating budgets. Like again, the deals that we were anticipating closing, the feedback was that a lot of companies are kind of pausing purchase decisions and reevaluating. And then, we just held our annual sales kick-off meeting last week. It was our first time we’ve got our wholesales team together in two and a half years, I believe. And I got to sit in on a lot of the sales team kind of discussions. And there’s really — I thought there’s a lot of confidence and optimism, more so in Q4 than a lot of worries about the macro environment. So that was again more at the global and enterprise level that I was sitting in with those teams. So, I love to hear their confidence, their focus and the need. So — but our guide assumes that we see softness during the year. And we’ll see how this plays out with the economy and these decisions need to be made with our customers — potential customers.
Arjun Bhatia
Got it. Okay. Perfect. Thank you very much for taking the question.
Andy MacMillan
Thank you.
Operator
Our next question comes from Pinjalim Bora with JPMorgan. Please proceed with your question.
Pinjalim Bora
Hey, thank you for taking the question. I want to understand, I think you talked about a reduction in sales capacity, is that largely associated with the low-end of the sales pyramid? Trying to understand why reduced sales capacity as demand is there and maybe ready when the macro improves or the close rates improve?
Andy MacMillan
Yeah. I mean, just to take the last little bit quickly. We’ve shown an ability as a management team to be able to ramp up sales capacity and make it quite productive in the past, driving growth rates up and things like that. So one, we went into this thought process knowing that as we have more certainty, we can always ramp demand back up, and we have a team that’s shown the ability to do that — to ramp up capacity — sorry — ramp up demand.
To your first point, I think it’s important to sort of recognize, as Jon said, that the last month of Q2, maybe the last half of Q2, which was very different, and it was a difference in terms of people, again, telling us that they were replanning the second half of the year. I expect that, that will be very different than as the second half of the year starts, people have budgets, will be selling into those budgets. But we wanted to be a little defensive, if you will, on our path to profitability. We think it’s important that we have committed to being on a path to profitability.
And so, we sat down and said, what do we — what is our best defensive strategy for ensuring that we can have strong sales productivity, that we can have a path to profitability, where we’re showing progress along that path. And that led us to trying to manage the kind of dynamic aspect of the lower end of the market. So that demand that we see — I don’t know how much of that demand at the lower end of the market changes or comes through as deals in the second half of the year.
And so, until we see that happen, and again, it’s easy — that’s actually the end of the market where it’s easier for us to ramp up capacity. They have lower ramp times, faster time to value when we hire sales reps. And so Jon and I and the team felt like it was the right approach for us to again be defensive of that path to profitability, to reduce some of our exposure to that dynamism at the low-end of the market, to see what happens as we go through the next couple of quarters. And as we see strength in that end of the market, we know we have a great product that solves a real need at that end of the market, we can ramp capacity back up. If we don’t see that, then we’re in a defensive position already where we can manage our sales productivity and our path to profitability.
Pinjalim Bora
Understood. And one follow-up on the MDR side on expansion. I want to understand if there is a difference in the expansion metrics between customers who are using the flex based pricing model versus seat based pricing model. Are those discussions a little bit different? I understand that number of seats might be pressured if there are layoffs and all that, but flex based, I guess, is — should be a little bit not affected by that.
Andy MacMillan
I think that’s definitely — there’s some truth to that. I would say, historically, the seat-based pricing model was also a little bit chunkier because it was a high priced seat. And so think of that being sort of a lumpier model that people were doing a lot of dedicated testing with a small number of seats at a much higher price point. Those decisions to add another seat were sort of step changes versus our new model. And part of what customers like what the flexibility is, it’s easy to just add a little bit more capacity if the team is testing a little bit more, add another seat or two if you’ve got some people coming on board.
And so, I think it’s a little lumpier with the seat based model, but I wouldn’t necessarily say that one model lends itself to expansion and the other does not. We have had good expansion revenue in the enterprise under both models historically, and I think that will continue.
Pinjalim Bora
Got it. Thank you.
Operator
Our next question is with Brent Bracelin with Piper Sandler. Please proceed with your question.
Brent Bracelin
Thank you. Good morning. Andy, I know decisions to reduce headcount are tough ones to make. But clearly, I appreciate the decision to take more of a defensive stance just given the dynamic environment we’re in. One thing that stood out to me this quarter though was the momentum in the enterprise, 41 net new enterprise adds is an all-time record. It’s still up over 50% year-over-year. Can you walk us through kind of maybe the linearity? Does that imply a lot of those wins came in April and May and then June, July sort of slowed a little bit? Walk us through maybe what you saw and what you’re seeing in specifically that enterprise cohort that, at the surface, looks really strong.
Andy MacMillan
Yeah. I don’t know that there was specific linearity there. I definitely think we had even some substantive deals late in the quarter that were expansion deals that did push the decision into Q3. I don’t want to imply necessarily that those are even given. These are again decisions that got — are going to get revisited this quarter. So, I definitely think there was an opportunity to improve that number if we hadn’t seen some of the slowdown in the rebudgeting that was happening.
I think it’s a consistent trend we’ve seen. And it reflects, frankly, a lot of the investments we’re making in the product. I think at this point, we’re really providing a unique solution in terms of thinking about what we do as a real enterprise platform that companies can tie into, development workflow can tie into sort of how a large organization makes decisions. And frankly, we’ve been selling for a while now as an evangelical sale with an ROI that is based on how to make these engineering teams more productive by building the right thing early on, and I think that message resonates even in these kind of economic headwind type environment. And so, I think that’s an area where, frankly, we have line of sight to even improve on those numbers if we’d seen less headwinds on decision making, and I think we’re going to continue to lean into our enterprise business going forward. I think that really represents even stronger unit economics.
Just inherently, that end of the market always tends to have stronger gross retention rates, better upsell rates. And so, again, I think part of our mindset of being defensive on our path to profitability is leaning into that success in the enterprise. Maybe to make a small point, we’re not exiting the SMB space at all. We just have some — we’ve reduced our sales capacity there some, really more focused on just meeting the demand that comes inbound that has approved budget and can spend. So, we’re being more pragmatic there, but certainly not abandoning that end of the market either.
Brent Bracelin
Totally makes sense. And then, Jon, I guess, for you. As you think about the downtick in NRR this quarter, has that been impacted at all by enterprise customers maybe reducing capacity and consumption on the platform? Is it all mostly just SMB? Any color there you’re seeing relative to NRR trends in those two different cohorts?
Jon Pexton
Yeah. So, as we’ve mentioned, the SMB segment, our smaller customers was the softest area. We saw more churn. The unit economics are generally lower in that area. But the enterprise level, though, again, you’re exactly right. We’re really, really happy with the progress and the expansion of our large customers, those over $100,000 of ARR, all-time record increase. But the land and expand is working well in that area. We — let us come in, let us prove our worth and then we’ll expand beyond that.
I’ll remind you in the S-1, we disclosed that our top 30 customers had a median land of $50,000. And today, those top 30 customers have a median ARR of $800,000. So, let us come in, let us show you the value and then let us expand. So that continues to work well at the enterprise level. But yes, with the flex pricing model, the idea of the flex pricing model is to give our customers flexibility in what is right for them. And so, it is going to be easier for them to flex down in down markets as they need to and flex up in up markets. And so that situation exists, but we still think it’s a better model than, as Andy said, the chunkiness of a pretty expensive unlimited license that we use.
We still have both plans out there. So, whatever is right for the customer, they can choose that plan. Most people have moved to the flex model, particularly the enterprise, because it’s easier for them to expand and grow and it will also be easier for them to flex down on an annual contract value. But I’m pretty happy with kind of how we’re set up in the enterprise space in particular.
Brent Bracelin
Make sense. Thanks for the comment.
Andy MacMillan
Thank you.
Operator
Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.
Brian Peterson
Good morning, gentlemen. Thanks for taking the question. So, Jon, I wanted to double-click maybe a little bit on the pipeline. We’re hearing a lot from other companies that some VC-backed customers may be struggling with budgets. I’d be curious, as you look at the pipe more broadly, how much of it is just maybe some customers just sort of evaluating and taking a pause? Or is there a certain amount that may have more structural challenges in terms of spend? Any sense for how that splits out?
Jon Pexton
Well, not specifically. But again, yes, there was a surprising kind of pause and shift in reevaluation that we saw towards the end of the quarter. Our view, our concern was more that the SMB side might have a harder time to get over the hurdle, and that’s why we decided to make the restructuring action that again reduced quota-carrying capacity in the SMB segment primarily. We’re more optimistic as we look out that pipeline at the larger enterprise comes through, but it’s still pretty uncertain. We have good confidence from our sales team, but more of those deals are looking like Q4 deals.
Andy MacMillan
And Brian, this is Andy. Just to add like a double-click on Jon’s point. Part of our philosophy on this has been to sort of manage the size of our SMB team right now to what we see as essentially being more inbound demand. People are reaching out to us that have funding or have used UserTesting before, they have conviction already, they’re great accounts for us. We have better close rates, faster sales cycles, better renewal rates, frankly, with customers that come in with that mindset.
What we had been doing in a kind of booming market with lots of VC funding was doing a lot of outreach. We were outbounding. You could call anybody who recently got funding and pitch them UserTesting, and they are like, yes, that makes sense. We’re trying to, whatever, figure out product market fit, launch a second product, and we’d start a sales cycle. And a lot of our thinking is that’s going to be tougher sledding going forward. So, we reduced some of that outbounding SDR, infrastructure. We kind of right-sized the team, if you will. So that when an SMB goes through our funnel and qualifies, that they are well funded, they have got budget, they have got projects, they have got need. We’ve got salespeople there to close those deals.
But I think the idea that you can just pick up the phone and open up Crunchbase and start ringing up start-ups and they’re going to have funding to spend on new projects, I think that’s just a big change in mentality, and I think we’re right to make that shift.
Brian Peterson
Absolutely. Yeah. That makes a ton of sense. And maybe just a follow-up. I know there’s a lot of time between now and October, but I think we’re all looking forward to getting together in New Orleans. But any thoughts on what an in-person user conference could mean in terms of prospects or expansion or products? I’d just love to get your thoughts on the user conference as a potential catalyst. Thanks guys.
Andy MacMillan
Yeah. I’m extremely excited about our upcoming user conference in mid-October. It’s in New Orleans. We call it the Human Insight Summit. It’s something we’ve had in the works for a while. We had planned to do our first-ever global user conference in 2020 when COVID hit and obviously, it was delayed because of that. The prior year, we had run three regional conferences that were a smashing success for us. They were all sold-out events. They had waiting lists. We really got the sense at that point that, as the established leader in the space, there was a lot of demand and desire for people to get together, both about our products but also about the space to share best practices and understanding. It was really driven in many ways, like the rest of the decisions we make at UserTesting, from our customers wanting to get together.
And so, it feels now like there’s a lot of pent-up demand for that event to happen. I know our team is really excited. We’re looking forward to welcoming people and what I think will really be the — an industry level conference on why human insight is so important. So, thanks for bringing it up and asking about it. We’re really excited about it.
Brian Peterson
Thanks Andy.
Operator
Our next question comes from Rob Oliver with Baird. Please proceed with your question.
Rob Oliver
Hey, guys. Good morning. Andy, for you guys, one of the success stories, I think, for UserTesting has been a use case expansion, which you guys have cited as — come up often in our checks with some of your biggest accounts. Just curious, and recognizing that the majority of the weakness here is SMB, when you look at the sales feedback and pipeline, is there any that maybe among some of your most [technical difficulty] customers, there’s perhaps a slowing of that use case expansion within those accounts and — or perhaps kind of rationalization of timing on some of those deals? And then, a quick follow-up for Jon.
Andy MacMillan
Yeah. Good question, Rob. I think it’s been less about evaluating specific use cases and deciding that they don’t provide value. It really does feel like a tail of several different scenarios. As we mentioned, sort of new logo acquisition in SMB was maybe our most challenging area. And again, that’s more kind of selling the initial use case than an expansion play. I think in existing customers that are growing, what we actually saw a lot was the thought of moving even beyond individual use case expansion to kind of the strategy of thinking about the overall workflow and how do you tie UserTesting into your product development process, your prototyping process, and that might involve kind of several use cases. And so, I think we’re continuing to see that, which was reflected in sort of the strength that we saw in enterprise relative to SMB.
We do, however, continue to be nimble about what use cases we are demonstrating on the platform, and I think that’s part of the power of being a flexible tool like we are. And again, I mentioned the inflation templates that we launched and there are many others where companies are saying, hey, if the world changes, we want to be able to go understand our users. So, we put those use cases out in front of what we’re selling.
Rob Oliver
Great. Okay. Andy, appreciate that. And then, Jon, just a question on the — some of the mechanics or impact of the sales — the headcount, sales and marketing headcount. So, you guys had been ramping sales and marketing fairly meaningfully. And I think we’re sort of looking at that and saying, okay, we get into the back half and early 2023, there’s going to be a cohort of salespeople that are going to be up to speed and ready to really [technical difficulty] sales. Can you — I realize it’s delicate, but just was curious as to how you thought about the rationalization in sales and marketing. Were these more existing folks or some of the newer folks? Was it geographical base where you saw pockets of weakness? Any color there would be helpful. Thank you.
Jon Pexton
Yeah. So, you’re right, Rob. The last two quarters, Q4, Q1 were some of the biggest hiring quarters we’ve had in the history of the company. So, we were positioning the company for big growth, and probably for the first time, maybe getting the head of the demand curve. But again, we had a really good 2021, and we were optimistic going through. And then really the war started in February, and again, things started to get really soft, really quick.
As we reevaluated that, we had a lot of thought, both bottoms up and top down, as to what is the right size of the different sales teams in the different segments and different geographies to make sure that we’re efficient with our spend and our sales team that remains is set up to be successful. And I think that more — certainly more was done in the SMB space than any other space, and then it was probably more so in the U.S., lesser in some of the international geographies. But that was about the breakup.
Andy MacMillan
Yeah. The only thing I’d add to that — it’s a good answer, Jon, is that we also have — it’s not just the quota-carrying salespeople when we think about making these changes. We have ratios like most companies in every one of these roles of supporting functions, solutions consultants and sales development reps, SDRs and folks like that. And so, we sort of made the changes, keeping those ratios consistent. So, for every rep we might have taken out of our SMB space, there were some other roles impacted too that supported that function. And so, it’s — and pretty focused, as Jon said, in sort of where we saw some of the more dynamic market aspects of the SMB space.
Jon Pexton
And really that adjustment to the sales spend is to decrease the growth rate. We still expect in our models to have an increase in sales and marketing spend in absolute dollars in Q3 relative to Q2 and Q4 relative to Q3. So, we’re still growing. We’re still investing in all categories. It’s really — again, we had some really big hiring in Q4, Q1. We’re pulling that growth rate back, a little bit more of a defensive posture and then making sure that our sales efficiency is within a range, but we are continuing to grow the spend. And partly, that’s also because we had our first sales kickoff event in two years that we held in Q3 that was very productive. And then Q4, we’ll have our first in-person customer conference as well. So, those are also part of the spend profile for the second half of the year.
Rob Oliver
Great. okay. Good color. Thank you, guys. Appreciate it.
Andy MacMillan
Yeah. Thanks Rob.
Operator
[Operator Instructions]
Our next question comes from Brian Schwartz with Oppenheimer. Please proceed with your question.
Brian Schwartz
Yeah. Thank you for taking the question this morning. Andy, I just wanted to double-click on the delayed decisioning that you’re seeing. I think, we’re hearing it in the commentary as well as the Q&A. Is it fair to assume that, that was more pronounced in North America?
Andy MacMillan
A little bit. But again, I think it was largely more segment-driven than geo-driven. So, maybe slightly more pronounced in North America, but we also — it’s — what’s the number we gave you, 78% of our business in North America. So, you sort of end up with a bit of a weighting there in anything we do, because it’s the majority of the business.
Brian Schwartz
Thank you. And then, Jon, one follow-up for you. I know you changed the pricing model, I think, a couple of years ago. But what percentage of the base is still left on that seat based model versus the new pricing — the new flex pricing model? Thank you.
Jon Pexton
Yeah. Brian, it’s been adopted more heavily at the enterprise global account base. And then the SMB, we’re giving people more of a choice. Some people just want to have an easy bite at an unlimited license and not worry about trying to figure out capacity and then some people usually want to switch over. So, we’re still offering both models. I think that it’s the vast majority of the company, I’d say, 60% to 70%, is on the flex model.
Brian Schwartz
Thank you.
Andy MacMillan
Thanks Brian.
Operator
Our next question comes from Yun Kim with Loop Capital Markets. Please proceed with your question.
Yun Kim
Thank you. Hey, Andy, given the reduction in the sales capacity, can you just update us on your partner network strategy?
Andy MacMillan
Yeah. We’re definitely continuing to lean into partners as an opportunity for us. We think of that in a couple of different areas. We’re continuing to do work and are starting to see some early signs of success working with agencies. And so, I hope in a future call, we can call out some specific agency wins that we’re doing. I don’t think we have public rights to share any of those yet, but we’re continuing to work with agencies really in two ways. One is agencies that actually do some kind of UX design work and want to be able to test that. But we also see some interest out of agencies that do more work in the marketing area to look at using our platform for getting early feedback on marketing and editorial kind of comment — content.
And then, we also think there’s an opportunity for us to work more in the tech partnership ecosystem as well. And you’ve heard me mention a couple of times, I think some of the areas like workflow where we’re seeing companies that progress from having a person or two in a team that are using UserTesting and they get feedback on something they’re working on, to saying, hey, this is really something that’s part of the way that we want to design something, part of the way that we want to build something, part the way we want to do needs assessment. And so, they’re looking at the tools that they use to orchestrate those workflows and thinking about how UserTesting can sit inside those workflows. And so, those are also partnerships that we continue to work on but I think will bear fruit in the future.
So yes, very much still in the earlier stages of building out that partner ecosystem, but something we remain committed to and bullish on over the long term.
Yun Kim
Okay. Great. And then on the number one topic in prior costs, but I guess not today, the contributor network. Can you give us an update on the contributor network, like the growth trend that you’re seeing there in terms of the number of contributors, any cost trends associated with the new contributor acquisitions? And then, I think we talked about it before, but any plan to charge different rates for certain more targeted audience that could command higher value to their customers? Thanks.
Andy MacMillan
Yeah. We’ve continued to see kind of our typical economics around contributor acquisition, around contributor payments, those kinds of things. So nothing unusual or different there. I think that engine is running well. We’re very happy with it as you see in the numbers from a margins perspective and things like that. That continues to all be in line, if not performing a little above what we think the long range plan might be from a margin perspective with the contributor network expense.
We continue to invest in growing the network. So, we mentioned, I think it was two quarters ago, the investment we were making in sort of building out a little bit more in Germany. We’re doing a little bit of that with our contributor network now being available in French. So, you’ll see some additional folks coming on from regions that speak those languages. But again, that sort of happens naturally in the business model that we have structured around the contributor network.
We also have made investments to make our platform and the technology that supports that network more dynamic. One of the things that we released a few quarters ago was the concept of a shorter test, which allowed us to let our customers run a five-minute test which had a different contributor, payment model behind it. The technology investments we made in doing that gave us the ability to make more flexible payments. So, if we choose to, in the future, provide different incentive models for different kinds of contributors we can.
With that, though, I would say we find, as we go upmarket into more kind of expert network areas, what we often find is people are looking for other rewards for their feedback, either they want to know that they’ve been heard or they want to get to know that the design team is looking at what they are doing versus a payment remediation. So, we continue to think that’s an interesting opportunity over the long term, not necessarily a near-term focus, but we have built into our technology, the ability to sort of take on different models with different types of contributor networks.
Yun Kim
Okay. Great. Thank you so much.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Andy MacMillan for closing remarks.
Andy MacMillan
Excellent. Well, thank you everyone for taking the time to join our call today. Jon and I were excited to bring the call to you from Scotland, as we mentioned at the start of the call. Just a lot of energy, right now, in our efforts in Europe and seeing success there, which has been great. I want to also thank you for your interest in UserTesting and what I think is a really exciting and compelling thing that we’re building and continue to roll it to our customers here.
We look forward to meeting with some of you at the investor conferences that we’re attending in August and September. So, if you’re at those events, please make sure you say, hi, to Jon and I, and we look forward to updating all of you on our business progress in the quarters ahead. So, thank you, everyone. Have a great day.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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