Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Beauty 2019 Foresight earnings Conference call. At this time all participants line are you know listen only mode. After the speakers presentation, there will be a question and answer session.
I think what's changing discussion you want me to press Star one on your telephone. Please be advised to today's conference is being recorded if you acquire any food assistance. Please press star zero.
Oh, no like the hand, a confluence of what you're speaking today Mr. Mark Mike Brown director of Investor Relations. Sir. Please go ahead.
Thank you good afternoon, and welcome to pool sites third quarter 2019 earnings Conference call with me today, our Aaron scanner co founder and CEO , James Budge, CFO and Ross Meyercord, our new CRM.
Some of my remarks will include forward looking statements within the meaning of the federal Securities laws actual results may differ materially from those contemplated by these forward looking statements.
Factors that could cause these results to differ materially are set forth in today's press release and in our SEC filings any forward looking statements that we make on this call are based on information and assumptions as of today and we assume no obligation to update these statements.
During this call we may present, both GAAP and non-GAAP financial measures, except for revenue balance sheet, a mountain billings all financial amounts discussed our non-GAAP and growth rates are compared to the prior year comparable period, unless otherwise stated.
A reconciliation of GAAP to non-GAAP measures is included in todays earnings press release. The press release is available on our web site at investors doctoral site Dot com.
For your from Aaron I'd like to remind you that James and I will be attending several conferences over the next couple of months all of which are listed on our IR site. We hope to see many of you at these conferences and with that I'll turn the call over to Aaron. Thanks, Mark Good afternoon, everyone and thanks for joining our Q3 2019 earnings call.
All.
We had a solid quarter and improved many of our growth metrics demonstrating that the operational improvements we put into motion at the beginning of the quarter are working.
I met with over 90 customers and perspective customers since our last earnings call. In every meeting there was a clear need for tech skills transformation at scale and strong recognition for how we can be that solution.
I'm happy with the progress we made in the quarter and recognize we still have work to do.
B to B billings grew 32% total billings grew 28% revenue grew 34% and our guidance for 2019 remains inside the range, we provided and reiterated earlier in the year.
We're seeing signs of improvement and I'm confident this will continue under our new Chief revenue Officer Ross Meyercord.
Over the course of the last few months I met incredible CRL candidates from some of the best software companies in the World.
Ross stood out as the best fit for plural site.
He brings a unique combination of skills and experience to our business.
And his most recent role is easy VP of sales at Salesforce Ross, let the North America sales team responsible for Upselling and cross selling into large existing enterprise customers.
He also manage the sales strategy business development and sales operations of the North American Enterprise business.
And his previous role at Salesforce as CIO Ross lived the real life roll up our typical buyer.
He understands the mindset of those we sell to and how to best position the product.
He scaled the organization processes and applications that supported the business during this period of remarkable growth.
During his time at Salesforce annual revenue grew from 2 billion to more than 16 billion.
Before sales force Ross was a senior partner in the high Tech practice at Accenture, one of the largest consulting firms in the world.
While there he built a massive network of CIO Cts, helping them to manage its scale execute digital transformations and moved their businesses to the cloud.
He gained unique insight into an important go to market channel, we expect to develop further.
We're thrilled to have Ross lead us through the next phase of our growth as a public company and I've asked him to share a few words with you here today Ross.
Thanks, Aaron its great to be here and wouldn't exciting time in the evolution of the company.
As a former tech leader I see a rare opportunity to solve a massive problem that impacts every organization in the world.
The need to transform tech skills at scale in a way that aligns with our tech strategy.
I was a CIO and a customer portal side I understand what keeps hectoliters up at night.
In the rights skills to execute and deliver for their business.
I look forward to working with my network of Tech leaders to help provide the fastest path to skills development.
I also see the opportunity to build a strong channel motion unfurl site.
This is something I know first hand from my 22 years at Accenture.
I'm confident that the sales team here is focused.
Looking forward to implementing the operational rigor necessary to further grow the business. Thanks, Ross, we're really happy to have you here with us.
I'll share more later in the call about our progress with new and existing customers and our partners, but first I'd like to turn the call over to James to review the numbers James Thanks Aaron.
In Q3 improved execution drove billings growth of 28% to 92.1 million.
And revenue growth of 34% to 82.6 million.
Our b to B billings increased by 32%.
80.7 million.
Landing expanding is one of the top strengths of our business as we work with customers to become a solution that is prioritize that the organization level not just within a few departments.
The evidence that this is working as the growing number of customers with larger deal sizes.
By the end of Q3, we say, 51% increase in customers with annual billings of over $100000.
And 81% increase in customers with annual billings exceeding $500000.
And a 91% increase in customers with annual billings exceeding 1 million dollar.
As of the end of Q3, our top 25 customers have now expanded to 23 times their initial purchase.
The continued growth in our largest accounts demonstrates the value. We continue to provide which has helped keep our net revenue retention above 120%.
Our go to market efforts in Q3 were mostly focused on our high end commercial enter enterprise customers, which resulted in our highest average deal size to date up 30% higher than the same period a year ago.
The tradeoff in Q3 was a higher percentage of churn in our smaller accounts.
Which offset the new logos, we added in the quarter.
The larger deal sizes have resulted in slight increases in our average deal closing cycle, which increases the variability of those close date.
Reducing this churn will receive an increased emphasis going forward as we increased our investment in customer success and enhance our customer coverage model.
Our Q3 gross margin was 80% up from 77% last year.
Gross margin is ahead of pace as 80% is our target gross margin.
And we're proud of achieving this earlier than expected.
non-GAAP net loss per share in Q3 was eight cents an improvement over our net loss per share in Q3 last year at 10 cents.
We closed the quarter with total cash in investments of $561 million and our on balance sheet backlog as expressed by our deferred revenue was 195 million at the ended the quarter.
Turning now to guidance for the full year 2019 revenue, we are holding the midpoint constant with what we've said in the past.
And with one quarter left in the year tightening the range to 314 to 316 million.
An increase of 36% over 2018 at the midpoint of the range.
On the bottom line given that the year to date results through Q3, we expect the full year non-GAAP net loss per share to be in the range of 35 to 37 cents.
The full year 2019, EPS estimate assumes a weighted average shares outstanding number of approximately 137 million.
For the next few quarters, we expect marginal improvements in our billings performance compared to the mid 20% growth we've seen over the last six months.
And given the continued opportunities we see we expect to accelerate our go to market investments next year in order to capture the topline growth opportunities. We see ahead of us.
For example on our last earnings call. We said, we had increased our target hiring plans for quota bearing sales reps.
And we have made good progress toward those increased hiring objectives.
More sales reps plus deeper investments in customer success and other go to market initiatives will increase our losses in 2020 as compared to 2019.
However, we do expect to exit 2020 on a positive cash flow trajectory.
We will provide specific revenue and EPS guidance for 2020 on the next call in February but generally speaking the recent billings growth in the mid 20% range will now roll through to our anticipated revenue results in 2020.
And with that I'd like to turn the call back over to air Aaron. Thanks, James We have a lot to be proud of with our Q3 results. Let me share some of the positive themes that I saw in the quarter.
As James mentioned, we had nearly 100% growth in our largest customers and we continue to sign new customers from all verticals. For example, this quarter, we signed one of the largest and oldest banks in the world.
We also signed a top European auto manufacturer, a fortune 500 American farm machinery company and one of the world's largest telco companies.
These new customer wins continue to demonstrate that our platform works for any industry at scale.
Having spent so much time with customers recently I'd like to share. An example that has a great illustration of a company that is turning cashiers into engineers with the health of plural site.
The home depot was founded on a simple premise put customers and associates first.
To do that in an innovative way the do it yourself giant is committed to its investment in technology skills development.
To create a pipeline of skilled associates to fill upwards of 1000 opened technology roles. The home depot rolled out an immersive skills boot camp dubbed Orange method and commented we looked internally and we have 400000 people that were orange difference for US every day, there's got to be a pool of.
Associates passionate about technology, so let's start there.
Pleural side, it's been a strategic partner since day, one says Anthony regarding the director of technology enablement.
When you look at the content it aligns perfectly with the technology stacks that home depot sees as a competitive advantage for us going into the future.
Home depots Orange method leaders leveraged pleural site analytics to track progress and see what their new technologists are interested in so they can incorporate the latest and greatest into the upcoming curriculum and eventually into customer and associate experiences.
Helping home depot fill open technology roles, while creating a better future for their associates is a great example of why pleural site was found it and how we're fulfilling our mission to democratize technology skills.
We're proud to be working with innovative companies like home depot that sees the value in their people and see pleural side as the platform to help increase that value.
If you joined US at floral site live you heard a lot about different now called pleural site flow.
Flow exceeded our internal billings expectations growing by over 100%.
And in Q3, we signed our first seven figure deal for flow.
We are encouraged by the progress and excited by the demand were seeing for our engineering analytics platform.
We are actively building our unified SAS offerings that we're on track to launch in Q1, 2020, and we believe that this will create even more opportunity to penetrate our large and expanding Tam.
On the partnership front, we continue to be encouraged by our progress with Microsoft Google and Amazon.
We now have over 35, Google cloud authored courses on our skills platform and since launching just a few months ago. We've already had over 1700 business customers access this content.
Similar to our partnership with Microsoft Google is now selling a slice of targeted content to their community and we're excited to see the impact our platform will have on GCP users.
We continue to invest in our sales collaboration with ADW us both deepening our relationship with existing customers by aligning with important cloud initiatives as well as expanding to new customers to support them on their cloud journey.
We believe that are unmatched content and strong partnerships reinforce our position as the unquestioned leader in cloud skills.
Before I close I'd like to provide a brief update on our social enterprise pleural site one.
Our community of nonprofits and key through 12 schools leveraging the product has now surpassed 400 organizations spanning 13 countries.
We're proud of the impact for all site, one is having in helping provide opportunities to underserved communities all over the world.
To close I'm pleased with the progress we made as a company in Q3 and recognize we still have work to do our market remains as strong as ever.
We are doubling down on execution to unlock that potential and we're confident that Ross joining our leadership team will bring us to that vision faster and with that I'll turn the call back over to the operator for some una.
Thank you Sir as a reminder.
You asked a question you will need to press Star Wars.
Good question.
Yes.
Well, we can file that any roster.
Your first question comes from the line.
Barclays Capital Your line is open.
For taking my questions here and and welcome Ross.
Thank you Hey, second happy birthday from all of Us here.
Okay.
Thanks, Dave.
Yes, Hey, maybe maybe maybe for you Aaron.
As you as you reviewed last quarter's performance I guess in a post mortem and I know, we talked a lot about this at the analyst day, but as you dug deeper can you just talk about what role competition fleet. If at all in last quarter's results and this quarter frankly, and maybe just broadening that question.
Can you just give us an update on what you're seeing.
Competitively from the likes of linked and learning and others in the space.
You bet, we're seeing very little impact directly related to competition as I dug into the win loss data for both Q2 and Q3, we saw very little impact in terms of dollars impacted that the salesforce would have attributed to competition.
More broadly when we look at the space and especially the larger deals that were now penetrating I'm much more deeply.
We are positioning ourselves as the go to platform for tech skills transformation within these companies, which means we're selling to the tech leader not into HR.
Which allows us to happily coexist with any of those other products. You mentioned, so I think thats a big reason why we don't see direct impact due to competition today.
And I think if you mentioned linked in specifically with their recent announcement that they are moving more towards an l. XP model a learning experience platform I.
I think that signals to some degree their move to be even more horizontal in nature, whereas plural sides recent investments and decisions such as the acquisition of gift Prime have signaled that we're going even deeper in our vertical intact. So I think our strategies are very differ.
Brent and also to some degree very complementary.
That makes sense and maybe if I mean.
If I just stay with you.
To your point in your in your prepared remarks.
Given that you spent a lot of time with customers in the quarter.
Im curious, what's the tone that you heard from customers on their willingness to invest in a tool like floral site and in in the face of what frankly, some could speculate could be a softer macro backdrop in 2020.
Yeah, it's a I've been paying close attention to that you know because I'm curious about what's happening in 2020 like like everyone else is.
And I'll tell you that the the senior sea level buyers that I'm talking to.
You know are looking at this tech skilled investment as as a critical aspect to succeeding on their long term technology strategy.
So I.
I think that makes the the macro economic situation come less into play then perhaps in other areas, but I would acknowledge there is still probably some concerned there.
But we're seeing we're seeing.
A strong need for this in the marketplace overall.
Got it very helpful.
Helpful guys I'll get back in queue. Thank you.
Thank you.
Your next question comes from the line of Brian Peterson.
From Raymond James Your line is open.
Hi, gentlemen, thanks for taking the question and congrats on a strong billings number. So so it sounds like flow is going really well out of the gate.
Curious how would those conversations been with customers and I'm curious if the success as you've seen at least so far has mostly been with total say customers or are you seeing new prospects coming into the fold as well.
Yeah, we're seeing we're seeing a lot of strength on both sides of that today, we mentioned the the our first seven figure win with flow and on that particular deal has already led to another deal in the pipeline.
For Q4, which is another seven figure deal for skills. So a great example of of a customer who started and landed with flow Thats now cross selling and transitioning to skills.
And we've also.
Activated our entire salesforce with a referral model to send leads and pipeline from our existing skills customer base over to the flow team, but remember their operating independently today as a as a standalone go to market team and we'll be doing the full integration with an overlay model in in 2012.
Yes.
Got it thanks, Aaron in James I appreciate the color on the retention dynamics, but can you bifurcate that a little bit was that a function of users or do we see a little bit of pickup in churn on the Logan side and if it's the latter any commonality and what drove that thanks.
Yes.
On the user side, probably nothing unique to Q3, we do have some churn here and there on the user side nothing nothing different in Q3 on the customer side, we did have.
More churn on the logo side down at the lower end of the business as we focused on the higher end, we are deploying more resources there were dropping our coverage model. So we pick up more of those smaller end customers and make sure. We we retain them and that's that's something we need to do better on as we move forward but.
That was the impact in Q3 little bit more churn at lower end of the business.
Thank you.
Yep.
Your next question comes from line of Arvind Ramnani from Keybanc. Your line is open.
Hi, Hey, congrats on a on the good but numbers so.
My first question as you know you provided.
A lot of color at.
After the site live about the infrastructure, you've been darn done the sand and sales process.
And can you kind of just provide an update on how much of that.
Infrastructure as permanent or is that still sort of evolving.
Just to make sure that that you you kind of funny really incorporate some of the some of the addition feedback you're getting from from new leadership.
Yeah, a lot of the quick fixes and adjustments we've made in terms of sales process and execution have laid the foundation for a new permanent model that we will also continue to innovate and incrementally improve and we're already seeing some some great improvements in.
Our predictability and clarity as a result of those key changes and with Ross coming onboard. He's he's also a very quickly identify and further improvements that can be made anything you'd like to add to that Ross, yes, Harbin. Thanks, I'm as I'd jump in here, we've got a great team and adding in my external perspective.
Here I think there's some opportunity to continue to optimize existing processes and shore up a couple of the areas.
Great.
So you know I mean, I guess at live I mean I guess.
When do you have probably going to the interview process.
One of the concerns that I guess.
That was advanced was essentially the new on NIM, CIO, what gunmen and essentially going to upset the.
The dynamics of the team and culture.
I guess steps, you're taking to make sure that that's not unlike a spike in attrition or going to sum up some of the kind of.
The good part of the sand kind of gets Genthree Dan.
But do you taking or taking or the the process.
Yes, carbon thanks, Ive had an opportunity even before I joined to meet the senior leaders around the world and I'm really confident that we have a great leadership team in place.
Im still get a chance to meet all the way down through the organization on costs and we have a good team in place now and as James articulated we're continuing to add a lot of capacities, while the opportunity to continue to add the right resources and write regions to help us scale for success and I would add on.
Arvind that this is an excellent time for Ross to be entering the business in terms of the timing within the year in preparation for 2020, which allows him to further impact the very questions, you're pointing to and things like commission plans and coverage model and territory assignments.
And so the timing is very advantageous and we think that will help bolster confidence across the salesforce moving into the new year.
Great and last question for me on on flow I mean, clearly.
I think some good commercial success.
Can you give us an update a little bit on the.
On the integration of flow over the core offering and and as you look forward in the next day six month or so.
Then the combined.
The integration, but but the core offering drive kind of even bigger deals are in sort of.
Most of the integration is already.
Put into place.
No. There's a lot more integration still to do which were actively working on on both the product side as well as the go to market side of the does not as I'll just I'll just addressed that across both of those independently on the the product integration has been underway sense since day, one of signing the deal.
Oil and we've already released.
Some simple experiences that bring some of that integration to live today. So we're continually releasing some value experiences to our customers.
Before we get the holistic unified offering that will be released at some point in Q1 2020.
That unified offering will give us even more ability to extract.
On the go to market side.
Sales execution and sales plans for 2019 across the Salesforce. So they're operating independently there's a lead generation referral model with incentives attached to it that in that that encourages our core sales reps to refer business over to the flow sales reps and thats happening.
And we're seeing a lot of good success from that.
But the bigger impact will happen in 2020, when we introduce an overlay in model. So we'll have overlay flow specialists supporting our entire army of of of sales reps that are going to be selling both products.
And now that you'll see the big uptick in.
In pipeline, and obviously future Tam and opportunity.
Yes, and I guess, one other things had mentioned.
The new spoke last was.
This should be a big part of driving essentially been build rate.
Sort of increases are kind of.
Price increases and I assume that that something is still sticking with.
Yes, no Arden definitely a customer that has skilled and flow we would expect certainly to have them pay more than each of those independent so definitely expect price increases as a result of flow going into the market.
On a combined offering in 2020.
Still working through what that increase ought to look like so don't have a specific number for you right now, but we'll have that in the next few months. Good. Thank you.
Yep.
Your next question comes from the line.
Thank you from Jpmorgan your line.
Yes, Thanks, Hi, guys. So once you start off with Ross you mentioned.
Improvements and processes et cetera can you give us maybe one or two examples of the things that you'd like to come in and focus on on along those lines.
Yes, Thanks Sterling it's.
Early days here for me as I'm walking through the company, but as we are.
Working through specific issues and opportunities it really seen the opportunity to bring in best practices that I've learned from my days Accenture from our experiences that salesforce here to bear I never in regards to things as broad as a forecasting how we do territory planning.
How we do estimate et cetera, so really really across the board I think a number opportunities to really tune what has already been working well for the company.
Okay, Great and then just one follow up question view you talked about.
The investments next year cash flow going negative, but I wasn't clear, we talking about cash from operations or free cash flow and you expected to be negative every quarter through the year or perhaps break into positive cash flow for maybe let's say the fourth quarter.
Yes, I'm one of the latter.
Sterling, where because of the building that we're finishing up here in the first half of 2020 tough to be free cash flow positive.
For at least the first half once that the big expenditures around that go away and we get into more efficiencies in the back half of the year, we would expect to exit fourth quarters. So I think to be very specific could probably look negative in the first three quarters and start to trend positive in the fourth quarter.
I might just maybe just super quick I, just wanted to add on to what Ross at one of the things that I really love about Ross also that I know you're going to dig.
Here as well is the whole channel opportunity, we have we done really well with our cloud partners in there.
Good job opportunities in my mind to go deeper into some of the systems integrators, and obviously with the with Ross's background, we've got tremendous opportunity there.
Alright, great. Thank you.
Yep.
Yes.
Your next question comes from the line of Corey Greendale from first analysis.
Hey, good afternoon.
First question I had.
Someone asked about the price opportunity around flow.
One of the questions that I think is on People's minds since last quarter is more the same product basis pricing and whether some of the floor billings is because of customer increased customer pushback on price or on repeated price increases just comment on kind of how much you think that dynamics impacting the company what you expect for.
On a future theme product price changes.
Yeah, I mean look the price increases given the value that we provide even prior to low has been going up over the last couple of years I think we've been opened that a couple of years ago. Our average billing rates were around to 40 and now they have increased to well over 300 and they increased again in the third quarter relative to all the prior quarter.
So.
We don't feel like there is always no customer loves to have their price increase including me when I am a customer.
But when you compare that to the value of the product in the back when we provide it's it's usually pretty well accepted that we have opportunities to increase price than we've seen that through this year with good prime or flow as we roll through into 2020 that adds a massive amount of value to a customer and so we definitely expect those price increases.
We continue to operate on average go up.
Okay.
And you talked in a couple of always about.
Changes to sales structure around the integration.
Maybe can you give us a little detail around kind of the sales planning process, and where where it's at this year versus last year.
And if there's any insight you can give at this point on just are you going to have a full blown separate farmer team first the hunter team.
Hey, good as you like an SMB versus enterprise or just some thoughts on how the sales and can be struck self sourcing restructured next year.
Yeah. Corey this is Aaron we are.
In really good shape this year and are planning cycle from a timing perspective, a much better in much better shape than we've ever been in prior years.
You know, where we're very committed to hit the ground running in January with clarity at the rep level around territories and accounts than Weve worked back from that with a very clear set of milestones and.
And date, driven deadlines to ensure that we are making all the key decisions that have to be made at the right time and this is another reason why it's so advantageous for Ross to be coming in right now when he is because it gives him time to participate in that progress where a lot of the key sales level specific decision.
Since our are made and those are critical decisions to get everything right and to ensure sales.
Sales rep retention and setting those teams up for success next year. So at a high level I would say where.
We're in really good shape from a timing perspective.
And we're continuing to hit all of those deadlines as they as they come week by week on and we're really encouraged by.
You know where we're at today as a result so.
What was the second part to your question Corey. The 100 did good to hear on the first I think if I just like any preliminary thoughts on the sales structure 100 versus yammer teams and.
Thank you Yeah. We are we are making some some some changes some shifts going from 19 to 20, specifically on that front.
We do see moving to a more traditional hunter farmer model, which we've been experimenting with in 2019, so that won't be a massive shift we've already learned quite a bit through our experiences this year.
But we do believe that we'll continue to deliver more net new billings and better focus on the right types of expansion opportunities and of course the renewals. So you will see some of those yes, we can share more details around what that looks like specifically on one of our future calls.
Yes, I might just I think where it's it's a model that's not too dissimilar than what Salesforce has in there the apex of how people ought to think about their SaaS model. So certainly something that Ross is familiar with managing.
Excellent and look for me era.
Yes, Thanks Corey.
Your next question comes from the line obtained gentlemen comes Suntrust Robinson Humphrey Your line is open.
Taking my questions, Hey, Aaron James Ross as Mark pointed out everybody there.
First question Aaron just relates to you in terms of.
The tech or cloud ecosystem partners, Microsoft definitely is it's been there for several years and I think.
Meaningful contributor to the business I would love some more specifics on Cws and Google in terms of their alignment I mean are there some hard targets or somewhat hard targets in terms of how they're actually going to drive revenue and just maybe.
In the spirit of about seven parts there to that question just where are we in terms of overall Tucker cloud partners in terms of how much of the business for driving out and then I've a follow up.
When you when you ask about targets do you mean internal sales targets billions targets or something else.
Well, yeah, Yeah billings were just revenue.
Yeah got it okay.
We don't break down and create target by partner internally.
But we do look at each of these these significant vendors as a source of pipeline and future opportunity for the business and in many cases, they are influencing business for us, which would then show up in different parts of our enterprise or commercial business. So like the benefit of working with the Microsoft like we have over the last decade.
It is we're partnering with them to produce content in many cases bespoke content that we then deliver out with them to their ecosystem of developers, which then touches all the other companies that we sell into and with our land and expand motion they didn't bring us into their companies and off we go to produce more billings there. So.
So its we'd see the impact of those three partners as as more focused on pipeline versus direct billings overtime.
And we're continuing to figure out better ways to cooperate with them into work in tandem with them to produce more of those build is more like a channel model.
And so so we're focusing more on it from that perspective than we are from the direct billions perspective, although at times, we do derive direct billions from those partners when we sell directly to them. If you want to add to that Jim.
How does that in their Terry that today, the direct or indirect contribution that comes from those partners is about 70% of our billings.
And as we mentioned at our Investor day between those cloud partners and some of the system integrators are like Accenture, Fujitsu and others. We expect that total contribution to grow to over 20% over the next three to four years as a good example of this Terry.
The Jetlag contract that was just awarded to Microsoft.
Thats a massive contract obviously, there's a great example of the theme the trend that is playing out right now for us with with a big organizations everywhere, including the federal government of the United States moving everything to the cloud and given our relationship with Microsoft we are perfectly.
We positioned to partner with Azure and Microsoft in assisting the federal government with that transformation, which will require a massive transformation of those underlying tax skill.
Yeah, that's so that's great.
Well, you've got Ross on the call can asking my follow up question.
So there is not going away from me Okay, yes.
Well, we'll Ross you weren't a lot of hats, CIO ESI, and then running big sales ops and big part of PNM Salesforce.
We're in kind of a little bit of we're not sure where we're going to go in terms of a macro perspective, and just economic activity just knowing that the backdrop is a little bit maybe.
Less certain what do you think of the two products are easier to sell in a more uncertain time frame and I'm sure you would love. Both these children the same but I want you to tell me skills or flow what would be the wedge what's the spirit tip of the spear into a new account given kind of the macro backdrop that you can answer that thanks.
Absolutely Terry well as a father of three children I well familiar with the who do you love more dad.
But what I would say is yes I.
Good about both products, but for different reasons, yes, I actually last night went through our internal element session for flow and I couldn't be more excited about the opportunity to provide engineering leaders the level of business metrics that the rest of their counterparts and Ses, we have and I'm Super excited about going to talk to my contacts and our existing customer.
Base, it's really bill toxin about the benefits of flow on the other hand, I'd I look at the opportunities with skills and really just.
Growing need for organizations that go through that ex fuel is transformation and I think it's absolutely the right product to solve that business problem that really all entities happen as Aaron talked about as not as public companies. It's.
It's private companies its nonprofits its government organizations. This as the skills transformation is really a global.
Challenge that I'm excited about scale is really helping solve so I guess any and I loved by children equally [laughter], if I could if I could jump in and throwing my two cents you know if if large tech organizations are being pushed to become more efficient then I think that does create more demand for.
Low because it surfaces efficiency metrics that are useful to those tech leader, so it'll be interesting to watch this play out.
Thank you gentlemen.
Again.
Your next question comes from the line of Scott very pretty Damn your line is open.
Hi, everyone. Congrats on good quarter and thanks for taking my questions I guess.
Aaron first one probably for you.
Remember if it's your James to the talked about.
Billings or expectations billings to improve nominally from this mid twenties level over the next couple of quarters I guess, how should we think about that is that because you feel on the new sales side things have stabilized to point, where you're generally happy with it or is that.
Proven driven maybe by an improvement in engrossed retention.
Yes, we we see the reason where were seen marginal for the next few quarters is because of the sheer amount to change and and and transformation, we're going through here internally as Ross comes.
And and we really started to execute on the new 2020 strategy. So that's why you're hearing a little bit of of caution in our language.
And the further we get into 2020, the more optimistic we are about that billings growth strengthening due to both increases in gross retention will we expect to see a clear impact there from the investments where were making in customer success and other operational process improvements.
And we also expect to see improvements with net new business given the direct focus with the shift to a hunter farmer model. So we expect both of those metrics to rise in the further we get into 2020, the more both of those will strengthen.
Got it very helpful. And then James I, just wanted to follow up in the expense commentary for next year.
About the investments should we think about those investments strictly on the and on the sale side sales capacity side or are there other investments there to maybe consider for the first half here.
Yes, definitely sales and marketing line is where you'll see that.
Tech and content line. The Gionee line, we'll probably look fairly similar relative to as a percentage of revenue, but the sales and marketing line will will increase in 2020 relative to 2019.
Hi.
Got it very helpful. Thanks for taking my questions. Yes. Thank you Scott.
Your next question comes from the line of Jeff can you lay of Baird. Your line is open yes. Thank you want to better understand those smaller account churn is occurring is this a issue of.
Usage at that end and kind of needing a more intensive process to I guess activate.
Usage and if is that the case or is that something else and any reason why it's occurring.
Increasingly now.
Yes, I would say.
Given what we mentioned in the call an increased focus the shift in focus across the business towards the larger deals, which we've emphasized a few times today.
Caused us to take our eye off the ball a bit more on the smaller accounts and there is a big part of the smaller accounts that got very little coverage in both Q2 in Q3.
And so we have seen that shift and the churn in those smaller accounts increased.
And so we've been actively.
Working to shift that focus in the 2020 coverage models. There are specific coverage model shifts that will occur in January that will ensure that a much larger portion of those smaller account dollars are covered by cfms with a one to many.
Coverage ratio and we will also introduce a new digital motion that coverages all of the remaining dollars and those things have not been happening to date and so I think what you saw in the last few quarters is as as we started to see more and more demand for the larger and larger deals.
More of the company's time focus resources shifted to those deals and that cause a little more churn in those smaller accounts.
Got it maybe the only thing I'd add there Jeff is since you brought in usage.
No we shared a bunch of usage metrics at our Investor Day I would just.
Add anecdotally those haven't changed materially we view them as a really good back in August when we met with many of you here and we still view them as really good and and so we're really confident in the usage of our customers in the platform is really more as Aaron mentioned, it's something we can go correct on our own and we plan to do that.
Got it and then second question on gross margin I guess I'm surprised to see a pretty sizable upside surprise on gross margin I would've thought it would take longer to to see the expansion as.
The usage of the courses.
Time to migrate to the lower author payout rate courses. So.
What drove that are there specific expenses that you're you're managing the cost of revenue on thanks.
No I mean look you got to the majority of the expense there are the author fees and I would just note here that our author NPS is at an all time high well above 60, which is fantastic and we have 63% more of our authors making over $100000 than they did a year ago, So everyone's handsomely paid and what you're seeing.
Being in the margin line is the impact of.
Some of the lowering of those average commissions or fee rates that we pay and that's the primary driver there.
Thank you.
Yes.
Your next question comes from the line of Brad.
From Bank of America. Your line is open.
Hey, guys. Thanks for taking my question.
Earlier in the call you mentioned.
Longer sales cycles, I think that is that just a result of you going after larger deals so naturally they're going to have longer sales cycles.
I guess, where are the sales cycles today and do you expect some improvement there I'm just any color on that comment please.
Yes, James can speak to the specifics on a on the length of cycle, but the quick answer is yes, given the shift in focused the these larger deals.
We're seeing.
A lengthening of that cycle not super dramatic, but it is it is lengthening and and also a little more variability in low in predictability of close date, obviously and when you have large a large number of large deals in your pipeline targeted to close at the end of the quarter that are all very binary.
In nature.
That does introduce a little bit of variability there like we saw a represented in Q2. So we're working very.
Carefully.
To ensure that we're.
Conscious of the lengthening deal cycle and getting our arms around the predictability of how many of those deals will actually close when we think they will clubs James want to add yes, yes happy to thanks, Brad and I think guaran hit it there, but in general a enterprise or large commercial deals going to be around six to nine months.
The yields cycle, a mid market deals going to be sort of in that three to six month range in a small deal could be short as a month.
Does this cycle there hasn't changed much but what you're seeing is as more of our business has shifted to the enterprise or higher commercial deal a higher percentage of our billings shifting into that mix. He does have an overall waiting shifts to the to the longer sales cycles. So that's how we're that's what we're seeing and that's how we look out.
Understood. Thanks, guys and then Ross earlier, you had mentioned the opportunity to go after the ESI channel here just curious any color on kind of how you would go to market with the sizes as part of a bigger cloud project you could add some training.
To that or is it even a standalone sale opportunity to sell training separately.
Yes, Brad I think all options are still on the table for us.
We have a series of meetings over the next weeks and months to really explore with a number the size kind of what we think makes total sense for both of us.
But from my experience.
Really we can have the fantastic solution, we have with our SaaS offerings that size can wrap with their professional services and our even potentially additional software they wraparound ours as when it becomes a really win win for both organizations and that's really look to propel a successful channel model.
Great. Thank you and then James last one just on net revenue retention I think you said it was north of 120% I think last quarter was 126 was it's similar to two what we saw last quarter or or just over 120 any color there. Please.
Yes, it dropped from 126 to 124 because of the churn we mentioned, but as we.
Get our arms around that put more resources around our customer success, we we definitely see a path back into the high 120 is again as we move it moved through next year.
Great. Thanks James.
Yep.
Your next question comes from the line Brett knowledge from Brean Capital. Your line is open.
Hi, guys. Thanks for taking my question I guess much really on the gross margins.
Sorry.
I would also be seen wishful thinking.
The total levels how does that.
Work with did not really course content.
Yeah, Hey, Brad I think.
Got most of the question I think you're asking about how the good prime model does or does not impact our gross margin is that what I heard.
Yeah, just because authors technically that revenue is not coming from forces a great. So it shouldn't get I guess competence that.
Yeah, no you're you're absolutely right there isn't the author components. So they don't have two thirds of their cost of goods sold I shouldn't say, they they're part of US now, but the the flow gross margins are not impacted by the author fee model that that.
Little side has historically had but there are other costs of their model that flow through cost of goods sold as well that puts them roughly equivalent to the same gross margins that we have so when you net it all out it doesn't the model that we inherited from get prime doesn't have a material impact one way or the other.
Okay. That's all that's it for me thanks.
Yes. Thank you.
Hi, I'm showing no further questions at this time I would now like to turn the conference that came into areas finance Sir.
Okay, I'll, just close with the big Thanks to all of our customers. Our shareholders are authors and our team members for your continued support we look forward to speaking with you all again next quarter. Thanks, everyone. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for everyone participating you may now disconnect.
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