Q4 2021 Smartsheet Inc Earnings Call
And ladies and gentlemen, thank you for standing by and welcome to the Smart sheet fourth quarter fiscal 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
The ask a question during the session go meet the press 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 and I would now like to hand, the conference over to your Speaker today, Aaron Turner head of Investor Relations. Thank you. Please go ahead Sir.
Thank you Christine good afternoon, and welcome everyone to smart sheets fourth quarter and fiscal year 2021 earnings call. We will be discussing the results announced in your press release issued after the market closed today with me today are smart sheets, CEO, Mark Mader, our CFO, Pete Godbolt, our chief strategy and product Officer Gene Farrell will also be available during.
And the Q&A today's.
Today's call is being webcast and will also be available for replay on our Investor Relations website at investors that smart dot com, there's a slide presentation that accompanies pizza prepared remarks, which can be viewed and the event section of our prepared 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 financial trends and our expectations around the impact of COVID-19, and on our 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 SEC's website at Www Dot FCC Dot Gov.
Although we believe that the expectations reflected in the forward looking statements of reasonable our actual results may differ materially and adversely all.
All forward looking statements made during this call are based on information available to us today, and we do not assume any obligation to update these statements as a result of new information or future events.
Sept as required by law.
In addition to the U S. GAAP financials, we will discuss certain non-GAAP financial measures and reconciliation to the most directly comparable U S. GAAP measure is available and the presentation that accompanies this call, which can also be found on our Investor Relations website with that let me turn the call over to Mark. Thank.
Thank you Aaron and thanks to everyone for joining us on our fourth quarter earnings call.
We're pleased with our Q4 results of $109 $9 million and revenue and $151 $2 million and billings.
As of quarter, and which we achieved success with large deals saw strong performance from our acquired brands launched are no code work apps offering and saw the community of smart sheet users exceed 8 million users, including over $1 2 million licensed users.
And Q4, our average domain annualized contract value of our HCV grew 40% year over year to over $5100 and expansion within our base included 385 companies increasing their annual recurring revenue or <unk> by more than $25000 up from 273 in Q4 of last year of 100 and.
38 increase their <unk> by more than 50000 and up from 93, and Q4 and 43 increase their air or by more than 100000 up from 28 and Q4.
Our Q4 results were fueled by the dedication of our team partners and the value customers derive from our platform.
While the macro events of last year were unexpected we now understand the 2020 help shine a light on the many benefits of the secular shift to the cloud and digital transformation.
After the initial adjustment period, where customers were focused on business continuity and employee safety customers seem to recognize that this new normal compelled them to think differently about how they operate and which tools they would need to navigate a new reality.
This has created opportunities for customers to realize meaningful value opportunities for them to modernize the wide array of workloads and solidifies smart she is a core component and their enterprise software stack.
Last year proved that organizations have the capacity to adapt rapidly to changing conditions, even using change as an opportunity to more deeply connect individuals' to their work and their company's missions and.
And as distributed work has placed a greater pressure on people's need to solve and managed through distributed teams and smart sheets quick to configure no code platform has proven to be a highly capable mechanism.
And customers were able to rely on the scale of the smart sheet platform to respond to the global pandemic from global from Covid testing at Roche to employee health and safety of customers like Syngenta and the state of Washington, They demonstrated that smart sheet was built to enable organizational agility, even and the largest settings.
Driving change has been a core trade of Smart Street as well and the last year was a year of meaningful progress key highlights include increasing air are in every major industry served completing the migration of our data centers to the public cloud launching work apps and January with 3100 organizations building over 16000 and apps so far.
Sure.
Achieving 400 per cent year over year, federal AOR growth and achieving department of defense impact level for provisional authorization.
Establishing our international footprint to serve organizations like the U K National Health service and Fox Sports Australia.
Exceeding 500 channel partners acquiring brand for the centerpiece of our content management offering.
And scaling the number of companies, who made meaningful investments and smart sheet of 113 transactions over $100000 in the year.
Our mission is to empower anyone to drive meaningful change at a time when the world continues to undergo rapid change our platform drives equity and invites those closest to the problem to be the solution are lifting some from the role of observer or requester to valued change agent and creator.
Historically transformation has been one directional from the top down from the center to the edge often through large I T initiatives smart and enables organizations to do this critical work, but in a way that is more flexible and allows for continuous improvement by directionally.
Smart sheet cultivates more engaged and the effective teams contributing to the business in meaningful ways that is the future of work.
To support our customers and meeting this challenge we are committed to driving continuous innovation and improvements and our platform.
For this and growing customer signal indicates that a critical step in developing and mission critical workflows at scale is the ability to connect of other back end systems as well of systems of engagement.
And we're continuing our investments and delivering and enterprise grade platform and the ecosystem to which it connects to enable organizations to drive greater net value from their cloud investments spin.
Specifically this means deepen our investments our investments and strategic alignments with Microsoft Salesforce, Google Adobe and AWS among others. So organizations can move faster and achieve more across the value chain.
And the last quarter, we expanded our partnerships with additional integrations to support new use cases, including human capital management, or HCM robotic process automation or RPE eh and automated document workflows.
With the Workday HCM integration by Dell Boomy smart sheet customers can deploy integrated and automated workflows from workday HCM to track progress create tasks and execute on work related to their talent needs.
Customers use smart Chi to automate dynamic workflows continues to grow rapidly year over year growth has been 300% over the past six months with over 7 million of automated actions processed in the last 30 days.
We are also hearing from customers of desire for the ability to connect dynamic workflows managed and smart Street with the more structured workflows that many customers are automating with our P. A.
So our recently announced partnership with you Ipass, we're making it even easier for our customers to automate interactions and smart sheet around common use cases like employee on boarding lease management and project management.
Customers also consistently highlight the challenges of executing document workflows, including signature at scale last week, we enhanced our doctor sign integration to enable signature and process tracking as part of smart E document of builder.
Document builder automates and increases the accuracy of document creation for use cases like lease agreements job offers and invoices.
Over the past 90 days document builder has helped customers generate over 300000 documents.
Beyond the benefits provided to our mutual customers I'm also proud of each of these high impact brands Workday HCM UI path and Doctor sign are also smart sheet customers.
I'd like to talk about our solutions strategy for a moment over the last few years. Our accelerator strategy has helped customers increase the speed and agility of projects and processes and address targeted workflows.
With solid traction customer signal indicated a desire to take these solutions even further and.
In support of this we're launching the next phase of our accelerator strategy capability based offerings that provide differentiated technology and that can be used to configure and support the set of use cases.
Starting with marketing and project and portfolio management P. P. M use cases, these solutions will deliver even higher levels of capability to enable customers achieve greater results.
Smart heat for marketing combines the resource management capabilities of 10000 feet brand folders content management and analytics capabilities and smart she proofing to deliver solutions that benefit marketers and content creators.
Smart heat for marketing is reinvigorating how customers tackle their marketing challenges.
A recent customer win with the disruptive sports network overtime sports demonstrates the strength of our combined offering for marketing.
Overtime has chosen the full suite of smart sheet properties to streamline content production track and measure of resources establish the scalable library of content and determined ROI for their content strategies.
The combined capabilities of smart sheets platform project management resource management digital asset management marketing analytics tools and proofing provided a unique solution like no other vendor.
Beyond features and capabilities form is as important as function and.
And in 2020, one we will deliver of new user experience for our customers. This design is a multi phase of investment to help customers achieve more with the beautiful refined user experience. The first phase of the redesigned experience has been and used by over 35000 users and beta and launches globally next month.
And in the coming year, we will continue to provide meaningful touch points with customers through virtual experiences.
In 2020, one our annual customer conference engage will take a different form shifting to three distinct virtual events that will provide multiple opportunities for education and support and connections throughout the year we.
We look forward to resuming events with in person connection opportunities when deemed safe to do so.
In closing our goal is to lead the organization's up the ladder of digital transformation, where all of the benefits productivity gains engaged employees delighted customers and significant ROI are realized and.
And I shared with the latest group of 50, New team members, who started at smart sheet last month, and 15 years of leading smart sheet. There has never been on opportunity like the year ahead, with new solutions and improved core offering of more capable team and most importantly customers who realize what's possible. We are looking forward to the future.
Now, let me turn the call over to Pete to provide additional details on our financial results Pete.
Thank you Mark overall, we were pleased with the results for the quarter, which reflected the continuation of improving business trends and large deal volume.
I will now go through our financial results for Q4 and fiscal year 'twenty one.
Unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings of these and presentation that was posted before the call.
Our Q4 results were positively impacted by and easing of Covid related sales headwinds, we saw earlier and the year continued strength of larger transactions and the strong close to the fiscal year and by our sales organization that was supported by a year and customer budget.
Okay.
For a full year.
2021, we ended with total revenue of $385 $5 million up 42% year over year.
Billings of $457 million up 35% year over year.
Operating loss of $41 million and free cash flow of negative $31 $6 million.
We ended the year with annual recurring revenue of approximately $440 million.
Next I will provide more color on our fourth quarter financial results.
As previously mentioned fourth quarter revenue came in at $109 9 million up 40% year over year.
Subscription revenue crossed the 100 million Mark for the first time and was 101 $1 million accelerating year over year of growth to 42%.
Services revenue was $8 $8 million, representing year over year of growth of 18%.
The brand for the contribution to total revenue and the fourth quarter was $4 million exceeding our expectations.
Now turning to billings fourth quarter billings came in strong and 151 $2 million, which was an acceleration and the year over year of growth rate to 49%.
Grandfathered for contributed $5 9 million to our billings number which also exceeded our guidance.
Approximately 90% of our subscription billings were annual with 5% monthly.
Quarterly semi annual and multiyear billings represented 5% of the total.
Moving on to our reported metrics, we know of 11870 for customers paying us $5000 of more per year.
1515, being $50000 or more per year, and 588, now paying us $100000 or more per year.
These customer segments, now represent 82% and 46% and 32% respectively of totally IRR.
Our domain and average ACD from 40.
And 40% year over year to $5103.
We ended the quarter with the dollar based net retention rate of 123%.
The full churn rate improved and is now below 7%.
You may notice that our billings number came in higher than our guidance, while our dollar based net retention rate was in line with our expectations.
This is due to a greater proportion of our billings this quarter coming from both new customers and expansion of customers that we acquired over the past year, neither of which would impact our Q for dollar based net retention rate.
For the first quarter, we expect our dollar based net retention rate to remain around 123% as we lap the first COVID-19 impacted quarter.
For the remainder of the year, we expect dollar based net retention rate to trend moderately higher.
I'd like to provide additional color on our progress with our large customer segment, which we define as a customer with over 10000 total employees.
At the end of fiscal year 2021, we had over 2800 customers and this segment of which 41 had annual recurring revenue of $500000.
Greater than $500000 up from 19, a year ago.
This customer ear are level represents an investment in the smart sheet platform. The income passes a broad selection of our offerings.
This large customer segment represents approximately a quarter of our current IRR with significant expansion potential.
If we expanded the remaining domains in this cohort to the 500000 E. R. R level.
Which we have shown an ability to do the total error opportunity for this segment would be around $1 $4 billion.
Our strategy across all segments starts with organic adoption and subsequent expansion.
This is seen in this segment as well where greater than 80% of these customers had ear of less than $5000 in their first year.
The segment also exhibits higher expansion rates.
As of Q for the dollar based net retention rate for the over 10000 employee and customer segment towards 140%.
Higher than the rest of our customer population.
Additionally, we are seeing significant active user growth in this segment, which also supports our conviction and why we continue to invest and features products and packaging the.
To further support our growth with large customers.
As we think about the growth opportunity ahead, we.
We are firmly establish smart sheet as the Cwm's solution of choice for enterprises with broad applicability for companies of all sizes.
As shown on earlier, we have a long growth runway ahead, we will continue to invest and our opportunity and I look forward to providing additional details on our progress in the coming quarters.
Now turning back to the financials.
Total gross margin was 81% two percentage points better than the third quarter.
As you'll recall, our gross margin was adversely impacted in Q3 due to the presence of duplicative server costs associated with the migration to the public cloud.
The completion of the migration and Q3 men did the duplicative costs did not repeat in Q4.
Our expectation for gross margin for the fiscal 2022 is to be between 79 and 81% as we look at leveraging public cloud infrastructure internationally.
Overall operating loss in the quarter was negative $5 $3 million or 5% of revenue.
Down from 22% of revenue a year ago.
This was built on year over year leverage and all functional areas.
And free cash flow was positive $9 $9 million, which exceeded our guidance.
Longer term on module has the capability generates significant cash flow at scale.
Now before I move on to guidance a quick housekeeping item.
In the past, we had reported out on our licensed user count at the end of each fiscal year.
Recently, we have expanded our product offerings to include new products and packaging structures that provide us with new ways to monetize more of our user base.
This is the trend we expect to continue.
As it does focusing on licensed users will understate, our increasing ability to monetize our user base.
Due to this evolution and our business going forward, we will continue to report out on our total community size each quarter.
However, we will no longer report out on our license to user count.
Now, let me move the guidance.
Our fiscal year 'twenty, two guidance contemplates gradual improvement and the macro environment and the second half of the year.
This drives our expectation of billings seasonality that is weighted more towards the back half of the year.
For the first quarter of fiscal year 'twenty, two we expect revenue to be and the range of $111 million of $112 million billings to be in the range of 118 million and $219 million non.
Non-GAAP operating loss to be and the range of 19 million to $17 million and non-GAAP net loss per share to be between 15 and.
And 14th.
Based on weighted average shares outstanding of $123 5 million.
Our net free cash outflow is expected to be and the range of $12 million for $10 million.
For the full fiscal year, we expect our revenues to be and the range of 500 million the $505 million representing growth of 30% to 31%, we expect billings to be in the range of 580 million to $585 million Rep.
The representing growth of 29% to 30%.
We expect non-GAAP operating loss to be and the range of 55 million to $45 million and non-GAAP net loss per share to be between 44, and 36 cents for the year based on approximately 124 million weighted shares outstanding.
And we expect our free cash flow margin and fiscal year 'twenty two to be between minus six and minus 4% and improvement from minus 8% in fiscal year 'twenty one.
In closing I'd.
I'd emphasize a few points in relation to our business for.
First the smart sheet business is diversified across segments verticals and geographies with customer errors that range in size from a few hundred dollars to several million dollars.
Second our customer spending priorities grow and scale well with our solutions and we will continue to invest and this opportunity.
Third with rapid innovation of our proprietary features and our M&A over the past couple of years, we have significantly widened our competitive moat.
And finally, we have and incredibly powerful distribution model with large community of over 8 million users. This positions us incredibly well to execute the fiscal year 'twenty two plan and maintain our position as the leader and enterprise CW and <unk>.
Now, let me turn it back to the operator for questions operator.
At the reminder to ask the question you've missed the press star one on your telephone Chili's child of your question. Please press the pound or hash key please standby, we compile the Q&A roster.
Your first question comes from the line of Irish and the cash from William Blair. Your line is open.
Okay.
Alright, Thank you and congrats on a on a great quarter and the great ended the year.
Mark maybe the first one is probably for you, but you you mentioned in your prepared remarks of a little bit on the evolution of the solution strategy and I was just wondering if you could maybe expand for us a little bit what the changes you are making to the solutions are and how you know maybe how should we think about the impact that will have on your on your pricing strategy for some of those.
The accelerators and the other value and value based capabilities.
The Orange and I think we'll take this as a two parter. So I'll answer I have a couple of comments and I'll, let Gina Gina cover off.
So I think I think two things we're trying to do is respond to customer signal and when I think about what we did with accelerators and prior years solving for very specific use cases really letting people take advantage of this composite of our dashboards and of our sheets and our reports and of our forms people like those but the things that we're saying is we're scaling further and the enterprise is a different set of needs.
It can be on the dimension of scale and control things for which we're actually developing prepared proprietary IP. So technology is being built it's way beyond just the configuration of the solution. So all of the gene to speak to that and the second the second piece around packaging and pricing that is very important over the last few years as we've created more and more capabilities, we have the ever growing portfolio.
And if things and people want simplicity and how they engage with us so for us to get our median sales rep to be able to sell quickly and confidently and let customers to be able to react to that well there needs to be of simplicity and the offer and that's what that's what we're achieving now with the change and packaging as well as with the this newly enhanced set of offerings gene and building on.
The building on Mark's comments, and it's really a of shifts that we've taken based on customer signal we're on.
On the solution side customers are looking for the ability to really tailor solutions more and.
More precisely to their individual business needs and they are looking for the ability of that when they licensed the set of capabilities being able to apply those capabilities.
Cross.
Multiple use cases of functional error and of functional areas. So for example, and marketing while we have a and accelerator for event management.
Customers are saying, hey, what I'd really like us to be able to license and set of capabilities that will support marketing event management and campaign management and creative content development and the list goes on and so what we've essentially done is look to new packaging approach that takes our premium capabilities that will still be available as all of <unk>.
Car or individual capabilities, but we're now also offering them and a bundle or package of premium platform capabilities that our customers can license at a at.
The significant discount or of value when they licensed the package versus buying them individually and by positioning that platform. It really enables us to.
Grow with less friction within customers because they then have the entire platform to be able to to build on top of and then it also changes how we monetize because we've actually priced debt.
Premium offering based on the number of connected users to the two of the actual platform and so a company that has smart sheet deployed within the department can license. It at a price point that is commensurate with the value that they get at the department level as they expand.
And add more connected users across the enterprise.
Renewal of that that will then.
The re licenser or expand at that customer at a higher price point.
Got it that's very helpful. Thanks for the color.
And then Pete maybe one for you a little bit of and open ended question, but.
And after being in the CFO seat for for 90 days now it'd be great. If you can share with us some of your early observations.
About the business overall is and you are a member of the leadership team and then from a financial perspective.
And I know you mentioned that the license to use your disclosure change would be curious if we should expect any other changes and disclosures going forward. Thank you.
Arjun Thanks for the question. So first 90 days of phone by really fast and this prop.
The three takeaways for me the first one is.
You always hear the words, Dan and you have to actually feel it so as I joined the smart sheet actually using the product and took it and how it could work and actually did work was just realization of that opportunity you can see the Dan you can see the Tam at play I couldn't be on any more zoom calls and get the work done.
The second one is as I dug into the business I have confidence and the business I believe the opportunity is is here.
The long term opportunity is our focus and our near term investments should help us unlock it. So I believe that and then the last part of it is the leadership team I think for every opportunity of the leadership team is what unlocks it and as I've gone through this year of experience the leadership team that really knows how to take advantage of it.
And scale into that opportunity. So those of my three quick observations of the second part of your question was on metrics changing we're not changing any metrics other than the one I specifically called out as a part of our housekeeping.
Perfect. Thank you and congrats again on the results.
Thanks RJ.
Your next question comes from the line of Terry Tillman from true Securities. Your line is open.
Yeah. Thanks, Todd one of the Echo the congratulations great quarter, Hi, Mark T gene and Aaron and and also I did like the the disclosure around the larger enterprises with 10000 plus employees that was very helpful.
And I had two questions after all of that there.
You know Mark I tend to ask you about where we are and just kind of the market itself. The collaborative work management market and its evolution.
You'll have a lot more capabilities now you have no code apps of bridge you have all of these other things that are kind of infrastructure oriented for enterprises are you seeing as we went through calendar 'twenty and and how you think about 'twenty. One are you seeing much larger landings when you get into a new enterprise for the first time that you hadn't touched before or is the initial.
<unk> kind of the.
Sizes, the changing much and then I had a follow up question.
Hi, Terry I think we of the opportunity to land larger, but the beautiful thing it's not a requirement.
So if you have someone who really wants to accelerate right out of the gate and want to consume of <unk>.
Premium platform thing with brand for included and fully digitize of large work workflow and they can do so.
But I would say that the ability for them to maintain the optionality still remains critical.
Still see evidence of teams within large departments had really large companies wanting to have that earned enterprise approach. So it's important as we come up of these new offerings, we're not forcing the customer's hand, we're giving them an option and I think that's where as gene said the Ala carte approach for the fully packaged and bundled approach I think of something that is still very much very much needed.
I would say, though that.
With the grandfather was a good example, where we had a couple of new wins that were and the high.
The high five figure range and that's a wonderful wonderful performance by that team.
Yep and and Pete.
Maybe a question for you. Thanks for the disclosure on the acquisition of our brand holder of benefit. So I think you said $5 9 million can you remind us what the expectation. If there was one you laid out going into the quarter for billings and did anything change because of what you're seeing and the signals on the acquired business' contribution to billings and FY 'twenty two thank you.
So Terry the number we guided to for a brand photo was $4 million and we came in at five nine. So that's the specific answer to your question and then what did we see in the market. We saw a great deal of traction for the brand forward of product, we saw them engaged and sort of our customers.
And the leaning into brand folder, and that's sort of what we're seeing and the market.
Your next question comes from the line of attack Kids on the from Oppenheimer. Your line is open.
Thanks, guys great quarter.
And as well I wanted to dig into the large customer.
Commentary.
Maybe you can talk about mark.
Mark what is it the do you think is the biggest bottleneck you have right now and taking these 2800.
Customers, none of have 10000 employees plus that on average spend with you I don't know of $40000 and getting them into a core of Amelia and of half of mail and what is the main bond on like how much of that is product driven versus go to market approach.
Alright, sorry, I think it is it is really a combination of the two I mean, you can't go you know you can't round go without the product capabilities, but if you don't have the mechanisms the sales muscle of the advisory service the sort of the journey mapping for the customer you're putting an intense amount of pressure on your prospect for your customer to figure that out on their own.
So as we look at leaning in on our large enterprise team built out both with quota carrying reps and with advisory services. Those are things that we think of fundamentals. So I would say the bottleneck or the opportunity for growth is really and building that team out.
I think we're doing all of the right things on the platform piece to make it happen, but it's really building the team and also enabling partners to contribute to it.
Got it okay, and so as I think about your evolution of through the year can you talk about some of your plans for your for quota based individuals and.
And how front loaded that's going to be or you know maybe if you don't go to say numbers at least by how much and what percentage of your intent to increase your quota based individuals our team this year.
Yeah.
He died of this is Pete so essentially like we've done every year, we are planning to increase the size of our sales team and as you will recall, we stayed on point and our investment and fiscal year 'twenty. One. So we started there we are going to add 25% more head count resources and like I said there'll be added more on the first part.
Of the year than the latter.
Got it for a good good luck guys. Thanks.
Thanks Peter.
Your next question comes from the line of scans plus cash from Morgan Stanley. Your line is open.
Hi, guys. This is Melissa Dunn on for Stan.
And.
And thank you for taking the question I think the first thing I was hoping to ask about is your performance and billings for Q4, obviously had a really strong quarter.
And you can flag that happened in the quarter of that you weren't necessarily expecting when issuing and your guidance of regionally and.
We should be aware of in terms of maybe one time dynamics and the corridor and any more color on the strength of early really.
Helpful.
I think in our prepared remarks, Melissa we referenced the three things we talked about less macroeconomic headwinds, we talked about the volume of larger transactions and the strong sales execution. Those were absolutely. The case, we've sort of covered those fairly well I would say a couple of the things we expanded of <unk>.
Cross almost every vertical our sales time of sales cycle times reduced and our pipeline conversion improved all of the inline with the earlier comments I made.
Okay. Thank you and then maybe a question for you Mark and so on and user experience enhancements to the.
The product and.
Are there specific things that you're.
And to solve for with the new improvements.
Yes, I think there are a couple of items. One is I think of a more refined look and feel but there's also a huge part of that which is around discover ability right. We have this ever growing set of capabilities unless you can have your users unlock those and benefit from them.
Somewhat don't matter and so we're really looking forward to being able to make certain things much more obvious and and again over the years. We've added lots of the product and our job is not willing to build but to also make sure that there's full attach across the suite and that's that's really what we're aiming to do.
Okay. Thank you.
Okay.
Your next question comes from the line of Michael <unk> from Wells Fargo Securities. Your line is open.
Hey, there.
Thanks, and good afternoon.
It sounded like from the commentary that the net expansion rate of stabilizing here and the loads of 120 as I think we appreciate the additional disclosure on the large customer side, whereas that number breaks out of it closer to 140% can you just expand on the large customer expansion opportunity of that $1 $4 billion opportunity, you're highlighting how you're defining it.
And how you effectively prioritize penetrating that from a product and go to market perspective.
So the I'll take the first part of it and I'll, let mark speak a little bit to the second part of sort of how we are going after the opportunity. The way we discussed the opportunities as we said we of 2800 customers today, who of more than 10000 employees are already customers of ours, we of 41 of those.
And who pay us greater than half of million dollars and annual recurring revenue. If I took the remaining population base and converted them all over to $500000 and you did the math you would come up with $1 4 billion. That's the way we did the opportunity sizing.
Mark I'll pass over to you and I think in terms of the go to market I think of a big part of this is really marrying a very strong land and expand motion with and opinionated sales approach. So if we go into a larger customer that we know has significant needs across automation customer enablement planning. These are the things that we can come in with.
With our solution set we can assign a significant ROI to it which would command a significant more significant level of investment. So I think the path to getting from 41 half over half of million dollars contributors to dramatically increasing that is to have more of those pairings of the top down guiding advisory examining how we can best help.
Paired with that bottom up and Thats, something which again, we're developing right now a few years ago. It didn't exist at our company at the muscle has been built and now we need to scale.
Great. Thank you.
Your next question comes from the line of Keith Bachman from Bank of Montreal. Your line is open.
Mr. Bachman Your line is open and if you're on mute please on mute.
Yes. Thank you I wanted to ask two questions that are related and I think I'll direct from the Mark if I could mark first of all on the competitive landscape I wanted to get an update on your thinking of and and in particular.
And I think about how the market may unfold as it relates to our P. A right now indicated you signed the recent partnership with you Ipass.
But how do you think that particular segment.
Has the risk or opportunity of overlapping in.
And the next couple of years.
I'm actually on let Jean and speak to this one.
Hi, Keith.
Thank you the question.
It's really around where the where do we see <unk> playing out around relative to our capabilities and you know and doing the agreement with your iPad. It was really driven by <unk>.
Signal from that both companies, we're receiving from customers.
For their workflows and modern enterprise it really cross between the more well call routine kind of on rails structured work into unstructured and dynamic work, where you need to you have a degree of variability that machine.
The machines are not going to be able to adapt for and customer desire to be able to take workflows that maybe start and that structured space and and there. They are using <unk> to improve efficiency and throughput and then be able to pass those off too and unstructured and dynamic workflow, that's being managed and spark.
And I think you can actually work both ways that you can start and the unstructured side and moved the structured and vice versa.
And your questions really around how do we see those converging while I think there will be.
Increasing marriage between those technologies is more and more companies find ways to leverage machine intelligence to really <unk>.
Illuminate what I call kind of the no brainer.
The.
The workflows that today are being done by humans, mainly because systems can't talk to each other very well.
I think that's very different than what's happening and the unstructured space, where you really have to have that ability to adapt and change really really quickly and so I don't think there's ever a complete overlap I think I think it's really a nice marriage of going forward and.
And our goal is to be positioned as the the platform of choice to be able to support the infrastructure side of work.
Okay that makes perfect sense to me the second question is on.
And increasing your dollar penetration rates, if you look even at your largest customers of yours. Your dollar per cent of spend per customer is still relatively low and while it's been coming up nicely and I'm just wondering how that moves more rapidly and the area that I wanted to focus on is both the accelerator strategy and the and.
The capability based projects that you talked about and marketing as an example, but how do you think about that unfolding over the next two years to try to increase your euro dollar penetration so to speak so in other words, if you look at accelerators now as a percent of your billings and you combine that two years from now with the.
And the marketing base capabilities.
Plus the extended family how do you think that changes and do you think that moves the needle on your.
Dollar base penetration of your customers.
Yeah. So let me kind of break this down I think there's really a couple of different elements to it.
I think it starts with some of the things Mark talked about around how do we be more intentional and and more.
Opinionated and helping customers accelerate their journey. The Covid has provided this amazing opportunity where companies are realizing that the kind of business as usual and the way they've been operating for years.
Is likely not going to be the preferred way to operate as we come out of the pandemic and so theres a real catalyst for folks to rethink and companies to rethink how the how they're operating so I think us being positioned to really help guide them on that journey through our sales and support services is probably at the tip of the spear to some.
Port debt.
I think there's really two key elements of our over offering the first is and the platform premium platform capabilities, we talked about one of the things we've learned over time with customers is the when you sell against the specific solution or a specific need customers derive a lot of value from that but then many times and.
Mediate we say hey, this works so well here I wanted to pivot to the next use case and when they just license a subset of our platform. They are not always able to solve for that beautifully. So they have to come back and re license or it creates friction and the process, which slows down the expansion and their ability to drive value from smart sheets, so shifting to a more.
For holistic premium platform approach, we think really is going to take the take the brakes off of for customers ability to extend the smart sheet and the value we create across the enterprise more quickly and solve for a broader set of use cases.
And of lower friction way.
The third thing I would mention is workouts and the no code capabilities of that introduces we are seeing really positive signals from customers is still very early and theres a lot of a lot that we're bringing to market over the course of this year to really enable work apps to be deployed at scale and manage at scale, but we really see that ability to create cash.
Curated experiences around workflows and specific use cases is truly differentiating and really empowering because it's a true no code platform, where where business users are able to build and configure the solutions and deploy them really really quickly and then and then modifier adjust when business the present so.
I think the combination of the of the.
Intentional and and advisory go to market with our platform and on workouts capabilities.
I think of really the key to accelerating that journey to a large.
Our customers.
Okay helpful. Many thanks.
Your next question comes from the line of Scott Berg from Needham Your line is open.
Hey, Mark G&P, congrats on the great quarter, and thanks for taking my questions and G and I promise I won't ask for you to pick your favorite children here on this call.
Thank you and God I was practicing I was proud of.
[laughter].
The first question Mark is you saw another competitor in the space get acquired over the last 90 days since we had this last call and I think.
And I asked the similar question on the last acquisition.
Acquisition 90 days ago of bulk.
And two two acquisitions in the space and the short timeframe and I think strictly speaks highly of the space, but how do you see maybe the collaborative work management sector and folding.
Two to four years and does this.
Heightened consolidation.
I guess and anything in particular, thank you.
Yeah, I don't I don't really have commentary on sort of the acquisition dynamics, but of what I would say, it's the recognition that the space is young and growing.
And we're investing heavily.
Larger caps as evidenced by the Adobe and Citrix wanting.
And wanting to participate.
So I think there's the there's really strong agreement that there's growth opportunity and we're maniacally focused on our strategy and executing it and.
And I will say that those both neither of those events meaningfully caused us to adjust our strategy of our investment posture.
Got it helpful and then from a follow up question.
Someone else recently asked about the net revenue retention rate looks like it's kind of stabilized and the low 120 share, but as we think about that metric here in the current quarter or maybe over the next couple of has the upsell piece normalize to what you saw pre pandemic or is there still are.
A couple of steps to take there as are the rest of the economy rebounds.
Scott This is Pete.
So the net dollar retention rate has.
<unk> has sort of stabilized at the 123% Mark.
And that sort of the way.
And we guided Q1, because it's lapping our first COVID-19 quarter.
I think if I were to sort of break this down we are instead of waiting for the upsell piece to pick up going forward and that's factored into my commentary on around Mark moderate improvements and the net dollar retention rate.
Got it very helpful. Thanks for taking my questions and training drops again on the good quarter.
Thanks Scott.
Your next question comes from the line of David Hynes from Canaccord. Your line is open.
Hey, Thanks, guys. Congrats on a strong finish to the year Mark I want to kind of build on Scott's last question right. If I think back a couple of quarters ago. It seemed to me like the transactional business was really healthy on the enterprise stayed fairly strong, but there's kind of a blip with expansion of customers and the middle right and that and I think the numbers would suggest you're seeing from recovering.
Q4, but but I just wanted to ask the explicitly about kind of what youre seeing with that expansion business and the middle customer cohort and if it is in fact getting better what was the just.
And recovery or is there something that you did the kind of effect change there.
I think one of the things that I'm really pleased to see is that both at the larger customer segment really all up and down the stack, we're seeing a shortening of sales cycles again. So if we had if we were down about 15% to 20% from what we saw and Q2 and that's a really good indicator. So I look at velocity is really important.
Factor and it's not just philosophy of the over 10000 employees. It's all the way down for emerging companies. So that's a really positive trade debt.
We're able to monitor.
So I think the in terms of the the number of transactions I think that the ability to simplify one's offerings. I think are a huge huge input to achieving of different result, I do think macros important too we are still coming out of Covid will hopefully vaccine vaccinations continues to go smoothly, but I think making what we do what's the within our.
The control easier for people to consume is probably as large of an and.
I think we're making right choices there and again, it's always interesting when you when you go to launch new things you.
We obviously as gene said vet many of these decisions with existing customers the.
And the parks on the ice now for real and we will get to see and Q1, whether all of that research and and packaging.
And it does what we hope it does.
And it makes sense.
And then maybe of decent segue, so like where are the other opportunities that you think you could vertical lives by function right. I mean, obviously brand holder has been a huge success and marketing and you guys have done some stuff organically and that area like where else do you have a concentration of users inside of large organizations that would make sense for kind of more vertically tailored.
The efforts.
Well I think the.
The most obvious and the one that we're most excited about right now is really.
Okay, I'll call it kind of disrupting traditional ppm.
Almost every company has an element of project program process management, and it's something that's of.
Our significant use case for us today, but an area where the work we're doing the 10000 and fee and smart she.
We think.
And some of the newer stuff that's in the pipeline, we have a real opportunity to disrupt their and really.
Deliver.
Pretty transformational experience for our customers that really moves away from a lot of the limitations of kind of the legacy platforms and that space. So that's an area that we're focused on and we'll be launching something later this year beyond that.
And that we're seeing really early signs of pause.
<unk> signed on document.
Generation workflows and being able to leverage some of the capabilities that we've recently launched their combined with.
Signature.
And our workflow automation.
The I think have a lot of potential we havent, we havent narrowed on a specific function.
But that is debt is an area that.
The bullish on exploring.
And that's great. Thanks for the color.
Your next question comes from the line of Mark Murphy from Jpmorgan. Your line is open.
Yes.
Yeah. Thank you I will add my congrats on a P.
I believe during Q3, you had still seen some minor.
The type of strain from industries, like travel and retail and entertainment.
And you just comment on what you saw in Q4 did those headwinds fade materially and in your forecast do you see those customers kind of re engaging with you this fiscal year.
So mark I'll answer your question and two parts. The first is the vertical piece of it. So we did see between Q3 and Q4 set of strong momentum.
<unk> and most industries the impacted industries were still travel and entertainment. So that continues to be a headwind.
And then the second part of your question was on returning customers. We saw about the same number of customers who had left us in Q1 and Q2 that I described in Q3, a similar number of came back in Q4. So we're seeing that trend of people coming back as the economics improve.
Okay.
And one quick housekeeping item and Pete are you able to ballpark of the percentage contribution from.
Capability based offerings and Q4, the if you mentioned that I might have missed it.
I didn't mention it but.
If I were to give you a sense of it on the revenue basis year over year the capabilities.
Range from 13% of year ago for the same quarter to 20% now so that'll give you a sense for how strong our capabilities businesses.
Okay, perfect and then.
Mark I wanted to go back to I think something you alluded to the.
The.
I'm wondering how tangible and maybe.
The signs that this whole category of collaborative work management and perhaps it was in the immediate pandemic response category, but that.
And maybe it was something that was just testing the happened a little later in the cycle and you know.
The companies have a little more time to think about getting work done outside of zoom as Pete referenced and and maybe they're getting a little more visibility into the distribution of their workforces and how it'll.
It will settle out and so I guess I'm. Just wondering is there is there something beyond kind of macro recovery to the prior glide path and maybe maybe a little extra spending wave that debt you might be seeing developing here.
Yeah, I'd love to see that extra weighted develop I think what there is recognition of his that synchronous communication, there's sort of an upper bound to what people can can handle.
I am on zoom, a lot and I would say, it's and essential it's an essential part of my day, but I also recognize and I think customers are recognizing that that is not the only tool that we can lean on to actually conduct business.
So I think this notion of asynchronous work the ability to track something mechanized something and not have to rely on of live conversation is is very important I think we are as we talked about a couple earnings calls ago, we talked about the phases phase one was react support and make sure people are safe synchronous synchronous synchronous and now we're entering that phase of.
Zinc is absolutely here and people are going to make investments in them.
Thank you.
Your next question comes from the line of Ryan Macwilliams from Stephens, Inc. Your line is open.
Thanks for taking the question and congrats on the strong results great to see dollar based net retention for customers with greater than 10000 employees at 140% and the quarter could you talk about house retention for the segment trended during Covid and maybe how we should think about the retention rate for the segment and a more normalized year just could be helpful to caliber.
And the enterprise growth opportunity. Thanks.
Ryan This is Pete so.
The segment, we reported we showed a 140% net dollar retention rate.
The other segment. This segment was also hit in terms of where it started and.
I would describe it as the effect was less pronounced compared to the segments, which had lesser number of employees are smaller segments.
So we saw that play out of the first part of it.
And then going forward you know I think it's hard to say how this is going to play out we have been sort of some modest improvement into our.
And to our guidance as we've given that the.
To all of you.
I appreciate that and Pete once.
Once again and welcome aboard.
The strong results from the quarter, what's your thoughts on net free cash flow for this year as you look to capitalize on this enterprise opportunity with larger customers.
So.
As I stepped into the job as CFO of 90 days.
I really developed the level of confidence around the business and I believe as I said the.
Growth opportunity and the long term requires the near term investment.
Our plan is to follow our philosophy of go after the long term growth opportunity, while keeping an eye on the free cash flow side of it.
So.
If you looked at our model I believe you're of the I'm confident of our model is the ability to generate free cash flow at scale.
And as you look at that going forward, we've actually guided the two set of free cash flow improvement from minus 8% and fiscal year 'twenty one to have debt at minus 5% of the midpoint of our guidance.
As a REIT the set of express what I just called out.
And I appreciate the color and congrats again.
Thank you go next.
Next question comes from the line of Brent Thill from Jefferies. Your line is open.
Yes.
Thanks, Tim Mark He mentioned a very strong federal close I'm curious if you could just walk us through the next chapter for federal and.
And when you look even outside the U S where are you seeing pockets of of opportunity on the federal space.
I think of of the federal side and I'd commentary on our year over year growth and.
And we did see nice progression throughout the year.
One of the one of the really big milestones for US was getting the I O for provisional authorization.
We're going through the technical work to actually get the the platforms connected now so we can move to serving our first Io for based customer and I think that sets of really good foundation for selling next year right. So that's both on the agency side that sort of on the on the military side as well as defense side as well as on the non defense agency front. So.
And I have high expectations for that again, I think and other growth markets for us of PD alluded to the extension of our cloud platform over in Europe, we're seeing opportunity with larger cap European companies, who I would say on more conservative around the data residency front and I think having done all the work on moving to public cloud last year the lift we have to.
Cheap debt. This year is a far less still of lift, but we are really well positioned for that so I would to highlight those as part of the two biggest opportunities.
And just the Pete just a quick follow up I think he mentioned, 25% more head count and the first half of the year can you just recap where you ended.
The full year in terms of growth for for the last fiscal year.
So I want to make sure I got to your question, but are you talking about growth in billings of you're talking about growth and revenue per head count and head count I think and hence.
So our head count for sales was about 360 heads and essentially what I was referencing the 25% growth I was working of that number.
Okay and in the growth rate that debt from the last fiscal year did you have that growth if not we can circle back and just wanted to be clear clear what the what the growth was on that.
So remember last year, we had a growth profile, which was similar but.
And the middle of the year as the pandemic hit we made the decision to stay with our capacity additions and Steve point and our investment. So as we go into the next fiscal year, we are adding resources on top of the capacity model the bid through the start of this year.
Two the start of fiscal year 'twenty one.
Great. Thanks for the color.
And of course.
Your next question comes from the line of Tyler Radke from Citi. Your line is open.
Hey, Thanks for taking my question.
I was wondering if you could kind of unpack the billings guidance for the full year of little bit obviously youre guiding to a.
And nice Reacceleration of the growth you put up this year and I imagine youre assuming.
Assuming churn rates kind of improve the.
And there's probably some impact from the.
The acquisition you made but maybe just help us understand kind of what are the bigger factors driving that improved outlook, there and you know.
Particularly the accelerated trajectory.
So we were really pleased with.
Our billings performance in Q4, and it spoke to some of the indicators that are important to this business as.
As we're thinking about this business in fiscal year 'twenty two.
There's two elements that are important as you think of billings, you should think of them as renewals expansions and new business.
So we are feeling really bullish on the expansions and new business base.
Based on our Q4 performance and the trend we're carrying forward on.
On the renewals that creates.
The news from last year of based on bookings that we did in fiscal year, 'twenty, one which represents the renewable opportunity for us and fiscal year 'twenty, two and therefore billings in fiscal year 'twenty two.
We look at that headwind, we had in what I call fiscal year, 'twenty, one and that's going to play itself out into our billings for fiscal year 'twenty. Two so on the some of it I would say really positive on the new business and expansion and billings and a headwind on the.
Billings from last year that carry forward now that headwind will probably be more manifest in the first half of the year, rather than the full year and those sort of.
He's out of normalize.
Great and and I.
I apologize if I missed it earlier, but just on some of the changes youre doing the the pricing and packaging is there any way to think about the impact of that on the potential benefit on that either this year or or or next year. If it's the kind of a longer term.
The dynamic.
Well I would say that we believe the removing friction and make it easier for customers to expand.
And leverage our.
Premium capabilities to build solutions.
And we're making that investment because we believe it will accelerate growth helped customers, but we have not.
And we're not disclosing kind of what we think the impact of those individual changes would be on on the growth rate, but it is built into our forecast right now.
Okay. Thank you very much.
That's all the time, we have for questions I'll turn the call back over to Aaron Turner.
Great. Thank you for joining us today, everyone and we'll speak to 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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