Q2 2021 Smartsheet Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Smart sheet second quarter fiscal 2021 earnings conference call. At this time all participants are in of listen only mode. After the speakers presentation there'll be a question answer session to ask a question during the fashion you want me to.
Our star one on your telephone please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to him the conference over to your speaker today Mr. Aaron Turner Investor Relations. Thank you. Please go ahead Sir.
Thank you Christine good afternoon, and welcome everyone to smart sheet second quarter fiscal year 2021 earnings call, we'll be discussing the results announced in our press release issued after the market close today with me today are smart sheet CEO, Mark meter and our CFO, Jennifer Sherman, our Chief product Officer Gene feral will also be available during the Q1 night.
Today's call is being webcast and will also be available for replay on our Investor Relations website and investors that smart she 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 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 financial trends and our expectations around the impact of coven 19, and her business. These forward looking statements are subject to a number of risks and other factors, including but not limited to.
Those described in our SEC filings available on our Investor Relations website and on the FCC website at Www Dot FCC Dot Gov, 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 information.
Available to us as of today, and we do not assume any obligation to update these statements as a result of new information where future events, except as required by law.
In addition to the U.S. GAAP financials, we'll be discussing certain non-GAAP non-GAAP financial measures reconciliation to the most directly comparable us GAAP measure is available in the presentation that accompanies this call, which can also be found in our Investor Relations website with that let me turn the call over to Mark.
Thanks, Aaron and welcome to our second quarter 2021 earnings call.
Q2 results exceeded the guidance, we provided on our Q1 earnings call revenue was $91.2 million up 41% year over year, and billings were $97.3 million up 22% year over year.
These results are a reflection of the stabilization, we're seeing in the market and the green shoots signals, we're seeing from customers. We're confident in the value of our offerings the investments, we're making and our future and our opportunity to help enterprises adapt to a reality that demand rapid transformation.
We added 500000, new users in Q2 largest sequential increase we've seen in the last eight quarters that brings our total number of both paid users and collaborators to over 7 million. This reflects the fact that our value proposition is resonating with customers.
Expansion within our base included 235 companies, increasing their annual recurring revenue or a our by more than $25000 up from 173 in Q1 79, increasing their air our by more than $50000 up from 51 in Q1 and 19, increasing their air our by more than 100000 dollar.
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These expansions despite the macroeconomic headwinds reflect a wide range of customers leaning in on their use of smart she to empower their people in teams to address critical challenges, including those presented by code.
It reinforces the findings of a reason Harvard business review study that found that 80% of business respondents agreed that agile and innovative employees enabled by the right technology have played a big part in ensuring business continuity and success during the Pandemics disruption.
Global Medical response, GMR and organization with 38000, clinicians and support personnel and more than 4000 communities has increased its use of smartid, specifically, our dashboard capabilities to communicate cobot related treatment data to government agencies track consumption of PPD and provide real time information.
International Communications hub in Dallas.
Doing so enables GM ours leaders to make faster more informed decisions that ultimately better serve critically ill patients.
One of the world's most disruptive companies known for its on demand transportation and food delivery businesses Leverages Smartid forms control center and dashboard capabilities to drive their global marketing campaigns, including intake requests launch in execution efforts and multi stakeholder reporting.
The global CRM campaign team reports dramatic benefit since implementing smart sheet, including increased return on AD spend shorter campaign cycle times, a reduction in tools required to execute thousands of campaigns and increased campaign volume per project manager.
In addition to expansion within existing customers. We saw some noteworthy new deals in Q2 for example, the largest network of pediatric medical practices in the U.S. invested in smartly to drive a standardized process by which to manager rapidly expanding portfolio of acquisitions. Our M&A accelerator served as the foundation of the six figure deal and.
Q2, and provides the customer with consistency and visibility across their M&A projects and processes.
Coated and the challenges associated with it or simply another reminder, that the only constant in the world is change.
Businesses, regardless of size are seeking new ways to address the pressures changing expectations in a digitally transforming world.
A significant part of the challenge is that many businesses continue to labor under the belief that simply digitizing or using cloud based versions of their traditional collaboration work flow and content management apps will solve the problem.
We believe that is only a partial salt.
A lack of integration between these apps means that critical information about the work being undertaken does not flow easily and quickly throughout the organization inevitably resulting in missed opportunities and inefficiencies.
These well intended but cumbersome solutions leave enterprises ill prepared for a reality that demands rapid transformation.
To effectively compete businesses must work more dynamically to simplify streamline and integrate how work is initiated managed and delivered by the people and by their teams.
The future of work is about creating impact from the edge empowering individual users and teams to innovate for the company as part of a dynamic workforce.
Achieving this means empowering people as agents have changed by both enabling in integrating three key areas.
One the ability for them to dynamically act in the moment, not just collaborating with colleagues vendors and customers, but having that collaboration lead to action in real time.
To to create and shape flows that are right for the chance challenges and the teams involved and three to impact the business by bringing more than a project to completion, but making the most of change actually improving and innovating processes in a way that creates true competitive advantage.
Successful businesses will achieve maximum impact by their ability to work dynamically and how they collaborate and build effective workflows.
Among other things those workflows are the means by which digital content is distributed through marketing activities sales motions in nearly all other day to day business operations.
With our acquisition of brand folder announced on August 24th and its leading digital asset in content management capabilities, we strengthen our platform for dynamic work with the solution that both deepens cross team collaboration and enables content workflows and distribution.
In addition to supporting the logistics of digital content workflows brand folders capabilities provide insights and analysis on the discoverability and usage of assets throughout the entire content lifecycle for both internal and external stakeholders.
Along with the resource management capabilities, we offer via 10000 feet brand folder deepened smartchoice ability to deliver a set of elite end to end capabilities for marketers to become the application for delivering excellence in marketing operations.
By offering and expanding range of marketing specific capabilities and solutions that integrate with our core platform. We enable marketing teams to dynamically execute distribute and report on the effectiveness of their work.
We introduced other meaningful enhancements to our product this quarter among them.
New Admin center, which provides an enterprise class experience for our CES adamant community and streamline our largest customers manage govern and act on information regarding their accounts.
Control Center as part of our Smartid GVE offering control center now provides consistency and visibility at scale by automating project creation aggregating product portfolio reporting and managing change while adhering to the federal government security and compliance requirements.
And bridge and no code business process automation engine that triggers actions and can enable cross platform workflow orchestration.
Soft launched in early July bridge has generated significant interest among our largest customers and we'll make a meaningful impact on how they connect their data across platforms.
We look forward to unveiling additional product offerings and enhancements at our fourth annual engaged global customer conference on October Onest.
Hosted as a virtual event, we have received over 25000 registrations with almost a month ago. We're very encouraged by this early response and we hope you'll join US again this year.
Finally, and before I close my comments I'd like to touch briefly on our success attracting world class leadership talent at all levels of the team.
Since the beginning of the year, we've added several senior leaders with operating experience from companies such as service now Amazon and Microsoft to help a scale the business.
Energized by the new ideas. These leaders are bringing to the table and I look forward to the results they'll help deliver.
With that let me now turn the call over to Jenny to provide additional details on our financial results Jenny.
Thanks, Mark and welcome everyone.
While we delivered financial results above the guidance, we issued last quarter, which reflected improving buying trends from customers.
Revenue came in at $91.2 million up 41% year over year, and billings were $97.3 million up 22% versus last year, our non-GAAP operating loss and free cash outflow also came in better than expected at $7.4 million and $4.4 million respectively.
We remain well capitalized with $546 million of cash on the balance sheet and no debt at the ended the quarter.
Following our recent acquisition announcement, we plan to use approximately $124 million of our cash for the purchase of brand folder, which we expect to close this month.
Next I'll provide more color on our second quarter financial results unless otherwise stated all references to our expenses and operating results on a non-GAAP basis on a reconciled to our GAAP results from the earnings release presentation that was posted before the call.
As we mentioned second quarter revenue came in at $91.2 million, 41% year over year.
Subscription revenue was $83.6 million representing year over year growth of 43%.
Services revenue was $7.6 million representing year over year growth of 20%.
Turning to billing second quarter billings came in at $97.3 million, which exceeded our guidance every five steady improvement in purchases from customers throughout the quarter.
As a result, we ended our formal cobot accommodation program at the end of June as a reminder, this program offered customers who are materially impacted by cobot extended payment or quarterly or semi annual billings term the estimated impact on billings from these special terms in the second quarter was approximately $2 million.
And for the quarter, approximately 89% of our subscription billings were annual with 8% monthly quarterly semiannual in multiyear billings represented 3% of the total and this is consistent with what we saw in the prior quarter.
Moving on to reported metrics, we now have 10049 customers paying a $5000 and more per year 1131, paying more than $50000 and were per year and 433 now paying is $500000 are more per year.
These customer segments grew 31%, 78% and 92% versus year ago, respectively, and now represent 78%, 41% and 28% of total air are.
Our domain average annualized contract value or ACB grew 40% year over year to $4156.
Ended the quarter with a dollar based net retention rate of 128% in line with the guidance, we provided on our Q1 call.
Full churn rate was stable and rounded up to 8%.
Expect our dollar based net retention rates remain under pressure until we lap the headwinds we've experienced this year as such we expect our dollar based net retention rate to trend down to the mid one twentyth in Q3.
Turning to gross margin our total gross margin was 82% one percentage point higher than the prior quarter driven predominantly by subscription revenue representing a higher proportion of our revenue mix. This quarter, our subscription gross margin was stable at 87%.
During the quarter, we substantially completed our migration to the public cloud, which will help us to scale and plan for in country data residents.
Moving to operating expenses sales and marketing expense as a percentage of revenue was 51% approximately seven percentage points better than the prior quarter and four percentage points better than a year ago quarter.
The improvement was driven predominately by lower marketing and travel expenses no. We expect to see an increase in marketing investments in the back half of the year for engage our annual customer conference and other marketing program.
Research and development as a percentage of revenue was 24% in line with the prior quarter and approximately five percentage points better than the year ago quarter General and administrative expense as a percentage of revenue was 14% in line with historical ranges.
Operating loss in the quarter with $7.4 million and free cash flow was negative $4.4 million cash burn was lower than expected due to stronger collections in the quarter combined with cost management personnel expenses represented 73% of our total expenses.
Let me move on to guidance as Mark mentioned, we announced the acquisition of brand folder on August 24 for approximately $155 million in cash and stock.
Expect brand builder to close later this month and to contribute approximately $2 million to revenue and $6 million to billings this fiscal year.
Additionally, we expect the incremental impact to second half operating loss to be negative $10 million.
Ramp older has been operating at cash flow breakeven and we expect to spend an incremental $2 million on a free cash flow in the second half of fiscal year 21 to support their growth and integration into smart check for purposes of our guidance below we are including the expected results of brand folder as if the transaction closes as expected in mid September.
For the third fiscal quarter, we expect revenue to be in the range of 94 million to $95 million billings to be in the range of 104 million to $106 million operating loss to be in the range of 28 million to $26 million and non-GAAP net loss per share to be between 23 cents and 22 cents based on weighted.
Average shares outstanding of 120.5 million.
Our free cash outflow is expected to be in the range of $10 million and $8 million.
For the full fiscal year, we expect our revenue to be in the range of 367 million to $373 million operating loss to be in the range of 66 million to $60 million and non-GAAP net loss per share to be between 54 cents and 49 cents for the year based on approximately 120 million weighted average shares outstanding.
We expect free cash flow outflow to be at least $30 million for the full fiscal year.
And with that I'll now turn it over to the operator for questions operator.
Thank you as a reminder to ask a question you meet the press star one on your telephone to withdraw your question. Please press the pound or hash key please standby, we compile acuity roster.
Your first question comes from line of Terry Tillman from tourists Securities. Your line is open.
Yes, thanks for taking my questions and it's nice to see the stabilization improvement.
Hi, Mark any and Aaron.
First question, maybe Mark for you.
Seeing these larger customers, a 100 K or 500, okay, that's vastly different than 5000 Kay.
That's right, but I can I can see that big difference there I'm curious, though what did the cohorts of those larger customers look like they do they tend to be larger businesses or they just more of a like a mid market business is very digital and nimble and they just use a lot of the capabilities to power. The business are you starting to see any kind of trends in terms of the type of business that is these more sizeable.
Piece Thats first question.
Yeah, typically the larger transactions do mapped to larger entities. However, as you as you look to provide additional value to customers through capabilities now with brand folders well there are companies, but I would classes mid size, who could absolutely be six figure customers of smartid, but to date the mapping is largely.
Size of customer typically trends with higher a are.
Okay, and then Jenny just a follow up question I think you put it in the cubit.
Can you give us an update on international as the mix of total and how do we think about the investments you've been making internationally now with public cloud and having that in country could we start to see that even lift or accelerate thank you.
Yes, sure since roughly 20% of our revenue right now and we did start in the UK couple of years ago, and we are doing well with the reps. There we have over 40 reps now in the UK with respect to Australia. We just got started this this year, we've just finishing ramp of about 20 quota carrying reps and so it's still relatively small.
But we see a big opportunity there.
Your next question comes from line of Alex Zukin from RBC Capital. Your line is open.
Hey, guys. Thanks for taking my question I guess, maybe the first on for Mark can you go through kind of.
What you saw specifically in the field around the improvements.
You talked about on the call in terms of the deal cycles the pipelines.
And kind of where as we are coming out of August any update on kind of how that's trending and then for for Jennie maybe are we pass the.
When do we in your mind start to trough on that dollar base net expansion metric and ultimately start to kind of come back up.
Yes, I'll speak to the what we saw in quarter, we did see a month to month improvement throughout the quarter as a shared on the last call, we had healthy pipeline coming into the quarter and.
Well conversion rates against that pipeline are not yet at pre covered levels, we did see stair step improvement throughout.
So that was really good to see.
We did have our largest pipeline build.
Month.
Just set again in August so customers are engaging in conversation they're interested in how we can add value and hopefully looking to extend this pattern into the second half.
And then with respect to the agent retention rate, we are still kind of in the midst of the initial some of the initial downgrades and expansion pressures. We saw starting in April as result of Covance, we're going to need to get through the 12 month period before we start seeing dollar not retention rate improve we do see that it will it could improve.
But we could see during that retention rate kind of coming into the ended the year of somewhere in the low twentys to mid one twentys.
Got it and if I could just sneak one more in around brand folder is there any sense you can give us and kind of the before write down what with the size of of the revenue was kind of how that's going to ramp back up next year.
So I did your question was around the revenues around brand folder.
Yes.
Yeah. So right now there are isn't the at the low double digits on we are not seeing that much revenue as we start off because of the accounting related to that acquisition, but next year.
We expect it can to continue to grow in that the high double digits.
Perfect. Thank you.
Your next question comes from line of Kidron from Oppenheimer. Your line is open.
Thanks, Hey, guys say to tie.
A couple of questions from me first Mark on on the business side can you talk about.
Accelerators and the fed vertical how did that look and and the quarter on Dan I have a follow up.
Yes on capability based sales it was a good quarter. So they remain integral part of our go to market.
It's one of the reasons why we're concerned continuing with our strategy to add value with marketing solutions landfall in our coming into the family. So thats that continued to resonate on the fed side, we did have our best quarter.
To date, which was great for the team to see.
In the Grand scheme of things, it's still a small contributor but it was really good to see the team take a step in the right direction.
Great and then.
Jamie on the billings I wanted to dig into that I mean, you had a nice outperformance here.
Maybe you could talk about the components off data and also with respect to your billings guidance, if I take brand folder out of that.
Somewhere around 100 million I guess billing for your core smartreach growth excluding brand.
Holders, which means low twentys growth, so you're not really assuming.
Yes, and acceleration again in billings in year for your feelings right. It doesn't sound like you're seeing or you're not confident enough that billings will accelerate from this quarter did you just reported.
So I tie I think a let's clarify that the 6 million we gave as their contribution that's full year and we're acquiring them sometime in the next for four weeks. So if you think about their contribution to Q3 billings, it's actually quite small so there is an acceleration inorganic.
Okay very good.
And then in terms of the contribution just sort of the components of billings any we had a lot of strengthen the enterprise a lot of goodness going on there SMB still you know not quite back to where they need to be we're still there's still living some of the pressures of coded, but we saw really nice growth in our in our larger enterprises for sure.
Great. Thank you good luck.
Your next question comes from line of Archon bacteria from William Blair. Your line is open.
Hey, guys. Thanks for taking my question and then maybe I just wanted to follow up on that last one a little bit about strength in the enterprise.
Good to see the you know some of these 70 mine expansions over 50, K., but I'm just curious when you're seeing these large expansions come through our these new deals that are coming into the pipeline from customers looking to.
Urgently deploy smart you'd or are these deals in the pipeline at the beginning of the year that are just now starting to close.
You know as customers that a little bit more confident on the macro outlook, just maybe trying to understand the dynamics on the on the larger larger expansion deals that you closed this quarter.
Yeah. This this is market I mean, we continue to see a fairly short.
Close cycle in terms of relative to businesses that maybe have a year or even an extended time. So the discover discoverability. These opportunities are still in a fairly short fuse I would say I wouldn't class the message urgent people are being mindful about our business I think there's extra scrutiny to their applying in the trying to have unlocked.
So we're trying to be very responsive to those situations.
I think one of the things that that's encouraging to see is you know we talk about 50 K. opportunities 100 care opportunities. This was also a big quarter for us in the sense that we now have 10 customers, who pays over million dollars NASCAR and it's a testament to the team's ability to really elevate the value at substantial levels and thats part of our ongoing strike.
She is we booked business.
It's great to hear thanks, Mark and then.
The other part that kind of stuck out in your prepared remarks.
Mark was the user growth.
Seems like that's that's kind of staying at a healthy clip.
And it seems like.
From what I can gather from what you said is that the free collaborative base is actually.
Increasing a little more rapidly than than the paying customers can you just maybe give us an update on how you're looking at converting those three collaborators collaborators over time and is there any kind of this co that environment, where there's a little bit more cost sensitivity are you seeing customers trying to put more users into that three bucket.
And maybe convert them later over over time, what are you seem almost three on the free user base.
Yes, I think I think it's a it's a signal that people are needing to share right now and we since the very beginning of the company has believe deeply in a low friction sharing model and while we're while we're thoughtful about how we can add value to those collaborators are number one job is to get people engage with one another and add value and we have a series of.
Things that we're releasing it engage where they will be opportunities to add more value to collaborators.
But right now it's about getting the community big an engaged.
So we're really pleased to see and when we're talking about Tailwinds tailwinds can manifest themselves in different ways. It can manifest itself in a deal that you can book in the available are you also community size. So again, we're real pleased to see people come to the platform right now.
Great. Thank you.
Your next question comes from liner Stan Zlotsky from Morgan Stanley. Your line is open.
Hey, guys.
Good afternoon, and thank you Mike for taking my question.
Just following up on some of the other ones have been asked before.
It's certainly great to see the step function improvement as you guys went through the quarter.
But as far as what's embedded as far as you macro improvements into your guidance for Q3 and for the rest of the year and then have a quick follow up.
Yes, Thanks, Stan and nice to hear from you as well so we're not expecting on.
The shape recovery, yet, we still think theres a lot of uncertainty in the back half generally around the election around when we will have.
The shots that will help us get over coded, but so in terms of our guidance. It's still guarded we're kind of looking out what we just accomplished what we what we see kind of right in front of horizon and that's how we're guiding.
Got it and is that is that the rationale for.
Not reinstating full year ability than billings guidance.
But giving us some some free cash flow.
Directionally.
Guide for the year.
Yeah, exactly I mean, there is a bigger range of outcomes for billings in Q4 could be quite positive, but until we really see on us through Q3, we.
Maintain no guidance.
Got it and then maybe just if I could sneak in one more just on the customer metrics. The certainly great to hear the 10 logos above a million now they are.
When we look at the reported numbers.
There's a there's some deceleration that we're seeing as far as the metrics for customer team being one of the 100 Kay.
And 50 K. five cake is that just a function of net revenue retention and customers not.
Clinical graduating into those higher Geo buckets.
I think it's relative right we were in triple digit zone for a long time, and our largest I think the over one hundreds over 90% still assuming it's still a pretty impressive number.
So we have to look at this also in the backdrop of the macro situation and we continue to invest in cater to these customers to the best for our ability.
We think there's still a huge upside to sell software and deliver value for these for our existing customers in new customer so.
You know, we're navigating through that's to our best of our ability and then keep the hammered out.
Yes, maybe just to add on that if you look at that the change in a number of Fiftys and 100 KD were actually slightly bigger than what we saw on Q1. So I think that's very encouraging.
Perfect. Thank you so much guys.
Your next question comes from line of Brent Thill from Jefferies. Your line is open.
Good afternoon, Mark on the pipeline building. Some larger deals you closed are there new areas that are opening that maybe you haven't seen before new use cases that are you are kind of getting more excited about that are.
Are starting to show showed good strength.
And then.
Jenny just on I think you'd mentioned off the Q4, you wanted to add more sales rep in fiscal 21 over.
Over last years that is that still on track given given how big is pipeline build is coming along.
Now let me use cases side I would say we're still in the areas that have served us very well to date, so rather than sort of identifying new use cases, I would say, it's a deepening in extending in the areas we were already performing well.
People are responding well to moving from a we have solutions for marketers to looking at our vision and saying we're going to be the lead provider for marketing operations that is so the strength of those offerings is improving and when we look at really like adaptive project portfolio management and marketing operations. Those are two veins, we're really improving the high.
And right now.
I would say, it's more of a deepening and improving than it is a new a new vector engine yen with respect to sales reps and we continue to add where where we see strong demand and a strong pipeline and so we'll weve been reevaluating that every quarter and we'll continue to do so.
Great. Thanks.
Your next question comes from the line of Michael Turits from Wells Fargo. Your line is open.
Okay, great. Thanks, good afternoon.
Going back to some of the earlier comments you mentioned stabilization on the large customer side. The 100, K customer metrics still up more than 90% certainly seems to support that just is there any more color you can maybe out on that up market stabilization and how that compares to what you saw across the other segments among customers, especially given some of that the small business.
His commentary last quarter.
Yes, I think a stabilization references made in the context of the broader market and so what we're hearing from our peers are fellow SAS Ceos are.
Other buyer sentiment from different categories. So it was not a statement specific to smartly, but more broader.
And in terms of in terms of what we're seeing at the at the larger side I think the the mapping of higher dollar transactions to real business value that is a fundamental requirement. When you are selling at an enterprise level. So it is less about productivity wins in general.
Feeling great about collaborating but it's like what are you delivered for the business and the company's ability to articulate that is I think directly mapped to whether they can sell high.
Okay, Great and then the brand folder acquisition is there anymore, you can tell us around that opportunity what that could help open up going forward, whether its cross sale or reach into additional use cases as well. Thank you.
Yes, Hi, Michael is gene I'll speak to the brand folder piece.
When you look at brand pulled I think it's a continuation of the investment strategy. We've had over the last really call a year and a half starting with our slope acquisition and 10000 feet to really build a set of capabilities to deliver elite experiences for marketing and marketing use cases.
And we really chose that vein because we believe it's such a broad based need.
Across so many different industries and consistent with the signal that we hear from customers. So we think brand folder really brings a piece of the the supporting marketing workflow really bringing a content element into it is a powerful piece that was missing before for us and we think really lets us complete the play on.
And from creation through distribution.
But more importantly, it brings content and digital asset management capabilities into our portfolio and we are very bullish on opportunities beyond just marketing to extend those content management capabilities into our platform across a variety of other use cases.
Okay got it thank you.
Your next question comes from line of Scott Berg from Needham Your line is open.
Hi, everyone. Congrats on the good quarter and thanks for taking my questions. I guess the first one is for gene I just wanted seats in expand upon that rent will the comments a little bit maybe more from a competitive dynamic I guess, what's the acquisition breed you that maybe other competitors don't have in your mind that can.
Help create some further probably separation.
Yes, Scott I think there's a couple of dimensions to look at the first dimension would be and collaborative work management space, where I believe that brand folders pretty unique offering compared to many of the other players that are that are trying to serve marketers and we believe it brings a first class experience too.
Our platform.
And the addition of content and the way, we can deeply integrate content creation workflows content distribution workflows, the whole markup and approval process and the interplay between where the constant is.
Stored and shared along with the work flow and we think will be differentiating.
And then beyond that if you look generally at marketing and when we talk to marketing customers. What we hear is there are some very purpose built very kind of opinionated solutions out there that can be.
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Tend to not give them the complete solution. So they end up wiring together multiple platforms to try and make things work, we think that.
Empowering a team to be able to configure end to end with our platform is going to be a differentiator for us.
Got it helps and then from a follow up perspective changing as soon as question on the third quarter guidance you guidance assumes bottle, we'll call. It 18 $19 million step up in operating expenses I guess, how should we think about that difference. So that is obviously with engage but for the maybe for the balance how much of that is investment.
Maybe I don't know additional sales and marketing efforts given the improvement that you're seeing in the macro.
Yes, I mean, we have our engage conference so that that's incremental spend compared to what you see this quarter. We've got other marketing activities that we are involved in there. So thats a big part of it. We've also got some product things that we're doing we're kicking off brand folder integration, we're spending on that and so those are kind of major components. Some odd.
Operationally scale, continuing our efforts with Sox another area of investment.
Great. Thanks again.
Your next question comes from line of David Hynes from Canaccord. Your line is open.
Hey, Thanks for taking my question Mark I want to ask a high level competitive question. So if I think about the platform right its product management its data capture and dashboards that.
I think that the secret sauce is really in kind of the workflow automation. If that's the case and as you continue to have sex success in the enterprise how do you view smart sheet VCT. The RFP eight vendors over time do you view them as competitive.
I think I think work flow is a huge category and workflow is going to within businesses the utilized by whole host of participants.
All righty business units citizen dads and what we're seeing is you have different offerings, which serve different participants most effectively.
And what we've elected to do I talk about impacting from the edge.
We've been doing that for many years the bridge offering does really provide additional value to core IP and the citizen developers as well so I think with AARP, Hey, it's a really great platform that targets very usually very large workflows that are less nimble or requiring less dynamic work or change.
It's more I shouldn't say said it and forget it but it's much more heavy upfront investment in a very known very deliberate process and the CWM space is more dynamic you have you have more fluidity in the process the controls how they need to respond to customer preference and I would argue that that is probably not best suited for a larger scale less.
Nimble platform.
Yes, yes, okay that makes sense.
And then maybe a follow up just in terms of the August pipeline build that you called out any change in the mix of.
New versus expand opportunities as demand continues to improve.
Not materially no.
No we see we saw activity on both sides.
Very good thanks.
Your next question comes from line every she Jaguara from D.A. Davidson Your line is open.
Hey, Mark Sammy Aaron Thanks, So much for taking my questions I want to go back Mark to comment you made in your prepared remarks on kind of the difference between Digitization versus digital transformation can you speak a little bit about the differences between those two and kind of how that pertains to have that Paul.
Yes, I think I'll give an example would truly builds on gene just spoke about brand folder. So digitization might mean digital asset that a store in online shared folder.
It's digitized it has a link and it can be given to somebody on the web team to post two website.
Digital transformation might be having an asset and you can deployed globally and be able to not have to actually ship product round you can get insights into both activities insights into whether it's actually utilize those the types of things that aren't provided by an online shared folder, which was what most marketers do today in managing the digital.
Assets.
So people might feel great about having that digitized asset but is there process fundamentally different are they getting fundamentally different insights and able to change their flows accordingly and.
I guess, that's probably one that ties out to our most recent acquisition most directly.
Got it that that's really helpful.
And then I want to just think Jenny about on the margin front.
My operating margins clearly it's awesome.
When I think about operating margins right, you're getting some cost savings that I'm sure are coming through as a result of effectively having zero t. any.
As we kind of go forward and whenever there is there's a post pandemic environment, how I think about kind of the permanence of some of these cobot related cost savings.
Some of that can get permanent has it come back snack kind of back to normal teeny budget and spending as they're going to be some middle ground. There any any color there direction would be helpful. Thanks.
I think it's really too early to tell what it will look like kind of post covert I think.
My own personal point of view as will gradually come back to certain level, but clearly with.
Some of the different communication methodology is now that people are getting used to there's a lot of efficiency to doing so sales calls directly without having to travel. So I think there's going be some benefit you see there I think the one area that's going to be really interesting amongst companies is how they think about their workforce strategy and their facilities, whether they're all.
In office, whether there is a hybrid between work from home and office and I think generally we could see some scale on that front post cobot.
Okay, Great Thats helpful. I guess how test.
Your next question comes from line of Walter Pritchard from Citi. Your line is open.
Hi, Thanks to product really a question for Mark one on on the free side I'm wondering if youre being sort of more accommodative in terms of customers wanting to move people on the platform, but not having budget and if the free volumes sort of represents traction that you're seeing in those types of users and an opportunity maybe even more so than in the past the monetized.
Yes that is not a pattern that we've we've been observing we havent made accommodations to enable for users to have special privileges. So that is not something that we're observing today.
And then also just another covered related question I guess are you seeing any of your customers look to consolidate multiple vendors in this category that there might have pockets of throughout their businesses. They as they just like to streamline things and sort of push towards more of a standard solution or if you still seeing sort of departmental and and so forth workgroup be that'd be the norm and.
Good initial footprints.
Yes, we saw as we spoke to in our last earnings call. There were couple of examples of some large scale customers, who did a consolidated multiple vendors in our favor.
But I would say we're still very early in this category and I would expect that to be a more pronounced maybe a year out 18 months out.
So again, we'll we'll report out or notables when we see it but I wouldn't say, that's a huge emerging pattern today.
Okay, great. Thank you.
Your next question comes from line of Steve and there is from Keybanc. Your line is open.
Hi, great. Thanks for taking my question.
I know you announced a couple international partners and the quarter I'm, just wondering kind of what you're seeing.
Within those efforts as you continue to expand into the UK Australia.
Yes, I think partners are partners are growing part of the business. When we think about being a leading company a global scale. It's not just about what you can deliver but what does your ecosystem deliberate how does the ecosystem benefit and one of the things that were quite energized about as you look at what value a partner can bring to their customer.
When you do things like brand folder, you, giving lightbridge when you look at the work we're doing that we announced at our last analyst day around enabling the building of no code apps. These are all things that feed directly into what a partner value delivery looks like so I would expect us to continue to lean here.
We had a European partner do a significant expansion for us this last quarter, which was a great milestone. So we're starting to see that we talked with some of these green shoots signals that would be one of them and we expect to continue to grow that footprint.
Okay, great and maybe for Jenny and just want to get a bit better sense. Thank you said there are the 2 million impact in the quarter related to co. Then on the billions front I'm, just wondering kind of what's built into expectations.
Through the rest of the year there.
Well as I mentioned we.
Ended our formal accommodation program.
I also mentioned about 89% of our billings this quarter were annual and my expectation for guidance is that roughly stays the same for Q3 in Q4.
Okay, great. Thank you.
Your next question comes from line of Mark Murphy from JP Morgan Your line is open.
Yes, Thank you sorry about the delay.
Mark you had mentioned this healthy increasing the number of user at in Q2 and I was just wondering if you can clarify that seem to be boosted at all by.
Degree the workforce trend, maybe that drove some top of funnel it.
Free collaborator collaborators seats or did you actually see relatively more improvement in the paid user adds this quarter.
Yes, it's really tough to say mark because when when your business that runs multiple campaigns makes number of improvements it's tough to attribute what caused it. So was it coded wasn't the fact that our team substantially completed the mws and the outperformance increased dramatically. There are number of factors that could influence it so I.
I think it is I think it's easy to so have revisionist history and say this is what caused it I think there are certain things that we did do that created a better experience, which may or may have served as a tailwind for us.
But I would not say that.
I don't think we know enough yet to be able to say declare to believe that co bid was the reason.
And in terms of the the again the paid and the the paid in the free collaborator.
As you know we report on an overall population, we don't we don't breakout on that that dimension.
Okay.
As a follow up Jenny I understand it's very early to know with any kind of.
30, but just given what you can see today would you think that fiscal 22 is shaping up to be a year of revenue reacceleration or do you think you'd still be kind of working through the lag effect of of slower billings here in Q1 in Q2 in Q3 and therefore, maybe.
Deceleration is a little more appropriate thought.
Well Mark.
I don't think I can call the ball on that yet it's really still early I think we feel more optimistic that.
We stated that we saw the bottom in the last couple of months in quarter odd and I'm optimistic that next year will be better, but it's too early to call the ball.
Thank you.
Your next question comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Hi, Thanks.
Hi, Thank you very much I wanted to ask one to Gennine one the Mark Jenny I wanted to go back to net retention rate because I'm a little surprised.
That.
You expected to decelerate from here and that's probably came down on July at all but if I think about the two drivers churn in up sell.
You've talked about the pipeline looks really promising in big deals. So I would assume that the upsells stays relatively constant and while I. Appreciate the contracts will continue to rollover I guess I'd be surprised or I am surprised at the turn rate might change so.
Can you just highlights what what do you expect to get worse.
Over the next couple of quarters between the two key variables of churn up so that would drive net retention lower.
Yes upset our sorry, our churn has been stable, losing full logos, where we've seen on a degradation is on our expansion business. So that expansion that would be upsells and downgrades and it's still a very good number that we've had more downgrades. This on.
This this year as a result of for example companies like in the travel industry, who aren't generating any revenue at renewal their downgrading now I think there's a high likelihood they're going to come back when their business gets back but it takes basically four quarters for that to flow through our dollars net retention rate because we look back 12 months ago and so.
Dave and our calculation for for four quarters.
I don't really know what Q4 is gonna be yet, but I do feel that theres more downward pressure right now because of this phenomenon. How it's calculated at the same time, we kit Q1 of next year I see there's potentially a tailwind on that.
Okay. Thank you for that answer Mark I wanted to come back to you for second on the competitive dynamics and if you could talk a.
What you're seeing.
Consequence of the Colin economy in terms of any changes dynamics, particularly in pricing and then b.
I'm sure you know that it's on a file and.
They seem to be growing quite a bit faster than you are in particularly going if you just look at the April quarterly GAAP results versus your results and while that may not be the benchmark for the current quarter. Just wondering though if you wanted to offer any thoughts on.
Because I'm sure we're going to get the question on why sauna is growing so much smaller so much faster is a bit smaller.
You are but any thoughts there would be appreciated. Thank you.
Yeah, I think its.
It's difficult without being in anybody else's boardroom or exact room to understand what the complexion of that revenue is.
We have not seen a material change in who we see.
We deeply inspectors, we look at our Salesforce comments, we talked to our sales team Dr. sales leaders and the number of contested opportunities still de minimis in the Grand scheme of things.
And I think partly that's a function of people flying a different elevations right. So as we go into talk some about an enterprise work flow with control center dynamic view our capabilities.
And you compare that against.
Another provider, who maybe is more task oriented.
They maybe talking to different things and we may never be made ever see better the person so.
That's that's sort of I think when the diversity in what people are deploying.
There has been such a dramatic shift in the last decade going staying relatively few technology providers to a multitude of providers within a company.
Overtime do I think companies will.
So choose their winners and choose the people who they really want to go big with I do think so but we're still in this this real proliferation when people understanding what the possibilities are.
So on the on the on the growth side, when we look at I've spoken to the texture of revenue before so while you are you getting a dollar for your are from a fortune 500 company with tremendous growth opportunity you're getting a dollar revenue from a smaller business that maybe has slowed growth prospects.
We're really focused on continuing to pursue and cater all customers, but could be very mindful of how we serve those very capable firms that have long long lives.
And.
Penetration or fortune five global too, it's a very high and improving and I think thats one of things that we still do they fixated on when we think about how we're performing relative to others.
Okay. Many thanks for the answer.
Hi.
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 for joining us and will speak with all of 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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