Monday.com (MNDY) Q4 2022 Earnings Call Transcript

Monday.com (MNDY 1.33%)
Q4 2022 Earnings Call
Feb 13, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning or good afternoon, and welcome to the monday.com fourth quarter fiscal year 2022 earnings conference call. My name is Adam, and I'll be your operator today. [Operator instructions] I will now hand the floor over to Byron Stephen to begin. So, Byron, please go ahead when you are ready.

Byron Stephen -- Director, Investor Relations

Hello, everyone, and thank you for joining us on today's conference call to discuss the financial results for monday.com's fourth quarter and fiscal year 2022. Joining me today are Roy Mann and Eran Zinman, co-CEOs of monday.com; and Eliran Glazer, monday.com's CFO. We released our results for the fourth quarter and fiscal year 2022 earlier today. You can find our quarterly shareholder letter along with our investor presentation and a replay of today's webcast under the news and events section of our IR website at ir.monday.com.

Certain statements made on the call today will be forward-looking statements, which reflect management's best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Additionally, non-GAAP financial measures will be discussed on the call.

Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and on the investor presentation for today's call, which are posted on our investor relations website. Now, let me turn the call over to Roy.

Roy Mann -- Co-Chief Executive Officer

Thanks, Byron, and thank you, everyone, for joining us today. Fiscal year 2022 was a year of significant accomplishments at monday.com. We finished the year more energized than ever with strong financial results, improved efficiency, and continued product innovation. We put this progress on display at our Elevate 2022 world tour, where we had the opportunity to meet with customers and partners in person.

We also announced plans to launch mondayDB, which will upgrade our infrastructure, drive faster board performance, and provide even more flexibility. mondayDB will enhance the way Work OS engine run and store data to ensure that our platform is schemaless, completely flexible, and built for infinite scale, supporting 100 times larger boards. Q4 capped off an amazing year with strong revenue growth and free cash flow expansion. We finished the quarter with 150 million in revenue, 30 million in free cash flow, and achieved positive adjusted operating profit for the first time.

New customer demand trends also continues to be strong. In FY 2022, we added 34,000 net new customers to moday.com family. Our fastest growing customer segments remained the enterprise, where we grew customers by 86% to 1,474 customers. While we are seeing healthy new customer demand, we continue to see competitors significantly reduce their performance marketing efforts.

As a result, we have been able to build market share and improve overall customer acquisition efficiency. Our results demonstrate that monday.com continued to drive growth and profitability at scale. Since inception, the company has now generated more than $5 in ARR for every $1 in cash burned. Regardless of macro uncertainties, we believe we are well positioned for the road ahead.

Let me now turn it over to Eran to walk you through some of our business highlights for the year.

Eran Zinman -- Co-Chief Executive Officer

Thank you, Roy. Fiscal year 2022 was another year of phenomenal growth at money.com, both financially and business-wise. We ended the year with 519 million in revenue, up 68% year over year, improve overall efficiency, and achieve positive free cash flow for the second year in a row. Fiscal year 2022 was also a transformational year for our product.

We've received incredible feedback on our new Work OS product suite, particularly on monday sales CRM. As a reminder, CRM has only been made available to new customers. And we finished 2022 with 2,458 new monday sales CRM accounts. The fast adoption and strong customer feedback of monday sales CRM has been amazing.

Customers tell us they love monday sales CRM. And it's more customizable and easier to use than any traditional CRM tools. As we begin to slowly roll out monday sales CRM to our existing customers, we remain focused on adding more powerful features and functionality to make it the best CRM in the industry. As Roy mentioned, our strong growth continues to be led by enterprise customers.

This quarter, we are particularly excited to announce that one of the world's leading banks recently adopted monday.com. With a goal to move away from multiple work management and legacy communication tools, monday.com proves to be the best fit for the company. To date, over 1000 users across multiple teams have adopted monday.com, and we are seeing the power of our Work OS in enabling collaboration and efficiency. We also made significant progress in expanding our marketplace.

In fiscal year 2022, we increased the number of marketplace apps to 217, including 61 monetized apps. As we look to accelerate efforts in building out the marketplace, we're excited to announce a new partnership with Appfire, the world's largest enterprise collaboration app provider. With a track record of creating easy-to-use, powerful, and reliable apps for the world's most reputable tech companies, Appfire will allow us to build on our strong foundation and take our marketplace to the next level. With that, let me now turn it back over to Roy.

Roy Mann -- Co-Chief Executive Officer

Thank you, Eran. As we turn our attention to the next fiscal year, we are highly confident in meeting our goals, and there's a lot we plan to accomplish. In FY '23, we will be focused on remaining the market leader in work management space. To accomplish this, we will continue to give our users exceptional customer experience with easy-to-use and intuitive products.

We plan to enhance our upmarket efforts through building and scaling our platform and product suite and expanding existing channels that will allow us to build market share. We expect to accomplish all of this while being committed to improving efficiency and delivering positive free cash flow for the third straight year. In closing, Eran, and I want to thank the entire monday.com team for your amazing work in making 2022 our most successful year yet. Now, it's full steam ahead into an exciting 2023.

With that, I'll now turn it over to Eliran to cover our financials and guidance.

Eliran Glazer -- Chief Financial Officer

Thank you, Roy, and thank you to everyone for joining our call today. I'll review our fourth quarter and full year 2022 results in detail and provide initial fiscal year 2023 guidance. We finished fiscal year 2022 exceptionally strong. Total revenue in Q4 2022 came in at 149.9 million, up 57% from the year-ago quarter and a 519 million in fiscal year 2022, up 68% from the prior year.

Excluding the impact of foreign exchange, revenue grew 60% year over year in Q4 '22 and 71% year over year in fiscal year 2022. Our overall net dollar retention rate remained steady in Q4 2022, reflecting our focus on the organizations with the highest expansion potential and continued resilience to a more challenging macroeconomic environment. We experienced a decline in net dollar retention for our largest customers, reflecting slower seat expansion in the upmarket. As a reminder, our net dollar retention is a trailing fourth quarter weighted average calculation.

For the remainder of the financial metrics disclosed, unless otherwise noted, I will be reflecting non-GAAP financial measures. We have provided a reconciliation of GAAP to non-GAAP financial in our earnings release. Fourth quarter gross margin was 90%. In the medium to long term, we continue to expect gross margin to remain in the high 80% range.

Research and development expense was 24.7 million in Q4 2022, or 16% of revenue, in line with the year-ago quarter; and 94.1 million in fiscal year 2022, or 18% of revenue, up from 17% in the prior year. We plan to invest significantly in R&D in fiscal year '23 as we build out our product suite and scale our operating system platform, both horizontally and vertically. Sales and marketing expense was 80.9 million in Q4 2022, or 54% of revenue, compared to 72% in the year-ago quarter; and 358.6 million in fiscal year '22, or 69% of revenue, compared to 79% in the prior year. G&A expense was 50 million in Q4 2022, or 10% of revenue, compared to 2% in the year-ago quarter; and 57.3 million in fiscal year 2022, or 11% of revenue, in line with the prior year.

Net income was 22.2 million in Q4 2022 and the loss of 33.4 million in fiscal year '22. Diluted net income per share was $0.44 in Q4 2022 and negative $0.72 in fiscal year 2022 based on 50.4 million and 45.8 million fully diluted shares outstanding, respectively. Total employee headcount was 1,549, a decline of three employees, since Q3 2022. Looking to next year, as we build our platform and product suite, we expect to continue hiring for our R&D and product teams.

Moving on to the balance sheet and cash flow, we ended the quarter with 885.9 million in cash and cash equivalents, up from 852.6 million at the end of Q3 2022. In Q4 2022, adjusted free cash flow was 29.7 million. And adjusted free cash flow margin, as defined as adjusted free cash flow as a percentage of revenue, was 20%. In fiscal year 2022, adjusted free cash flow was 8.1 million, and adjusted free cash flow margin was 2%.

Fiscal year 2022 marks our second consecutive year of being adjusted free cash flow positive and anticipate to be adjusted free cash flow positive in fiscal year 2023. Adjusted free cash flow is defined as the net cash from operating activities, less cash used for property and equipment and capitalized software costs, excluding nonrecurring items. Now, let's turn to our outlook for fiscal year 2023. For the first quarter of fiscal year 2023, we expect our revenue to be in the range of 154 million to 156 million, representing growth of 42% to 44% year over year.

We expect a non-GAAP operating loss of 19 million to 17 million and a negative operating margin of 13% to 12%. For the full year 2023, we expect revenue to be in the range of 688 million to 693 million, representing growth of 33% to 34% year over year. We expect the full year non-GAAP operating loss of 36 million to 32 million and a negative operating margin of approximately 5%. I'll now turn it over to the operator for your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Kash Rangan from Goldman Sachs. Kash, please go ahead. Your line is open. Kash, your line is open.

Please go ahead with your question. Moving on, our next question is from Pinjalim Bora from JPMorgan. Pinjalim, please go ahead. Your line is open.

Pinjalim Bora -- JPMorgan Chase and Company -- Analyst

OK. Hey, thank you. Congrats on the quarters. Seems like a good one.

I want to understand the guidance a bit, Eliran. If you could tease out maybe the assumptions behind the guidance. Do you expect expansions to kind of continue to deteriorate or, you know, grow growth kind of slow? Are you assuming the macro kind of to stay the same or take a step down? Trying to understand if you're baking in a little bit of more conservatism than usual for this year.

Eliran Glazer -- Chief Financial Officer

Hey. Hi, Pinjalim. It's Eliran. So, thank you for the question.

So, what we took into account for guidance. So, you know, you always take into account the latest trends that we are seeing. So, as we said, there is some challenging macroeconomic conditions [Technical Difficulty] You know, but on the other side, we see a completed [Technical Difficulty] of demand. The reason why NDR is slowing is the fact [Technical Difficulty] on their budget.

So, we took it into account as part of the guidance that we provided for the year. In addition to that, we're seeing improving overall efficiency and the fact that we are also generating cash also took into account as part of the guidance. So, you know, we feel comfortable with what we provided number that we can achieve.

Pinjalim Bora -- JPMorgan Chase and Company -- Analyst

OK. Understood. On the CRM customer growth team, it seems pretty interesting, really solid. I wanted to ask you, I mean, it seems like almost 12% to 13% of your total new customers added in the year was CRM.

I wanted to understand what's kind of the typical size of customers that you're landing CRM with and if you're seeing any kind of interesting expansion characteristics with those as they kind of understand how to expand monday beyond CRM.

Eran Zinman -- Co-Chief Executive Officer

Hi,, Pinjalim. This is Eran. So, as we mentioned previously, right now, the CRM product is mostly offered to new customers. We didn't offer it to existing customers.

And in terms of new customers, we get a mixture of both, you know, S&B, but also midsize and large organization adopting the product. We're very happy and excited with the results. The momentum is great with that product and also the feedback that we get from customers. And we kind of predict this momentum to continue into next year.

So, right now we've got a healthy mixture of both small- and medium-sized customers into the pipeline.

Pinjalim Bora -- JPMorgan Chase and Company -- Analyst

Got it. I'll get back in the queue. Thank you.

Operator

The next question is from Brent Bracelin from Piper Sandler. Brent, please go ahead. Your line is open.

Brent Bracelin -- Piper Sandler -- Analyst

Thank you. Good morning. My question really is around monday sales CRM and the marketer. They showed up on G2 is the two -- one of the fastest new products in categories? Can you just talk a little bit about the momentum you're seeing in marketer, as well as sales, and what's really driving that? Is there a price point that seems to be resonating with customers? And then, talk a little bit about when do you plan to roll that out to existing customers? I know that was only for new customers.

Only when do you roll it out to existing? Thanks.

Eran Zinman -- Co-Chief Executive Officer

Yeah. Thanks, Brent. This is Eran. Thanks for the question.

So, we mentioned previously that about 50% of the new paying customers are CRM customers. But the remaining 50% are split between the marketer and the dev tool. But definitely we highlighted the CRM because it has the most momentum. But also, the two other products also have great momentum that we're seeing.

In terms of releasing those products to existing customers, we plan to do it like at the end of H1. So, midyear this year. And just to your comment about the G2 rating, I think this shows exactly our strategy that because those products are built on top of the Work OS platform, they are already pretty mature to offer a lot of advanced features. And we're able to compete in each one of those markets and achieve high rating within customers, which is definitely kind of what we expected and a big part of our strategy as we build those products.

Operator

The next question is from Steve Enders from Citi. Steve, please go ahead. Your line is open.

Steve Enders -- Citi -- Analyst

OK, great. Thanks for taking the question. I guess I want to ask a little bit on the outlook on the EBIT line and the strong upside we saw there in the quarter. I guess how should we think about the kind of puts and takes of where you're investing and incremental opex and maybe where there might have been a little bit of pullback from what you're expecting in 4Q? And I guess, you know, similarly for the outlook, is there, you know, a pause and maybe some investments that you're making on the headcount side? Or just anything that we should be thinking about as we think about the EBIT outlook for the year? Thanks.

Eran Zinman -- Co-Chief Executive Officer

Hey, Steve. It's Eliran. So, with regard to the first quote quarter, you know, we provide the operating profit. That must be driven by the fact that we, based on the revenue side, we saw a lower S&M spend, you know, due to the fact that it cost us less to acquire customers.

It can be because some of the competitions or the competitors that we stayed that pulled back. And we believe this is an opportunity for us actually to take market share and to grab land. Some of the hirings that we wanted to do in Q4 were delayed to next year. We would like to focus on having people for engineering and product.

This is an area that we will continue to invest. And in addition, in Q4, as part of your year-end audit, there is always kind of reversals of some [Inaudible] that you are doing throughout the year. Nevertheless, I would like to emphasize that, from our perspective, you know, we are going now into Q1. We will continue to invest still in an efficient manner.

And, you know, with regard to overall EBIT that you were asking, we are currently consistent with our original plan to reach profitability bar before 2025 sustainable. And with regard to free cash flow, we said that we are going to be free cash flow for the entire year, not only in H2.

Steve Enders -- Citi -- Analyst

OK, perfect. That's helpful context there. I do want to ask on the marketplace side and the new relationship with Appfire. I guess, how do you kind of view the marketplace opportunity, you know, evolving moving forward? And how do you think about, you know, outside partners and third parties building applications and use cases versus kind of what you would build in-house? Thanks.

Roy Mann -- Co-Chief Executive Officer

Hi. Thank you. This is Roy. So, we really care about the marketplace being a huge growth engine for us.

We want to invest a lot in partners joining us. Appfire is a great partner to have. And our vision here is to build a very large and robust ecosystem around us. And the way we're doing it, I think, is unique, is that we're opening the platform up completely.

And just as an example, application developers can create now first to our citizens within the platform. It's not something that is second grade or like hidden, OK? So, they can really build on top of the platform like we do, and we really open up completely. And I think they feel that, and they feel that we are a great partner to build upon.

Steve Enders -- Citi -- Analyst

Great. Thanks for taking the questions.

Roy Mann -- Co-Chief Executive Officer

Thank you.

Operator

We have a question from Kash Rangan from Goldman Sachs. Kash, please go ahead. Your line is open.

Kash Rangan -- Goldman Sachs -- Analyst

Hi. Good morning. Thank you very much. Congratulations on the quarter.

Terrific for the team. Curious to get your perspective on mondayDB. I know that it's going to be rolled out in 2024. But was the initiative based on any specific customer feedback? Or is it something that you're doing more proactively? What are the kinds of customers that you help them land with mondayDB enhancements you're putting in through that you could not otherwise previously get? And also, with this partnership initiative, where you're opening up to possible partners to develop what kinds of applications, new kinds of applications, what is your goal here? Is that the long tail of apps that you don't have, the resources development that you hope to progress can get you into new markets? Or is it new geographies? Or is it just to open up the platform even more to existing customers so they can exploit the new capabilities more? Curious to get your take on what you want to accomplish with the opening up of the platform initiative? Thank you so much.

Roy Mann -- Co-Chief Executive Officer

Hey, Kash. It's Roy. Thank you for the question. So, mondayDB is something that is within the core of our infrastructure like we are.

And we've always highlighted how being schemaless and how we built the platform on top of a solid backbone that enable our customers to build whatever they want. monday is the next phase of that. We want to make it more scalable. And like a lot of customers tell us, we're doing like -- they can do flip-flops with monday.

They can do whatever they want. It's magic. And I think where mondayDB comes in, it takes that magic in a scalable way and allows us to be like way bigger applications on top of us, and that opens up the door for a larger installment and like different use cases that requires like millions of [Inaudible] opens the door for larger customers in many ways. But again, it's like an infrastructure move to move us to the next level.

Regarding the marketplace, what we think is that -- first of all, when we started it, we just wanted to open it up to everyone and see what they do. And they surprise us all the time with what they do. And I think you nailed two of the great points. Like one, it's obviously -- the long tail, solving a lot of problems that we would not get to for our customers.

And the other thing is go-to-market, like new markets, and those solutions bring us more audience. And I think the third thing, which is very important, is the fact that our customers choose us when we win. And the deal is because they see that they can build a future on monday, even if they don't know exactly what they need to build now, they know that whatever they want to, they'll never hit the wall because the platform is open, and they can always take a partner to build whatever they want. They can connect bespoke software and a lot of those stuff.

So, in that respect, it's also super important for us.

Kash Rangan -- Goldman Sachs -- Analyst

Sort of great moves. Thank you so much, and congratulations again. Very happy to see this.

Roy Mann -- Co-Chief Executive Officer

Thank you.

Operator

The next question is from Jackson Ader from SVB MoffettNathanson. Jackson, please go ahead. Your line is open.

Jackson Ader -- MoffettNathanson -- Analyst

Great. Thanks for taking my questions, guys. The first one is on the commentary on the net dollar retention rate and specifically in the high and that kind of 50,000 and above. What is kind of driving the weakness there? Is it just people not expanding upon their annual renewals as much as you thought? Is there any downshift in terms of the number of seats at some of your customers? Interested in those dynamics.

Eliran Glazer -- Chief Financial Officer

Hey, Jackson. It's Eliran. So, you know, as a reminder, with the enterprise accounts, we're coming off historical highs. What we see is basically I think this is something that we started seeing also last year, larger customers become more cautious with their budgets.

It's mostly seeing a slowdown in expansions of seats. So, on one hand, we see a very healthy traffic of new customers, new logos that's actually buying monday software. But on the other hand, you see the amount of expansion within existing customer base, mainly the big ones is the less than what is defined above. We believe it's kind of uncertainty that has been driving most of this behavior.

But on the other end, you know, the positive is that overall NDR remains steady at 120%. The growth journey has held up well, and we're still seeing, as I said, solid new customers demand. We would say that, by the end of this year, we expect additional, probably, decline, you know, due to mostly to the macro economy headwinds.

Jackson Ader -- MoffettNathanson -- Analyst

OK. And actually, if we just stick a little bit on that theme that maybe geographically speaking, Europe has held up maybe better than what we expected, you know, just dropping in the revenue mix by only a percent year over year. I'm just curious in that geography, what you guys are seeing and maybe, you know, whether it's kind of out or underperformed your expectations in 22 and what we should be thinking about for '23.

Eliran Glazer -- Chief Financial Officer

So, maybe just to take a step back as a reminder, you know, 70% of our customers are nontech and 30% is tech. So, when you think about the softness in demand that we saw last year, it's mostly was around tech. So, when you think about Europe, we said that we see a more -- less of an impact of what potentially there as a thing because of the level of exposure that we have. So, I think that we don't see significant changes to what we saw in the past.

It's relatively stable. And actually, getting into the new year, we see even some positive signs yet to be seen for the remainder of the year.

Jackson Ader -- MoffettNathanson -- Analyst

OK. All right. Great. Thank you.

Operator

The next question is from George Iwanyc from Oppenheimer. George, please go ahead. Your line is open.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you for taking my question. Congratulations on the results. Roy or Eran, maybe if you can give us some more color on the competitive space. You continue to add a solid number of new customers.

Are these ones mostly new? And are you seeing displacement from other work management solutions or mostly from productivity tools?

Operator

We have lost connection with the speaker team. Please stand by while we reconnect them. Thank you for your patience. We are now reconnected with the speaker team.

George, your line is open.

George Iwanyc -- Oppenheimer and Company -- Analyst

All right. Thank you. Roy or Eran, I basically was asking about the competitive environment, you know, the pipeline generation you see. Is that mostly still greenfield, or are you displacing other connectivity tools or work management tools at this point?

Roy Mann -- Co-Chief Executive Officer

Hi. It's Roy. Sorry for the disconnect. And so, when we were looking into new customers that joined the platform, we still see it as greenfield.

And also, the majority of the deals we do are not against any other competitor. And within the ones that we do compete with someone, we win mostly because of our Work OS because they want the platform, they want the fact that they can do a lot of things with it toward the future.

George Iwanyc -- Oppenheimer and Company -- Analyst

OK. And, Eliran, maybe digging into the hiring that you expect to do this year, how frontloaded is that? And what things will you be monitoring to kind of judge the pace of future hiring and upcoming quarters?

Eliran Glazer -- Chief Financial Officer

So, you know, George, just to relate to that, we are mostly focused on building our platform and product offering. So, the focus will be mostly on R&D and product. You know, different to prior year, we are going to hire probably around 10%, give or take, based on our needs. It's not going to be necessarily frontloaded.

Maybe there is going to be a slightly skew toward H1. But overall, we are expecting a more of a balanced hiring process throughout the year. And obviously, if we need to hire more, then we make decision as we progress.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you.

Operator

The next question comes from DJ Hynes from Canaccord. DJ, please go ahead. Your line is open.

DJ Hynes -- Canaccord Genuity -- Analyst

Hey. Good morning, guys. So, maybe just building off that last line of thinking, Eliran, I mean, in the shareholder letter, in your prepared remarks, it says, you know, one of the focus areas this year was to expand the upmarket growth engine. You know, you get the great slide in the deck that shows your efficiency metrics are hanging in there really well.

Clearly, there's uncertainty out there. So, just help us understand kind of how you're thinking about executing on the go-to-market side of things, hiring there. And kind of what are the key initiatives we should be watching for this year?

Eran Zinman -- Co-Chief Executive Officer

Yeah. So, in terms -- this is Eliran. Thank you, DJ. So, in terms of our go-to-market we have a bunch of plans.

So, definitely the new products are a great way to expand our go-to-market. The fact that we can now market specifically the CRM product, the marketing product, just opens up monday to new audiences, a new type of buyer. And just as a reminder, you know, once the customer starts using one of those products, they can expand to additional products and eventually get the whole company into the monday Work OS platform. So, definitely, this is a big game changer for us in terms of our ability to go-to-market, different kind of buyers, different personas within the organizations.

Also, this year, we're going to double down on our outbound motion, so expand our channels, marketing channels, do some more B2B enterprise-focused marketing. So, all those efforts together will allow us to continue to execute. In addition to the great momentum we've already seen with performance marketing that we mentioned, given that most of the other players in the market have pulled back, we're able to achieve now a greater market share and greater efficiency. So, combine all those things together, we see great momentum in terms of acquiring new customers.

Eliran Glazer -- Chief Financial Officer

Maybe, DJ, this is Eliran. Just to -- sorry, just to add to what Eran said, last year, we hired to, you know, increase their headcount in more than 50%. And we believe we are now well positioned to grow to 2023 and beyond in terms of sales and marketing headcount, you know, with regards to going upmarket as well.

DJ Hynes -- Canaccord Genuity -- Analyst

Yeah. OK. Great color. Thank you, guys.

Operator

The next question is from Derrick Wood from Cowen and Company. Derek, please go ahead. Your line is open.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks, and congratulations as well. I guess just to follow up to that, you did hire your first ever CRO in November. Just wanted to hear what the kind of impetus was to bring on a CRO and what changes you may be making on the go-to-market side.

Eran Zinman -- Co-Chief Executive Officer

Yeah. Thanks, Derrick. So, actually, Yoni, our CFO was actually promoted from within the company. He was managing both the sales team and the marketing team, and we promoted him to be the CRO of the company, basically, adding also the management of the customer success group and the customer support, in addition to our partners group.

So, first of all, you know, we're really proud of Yoni. He has been doing a phenomenal job. He basically himself created the whole sales team from scratch and done a great job. And with this change within the company, we believe this will allow for better collaboration between a different team, which will drive greater efficiency.

You know, the teams working together and more optimized go-to-market. The fact that you have such a wide look. Any sign from the marketing team all the way to the sales and partners just gave so much energy to all the teams and much better collaboration. So, we're already seeing the fruits of that, and I feel that going into 2023, this will even create greater efficiency within those teams.

Derrick Wood -- Cowen and Company -- Analyst

Got it. That's helpful. And just maybe a follow-up. So, it sounds like from a macro standpoint, you're not seeing a whole lot of headwind on the SMB side.

It's mainly just from slower expansion activity in the upmarket customers. I guess, why is it that the -- you know, we've heard more pressure from SMB, from other companies. Why is it that it sounds like you're seeing more stability on the SMB side?

Roy Mann -- Co-Chief Executive Officer

Hi. It's Roy. It's really hard to say, but I feel that like SMBs want to consolidate on -- you know, have a product that solves more problems for them. That's typically the case.

And monday is obviously the tool of tools, and they can do so much with us. Having said that the situation, they are very stable, like you said. And we do see a very healthy top-line demand that Eran mentioned with our performance marketing and getting new customers to join monday.

Derrick Wood -- Cowen and Company -- Analyst

Well done. Thanks.

Roy Mann -- Co-Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question is from Fred Lee from Credit Suisse. Fred, please go ahead. Your line is open.

Fred Lee -- Credit Suisse -- Analyst

Very nice quarter, and thank you for taking my question. I noticed R&D in dollar terms declined sequentially for the very first time. I was wondering if you could talk about how we should think about leverage going forward, especially as you add new features and will add CRM to your existing customers and invest in new products like mondayDB. And then, if you could also share year-end headcount R&D.

Thank you.

Eliran Glazer -- Chief Financial Officer

Yes, so, with regards to R&D, Fred, it's Eliran. So, the fourth quarter is 18% for the year and 16% for the fourth quarter. The reason why, it's more mainly due to the fact that we did some cost adjustments at the end of the year. There was the impact of the Israeli dollar shekel exchange rate because the dollar was strong.

And on this front, in Israel, with all the R&D based in Israel, you get benefits on their payroll, which is most of the cost for R&D. And when you think about going into 2023 and 2024, we are in accordance with our long-term operating plan, which was around 22% to 24%. We believe it's going to be on the lower side to fit, around roughly 20%. We're never very significant in terms of R&D as a percentage of revenue, and this is pretty much the kind of the ballpark I would assume that we need to maintain.

Obviously, we're willing to invest further on the platform. And on mondayDB, as we said, already took that into account. But if we feel or we feel that we need more resources and more headcount, then there is no -- you know, we will obviously hire them.

Fred Lee -- Credit Suisse -- Analyst

Thank you. And then, also, the year-end headcount, if you don't mind, in R&D.

Eliran Glazer -- Chief Financial Officer

The year-end headcount?

Fred Lee -- Credit Suisse -- Analyst

Yeah.

Eliran Glazer -- Chief Financial Officer

The problem is, north of 300, I don't remember the exact number.

Eran Zinman -- Co-Chief Executive Officer

Yeah, but maybe just to add to Eliran to give you a perspective, most of the vast majority of the hiring for 2023 is going to be focused on R&D resources. For us, this is the main part of the business we're planning to expand next year and put most of the efforts and the budget. So, we continue and like always, we're going to deliver with very high execution. also, in 2023.

We have that very big plan.

Fred Lee -- Credit Suisse -- Analyst

OK. That's very helpful. Thank you. Thank you very much.

Great quarter.

Operator

The next question comes from Brent Thill from Jefferies. Brent, please go ahead. Your line is open.

Brent Thill -- Jefferies -- Analyst

Thanks. Just back on the guidance, I just wanted to better understand what you're embedding for the year in terms of macro or SMB churn. It's pretty drastic slowdown in growth. Is this just good old fashioned conservatism? Or are you baking in anything else to give yourself a little wiggle room?

Eliran Glazer -- Chief Financial Officer

Hey, Brent. It's Eliran. So, we believe this is going to be a pretty much the same macroeconomy conditions that we see now that will persist by the end of the year. We took that into account.

We did also take into account the some slowdown we see on NDR from enterprise account. It's also baked into the numbers. Other than that, we believe that the guidance, you know, is consistent with what we see as of now. And, you know, also, with the improving overall efficiency on one hand, but the challenging macroeconomic.

So, we feel this is a number that we can achieve.

Brent Thill -- Jefferies -- Analyst

And that enterprise slowdown is not just as it relates to the macro, having a hold on those customers slowing? Or is there something from an internal execution that you'd like to do better there?

Eran Zinman -- Co-Chief Executive Officer

Yeah, this is Eran. Thanks, Brent. So, I feel it's more about the macroenvironment and the fact that those enterprises are a bit more cautious going into 2023, maybe slowing down hiring. Just as a reminder, the way we charge customers is per user.

So, the fact that they might be slowing down hiring might have an effect here. But definitely we are seeing growth and some optimism and some, you know, good momentum as we start the year. So, I think there's some optimism making to that going forward.

Brent Thill -- Jefferies -- Analyst

Thank you.

Operator

The next question is from Arjun Bhatia from William Blair. Arjun, please go ahead. Your line is open. Hi, Arjun.

Your line is open. Please make sure you're not muted locally.

Arjun Bhatia -- William Blair and Company -- Analyst

Hello? Can you hear me? All right. Perfect.

Roy Mann -- Co-Chief Executive Officer

Yes.

Arjun Bhatia -- William Blair and Company -- Analyst

Thank you. All right. Thanks, guys. My congrats on a good quarter.

I wanted to touch on the product verticalization efforts. I think you mentioned that a little bit in the shareholder. letter. But I'm curious what your roadmap is on a verticalization and maybe what role the partners can play there, if any, in helping to reach verticals where you may not have a presence right now.

Roy Mann -- Co-Chief Executive Officer

Hi. Thank you. It's Roy. So, we are relying a lot on the partners to both expand our marketplace offerings and also to provide a lot of services and help us with customers in territories we are not presenting.

And I think it's a great power that we have, that we have so many engaged partners. Just recently, a lot of them -- like 170 of them flowing to Israel. We had a large event here. And it was very exciting to see how they're going to build on us.

And, you know, really we shared with them the roadmap of the marketplace and how much they can do there. So, it's really exciting.

Arjun Bhatia -- William Blair and Company -- Analyst

And maybe one follow up for Eliran. As you think about just the sales and marketing spend going into next year, obviously, you're seeing efficiency there on customer acquisition. But how do you think about the trade-off between performance marketing and sales-led spend on the go-to-market side in 2023?

Eliran Glazer -- Chief Financial Officer

Hey, Arjun. So, the short answer is that it will be pretty much the same ratio that we saw in the past. I would say around 30% is going to be performance marketing based on efficiency, and around 70% is sales and partners. So, this is going to be kind of the ratio that we believe is going to continue also this year.

Arjun Bhatia -- William Blair and Company -- Analyst

OK, Perfect. Thank you, guys.

Operator

The next question is from Robert Simmons from D.A. Davidson. Robert, please go ahead. Your line is open.

Robert Simmons -- D.A. Davidson -- Analyst

Hey, nice quarter, and thanks for taking my questions. For the year, retention number particularly in the large enterprises. And will you disclose the fourth quarter number? Can you talk about what you actually saw in the quarter itself in terms of how that trended in the third quarter? And then, also the gross retention, what you saw there?

Eliran Glazer -- Chief Financial Officer

Hey, Robert. It's Eliran. So, from an overall -- you know, the NDR remains steady with [Technical Difficulty] 420% gross churn and held up well. We're still seeing solid new customer demand and overall as it keeps growing.

On the larger accounts, we saw a decline. As I said at the beginning of the call, the remainder is that we coming off historical lines. We see larger customers that become more conscious with the budgets. They are more conscious with the level of spend, and we do see a slowdown in expansion, mostly driven, we believe, by current macro uncertainty that is driving this behavior.

Robert Simmons -- D.A. Davidson -- Analyst

Would it be possible to get any quantification on those factors, or is that not? Thanks.

Eliran Glazer -- Chief Financial Officer

Can you repeat the question, please?

Robert Simmons -- D.A. Davidson -- Analyst

Would it be possible to get a quantification on any of those factors in order?

Eliran Glazer -- Chief Financial Officer

Don't have it right now with me, you know, the quantities of each contribution. But to the NDR.

Robert Simmons -- D.A. Davidson -- Analyst

Yeah.

Eliran Glazer -- Chief Financial Officer

So, the larger one would be the slowdown in expansions. And so, this is the main factor that drove the NDR. And you can see that the NDR of larger customers slowed down more sharply than the other ones.

Robert Simmons -- D.A. Davidson -- Analyst

Great. Thanks.

Operator

The next question is from Jason Celino from KeyBanc. Jason, please go ahead. Your line is open.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Thanks for fitting me in. You know, very nice to see a customer in one of the major financial institutions in the prepared remarks. When we think about the slowdown in the seat expansions at the enterprise, has it been mainly limited to your tech exposure? Curious there. Thanks.

Eran Zinman -- Co-Chief Executive Officer

Yeah. Thanks, Jason. This is Eran. Yeah, I would say that sector again, like the thing that drives NDR hub is mostly companies expanding, meaning hiring more people, getting more people on board and into the product.

Definitely, the tech sector has suffered more. But just as a reminder, it's only 30% of our customers. The other 70% are more or less impacted. But it's something we are seeing across the board within companies.

And again, it's hard to tell how much is that large organization being more cautious and how much is that will stay with us going into 2023. But this is the current trend we're seeing.

Jason Celino -- KeyBanc Capital Markets -- Analyst

OK, great. And if I were to kind of summarize, you know, the top-of-funnel trends, it sounds like things are still, you know, very strong. You know, I'm curious on like the linearity that you saw in Q4. I guess, how did that top-of-funnel look in December versus maybe early in the quarter? Thank you.

Roy Mann -- Co-Chief Executive Officer

Hi, it's Roy. So, historically, we've seen that the first quarter is much stronger, people coming back from vacation, and it's a new year. And so, this first quarter, we actually anticipate that it will be less strong than it is. So, we do see it as a very positive sign.

We see a very strong demand. And, you know, so that's like super positive for us.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

The next question is from Andrew DeGasperi from Berenberg. Andrew, please go ahead. Your line is open.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for taking my questions. I guess -- I know you've talked a lot about the retention rate, and I know this being a 12-month trailing metric. I guess what I'm trying to get at is, is this metric going to step down sequentially for the larger cohorts, you know, the over 10 users?

Eliran Glazer -- Chief Financial Officer

Yeah. We anticipate that it might go down in the larger accounts, between 5% to 10% more this year. There is a lagging effect every month due to the trailing 12 months, and we're accounting at weighted average. So, obviously, the impact is going to be throughout the year.

So, I believe this is probably the trend that we're seeing.

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for that. And then, secondly, on the sales and marketing savings, I know you mentioned performance marketing, competitors pulling back. I just wanted to dig a little deeper in terms of who those competitors are. Are we talking about other collaboration work management platforms? Is it a bigger cohort of that?

Roy Mann -- Co-Chief Executive Officer

Hi. It's Roy. So, generally, when we say that, we mean the overall competition on the keywords and on those ads. So, we don't necessarily know who they are.

We just see that we are getting more customers for less money.

Operator

The next question comes from Shebly Seyrafi from FBN Securities. Shebly, please go ahead. Your line is open.

Shebly Seyrafi -- FBN Securities -- Analyst

Yeah. So, thank you very much. So, it looks like you're going to be hiring in product and R&D in 2023. Does that mean you're going to have lower sales and marketing headcount at the end of '23? Just talk about how you intend to invest in sales and marketing this year?

Eliran Glazer -- Chief Financial Officer

Hey, Shebly. It's Eliran. So, yeah, we said that we are going to focus on product and R&D. It does not necessarily mean that we're going to have lower headcount with sales and marketing.

If we need to hire, there is going to be hiring there as well. Currently, we are, you know, continuing with the number that we have, but we see the bulk of the investment in R&D.

Shebly Seyrafi -- FBN Securities -- Analyst

OK. All right. And I just want to elaborate on the competitor pullbacks. You just answered it, the prior question, but just if you can elaborate on that.

For example, do you have a number of competitors that you saw pull back? When did you see it if there was a time that was more noticeable? And what is your response? Are you going to be more aggressive now against your competition? And just describe how you might become more so. Thank you.

Roy Mann -- Co-Chief Executive Officer

Hey, Shebly. It's Roy. So, yeah, I'll elaborate more on that. So, essentially, we bid on ads in Google and Facebook and YouTube in all those areas of performance marketing.

And we see that we can get the same ad placements for a lower cost. So, that's essentially what we say when we say less competition. So, like to be in first place, we need to pay way less. And then we get a lot more customers in because of that.

And our approach is that we have a BigBrain, we have our own measurement, internal measurement tools that we've built that show us exactly the ROI on every dollar we spend on marketing. So, we know what's working. So, if there is a campaign that is working less good, we will lower the bid automatically almost. And so, I think this is a competitive advantage we have over others where they needed to cut back, so they just did.

And we know what's working. And so, what's happened is that we've even increased the budget we have for performance marketing in January and February because we know and we see what's working, and we have internal predictions to what we'll get out of it. So, I think we're doing it super responsibly. We know exactly what the ROI is.

And, you know, that's the strategy and what it's been up until now.

Operator

The next question comes from Scott Berg from Needham. Scott, please go ahead. Your line is open.

Scott Berg -- Needham and Company -- Analyst

Hi. Congrats on the quarter. Thanks for taking my question. I guess I'll leave you with one in essence of time here.

Given the success that you've had on the marketing side, those numbers have actually trended down all year, you know, after the largest Superbowl ad last year. It sounds like FX was a benefit in the quarter. I guess, why not step on marketing a little bit more? If the cost of customer acquisition is actually coming down, you continue to have success there, and the competitors are pulling away, why not take this opportunity to even capture more market?

Roy Mann -- Co-Chief Executive Officer

Hi, Scott. It's Roy. So, yeah, we have been doing that up to the point that we are comfortable with the results. That's what BigBrain does.

Like it shows us exactly how further we can step on the gas. And we have. So, there isn't any point in extending it more, either there is no -- because we won't see the results that we want if we push it further. But we have, and we have extended the marketing.

Eran Zinman -- Co-Chief Executive Officer

Scott, just to add to what Roy said, from our perspective, you know, this is what we're also going to look at this year. If we see opportunities -- continue to see the opportunities with efficiency, then we are not going to pull back. We're actually going to, you know, push on the gas in order to generate more leads and more growth for the business.

Scott Berg -- Needham and Company -- Analyst

Great. That's all I have. Thanks for taking my questions.

Operator

The final question today comes from Ivan Feinseth from Tigress Financial Partners. Ivan, please go ahead. Your line is open.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Hi. Thanks for taking my questions. And also, congratulations on the great quarter and great year. Can you give us some, you know, insight or discussion on some of your AI initiatives and potential AI integration capabilities onto your platform?

Roy Mann -- Co-Chief Executive Officer

Hey, Ivan. It's Roy. It's obviously been amazing, right? Like, we've seen such a huge change in such a short time in AI. And now that we see that, like, the barrier was lowered so much to create such powerful AI tools, what we naturally do at monday, we open up the platform and allow anyone to build on top of that.

So, we have already added many layers that enable anyone, including us, to build AI tools on top of monday. And we'll soon have an AI hackathon where we'll invite anyone to build on top of the platform and essentially have a dedicated section within the marketplace for any AI tool that can benefit anyone. And I think that's like super exciting. And we'll see like long-tail solutions for specific industries.

And then, you know, it's like exciting.

Eran Zinman -- Co-Chief Executive Officer

Yeah, and maybe -- this is Eran. Just to add more color, so one of the main building blocks that we have in the platform is our monday docs. And that already saw a lot of potential use cases as we're using AI to generate automatic content and summarize content within the boards. So, definitely, we saw some exciting POCs.

And we're planning to expand, like Roy said, the platform and start with some off-the-shelf solutions to start with.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Great. Thank you. And wishing you a big 2023.

Eran Zinman -- Co-Chief Executive Officer

Thank you.

Roy Mann -- Co-Chief Executive Officer

Thank you. You, too.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Byron Stephen -- Director, Investor Relations

Roy Mann -- Co-Chief Executive Officer

Eran Zinman -- Co-Chief Executive Officer

Eliran Glazer -- Chief Financial Officer

Pinjalim Bora -- JPMorgan Chase and Company -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Steve Enders -- Citi -- Analyst

Kash Rangan -- Goldman Sachs -- Analyst

Jackson Ader -- MoffettNathanson -- Analyst

George Iwanyc -- Oppenheimer and Company -- Analyst

DJ Hynes -- Canaccord Genuity -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Fred Lee -- Credit Suisse -- Analyst

Brent Thill -- Jefferies -- Analyst

Arjun Bhatia -- William Blair and Company -- Analyst

Robert Simmons -- D.A. Davidson -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Shebly Seyrafi -- FBN Securities -- Analyst

Scott Berg -- Needham and Company -- Analyst

Ivan Feinseth -- Tigress Financial Partners -- Analyst

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