Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Smart sheet third quarter fiscal 2020 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one.
On your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Aaron Turner Investor Relations. Please go ahead.
Great. Thank you Emily good afternoon, and welcome everyone to smart sheets third quarter fiscal year 2020 earnings call, we'll be discussing the results announced in our press release issued after the market closed today with me are smart sheets, CEO , Mark made or our CFO Jennifers ran our chief product Officer gene barrel will also be available during the Q1 night today's call is being webcast.
Well also be available for replay on our Investor Relations website and investors that's murchie dot com, there's a slide presentation that accompanies jennifers prepared remarks, which can be viewed in the event section of our Investor Relations website.
During this call we will make forward looking statements within the meaning of the federal Securities laws. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends. These forward looking statements are subject to a number of risks and other factors, including but not limited to those described interestingly SEC filings available on our Investor Relations website.
And on the FCC website at Www Dot Si Si dot com.
Although we believe that the expectations reflected in the forward looking statements are reasonable our actual results may differ materially and adversely all forward looking statements made during this call are based on the information available to us as of today and we do not assume any obligation to update these statements as a result of new information or future events, except as required by law. In addition to the.
The U.S. GAAP financials, we will discuss certain non-GAAP financial measure measures reconciliation to the most directly comparable U.S. GAAP measure is available in the presentation that accompanies this call, which can be also be down on our investor Relations website with that let me turn the call over to Mark.
Thanks, Good afternoon, everyone and thanks for joining us on todays call.
Archie delivered another strong quarter in Q3.
Building off the momentum and excitement generated at engage our third annual global customer conference, we delivered revenues of $71.5 million, representing 53% year over year gross.
Billings came in at $83.5 million, representing 52% year over year growth.
Our dollar based net retention rate was 134% and the number of users on our platform is now over 5.8 million.
Now one of the 30 year and having grown over 4000 attendees engage has not only become a showcase first murchie product innovation, but a great opportunity to deepen relationships with customers from around the world.
I speak for our entire team when I say, how inspire ways to meet customers from such a diverse set of industries here their enthusiasm and learn how they're using smart sheet in their teams and businesses.
Thanks also to all of you on this call who made the trip to be with us in Seattle.
Customers continue to unlock new value and expand with us.
S Bank, Krispy, Kreme donuts and Rackspace among them.
Spansion within our base during the quarter included 69 customers that increase their annual recurring revenue by more than $50000 up from 46 last quarter and 17 that increase there are by more than $100000 up from 13 last quarter.
I'd contributor to that expansion was record sales of our capability based products, including accelerators.
NAMIC do you ended up loader.
More than 900 unique customers bought one or more capability based products in Q3.
For example, a fortune 100 insurance company recently selected smart sheets M&A accelerator to manage is significant and strategic step up in their M&A activity.
Chosen over three purpose built solutions smart cheap now has strong executive sponsorship within the account and is better positioned to deliver more value and broaden our footprint.
One year after introducing accelerators, we now have 10 end market, having expanded our offerings in Q3 to include solutions for GDPR marketing shared services events and campaign management.
I'm heartened by the performance of and the pipeline for these offerings that provide a tailored solution Fred no need.
In addition to the accelerators. We also introduced arranger feature set engage that enable organizations to drive greater creativity and effectiveness for marketing and creative content activities.
These content collaboration features are a direct result of our acquisition of slope earlier this year.
Enable users to review proof and comment on a variety of file types manish feedback from internal and external stakeholders.
And maintain version control all in the core Smartid application.
We continue to build out and expand this functionality organizations will eventually be able to manage their entire content production process using a single platform.
In addition in early November at Adobe, Max We announced a new Adobe creative cloud integration that will help creative teams eliminating manual work. So they can focus on what they do best creating game changing content.
Smartid extension will appear as a panel within Adobe creative cloud, enabling customers to manage workflows without having to switch applications or source content from various tools.
Multiple adobe creative cloud applications, including Photoshop in design and illustrator will be integrated before the end of the year.
Combined with powerful marketing oriented accelerators and content collaboration capabilities announced that engage these adobe integrations will deepen our ability to help enterprises drive collaborative marketing projects and processes.
As we deliver these and other high value offerings for customers, it's increasingly important for us to align ourselves with industry, leading consulting and integration partners that have well developed expertise that complements and expands our core capabilities.
That's why we recently announced the launch of smart sheet aligned a program for a global community of partners and solution providers.
Smart sheet aligned will drive continued momentum for us as we expand to solve for a widening set of high value enterprise workflows.
One such example is a partner let opportunity we recently closed with the world's largest CPG food conglomerate.
Smart sheet and our partner software one propose the solution for managing their end to end process of designing and installing displays in large grocery retailers.
From initial store selection to ongoing maintenance and improvements. This global company now relies on smart sheet and software one to coordinate the many processes and disparate teams required to deliver impactful brand experiences to their customers.
In mid August we announced the smart cheap Gov achieve fed ramp authorization.
This designation has stimulated interest in smart she'd from various federal agencies and departments among them the national Oceanic and atmospheric administration, Noah, which became one of our first customers on smart she'd dot Gov.
Along with our reseller partner spatial front Smartid now supports a wide range of departments within Noah to launch satellites communicate with the ocean going research vessels and manage our 500 million dollar plus portfolio of strategic projects.
We look forward to the opportunity Thats fed ramp authorization affords us to help elevate the important work being done by Noah and a range of other federal agencies.
Before I turn it over to Jenny to provide more financial details on the quarter I want to share with you my belief that smartid is well positioned for the future.
Our product pipeline, a strong we're demonstrating the ability to extend and expand across the enterprise and most importantly customers are realizing value and are leaning in.
They've responded with a genuine enthusiasm to the brand advertising. They now see in market and have told us repeatedly how much the strengthening of our brand presence helps them and being effective advocates for smart sheet within their companies.
It is clear that organizations now understand the need for a better way to empower their people on teams to achieve more by increasing the effectiveness of their work.
The fact that Gartner recently published their first market guide on collaborative work management is a clear sign of that.
Two are growing degree Smartid is recognized as the provider that can help enterprises accomplish this important objective.
I'd like to take a moment to acknowledge our employees for their hard work and thank our customers and partners for their trust in smart.
Many people both inside and outside the company have been where that's a long time and I've seen us through many stages of growth.
I'm very grateful for their continued support and encouragement.
We have some big goals at smart sheet, and working alongside our customers partners employees and investors I could not be more excited about what we've achieved and what lies ahead.
Now, let me turn the call over to our CFO Jenny surrender.
Thanks, Mark and welcome everyone.
As Mark mentioned, our third quarter revenue came in at $71.5 million up 53% versus a year ago.
Billings came in at $83.5 million, 52% versus a year ago. Our dollar based net retention rate remained flat at 134% and our average ACB per domain based customer grew 40% year over year.
We ended the quarter with 83139 domain names customers.
Third quarter non-GAAP operating loss was $20.7 million as we continue to make investments in our platform and go to market capability.
non-GAAP net loss per share was 15 cents.
Operating cash flow was positive $1 million and free cash flow was negative $2.9 million.
We ended the quarter with cash and short term investments of approximately $563 million.
Let me dive more into revenue for the quarter.
Of our $71.5 million and total revenue subscription revenue was $64.4 million.
55% increase versus a year ago.
Services revenue came in at $7.2 million, 34% versus a year ago and represented 10% of total revenue.
Services revenue growth rate accelerated compared to the prior quarter due to increased demand for our training program.
Let me move on the metrics.
We continue to see strong growth in our larger customers.
And 421 customers now past $5000 are more per year 770, now past $50000 are more per year and 279 now paying $100000 on more per year. These customer segments grew year over year by 51% <unk> hundred 14% in 120% respectively.
Now represent approximately 73%, 34% and 22% of total HCV.
Our average GCB for domain based customer increased to $3286 for the quarter and our dollar base net retention rate with 134% consistent with the prior quarter and two percentage points about the same quarter a year ago.
For the fourth quarter, we expect our dollar base net retention rate to be in the low thirtys.
Next I'll provide color on the rest of our income statement and a few highlights from our balance sheet unless otherwise stated all references to our expenses and operating results non-GAAP basis and are reconciled to GAAP results in the earnings release and presentation was posted before the call.
In the third quarter overall gross margin was 82% stable with prior quarter subscription gross margin rounded up to 88% not with the prior quarter, but we began to see some incremental costs associated with our continued shift to the public cloud.
Migrate more of our services to the public clouds, we do expect our overall gross margins to come down towards our long term target around gross margin of 70% to 80%.
Professional services margin for 32%, one percentage point better than the prior quarter.
Turning to operating expenses.
General and administrative costs in the third quarter were $11.1 million, representing 16% of total revenue one percentage point above the prior quarter due primarily to investments required to support socks.
Expect gnh remain elevated it'd be complete Sox compliance this year before realizing scale again next year.
Certain development was $21.1 million or 30% of total revenue one percentage point higher than the prior quarter and two percentage points higher than a year ago quarter due primarily to hiring more developer.
Finally sales and marketing expense with $47.1 million were 66% of revenue versus 55% of revenue in the prior quarter I'm, 60% in a year ago quarter increase relative to the prior quarter was due to cost associated with our engage customer conference in our brand advertising campaign, we expect sales and marketing.
Trend lower as a percentage of revenue in the fourth quarter.
Turning to operating loss and free cash flow.
Operating loss was $20.7 million, representing a negative operating margin of 29%.
Approximately 64% of our total expenses were head count related and we ended the quarter with nearly 1500 employees.
Free cash flow was negative $2.9 million, which includes capex, Ben capitalized internal use software and principal payments on leases totaling approximately 6% of revenue.
Now turning to billing.
Our third quarter billings were $83.5 million, a 52% versus year ago, approximately 90% of our subscription billings were annual with 9% monthly quarterly and multiyear billings represented about 1% of the total.
I will now provide our guidance for the fourth quarter and the full fiscal year 2020.
For the fourth quarter, we expect total revenue of $77 million to $78 million representing year over year growth of 48% to 50%.
We expect non-GAAP operating loss to come in between 21.5 $19.5 million and non-GAAP net loss per share to be between 17, and 16 cents based on weighted average shares outstanding of 117.5 million.
For the full fiscal year, we expect total revenue to be in the range of $269.4 million to $270.4 million representing growth of 52%.
Spec non-GAAP operating loss to be between 60 $765 million and non-GAAP net loss per share between 53, and 52 cents for the year based on approximately 112.5 million weighted average shares outstanding.
We expect billings to be in the range of $326 million to $328 million for the full fiscal year, representing growth of 51% versus last year.
Regarding free cash flow, we remain negative $25 million for the year and plan to spend the full remaining amount of approximately $2 million in the quarter to support our ongoing brand advertising campaign International expansion continued migration to the public cloud.
With that I'll now turn it back to the operator to take your questions operator.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith please standby well be compiled acuity roster.
Our first question comes from a line of Stan Zlotsky from Morgan Stanley . Your line is open.
Perfect. Thank you so much and.
Guys congratulations on nice quarter.
First question for me is on investments.
You guys are certainly making the right investments considering the gross you got to read that you're putting up.
What are you seeing specifically in Asia Pacific because it is a big focus area for your sales and marketing investments there what do you see as far as the beach head there for landing a your sales marketing resources.
And how are you thinking about that business I mean, how we can start to potentially inflect in growth as we get into calendar 2020 versus the single digit growth we've been seeing out of a pack a year to do what we did in the first half of this year and then have a quick follow up for Jennie.
Great Hi, Stan.
So our team was has been over there in quarter.
We had been a lotta interviewing we have approximately 20 roles already filled so we expect that team to be often running as we head into next fiscal year I think what we're going to see is something quite similar to what we observed in the UK, where local presence lousy to engage with thousands of customers, where we already have been regions.
In the region in a more meaningful way. So when you think about composite solutions, which bridge a traditional license engagement with capabilities those types of larger discussions that quote matter and connected things that are enduring and scalable those are best suited for that type of in region engagement. So.
I was very pleased with the team's performance our people operations team and our field ops team and getting really good candidate pool and converting on that so we feel like we are slightly ahead of where we work when we made the decision to go into the UK.
Okay, Perfect and then and then for Jennie.
Very very encouraging to see net revenue retention sustain a 134% in the quarter. Despite the tougher comparison of the you are now starting to lap for the second quarter well for for a number of quarters now.
And thank you could give us guidance for Q4 for our net revenue retention, but specifically in the quarter right what drove.
Such a strong net revenue retention result, because we do realize that you did have some large renewals signed a year ago that were a headwind of sorts. That's it for me. Thank you.
Yeah, you know I would say our sales team performed really well I think engaged held very much to motivate customers. They were very enthusiastic about the products that we announced in delivered engage I think it motivated our sales team and so if you look at our net expansion rate that really ive stayed roughly the same.
On our loss rate continue to improve but that but overall, we were flat with the prior quarter.
Okay perfect. Thank you.
And our next question comes from the line of Terry Tillman from Suntrust. Your line is open.
Hey can you hear me okay.
Sure Ken.
Well congrats from me as well as strong quarter. So it's good to see Jenny I don't know if you all talked about us in your prepared remarks, and maybe I just missed it but on capabilities based products, just maybe an update as a percentage of revenue in kind of how we should think about that trending and then I had a follow up remark.
Sure so.
On revenue our license revenue was 90% of our subscription revenue capabilities were 10% that was flat with Q2. However, if you looked at our billing our billings.
Were 80%.
Licenses, and 11% where capabilities and we have a license plan called Premier that also includes capabilities right. Now we put that was in the license amount, but if you incorporated that that number would be even higher for capabilities.
Let's get inside thanks.
And maybe Mark just I think.
It was in your prepared and actual press release in your prepared remarks, you used the phrase leaning in.
Total you're having strong expansion can sit in the expansion rate. The just talked about than the net revenue. There's a bunch of metrics that suggests yes. They are leaning in and they're expanding what I'm curious about is when you're one of these larger global 2000, a fortune 500 account and they're looking to expand is that kind of a captive audience or do they at least say hey, maybe we should look at some other collaborative work plan.
Forms or is it kind of your business to be had and it's almost like you're creating kind of the center of excellence minded about like my question, but thinking that's I'm just trying to kinda understand.
As a catalyzes into a bigger opportunity you know it is a competitive or no. It's it's really your business. Thanks.
I think a big part of it is you know people people leading into the things that are familiar with and when you develop mastery in something and you bring people with you front I mean literally bring people with you. We had people we had some organizations bring more than 10 people to engage.
So what changed this years that we had not only.
Divisions and team Representatives, but we started have executives brought to Seattle. So when you start developing mastery in something and you have confidence and you can articulate to your executive why.
The cost of switching is actually fairly high. So so we're very encouraged by that.
In terms of what we're seeing verbatim with what we said in prior quarters. The majority of the workforce is still graduating from a document centric messaging centric world.
And they are not moving between collaborative work management platforms are really embarking on their initial journey. That's what we see in the land and on the expense side as we look at being able to unlock value for people with additional capabilities.
They're wanting to learn more and when they see something they like they.
They can move.
And pursue it.
Hi, Thanks.
Our next question comes from the line of Richard Davis from Canaccord. Your line is open.
Hey, Thanks, two quick questions one.
With regard to the accelerators, how much of it is like you guys kind of sitting around the table going on this makes sense and how much of that kind of.
Influenced by customers and I know you have your customer conference and I'll just curious on that and then second mark you've been around a while as I.
Are we at the point you know you got a bunch of companies that are kind of probably let's just say running out of oxygen and your space is it getting comp is are they trying to confuse the market and that I mean, you're obviously sending them off.
This information that they would try to start things up but you know.
Maybe there is no answer to that but it's as good as or how are we on that market. If we tend to the we have to shake out loud yet or not so influence.
The accelerators and how do you keep block.
Well, let gene mixing remarks on accelerated and I'll take the second half the question Hi, Richard how you doing.
I would say that oney accelerator front. It is really driven by customer signal and where we see customer solution or a customer problems that need solving and so we get we do have customers that will say, hey, amuse marshy for these use cases, but I really got this problem over here and.
Managing onboarding with with.
Our employees that are inquired or acquired through an M&A transaction or.
Looking for a better way too to apply best practices to our management PMO and that's really what drives.
I would say probably 90% of the road map around accelerators.
That being said, we have made some conscious choices to invest in areas, where we think we have some unique capabilities or launching some new so our marketing sellers.
Renters are a great example, where we saw him.
There was a new space for us to go after and there were others in that space, where we felt like an accelerated with best practices was going to what's going to give us a leg up and competing for that customer business and we've been really pleasantly are positively encouraged by the customer reaction to the marketing Sars.
We launched engage.
I'd say on what we're seeing in the market I think being a provider who's who's been in market now for over a decade and understanding signal for what it takes to move from solving someone's project needs to program needs to process needs at scale, you get an appreciation for what those different yeah.
Employee groups that the customers seeking and what someone might have strong desire for in terms of a feature on day, one maybe quite different from what I T. At scale is asking your view on day 1000. So in terms of one thing Thats been helpful is that I think the types of questions that were getting asked from customers considering that.
Move to scale in our category there are actually quite flown with what they're looking for so they understand that it's not all about features it's about governance, it's about insights and I think being able to speak to both of those has really helped us.
Yeah, that's super helpful. Thanks, so much.
Our next question comes from the line above on sorry from William Blair. Your line is open.
Hey, guys and I'll Echo my congrats nice jump there.
I wanted to touch on something.
That you sort of said you obviously in really nice expansion of Acds 50, K. Hunter Keay regular basis, you're seeing executives come to conference.
I guess my question is are you seeing the sales process change because it change when it went from you know sort of domains to or no without domains to domains.
That calling on some of the lower end of that customer base.
As you get a component of the business at sea level.
And maybe even potentially top down type implementations are you seeing.
The change in how you Epicel and how are you thinking about the investment.
To bring maybe a different set of skills back to the company pod enterprise focus made good enterprise relationship focus how how you're thinking about that and how should we think about it.
Well I'll take that as Jean I think that.
I don't know that we've seen today that we need we need to change or motion, but we are seeing signal from from customers. We just recently held our first customer Advisory Board, where we where we brought in senior leaders from leave our top brands and talked to about how we can better aligned with them and engage them in a more strategic way.
And I think we got some really good signal from now on some things I would like to see us continue to invest and invest more in and around things like join Solutioning and building deeper long term relationships.
And giving them.
More transparency and and how they can continue to scale with us and so I think will we will be continuing to invest in I wouldn't call it changing but enhancing the skill sets of our team.
Yeah, and being able to as we graduate to larger and larger relationships with those customers being able to take that the next step into being truly strategic partners, where they've decided to go all in.
Got it it's good to hear voice gene.
Well another question that you can you.
Kevin you there.
As you think about customers adopt best of breed solution to integrate well and one of things happen, obviously with rest cpis things like that the ability to integrate has incentivization has become.
Much more efficient I guess, when you think about the platform where would you say you are and that can be in building out those possibilities attracting developers because of the integration capabilities is that have already priority. Do you think are like getting one or two in terms of the integration capabilities, whether it's going to go.
I guess, how much your priority. Thank you.
Yes. Good question <expletive> as we've been I think we've been really consistent you are primary target is citizens.
And we've you know as opposed to citizen developers or developers are.
Whether its enterprise or for independence that doesn't mean, we don't want to serve.
The developer audience and we are we are investing to improve the performance or if you guys have coverage Arabia eyes, but I think importantly from a from a prioritization standpoint, we're really looking at how do we.
Oh invest to more broadly support enterprise I T. Because what we are finding cost related to your last question as we're scaling with these customers I T is getting more engaged in their wanting to connect us with more systems and build more solutions across.
The platform and that's where you probably saw a little bit of a shout out had engaged to.
The development of bridge, which is a new platform, we have to make it really easy for for customers and developers to be able to connect smart you to other platforms and other systems of record and perform more advanced workflows.
That's right now in private beta we're getting a lot of great customer signal, we anticipate that big a probably the first part of next year and and so you'll see you'll continue to see us invest there probably first no that starts is down a path to overtime, probably providing even more support.
For more advanced use cases, with developers and integrating and other platforms, but today, our priorities really on serving citizens and ER and bridge.
And then the other thing I would say is it's important to us to be able to integrate with the other partners. We have an ecosystem as well so [noise], Microsoft with teams slack, Google with hang out and email Facebook, we think it's really important.
Good partner with the ecosystem, because that's really where our customers want us to be able to play.
And our next question comes from the line of Mark Murphy from Jpmorgan. Your line is open.
Hi, Good afternoon. This is not costs on behalf of Mark Murphy.
Still on track with pure fiscal 20 plans for quota carrying reps.
Particularly on track to have 30 enterprise account reps by the end of this year.
Yes, we are on track.
Okay, and I know currency exposure is pretty small for you guys, but that did that in any way impact revenue or billings headwinds.
And then any revenue were going settlement, there where there was about a couple hundred thousand dollars on both revenue and billings, but it was largely immaterial, but yet what the headwind.
Okay. Finally.
No. When you look when you look at the percentage of new logos with more than 50 employees, how is that trending versus prior periods and are you getting to a point, where do you maybe to the majority of your dad, new logos might have let's see more than 60 or more than 70 employees.
Yeah, we're seeing a when we look at our lead acquisition, we look at segmentation very closely we're pleased with how we're tracking on that front and over 50 segment.
As we've talked about on prior calls we we look at various size companies.
We bought from reported out on penetration to Fortune 501 hundred.
With over 80% penetration in the largest companies in the U.S. theres, such huge opportunity to expand still and we see that abroad as well.
What I want to see is I want to see progression in those segments, which represent the largest tam and that's not just the over 2000 employee base through other segments as well. So we're doing a variety of things to best position, whether that's in an assisted way for in a self directed way.
Thank you.
Our next question comes from the line of Alex Zukin from RBC. Your line is open.
Hey, guys. Thanks, taking my question Martin first one for you as you look at some of the incremental investments that we've kind of touched on I think in both the scrip them into Q1 as you guys have made this year.
What's the right way to stack rank kind of the biggest growth catalyst as you look out to next year between maybe federal expanding the continuing expansion product suite.
Thus and internationally, what what's the right when in your mind some stack rank those.
I think the ones that are going to have most substantial impact or the things that touch the largest percentage of our of our audience. So when I think of fed some exciting opportunities a differentiated opportunity.
The relevance to our 83000 plus brands today is somewhat muted.
When I compare that to the acquisition, we did and if you were engaged you saw the reaction to the to the announcement about 10000 feet integration, which is relevant to tens of thousands of our customers I would say stack ranking or 10000 feet above fed in the near term would be probably pretty safe that so when I when I look at those eye off.
Look at relevance to two sides of market in the two potential Tam.
So I would say a 10000 feet as one that we're very excited about it's really demonstrates a deepening and the capability set that's highly relevant to many the slope acquisition, which is coming online as well announced engage highly relevant to not only marketing teams, but anybody collaborating on content. So I would say in the lead group, it's going to be those higher.
Be relevant product investments that we've made and to those through acquisition.
The international markets I think it's a it's one of those where we have a well over 5000 accounts in Asia Pacific region.
We will report out as that team get set and when we demonstrate engagement.
Perfect and then maybe just broadly around M&A.
Is there a appetite for larger M&A and the current thought process and generally strategically how you think about.
M&A for over the next kind of 12 to 18 months.
Yeah, we're not bracketing ourselves into any artificial filter were really we're very disciplined in the things. We look out in terms of being a really nice logical fits for our business and also really high value for our customers.
There's some very interesting opportunities out there.
Then we don't put a quote on ourselves to make that rushed to bad decisions.
But I would anticipate given that what we've seen with 10000 feet and slope that we're going to continue to be acquisitive.
Perfect.
And getting maybe just if I can sneak one it on dollar based expansion kind of get.
So are you surprised that you've been able to maintain that rate consistently and what's the right way for us to think about.
Yeah. The progression there is it something that you expect to kind of naturally start to go down over some near term period or or is that something that can be sustained for for quite some time.
Well I think we're certainly pleased that we've been able to maintain that rate because as you get a larger denominator. It gets harder on the numerator part to maintain that I would say some of things that have been tailwinds for us or kind of larger instant transactions that were seeing now.
The international and part of our business, we're seeing the net expansion rate.
Increase in that area and prior to about a year ago. It was lower because we didn't have as much people on the ground kind of supporting the business there.
So.
We I can never say, if it's going to continue when 34, we don't know, but certainly we're pleased with where it is now and.
Uh huh.
Perfect. Thank you guys.
Our next question comes from the line of Ittai Kidron from Oppenheimer. Your line is open.
Thanks, Good quarter guys I'll, let him my questions have been asked what a mark I want to dig into little bit on the brand advertising campaign that you starting in October if I remember correctly.
Help me understand how did that go about relative to your expectations is that something by the way do you kind of dialing back a little bit now and you want to see how it translates into results or how does that evolve over the next 12 months help me think about that.
I think where we're not in deploying a start stop model. So we expect continued investment on demands and brand I would say with Anna having been on now for a north of two quarters. We're excited about having a really cohesive approach across <unk> across all aspects of marketing, whether it be product marketing demands and span.
Our investment and brand.
We are very clear about what we're trying to measure in terms of our brand investments I think customer advocacy given that expansion is so important and being able to get a we've had a host of interactions with customers now where executives who really didnt know much about smartid I haven't heard a radio campaign saw television commercial and that's sort of the air.
Cover which are advocates are very grateful for had been trying to promote us internally.
A lot of that size is anecdotal evidence there are some things around measuring aided and unaided recall on the brand.
For mid and post the initial campaign rate weeks into this campaign, what we've seen so far though is indicative of wanting to continue to invest.
Got it and then on the fed ramp slot glad to see you're making some real tangible progress here.
Many things, though from a pipeline standpoint, how is that evolving an order unique partners here, Doug can better help in.
Making penetration here deeper or maybe faster.
We use a third parties to help us establish and manage those relationships with the government. It's still early days, but since we have like since we are now fed ramp compliant we are seeing some good deals.
Growth in that area and we're optimistic about on that continue to help us next year.
Hi, Good Jenny maybe then last one for you I'm guessing you're staying consistent with your long term.
1 billion dollar and margin targets.
And also were Fergus to your breakeven free cash long next fiscal year well they are there any other elements.
Our next year.
I know you haven't guided yet for you, but any other things are potholes, you want us kind of to keep in mind, what have you ever year basis that make either opportunities are complexities in certain periods of the or.
No.
No very good [laughter]. Thanks, good luck [laughter]. Thanks.
Our next question comes from a line of Brent sell from Jefferies. Your line is open.
Thanks, Mark the accelerators for a big focus on the showroom floor and engage I know just from a.
It's still early but from a revenue impact this year and going into next year can you just.
Maybe help articulate what what you think it's just going to do if you can quantify it or or not and I a quick follow up for gene.
This is generally speaking on behalf of Mark [laughter] accelerators. So we actually had our best quarter ever to three for accelerators on our bookings and billings exceeded the million dollar so.
Please note that 10 accelerators now.
Our new we recently signed recently announced some of those now we're starting to see some sale. So it's still early days, but we certainly are seeing demand and we're very pleased with that.
One thing to add any which is which was encouraging it engages when you see a combination of hynix an accelerator in a distinct sort of value being delivered combined with new capabilities being released in product and you get those playing off of one another good really helps customers understand what it is and how to utilize it.
So thats, what gene and team did very well and engage is framing that.
Great.
Then just on the migration to public cloud can you just a highlight how long that that's going to take and when you expect that to largely completed.
Yeah.
I would I would tell you that one of the things that we focused on immediately after engage was ramping up migration of services into public cloud and so that work is in play now our current our current forecast is to be mostly into having everything in.
Public cloud services established by the Middle of next year.
And but the tricky part there as you need to make sure you get everything establish and then.
Really burn it and nicely before you shut down your existing data centers. So we think that transition to be totally out of the data centers right now is likely going to happen by the end of next year.
And it made it may come in sooner if things go well, but I think right now we're trying to be our.
And our approach there.
Thanks for the color.
Thank you.
Our next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.
Hi, guys.
Thanks for taking my question I'm, sorry, you talked about federal as a strong opportunities.
If you could talk about success, you're seeing in other regulated industries in general.
Yeah, I would say that's the one regulated industry that we serve today I would say a couple of years ago. We made some moves to be able to support business associates a agreement on the hip aside.
Which has gave a lot of confidence to our or healthcare industry buyers in the U.S.
But really fed is the only that really conforms to that strict set of standards that needed to be audited and such so there really isn't a good comp for that are currently in the business.
Okay great.
Have you seen any changes in buying behavior lately, maybe in terms of customer willingness to buy upfront annually.
Anything of that nature.
Well the majority of our customers by annually, 90% and so we that's been very stable. We report on that every quarter.
Just last question.
On that for accelerated engage have you seen any garnering more interest than others.
Yes, I would say, it's it's interesting because very different right you have GDPR, which is.
Applications.
Cost of wide spectrum of companies and then we had over three marketing accelerators I would say, there's probably a more interest in the three marketing only because it's very new and there's a lot of a lot of immediate application, where GDPR I think people are little bit more in the tons GDPR fit with Ccs.
Okay, which is another area that we're working on and so it's a little bit different type of a sale.
We closed some GPR deals, but I would just say in general I think those are the transaction time and velocity on the marketing accelerators is.
Faster.
Okay. Thanks, guys.
Q.
Our next question comes from the line of Scott Berg from Needham Your line is open.
Hi, everyone, Congrats and good quarter and thanks for taking my questions I guess I got you relatively quick ones.
First of all probably for Mark.
You mentioned partners in the quarter, you mentioned a couple deals.
The large CPG company, but help remind us how influential our partners on your new bookings today, and how should we think about them over a period of time, maybe over the next three to five years and then in the last part of that question is do you the large system integrators that well known delights accentures the world.
Finally start putting these tools into their digital transformation toolbox that simply.
Yeah, I would say a right now scar. We have you know we have a couple of hundred partners on on the new aligned platform.
I would say when I look at the types of deals that we participate in often times a partner who has a long engagement history with an account.
Has access to power as a trusted source and can be very helpful and unlock some doors that may be as or more difficult to unlock in a direct basis.
So I would say the the types of deals we've seen.
Do skew more towards the solution orientation than a.
Here's a tool box and capability you go and empower your workforce so as our teams get more engaged with the accounts in a solution context I think those partners can be helpful. The degree to which we're seeing digital practices get establish were partners are allocating scores of consultants on this I would say it is more still customer driven where a customer.
It will approach the partner if they have an existing relationship and start to enroll them, but we're not seeing a huge pattern of practice areas being developed.
The approach we have taken that our partner team has done is going into existing practices for example, protiviti or partner GDPR.
Not going to them in St create a new practice there'd be going to an existing practice area for something like governance, and compliance and audit and saying we have a solution that supports your existing team.
So I think what we'll see more of in the coming years is a collaborative work management tying into those existing practices with a new set of offerings.
Got it Super helpful and then from a.
A follow up perspective.
Obviously do quarterly results are fantastic both in the billings in the revenue side, but the obligatory macro question, especially in Europe in some of your early operations there you're getting a change any buying trends at all or or is the expectation going into early next year that the.
You see in last couple of quarters as is likely sustainable based on your own execution of course.
We see good pipelines right now Scott a the.
Exit from Q3 and into Q4 the team is confident.
Thanks, so much.
Our next question comes from the line of Steve Conic from Wedbush Securities. Your line is open.
Great. Thank you very much.
I got two questions for you all if you don't mind.
So first one you touched on this a little bit, but maybe could you give us a little bit more.
Color on.
Europe progression from having the aligned partner program too.
Hey, full blown kind of application ecosystem, if that's even in the cards <unk> what does that look like from a product can go to market perspective over time.
Yeah sure happy to see so I think that Oh, the align program is a great kind of foundational element for us where we've we've kind of shifted our partnered approach from one that historically was much more of a kind of a reseller model.
Or new business model as opposed to one where it's really aligning with partners to build solutions for customers, which fits I think really nicely with where we're building in investing in the product platform I think what would you will see as us continue to.
Develop and introduce new capabilities that will make it easier for customers and third parties partners to be able to configure solutions build solutions on our platform.
And then ultimately be able to monetize and third party monetize those as a package solution and there's a number of different elements that go into that from from how do you control version and how do you in April .
Testing in deployment.
And just the packaging and general and so we have investments.
Across the spectrum to to support that and it's certainly something that's part of our long term vision for the for the product.
Cool thanks for that team.
So then the second question because somebody that's got to after about a particular competitor by name and I guess, that's going to be me around that half this time.
So you you partner with Microsoft.
Yes, good partnership you've done some integration they have a long history of co op petition with partners.
They have been perfectly happy to compete aggressively with companies are partnered with.
And recently, they announced new subscription plans for Microsoft project, which is that.
It pretty venerable older product, but now they're putting it on a door with subscription plants, they're working on integrations with teams power beyond the office tools.
Seems like the space ought to be in their sweet spot.
So maybe talk a little bit about how you. How do you stay ahead of that from a product and again I go to market perspective as well.
Well I think that I think for us partnering with.
Many of the different players in the in the kind of office productivity and collaboration space is really core to our DNA and we've always been kind of Switzerland, and wanting to to work can play nicely with whatever customers want to go buy I mean, just recently Microsoft recognized us.
At their customer conference with a with a an award would be recognize us as one of the best integrations for teams.
We continue to have a close relationships with.
Microsoft overall, but also the teams team and building a integrations and solutions there we have dynamics connector that.
We actively selling more for Microsoft on as well. So I think that we think it's important to stay focused on the customer and how do we create value for what customers are trying to do.
The other thing I would tell you is that Microsoft is a great company that built great portfolio of solutions, but but I think sometimes when you have such a broad portfolio, it's sometimes not as easy to narrowing and focus on the specifics of what makes.
Things like club of work Amazing for your end users and I think we have our entire team is focused on.
Building, great solutions for our customers and so I think for US is really important for us to continue to innovate.
We're really great with the other thing the other tools and ecosystem and make sure that we win over that end user.
Mark talked about.
Yeah, helping our advocates inside of our customers and things like the advertising.
Those are all important parts of the play where user preferences ultimately going to win today.
These accounts.
Our next question comes from the line of Bretton Knoblock from Berenberg. Your line is open.
Hi, guys. Thanks for taking my questions. The first of which is on maybe as you.
Launch more accelerators.
More problems and able to develop more than a platform for say are seeing maybe a change in the competition who were sitting at all and then just the following question on maybe what's driving the the ACB gross and maybe the mix it maybe 70% from customers. This increase in their contract value through expanding licenses.
Or maybe 30% coming from customers with larger initial contracts are coming on board.
I think this I'll take the first half that question.
As I look at as I look at solving for very specific needs with accelerators.
Could be amazing thing about SASSA is you don't have to look too far and you're going to find an offering that solves a specific need that is a purpose built SAS offerings.
I think the degree to which a platform that has extensive on flexible and easy to use can solve for that need beautifully the customer will look at that and say Wow I get that capability pick M&A. For example, we solve really well for with our children and book what else I can do with US murchie platform as opposed to the fixed solution, which solves just that one thing.
So what we're hedging on what we're betting on is that customers will prefer to have optionality prefer to have configurability prefer to have extensibility as opposed to be locked into a specific function.
But again, the beautiful thing people get exercise choice right. We think there will be a multitude of SaaS providers addressing very specific needs.
And I think within large business, especially they want that optionality.
And with respect to the growth in average TCV I can tell you that are our lands are still relatively small because the majority of those.
And I insisted motion.
Through the App.
So what's driving our increase in HCV is really.
The bigger deals that were seeing the continued.
Expansion and engagement from customer tubing business for a while they're continuing to see bigger opportunities do you Archie our capabilities are helping a lot because they have higher price point, but license are still very important and still represents the majority of our billings on a quarterly basis.
Okay. Thank and the maybe just one more just launched 10 accelerates over the last year give or take.
That's the same pace of development over next year, maybe three years.
Yes, I would say that one of the things that we've learned as we've launched for accelerators is that there's a lot of value and I would call depth versus Brett.
So I think as Weve built solutions with partners and Weve built solutions around specific capabilities that we think can be differentiating I think what you'll see a lease over the next year is.
Well continue to launch new accelerators, but probably launch fewer with that are deeper.
Versus.
An accelerator for everything.
Okay. Thank you.
Thank you.
Our next question comes from the line of Terry Koala from first analysis. Your line is open.
Good afternoon, and thanks for taking my question I know, there's been some questions on the federal federal contracts and installations.
On the sales side with the federal opportunities any insights into the the length of time and at the length of time that the sales process takes and the average contract value of of the opportunity City RFP sure you're bidding on.
And what are your prepared whether you're currently are preparing to grow that team.
And then on the cost side, if there if you have any additional insight as to whether that is a more expensive customer to serve relatively speaking.
In terms of the team we are we're continuing to invest in the team as as it relates to our overall quota carrying base. It's a very small number of people, but it is growing I think the sample. We're working off of is still very small right. So it's going to be it's going to be influenced by Noah and a few of our other early customers.
So I think we're not ready to make a deep read into that yet.
In terms of the cost to serve.
We haven't seen a material difference on that from account management standpoint of sales proceeds standpoint looks quite similar today.
Great. Thanks.
And there are no further questions at this time I will turn the call back over to Aaron Turner for closing remarks, great well. Thank you all for joining us today and we look forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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