ServiceTitan Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
January 13, 2025

There are 14 speakers on the call.

Operator

Thank you for standing by and welcome to ServiceTitan's 3rd Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the call over to Jason Reichel, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Welcome everyone to ServiceTitan's first ever public company earnings call. We're here to discuss our Q3 FY 'twenty five results announced in our press release issued after the market closed today. We've also released an investor presentation, which can be found on our website. With me are ServiceTitan's Co Founder and CEO, Ara Madesyan Co Founder and President, Vahe Kazilean and CFO, Dave Sherry.

Speaker 1

Today's call will contain forward looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact could be deemed to be forward looking. These include, among others, statements concerning our expected future financial performance, including our outlook and business plans and objectives, as well as our product roadmap, long term targets and goals. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

Actual results could differ materially from those contemplated by our forward looking statements. Reported results should not be considered an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our actual results to differ, including our final perspectives filed on December 12, 2024. As a reminder, we previously disclosed certain preliminary fiscal third quarter operating results under the recent development section of our final prospectus dated December 12, 2024. Today, we are providing the final fiscal Q3 financial results and our guidance for the Q4 and full fiscal year.

Speaker 1

During the call, we'll discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non GAAP financial measures, along with reconciliations to our GAAP financial measures are included in our Q3 earnings release, which we have filed with the SEC and is available on our website at investors. Serviceditan.com. These non GAAP financial measures are not intended to serve as a substitute for our GAAP results. And with that, let me turn the call over to Ara.

Speaker 1

Ara?

Speaker 2

Thank you, Jason. I'd like to begin today by extending our sympathy to the titans, the customers and the communities that have been impacted by the devastating wildfires in the LA area. Our hearts are with you all during this happening crisis and we are here to support you all as we forge ahead together. And thank you all for joining us for our first earnings call. Since we just met with you a month ago on our roadshow, our goal today is to reinforce the key points we shared with you and to begin to establish a public company operating rhythm.

Speaker 2

We are grateful for the time you've all invested in getting to know our business. Our goal is to be good stewards of capital as we build what hopefully becomes the generational company and the operating system for the trades. Our December IPO was an important milestone for both our business as well as for the trades and it marked just how far we've come together. Our IPO, however, was never the destination. And in fact, it's just the beginning of a new era for ServiceTitan for our customers and for the trades, because the only thing more exciting to me than how far we've come is just how much further we have yet to go.

Speaker 2

We are obsessed with this industry because we grew up in it. It's in our DNA. We grew up watching our dads put hours and hours into building their trades businesses and struggled to see the financial success we thought they deserved. They sacrificed so much to give us a brighter future. And so we build service titan to solve the problems that they face.

Speaker 2

And thankfully today our dads are no longer our only customers. And on our IPO roadshow, we shared our aspirations to build a generational company and why we believe we have the 5 underlying drivers required to enable this journey. I'd like to remind you of these drivers today. 1st, our market opportunity is large and durable. 2nd, we're the leader in the market.

Speaker 2

3rd, our competitive moat gets deeper every day. 4th, we have many vectors to grow our business with a plan in place for each. And 5th, we target a long term business model to grow efficiently and become highly profitable over time. So let's first talk about our market opportunity. We estimate that end customers spend roughly $1,500,000,000,000 annually on services in the trades in the U.

Speaker 2

S. And Canada alone. And on your way home today, I'd like to encourage you to pay attention to just how many trades vehicles you see on the road. This industry is ubiquitous, it's essential and the jobs these men and women in the trades complete every day are immediate, are preventative or non discretionary in nature. People simply do not go without air conditioning in the scorching heat or heat in the freezing cold or without plumbing.

Speaker 2

So even in difficult times, the trades keep our society running. We executed consistently well against the backdrop of this healthy market during Q3 and we're working hard to to execute against the estimated $13,000,000,000 of addressable revenue opportunity in front of us today. The second and third underlying drivers are our market leadership position and the widening moat around service titan, each based on the fact that we power our customers' entire business end to end across nearly every key workflow. We are essential to the success of our customers' businesses and our business is built around maximizing their success. Our software optimizes our customers' business across their entire funnel to help them increase revenue and profits.

Speaker 2

This makes us mission critical and the transformational customer outcomes we help deliver attract new customers so that they can better compete in the market. This expands the customer footprint upon which we can offer our integrated portfolio of Pro products to further expand effective earn rate and net dollar retention. This is a powerful flywheel that extends our leadership position, It deepens our moat and it strengthens our ability to deliver future customer value. Our obsession with making customers successful, our position as part of the trades and our visibility into the full workflow of our customers have positioned us to continue to grow. Now before I turn it over to my better half of work to talk about our 4th driver, our growth factors, I want to step back to thank our customers and our team.

Speaker 2

We are in the position that we are in today because of our customers' trust and partnership, because of the transformational ROI that we are able to deliver for them and because of the team that works tirelessly every day to make sure that this happens. We won't stop until we've helped every contractor transform their business with ServiceTitan. Vahay?

Speaker 3

Thanks, Ara. I am deeply saddened by the devastating fires throughout many of our communities in Southern California over the past week. My thoughts are with everyone affected in ways big and small. We're part of the fabric of Glendale and we will support our titans, our customers and our surrounding communities to pull through together. We're only now building relationships with our new public stakeholders, but you need to understand that our commitment to our people and our customers is ingrained in who we are.

Speaker 3

We are focused on delivering ROI to our customers because it's the right thing to do and the core of our growth engine. As we deliver value to customers, we help them grow, driving more subscription and FinTech revenue, we earn the right to sell more products and we attract new customers, eager to benefit from the ROI that our platform delivers. We have a proven track record of doing exactly this. We've gone from serving small residential plumbing businesses with just our core platform to now supporting more than 10 trades, both residential and commercial and empowering many of the largest private equity backed customers in the market. We offer 10 pro and fintech add on products that our customers value, which increases our effective earn rate.

Speaker 3

This is why as we look ahead, we have conviction in our ability to execute our growth strategy to become the standard in all the trades we serve. It's simple. We want to bring as much GTV onto our platform as possible. By bringing more value to our customers and helping them grow and succeed through higher utilization of our platform and more pro and fintech products, we realize a larger effective run rate of that GTV. The breadth of our platform gives us a significant advantage for two reasons.

Speaker 3

First, we have visibility into our customers' entire workflow. We know their largest challenges and can then work to deliver solutions with high ROI over time. And because our pro products are a more sophisticated version of what is already offered in our core, the cross sell motion is far more natural for us and for our customers because we help them get stronger in an area we're already solving for today. The benefits of these advantages extend into new traits, where we can have success both more efficiently and more quickly over time, as evidenced by the traction we are seeing in commercial and roofing today. Speaking of pro products, we launched our 2 latest at Pantheon during Q3, Sales Pro and Contact Center Pro.

Speaker 3

Sales Pro was born from customer demands to proactively improve the technician selling experience. Contact Center Pro was born from demand to consolidate, automate and improve efficiency of the entire customer service experience. The foundation

Speaker 4

for both of these new

Speaker 3

Pro products enhances the capabilities we already deliver to customers today and leads to substantial improvements in customer ROI. For these reasons, we have seen very strong early traction. Rather than draw a line around a particular type of software application, we've drawn a line around our customer. We've always built solutions to real problems for our customers and for the trades. I'm excited to share our progress with you moving forward.

Speaker 3

And with that, let me turn it to Dave to talk about our financials.

Speaker 5

Dave? Thanks, Zahaie. I'll echo each of your sympathies for those impacted by the fires here in Southern California. Our thoughts are with you. Today, I'm planning to reinforce our guiding financial principles, run through Q3 financial results in detail and provide guidance for Q4 and the full fiscal year ending January 31, 2025.

Speaker 5

We're running this business for a marathon, not a sprint. Our goal is to durably compound revenue growth over many years and expand margins at the same time, growing earnings faster than revenue. Our long term non GAAP operating margin target is 25% and our path to that target will be driven by a focus on incremental operating margins, meaning how much of every incremental dollar revenue turns into incremental non GAAP operating profit. We believe the best proxy for long term profitability is incremental margins. And as such, we will manage the business to deliver 25 percent non GAAP incremental margins.

Speaker 5

Let's use this year's guidance as an example of how we operate the business. Based on the midpoint of full year fiscal 2025 guidance, we expect fiscal 2025 revenue of $762,600,000 and non GAAP operating profit of $21,900,000 That's an increase of $148,000,000 of revenue $39,000,000 of non GAAP operating income. Thus, we expect incremental operating margins of just over 26%. As we've discussed, the shape of our incremental operating margins will be different next year as we absorb the cost of becoming a public company. Beyond FY 2026, our goal will be to deliver incremental margins consistent with our long term operating margin target of 25%.

Speaker 5

We believe the output of this philosophy will result in sustainable long term growth and margin expansion. Our Q3 results were above the midpoint of our preliminary financial range previously provided, powered by the success and expansion of our customers. Subscription revenue modestly accelerated, led by steady execution and early strength of our new Pro products. Usage revenue also performed well. We've delivered consistent execution on our incremental margin framework through fiscal 2025 to date.

Speaker 5

Q3 total revenue was $199,300,000 up over 24% year over year. Q3 subscription revenue was $145,300,000 up 27% year over year. Usage revenue was $45,900,000 up 23% year over year and total platform revenue, the sum of subscription and usage revenue, grew 26% year over year. As a reminder, our core and pro product revenue is principally monetized via subscription, while usage revenue is principally FinTech revenue recognized on a net basis. Professional services revenue was up $8,100,000 during the quarter, a decline of 4% year over year.

Speaker 5

Q3 gross transaction volume or GTV was $17,800,000,000 up 20% year over year. Net dollar retention was greater than 110% during the quarter. As a reminder, we expect to report GTV every quarter, net dollar retention in a range every quarter and both gross dollar retention and total active customer count annually. Q3 non GAAP platform gross margin was 77.1 percent, an improvement of 30 basis points year over year and total non GAAP gross margin was 70.4%, up 90 basis points year over year. As a reminder, we invest in professional services to make customers successful in our platform.

Speaker 5

We think about professional services losses as customer acquisition costs in the service of maximizing long term customer value. Q3 non GAAP operating income was $1,600,000 leading to a non GAAP operating margin of almost 1%, an improvement of 3.50 basis points year over year. Free cash flow was $10,600,000 up from negative $6,200,000 for the prior year Q3. As we look forward, you should expect modest leverage from gross margin and sales and marketing as a percentage of sales. You should expect minimal R and D leverage over the next several years as we prioritize a series of product S curves to support durable growth.

Speaker 5

In the near term, you should expect high incremental G and A costs as we absorb the cost of becoming a public company, but expect G and A leverage thereafter. We ended Q3 with $134,000,000 in cash and cash equivalents compared with $173,000,000 in debt. At the end of Q3, we successfully completed our initial public offering, including the full execution of the underwriters option to purchase additional shares, which generated $672,000,000 in cash, net of fees. This allowed us to retire our class of non convertible preferred stock for $311,000,000 and add $361,000,000 in cash to our balance sheet. Optimizing our capital structure and transitioning into a net cash position puts our business in a financial position of strength moving forward.

Speaker 5

Shifting to guidance. As Arun mentioned earlier, our goal today is to reinforce the key investment points that we share with you on our roadshow and establish an operating cadence with you as a public company. For the Q4, we expect total revenue in the range of $199,000,000 to $201,000,000 representing growth of approximately 24% year over year. We expect to generate non GAAP operating income in the range of $3,000,000 to $4,000,000 For the full year fiscal 2025, we expect total revenue in the range of $761,600,000 to $763,600,000 representing growth of approximately 24% year over year. We expect to generate non GAAP operating income in the range of $21,400,000 to $22,400,000 The business performed well during Q3.

Speaker 5

We see this performance as evidence that our strategy to become the operating system for the trades is working, which has positioned us for long term durable growth.

Speaker 4

With that,

Speaker 5

I'll turn the call back to the operator for Q and A. Operator?

Operator

Thank Our first question comes from the line of Kash Rangan of Goldman Sachs. Your question please, Kash.

Speaker 4

Thank you very much, Josh. It's such a pleasure to connect with you guys. Congratulations on your Q1. As a public company, congrats on the results and I do share your sympathies with all those affected in Southern California. So join you with that.

Speaker 4

One for you, Ara, when you look at the commercial opportunity versus residential, can you give us some milestone markers from a product perspective? Maybe, Vahid can jump in here as well as to what are the things you're looking for in the commercial version of the product to unlock that massive TAM that's even larger than residential and the go to market, if you will, strategy that you'll be employing in the upcoming fiscal year to help unlock commercial? That's it for me. Thank you so much. Thank you, Kash.

Speaker 4

We appreciate the kind words and always appreciate the partnership. So when it comes to commercial, there's basically 4 key things. There's the customer acquisition portion, the presales piece. There's the cash collection cycle. There's construction.

Speaker 4

And then there's the pro product and broader attach story. And so we feel really good about where we're at today on the first two. We've made a ton of progress there and we're really happy with the traction we're getting on that front. This year, the primary focus is on construction. That's where we feel it's more important most important for us to close the gap this year in order to really put us in a position to becoming the market standard.

Speaker 4

And then after that is the pro product story, where as you would imagine on the residential side is much more mature than it is on the commercial side. And so that's what our priorities are today.

Operator

Thank you very much and congrats. Thank you. Thank you. Our next question comes from the line of Josh Baehr of Morgan Stanley. Your line is open, Josh.

Speaker 6

Great. Thanks for the question and congrats on the IPO. One sort of strategic question and one on the numbers. Just hoping you could comment on what you're seeing around consolidation trends, private equity roll up and standardizing on ServiceTitan, what you're seeing today and how you're thinking about those trends continuing in the future?

Speaker 2

Thank you, Josh. Great question. And again, thank you for the partnership. We've seen a lot of consolidation in the past several years. We continue to see consolidation.

Speaker 2

For us, they happen to be some of our best customers as partners. There is the strongest product fit and customer need in this segment because they have both the enterprise needs of things like multi location management, rollover reporting, centralized security, etcetera, etcetera, as well as the trade specific workflow needs. They help us by accelerating our own customer acquisition as they buy other companies and onboard them on the service side. They tend to be great operators, so they grow quickly and that means more licensing and GTV on our platform. They have a high appetite for our pro products.

Speaker 2

They have low churn And then they become lighthouse customers for us. In many cases, they actually help us move into new markets through their partnership. So that is actually how we entered roofing is through a partnership with one of our largest consolidators in plumbing and HVAC who launched the consolidation in roofing. And so all in all, they tend to be great customers and partners and we continue to see the consolidation trend.

Speaker 6

Great. Thank you. And follow-up for Dave. Assuming that there is some conservatism in Q4 revenue guidance, it doesn't take much to see how that will show an acceleration in 90 days after your report. What would be causing that acceleration at this point, both on a year over year basis, quarter over quarter basis?

Speaker 5

Thanks, Josh. Great question. I mean, a couple of things. With regard to guidance, our overall approach is to establish consistent track record of View All as a public company. With respect to growth rates, as a reminder in early Q4 of last fiscal year we disposed of an asset that was generating single digit 1,000,000 of dollars in revenue.

Speaker 5

That's been a headwind over the last 4 quarters in year over year growth. That headwind will no longer be there in Q4 and beyond. Finally, with regards to what's driving the guidance in Q4, there are 2 offsetting factors. 1st is the seasonal sequential decline we generally see in GTV and usage revenue in Q4 consistent with prior years. And second is, given the momentum we've seen in subscription revenue over the last couple of quarters, we do expect sequential increases there.

Speaker 5

In total, our guidance calls for a small sequential increase in Q3, as we expect subscription increase to be larger than the decline usage revenue. Important to note, we are not trying to be here in a place where we massively over perform. What we're trying to do is create a consistent operating cadence with you all.

Speaker 2

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Turrin of Wells Fargo Securities. Please go ahead, Michael.

Speaker 7

Hey, afternoon. Thanks for taking the question and hope you're all staying safe down in SoCal. You mentioned the focus on durable growth. We see growth rates holding in quite consistent over the past several quarters. Maybe help frame the drivers of that more consistent growth profile, the control you have there.

Speaker 7

And when we think about the mix between new logos and expansion where the priorities lie for the company currently? Thanks.

Speaker 5

I think, this is Dave here. Thanks for the question. In terms of the durability of what we've seen in the last 4 quarters, I think we've seen pretty consistent year over year growth rate in subscription revenue. The last 4 quarters between 26% 27%. This is a mix of both new and existing.

Speaker 5

To the extent that we see over performance in any given quarter, it's likely to be a result of faster expansion with our existing customers, given the pipeline we see of new customers. Arvind, if you want to comment anything on the new customer versus existing customer mix we've seen?

Speaker 2

Yes. The growth we see from the installed base and from new business, it's historically been relatively balanced and that held true in Q3. We had healthy new business activity as well as healthy existing customer upsell and it is not overly weighted to 1 or the other. The mix can often vary depending on the size of new customer lens. We just talked about the consolidation and how that benefits us too, but it's a healthy mix of both.

Speaker 7

Thanks. And maybe just as a follow-up on the net retention rate, you provided the greater than 110%. I think Dave mentioned you'll give us a range on a quarterly basis going forward. Is that 110% a target level you'd expect to execute above for the foreseeable future? Or maybe just help level set what we should expect from that metric in a normalized environment on a go forward basis?

Speaker 7

Thanks.

Speaker 5

Absolutely. I think the fall, I think our net dollar attention story certainly begins with gross dollar attention. As we've talked about quite a bit, we benefit from having high gross dollar attention, more than 95% for the 10 quarters preceding our IPO. When we look at net dollar attention, the biggest expansion despite the hardest part of our story being onboarding happens in the 1st 2 years of customer being on the platform. When we look beyond the 1st 2 year cohorts, what we see is net dollar attention roughly in the range of 110%.

Speaker 5

It's for that reason we picked this range of 110% to be honest.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Tyler Radke of Citi. Please go ahead, Tyler.

Speaker 8

Yes. Thanks for taking the question and congrats on the IPO and first earnings call here. So you talked about some success with some of the new pro products that you launched at Pantheon Marketing and Call Center. Just wondering if you could dimensionalize the success you're seeing in pro products, either what milestones are you tracking in terms of sign ups or contribution to deals you're seeing? Just any more detail you could share on some of those new products?

Speaker 2

Yes. As we noted, we're excited about the incremental ROI that our pro products create for our customers, including our latest pro products, Sales Pro and Contact Center Pro. We are pleased with the customer enthusiasm and the early progress for both of these products. They're pacing well relative to other pro products at this stage, but it's still quite early. We see a big opportunity for both of these products and so we are very much focused on a big opportunity in the long run, but pleased with what we're seeing so far.

Speaker 8

Great. And then a follow-up, would love just to hear your updated conversations you're having with customers here over the last few weeks with the inauguration set next week. And obviously, there's some puts and takes with every new administration. But maybe if you could just kind of go through what you're hearing both on the optimist front in terms of pro business policies, but then also potentially some concerns around immigration policies and how that could impact your customers?

Speaker 2

Yes. Great question. I am not hearing concerns from customers. This is a large market, very durable one and it's done well across all kinds of economic situations and administrations. Let's remember the market is largely non discretionary, 75% of work performed in the trade, it's immediate, it's nondiscretionary, it's got to get done when your plumbing doesn't work or your air conditioning goes down in the middle of summer.

Speaker 2

And we do not consider any administration or potential Thank you.

Operator

Thank you. Our next question comes from the line of D. J. Hynes of Canaccord Genuity. Your line is open, D.

Operator

J.

Speaker 2

Hey, good evening, guys. I'll also pass along my congrats. It's been great to see the IPO success. Ara, just given it's topical, when we see natural disasters like this, whether it's fires in Southern California or hurricanes or whatever it may be, can you just talk about the impact on your business and maybe parse that out kind of immediate term and intermediate term? I suspect maybe it's kind of different impacts as times pass, but I'd be curious to get some any color there.

Speaker 4

Hey, D. J, it's Dave here.

Speaker 5

I will say that it's still too early to tell what we think the impact here will be. I think that what we've seen historically is what we expect here, which is we don't think they'll have a material impact either in the short term or the long term. Our GTV is spread quite significantly geographically, and so we don't expect to be a big impact. And our focus today is

Speaker 2

on how we can help rebuild the community that we're part of.

Speaker 5

We don't expect to be a big impact short or long term.

Speaker 2

Okay. And then Dave, while I have you, maybe a follow-up. Given we're still all getting acquainted with the business model, I was hoping maybe you could talk about any fiscal Q4 free cash flow expectations and anything we should be paying attention to there?

Speaker 5

Yes, sure. I think that obviously Q3 free cash flow was a fair bit ahead of operating income. I think that's driven by a couple of factors for us. Of course, we beat a non GAAP operating income. 2nd, CapEx is lower than it was in prior year.

Speaker 5

And third is working capital, which was quite in our favor in Q3. Part of that has to do with bonuses, which we will expect to get back in Q1. To answer your question specifically on Q4, I do expect us to be operating excuse me, free cash flow positive, roughly in line or a touch ahead of what we had in operating guidance in the quarter.

Speaker 2

Perfect. Thank you guys for the color. Congrats.

Speaker 5

Thanks for the question, D. J.

Operator

Thank you. Our next question comes from the line of Dylan Becker of William Blair. Please go ahead, Dylan.

Speaker 9

Hey, gentlemen. I'll echo my congrats and thoughts for everyone in the SoCal area here. Maybe, Ara, starting with you, you guys are sitting on a trove of data. I think it's something like 110,000,000 projects that have run through the platform. I guess, we're wondering how customers and services businesses are thinking about leaning into operational context.

Speaker 9

What opportunities maybe does that provide from a predictive or proactive perspective? And what are the implications of driving kind of resiliency in the business models and improving economic outcomes for businesses as a function of that?

Speaker 2

Thank you so much, Doon. Fantastic question. I think it might almost seem ironic that such big opportunities for data and AI, some of the biggest happens to be in the trades and we happen to be big beneficiaries of this. As you mentioned, we have the largest data asset and so we are able to glean a lot of insights. But more importantly than just the data is the fact that we are the end to end workflow for our customers, the system of record.

Speaker 2

And so we're able to turn those insights into outcomes for them automatically, which means they automatically get ROI from that data. And that's what drives the appetite for them to buy products for us. And so for us, the AI story actually is not a hype, it's a reality. We already have 3 AI products. Dispatch Pro matches the right technician to the right job to increase our customers revenue and to decrease direct time and cost.

Speaker 2

Ads optimizer optimizes ad spend towards the most profitable campaigns to increase our customers' revenue and to lower their cost per lead. And then we talk a little bit about Sales Pro. Sales Pro records the conversation between the technician and the end customer to help coach technicians to provide a better customer experience, to increase close rates, to increase average tickets, which makes contractors more money. And so when these products help our customers make more money, they're more than happy to pay us. For those products and we think this is just the beginning.

Speaker 2

Our customers have a big appetite for us to continue automating their business and making it more efficient. That's been the direct ask from them to me and Vahae. And these three products are the 1st innings of what we hope to do.

Speaker 9

Okay, great. That's helpful. And it's a good segue maybe to a second question for Vahe here. As you align kind of that value proposition with the platform build out around customer success, how are you thinking about the extent of being able to leverage that partnership or that customer value towards kind of that incremental adoption that you're seeing with some of those newer SKUs and be stacking those S curves at a faster cadence as a function of kind of the compounded value you've been able to build out over time?

Speaker 4

Sorry, can you just restate the question? I'm not sure I follow.

Speaker 9

Sure. Yes. So being able to kind of leverage that value case, how that fuels your product innovation roadmap and how that kind of drives that incremental early stage adoption you called out kind of Sales Pro and Contact Center Pro. So that historical kind of ROI cadence enabling the faster stacking of some of those earlier S curves across new markets and pro SKUs, if that makes sense.

Speaker 4

Got it. Got it. Okay. Thank you. So one of the key benefits that we have with this regard is we're kind of the scorekeeper for our customers and that becomes very important because we have a closed loop visibility from beginning to end and that includes the impact that our products make on our customers' businesses.

Speaker 4

And so what we're able to do is 1st and foremost optimize how we build the product and how we evolve it based on the results that our customers see, which has a huge impact on the quality of the products we have. Secondly, we're able to make sure that our customers perceive the value that we're able to generate, which obviously becomes very important from a decision making perspective and so forth. And so this virtuous cycle we think is a big part of what gives us the right to win within this domain and why we think that there's still a pretty deep well of additional SKUs that we're going to continue to be able to build in addition to being able to use AI in the data to evolve the existing SKUs we already have including the core.

Speaker 9

Okay, great. Thanks guys. Appreciate it and congrats again.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Celino of KeyBanc Capital Markets. Please go ahead, Jason.

Speaker 9

Great. Thanks for taking my question. Nice to hear from everyone. And yes, I want to echo my sympathies for everyone in the LA area. I did want to ask about take rate or earn rate.

Speaker 9

This is a big focus and growth driver. Obviously, there are puts and takes dependent on which trades you enter and how quickly. But when we think about commercial, do those take rates differ materially from the residential side? Really just trying to understand if you see the same type of payments adoption with commercial customers. Thanks.

Speaker 2

Yes. Great question. The drivers on take rates are the probe attach, the FinTech attach and pricing. And certainly all three increase with product maturity in a given market segment. So in segments where we are a new entrant, these 3 are naturally lower.

Speaker 2

And in segments where we are the market standard, these 3 are higher. And hence, our focus on improving product maturity in each segment and becoming a market standard in each segment, where we currently aren't the standard. And so we've seen very good traction on the commercial side by the objective measures that are known to us with a number of customers or GTV on the platform. We are the leader in commercial. But our goal ultimately is to be more than just the leader.

Speaker 2

We want to be the market standard. And we have seen when we become the market standard, all the drivers improve. Vah had laid out the priorities on the commercial side from the very beginning when we won 10 for commercial. It was the 4 priorities we laid out, presales, cash collections, project workflows for commercial companies who have meaningful construction portion of this other business and then the Pro Attest. So we prioritize 1 and 2 and got those done.

Speaker 2

We're in the middle of number 3. And then once we're done with number 3, the next area of focus will be augmenting the Pro products to solve the needs of the commercial specific workflows within those Pro products.

Speaker 9

Okay, excellent. And then maybe just a quick follow-up on competition. What does the competitive set look like on the commercial side? Is it even more DIY or just help us understand, since we're all relatively new to the trades here?

Speaker 2

It's roughly very similar to the competitive set on the residential side, typically 4 categories. One would be the more legacy players where, for example, trades business owners or their relatives in the past build some kind of software for these trades businesses because nothing existed at the time. And while these are great products and we have a lot of respect for them because they ultimately have the same mission of serving the hardworking contractors. You can imagine we've invested a lot in the latest and greatest technologies that give the incredible capabilities we've talked about in the past. And so that is why we win against that set.

Speaker 2

The second would be the point solutions. And the reason why we win that set is typically because these trades businesses, while their businesses are very sophisticated, they don't want to spend all this time, money figuring out how to integrate things and more importantly than customize all these point solutions to fit their workflows. And so they'd rather buy from us. The third would be the horizontal players. And while they're great at the enterprise capabilities that a lot of large customers need, our trade specific workflows are why we win against this set.

Speaker 2

And then the last will be the down market players. And in this case, because we don't really serve the down market, we really appreciate that there are other software options that really focus on down market and help these contractors grow. And then at some point, they typically decide to upgrade the service side.

Speaker 4

Perfect. Thanks, Ira.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Scott Berg of Needham and Company. Please go ahead, Scott.

Speaker 10

Hi, everyone. Really nice quarter here, Q1 out of the gate. 2 for me. First one is to start with Ara. You talked about the 5 growth drivers of the business.

Speaker 10

Number 4 was the many vectors to grow. I guess out of those vectors, what which one are you most excited

Speaker 11

for maybe near term for

Speaker 2

the business? I'll take the

Speaker 11

business?

Speaker 4

I'll take that one. This is Zai. As I think about going into Q4, we had our annual user conference Pantheon during Q3 and our team executed well with new customers and new pro products. This led into our initial industry offering to celebrate the trades in our business and we're in a good position of strength looking into Q4.

Speaker 2

I think on the growth vector side, we continue to remain focused on improving product maturity in the segments that we have recently entered where our goal in all segments we choose to compete in is to become the market standard and hence why the continued focus despite the great traction that we've seen on commercial, the continued focus on becoming the market standard, same with roofing that we recently entered into. And then second, the continued focus on the pro products because our kind of our growth algorithm is number 1, get as much EQV onto the platform as possible. And then number 2, continue to deliver so much value and so much ROI to our customers that we continue to earn deeper partnership with them. And so excitement on both fronts on the market segments and on the pro

Speaker 10

products. Got it. Very helpful. And then, it's your fiscal Q4, there's roughly 3 weeks less. You're pretty much through.

Speaker 10

My guess is you're planning for how you think about fiscal 'twenty six. I know you're not guiding for fiscal 'twenty six at all. But as you think about the growth investments in the business next year, whether it's on the R and D side or go to market, should we expect 'twenty six to look a lot like 'twenty five? Or is there a new initiative or 2 that would be, I don't know, vastly different there that we should consider as we start looking at our models? Thank you.

Speaker 5

Yes. I mean, I think what we've articulated remain true. We see the incremental investment goal right now feels that the most opportunity place to put it is our need. And therefore, I would not expect much operating leverage there. The operating leverage probably need to come from sales and marketing or cost of revenue.

Speaker 5

In the next year, I would likely expect some negative operating leverage in G and A. Assuming about what our P and L looks like because of the cost coming to public company, I expect a little bit negative operating leverage there. In terms of priorities, it remains the same that Arjish articulated, they push on Com Plus or commercial, excuse me, and a big push on pro products. I don't think that you should expect a significant change to our strategy or P and L. The key thing that we talked about a bunch of times is focus on incremental margins in the year to come.

Speaker 5

Again, we don't think we'll hit the 25% target next year as we absorb the cost becoming a public company, but we do focus a lot there and the incremental dollar that is above our target there will probably go.

Speaker 10

Excellent. Nice quarter again. Congrats everyone.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Terry Tillman of Truist Securities. Your question please Terry.

Speaker 12

Yes, thanks. Hi, Ara, Vahae, Dave and Jason. Congrats from me as well on the IPO. And sorry for the background noise, I'm at the airport. And also my thoughts here also with all those affected by the fires in California.

Speaker 12

So I have a question and then a follow-up. In terms of marketing pros, we've done our due diligence talking to customers. It seems like that has a really high attach rate or a very good attach rate. Do you have any sense on your next potential product breakout, whether it's there is something that's kind of next in line that could be have more size and scale or are they all pretty balanced? And I know you love all your products just like you love all your children, but I'm just kind of curious if there's something that's next to maybe get to that inflection point like MarketingPro?

Speaker 12

And then I had a follow-up.

Speaker 2

Well, Terry, first of all, thank you, Stan. I love how you think. One of the things we love about this business is just how many opportunities there are and how under every rock is another opportunity. Certainly, we've seen we're very pleased with what we've seen with MarketingPro. And remember, MarketingPro, there are actually multiple capabilities on there.

Speaker 2

There's the email marketing automation. There's the reputation management. There's the ads optimizer, the direct mail, etcetera. And for now, similar to the last question, we have so much running room in the existing market segments that we are pursuing and so much running room in the existing products that we have, especially with the addition of Sales Pro and Contact Center Pro that we are firmly focused on these priorities. We prefer a model where we stay focused.

Speaker 2

We believe focus drives much better execution and thus much better results. But when the time comes where we successfully execute against what we have currently on our plate, Yes, we look forward to that day where we can sit down and again think through all the remaining opportunities and prioritize them and pick what's on top of that priority stack. And what we love is the customer intimacy in this business where Vahe and I and so many others are constantly on the phone with customers who are constantly in their businesses. We have very good visibility into what their future needs are.

Speaker 4

And the one thing I'll add on that is what we announced at Pantheon with our commercial CRM product that will be which will effectively be the commercial analog for Marketing Pro. And so that's going to be a big part of that 4th part of the commercial story of maturing our Pro product that we're very excited.

Speaker 12

That's great to hear. And I guess Dave, a follow-up question for you is, I'm just curious, where are you in the maturation of these larger consolidator or PE backed customer transactions? I mean, is there a normal cadence and predictability to those? And I think you talked about Authority Brands recently, which seems like a pretty big opportunity. How does the timing work in terms of the revenue recognition and rollout?

Speaker 12

Is it a couple of years, year and a half, etcetera? Thank you.

Speaker 5

Sure. So I think there's 2 questions in there. The first is on the consolidation trends. I feel like we've seen a fair bit of consolidation that Ara mentioned. We still feel like there's room to grow and these are some

Speaker 4

of our best customers where our

Speaker 5

product market fit is highest. And so we are excited about that trend continuing. With regards to large customers like Authority Brands and others, it depends on the contract by contract. What I'll say is that they typically have a rollout side by side. It's rarely done more than a year.

Speaker 5

We try to get more than a year, but I think it depends on the contract in the case of Authority Brands. And we're excited about the early progress in getting them live.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of Brent Breslin of Piper Sandler. Your line is open Brent.

Speaker 13

Hi guys. This is Hannah Rudolf on for Brent. Our thoughts and sympathies are with those in the SoCal area and we hope you and your loved ones are staying safe during this difficult time. Thanks for taking my question. Just one here.

Speaker 13

So it's good to hear the momentum you're seeing with your 2 newest pro products you announced at Pantheon. I understand the ROI that you're driving there, but how do you think about consistently incentivizing pro product adoption when you're landing end to end?

Speaker 2

Yes. Great question. So when we talk about landing end to end, we are talking about landing end to end with our core product because our core product is so wide and handles everything from call booking to scheduling to dispatching to little bit of marketing to inventory payroll, etcetera. And so think of the core product as offering say a very meaningful level of sophistication across all those different workflows. And then think about our pro products as offering the highest level of capability and sophistication in any one of those workflows.

Speaker 2

So marketing pro for the highest level of capability and marketing sales pro

Speaker 4

for the highest level of

Speaker 2

capability in selling dispatch growth to the highest level of capability in dispatching. We typically land customers only through the core product. And so then we have a long runway for attaching pro products thereafter. And the strategy fundamentally is about realizing the ROI that

Speaker 4

underwrote the original buying decision within the core. That's typically the most important predictor of whether or not we'll have success with the pro product story. So our plan is always to make sure that the customer gets 1st and foremost what they thought of the core, deliver that success and then earn the right to go talk about pro products and anything else.

Speaker 13

Super helpful. Thank you.

Operator

Thank you. Our final question comes from the line of Kim Kim of Loop Capital Markets. Your question please, Yoon.

Speaker 11

Okay, great. First, congrats on a successful IPO and also very congrats on a very concise prepared remark, especially for your first earnings call. My question, just following up on a couple of questions on the overall consolidation trend. Just at a high level, if you can share with us some thoughts on how that is changing your sales cycle and the efficiency of that sales cycle? And what are you seeing in terms of the overall monetization or take rate of those verticals that are going through the consolidation wave?

Speaker 2

Yes. Great question, Yung. We believe that Gray's businesses will continue to move on to service titan in order to better compete in their markets. So we actually prefer to land customers on their own timeline as opposed to trying to do unnatural things to accelerate this process, which would typically involve just more sales and marketing spend or discounted ARPUs or a less than great commitment to the implementation process. So those sales cycles on the largest consolidators can vary for some that know a lot about ServiceTitan already and have had exposure through some of their portfolio companies or in another market, that sales cycle can be quite quick.

Speaker 2

And for others, where they may have invested many years and many millions into, for example, a homegrown system, that sales cycle can be quite longer. So there's great variance in those sales cycles. And then the other part of your question, I think, was about the attached story. As I said, what we have seen is that the consolidators typically have the highest appetite for the pro product attached story simply because they're very sophisticated operators. They want the highest level of capability across every workflow.

Speaker 2

They want them in marketing. They want them scheduling and dispatching and how they sell and how they do everything. And I think, yes, I spent a lot of time on the phone and often in person with our largest customers. And the big focus is on streamlining every part of their business as much as possible. And they see that in many cases, the best way to do that is by making sure that utilization and adoption of service type is as high as possible.

Speaker 2

So we work with them directly to identify all the things they might not be using and share why it's so compelling to use it on service type.

Speaker 11

Okay, great. I have a quick product question. One of the best attended sessions at Pantheon, at least from my observation, was the session on Kontakt. If you can update us on how that business is trending and is that Convex business helping you with your push into commercial?

Speaker 4

So, we're very happy with the progress that we're seeing on the Convex side, both in terms of its performance with its current product. But personally, I'm even more excited about the opportunities in LOX for the future, particularly with the marriage between the Convex data set and the service titan data set. It effectively allows us to build a pre populated CRM. And so that's the vision of where we're driving it towards. And what's also been super helpful is Convex's stellar reputation with some of the biggest and best players within the commercial industry and the ability to have access to those customers in terms of getting insights into where value creation opportunities exist and just understanding how we can serve them better.

Speaker 4

And so we couldn't be more thrilled with the partnership and continue to see a lot of leg room within that part of the business.

Speaker 11

Okay, great. Thanks for the update.

Operator

Thank you. Ladies and gentlemen, that does conclude ServiceTitan's Q3 2025 earnings conference call. Thank you for participating. You may now disconnect.

Powered by Quartr

Key Takeaways

  • ServiceTitan reported Q3 FY2025 revenue of $199.3M (up 24% YoY), with subscription revenue of $145.3M (+27%) and usage revenue of $45.9M (+23%), while non-GAAP operating income was $1.6M, and guided Q4 revenue of $199M–$201M (24% growth).
  • The company estimates a $1.5T annual U.S. & Canada trades market and reaffirmed its five growth drivers: large durable market, market leadership, deepening moat, multiple growth vectors, and a path to efficient long-term profitability.
  • At its Pantheon user conference in Q3, ServiceTitan launched two new Pro products—Sales Pro and Contact Center Pro—designed to boost technician selling and automate customer service, both showing strong early traction.
  • Q3 operational metrics included $17.8B gross transaction volume (up 20% YoY), net dollar retention above 110%, platform gross margin of 77.1% (up 30bps), and free cash flow of $10.6M.
  • The CFO emphasized a long-term non-GAAP operating margin target of 25% driven by incremental operating margins, expecting FY2025 to achieve over 26% incremental margins at the midpoint despite near-term public company expenses.
AI Generated. May Contain Errors.
Earnings Conference Call
ServiceTitan Q3 2025
00:00 / 00:00