Q1 2022 Smartsheet Inc Earnings Call

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Yeah.

Good day, and thank you for standing by and welcome to the Smart sheet first quarter fiscal 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. If you'd like to ask a question. During the session you will need to press star 1 on your telephone.

Please be advised that today's conference is being recorded.

You require any further assistance please press star zero.

Now if you had the conference over to your Speaker today, Aaron Turner head of Investor Relations. Thank you. Please go ahead.

Thank you Mike.

Good afternoon, and welcome everyone to smart sheets first quarter of fiscal year 'twenty 'twenty 2 earnings call. We will be discussing the results announced in our press release issued after the market closed today with me today are smart sheets, CEO, Mark Mader, and our CFO Pete <unk>, our chief strategy and product Officer Gene Farrell will also be available during the Q&A today's call.

Is being webcast and will also be available for replay on our Investor Relations website at investors that smart T. Dot com, there's a slide presentation that accompanies pizza prepared remarks, which can be viewed and the events section of our Investor Relations website.

During this call we will make forward looking statements within the meaning of the federal Securities laws. We have based these forward looking statements largely on our current expectations and projections about future events financial trends and our expectations around the impact of COVID-19 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 or.

And SEC filings available on our Investor Relations website.

And on the SEC's website at Www Dot FCC dot Gov on.

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 or future events, except as required by law and.

And Additionally, the U S. GAAP financials, we will discuss certain non-GAAP financial measures a reconciliation to the most directly comparable U S. GAAP measures is available on 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 you Aaron and thanks, everyone for joining us today for our first quarter earnings call.

I want to start off by thanking our customers, whose belief and our vision motivates us and our team members, who inspire me every day with their drive and dedication.

Q1 was a strong quarter revenue grew 37% to $117.1 million billings grew 48% to $132.8 million and our dollar based net retention rate improved by 2 points to 125%.

We ended the quarter with over $8.5 million users.

In Q1, our average domain annualized contract value, where ACB grew 41% year over year to 50, $461 and expansion within our base included 305 companies increasing their annual recurring revenue or <unk> by more than $25000 up from 173 companies in Q1 of last year.

116 increase and their Arab and more than $50000 up from 51, and Q1 of last year.

And twenty-nine increasing their <unk> by more than $100000 up from 15 in Q1 of last year.

We also continued to see strong growth within enterprises, including Unitedhealth, Amazon home Depot, Mcdonald's Netflix crowd strike Meditech, Stanford University, Hewlett Packard, peloton, Vmware, Ribena and automotive, California Department of.

Taishan, Verizon and Abbvie arc tricks Cardinal health under armour Furtive, Sony Pictures Comcast.

Workday, United Natural food decks Com Airbus Intuit, Astrazeneca Disney Roche T. B S. St Jude Children's Research Hospital.

Honeywell Kaiser Permanente Sage group, Google Booz, Allen Hamilton, United Therapeutics, Equinix Stanley Black and Decker charter communications hub spot bed Bath and beyond vs.

<unk> Corp, Mcgraw Hill F 5 Blackrock and Salesforce dot com to name a few.

Our enterprise customer deployments demonstrate smart sheets momentum and serving the strategic needs of those customers.

Enterprise customers demand and deserve capability rich platforms that can scale to support mission critical workflows, while also meeting their requirements for advanced security and administration.

With this <unk> platform customers can manage execution and change at scale run workflows across disparate systems and bundle. These enterprise wide workflows and a curated experience to support a broad range of use cases that across departments and functions and.

And we deliver this while also providing customers with the security compliance Manageability control and trust that they expect from their enterprise partners.

Over the course of this fiscal year, we will continue to invest and our offerings executing on a platform strategy that delivers even more value for our customers.

This is something that we are well positioned to do based on our 15 years of operating experience 15 years that have yielded thousands of insights and a deep understanding of the enterprise.

And we've taken this unique experience and perspective to evolve the smart sheet platform and our vision for the future.

Q1 was also a strong quarter for our government business with expansions coming from agencies, such as the GSA NASA. The U S Department of veteran Affairs. The Department of Commerce. The U S Department of health and human services and the department of Defense.

Nasa's jet propulsion lab deployed smartly to support its mark perseverance Rover choosing our platform for the scheduling and tracking of the 2700 parts and 17005 hundred machining operations moving across 18 departments.

With smart sheet. This NASA team deploys process flows to drive efficiency kanban systems to streamline customer communications and resource allocation as well as dashboards for management visibility of the frequent changes and priority involved with such a significant endeavor.

Notably Nasa's flow of manufacturing data supported by an integrated workflow connecting smart she to other key systems like Oracle ERP and power behind.

Since day, 1 customers have relied on smart sheet to empower individuals and enable teams to not simply get work done but to re imagine and transform how work gets done.

And that means customers are able to rapidly build new solutions that benefit the whole organization and enable them to do their best work like managing corporate okay ours at intuit or delivering and end to end marketing solution and snap.

And as a category leading software company, we paid attention, we listened and we've improved our solution to solve even bigger challenges and.

In fact this year, we're evolving the design of smart sheet to offer a cleaner more modern and accessible look further simplifying the entire user experience. We've also introduced work apps smart sheets No code platform for building intuitive web and mobile apps, which further amplifies the power and usability of solutions, our customers are creating on the platform every day.

Many enterprise customer solutions that previously required resource intensive development or modifications to costly legacy systems can now be quickly and efficiently solved using smart sheet.

Customers choose smart heat for our ability to deliver at scale respond to and deliver on change manage workflows across systems and build curated experience to solve strategic business problems.

Hoover uses smart heat across critical business units, including facilities real estate engineering legal and marketing and.

And by employing work apps Ubers performance marketing organization has been able to clarify and standardized team processes. In addition, the streamlined user experience that work apps provides has made it easier than ever for these teams to locate their priorities and take action.

As we touched on last quarter. We've also taken a new approach to packaging to make it even easier for companies to acquire and deploy smart sheets premium capabilities at enterprise scale.

We call this smart sheet advance.

Smart sheet advance response to the demands of our growing customers by combining the ability to scale easily across departments and functions with access to premium capabilities that solve high value business problems.

The business receives robust no-code tools to automate workflows across systems aligned global teams and build scalable solutions, while giving it the controlled and managed risk and maintain compliance.

From skills based resource and content management to core systems integrations smart sheet advance is enterprise ready it indoors and bill to unlock the true power business and its people.

Initial customer reaction to smart sheet advance has been very positive recently smartly and advanced drove our expansion with the regional academic health system with over 13000 employees and 500 doctors that serves a population of $1.9 million across new England.

Over the past year departments, including QA pharmacy, finance, M&A and have used smartly to improve process efficiencies and automate manual efforts.

And with smart sheet advance this medical centers. It PMO will continue to leverage their smart sheet investment to help manage the significant system implementation projects that have resulted from organic growth and acquisitions.

We plan to provide additional details on smart sheet advance at our engage conference on June 8.

To be the enterprise CW and platform of choice smartly and is focused on building meaningful integrations that integrate critical systems that most organizations depend on to deliver and differentiate their work.

In May we further bolstered our enterprise offering with a new Mcafee integration and product partnership that Leverages Mcafee as cloud secure security platform to provide threat detection and to comply with data loss prevention policies.

As smart sheets customer base continues to expand within regulated industries the need for insight into specific risk related activities and data input is paramount.

Customers need a way to identify and flag sensitive data across their entire smart sheet environment, and an easy and intuitive manner to help find and remediate sensitive data violations integrating with tools like Mcafee provides assurance to our customers, including <unk> and it leaders that their <unk> environments are secure and and compliance.

In closing we have started the year off with strong momentum and a clear vision for growth ahead now.

Now, let me turn the call over to Pete to provide additional details on our financial results. Thank.

Thank you Mark and good afternoon, everyone, we and.

Into 2021 with continued momentum.

Our Q1 outperformance relative to our guidance was a function of solid sales execution large deal volume and a demand environment that has been approaching pre COVID-19 levels.

Many of the pressures we saw last year are dissipating.

For example, relative to Q1 of last year. Our sales cycle, then have shortened pipeline conversion has improved and we saw significant growth in deals of all sizes.

Another important milestone to call out as disclosed in our 10-K filed after our last earnings call on Sox material weaknesses, we remediated as of the end of fiscal year 2021.

I will now go through our financial results for Q1, unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results and the earnings release and the presentation that was posted before the call.

As previously mentioned first quarter revenue came in at $117.1 million.

Up 37% year over year.

Subscription revenue was $108 million.

Representing year over year growth of 40%.

Services revenue was $9.1 million representing year over year growth of 9%.

Turning to billings first quarter billings came in strong at $132.8 million representing year over year growth of 48%.

Approximately 88% of our subscription billings were annual with over 7% monthly.

Quarterly semiannual and multiyear billings represented over 4% of the total.

Moving on to our reported metrics.

We now have 12006 hundred 55 customers paying us $5000 or more per year.

1006 hundred 70 for being $50000 or more per year, and 661, now paying us $100000 or more per year.

These customer segments, now represent 83%, 48% and 33% respectively of totally IRR.

Next.

Our domain and average ACD annualized contract value grew 41% year over year to 5000 and $461.

We ended the quarter with the dollar based net retention rate of 125%.

A 2 percentage point improvement from Q4.

The full churn rate improved further and now rounds down to 6%.

Through the remainder of the year, we expect our dollar based net retention rate to trend moderately higher.

Now turning back to the financials.

Our total gross margin was 80% 1 percentage point lower than the previous quarter due to a lower professional services gross margin.

Our Q1 subscription gross margin was 85% in line with the previous quarter.

We continue to expect our gross margin for fiscal year 'twenty 2 to be between 79 and 81%.

Overall operating loss in the quarter was negative $12 million or 10% of revenue and improvement from 16% of revenue a year ago.

This margin improvement was a function of scale across our sales and marketing line inherent in our model.

Free cash flow was negative $8.2 million, which over achieved against our guidance.

Now, let me move on to guidance.

For the second quarter of fiscal year 'twenty, 2 we expect revenue to be and the range of $125 million to $126 million.

Moving to be and the range of $133 million to $134 million.

Non-GAAP operating loss to be and the range of 18% to $16 million and non-GAAP net loss per share to be between 14 cents.

And 13.

Based on weighted average shares outstanding of $125 million.

Our net free cash flow is expected to be in the range of negative 7 day negative $5 million.

Okay.

Given our strong Q1 results and continued momentum in the business, we are raising our full year 'twenty to revenue and billing guidance. We now expect revenue to be and the range of $510 million to $515 million representing growth of 32% to 34%.

Billings are expected to be intervened of $599 million to $604 million.

Representing growth of 33% to 34%.

We expect non-GAAP 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 <unk> 44.

And 36 cents for the year based on approximately 125 million weighted average shares outstanding.

Our free cash flow margin expectation in fiscal year 'twenty, 2 is to be between negative 6% and negative 4%.

Consistent with Q4, this quarter as exemplified the strength and customer signal manifested in billings growth.

This signal is about empowerment of work execution by users with enterprise grade extensibility.

This quarter saw excellent enterprise traction and larger deals with bigger volumes and so early residents with our smart sheet advance offering and the curation of workflows via word caps.

We continue to see significant opportunities to invest behind the signal, while managing the cash burn effectively.

Now, let me turn it back to the operator for questions operator.

At this time I'd like to remind everyone in order to ask a question you want and need to press star 1 on your telephone.

To withdraw your question press the pound key.

We'll pause for a moment to compile the Q&A roster.

Your first question comes from Mark Murphy from J P. Morgan.

Yes. Thank you very much congrats on a very strong result and guidance Mark.

Mark the list of enterprise logos, you rattled off.

At the start is pretty spectacular from.

And Amazon to home depot to Verizon and Airbus and then you you mentioned it.

It sounded like a handful.

Huge government agencies.

And that you had done business with on top of that how are you feeling about that depth of penetration there and the enterprise.

And I guess I'm, just wondering when we could reconsider that list of customers or are you actually finding relatively less competition upmarket than you did you see whenever you're down at the SMB level.

And.

I think where we find ourselves and the journey Mark as we're still early and the journey and we have now 15 customers paying us over 1 million Bucks.

Seeing increased value I think that flight group, that's coming up right behind them is indicative of us our messaging landing and then seeing value and what we're building.

So most of these companies still represent massive opportunity for us to deliver more value to them.

The things that I look for is continued penetration of the fortune 1 and the fortune 5 those numbers continue to go up where we almost have full coverage now and our job is to present value and deliver.

So we're really pleased to see it when we highlight a handful of customers just in the context of thousands of customers that expanded with us and quarter. So those happen to be some familiar names on the list is long beyond that as well.

Okay. If if I may a quick follow up maybe for Pete We had noticed I think it was last month you had commissioned a survey.

And it showed 71% of our technology decision makers are kind of rethinking their their decisions around workforce technologies.

So I guess my question is.

Are you sensing that somehow in the pipeline and with the billing strength or are you sensing that company has decided on a hybrid work force and then kind of in tandem with that day, they see that as a reason to use smart sheet more broadly.

Mark This is Pete as I look at your what you asked.

Would describe our pipeline for this quarter as being very strong we found that the number of deals we did with larger the conversion rates. We found were stronger what exactly the drivers are and sort of hard to piecemeal out, but we definitely saw traction this quarter and how this played out.

Yes, Mark let me add 1 comment let me add 1 comment Mark to what you asked in terms of what we see at scale I think the number of people who can offer the controls and security and this and the functional scale elements.

And that's something that we built over the last few years and when you're at that level.

They're really hard requirements that you need to have and sort of pasco and and I think we're really fortunate and that.

We believe with the leaders there and you know the innovation keeps happening fast and furiously we have engage coming up on June 8 for releasing a bunch of stuff that's going to be super relevant to those super large environments, but I think what's interesting about smart sheet advance its not just for the Super large it's how do you enable those growing companies who are not super large yet to capitalize on all of that innovation and I think smart sheet Advair.

And so it's going to be really interesting offering to cater to both smaller growth companies as well as those who are very established already.

Excellent. Thank you very much.

Your next question comes from DJ Hynes from Canaccord.

Hey, Thanks, guys, great quarter, and maybe Mark just building off that last comment on smart and advance just.

Given the momentum with larger customers may be a slight shift towards kind of more strategic bundled sales do you see the composition of your sales force.

<unk> at all you know who you hire and just just curious how you feel like your staff to take on that kind of Sally.

We continue to have a real diversity and that group I think when you have the way we organize across our commercial business, we have a large enterprise business.

We see appetite for these solutions across both of those areas I would say that as we look to fully capitalize on the opportunity with the super large.

Hiring and the large enterprise space is very important to us and the areas that we're focusing on now is not just creating product and pitching product, but also helping people understand the journey of how you go from starting out with CW am to actually scaling with it and that is not just a selling motion that is also a services motion and really almost a consulting and advisory role and helping people hit.

Those different stages at the right time with the right tools.

This is not a self directed go on your own and hope it works type approach and.

And I think that's what we're getting really dialed in right now.

And it makes sense.

And maybe I can follow up with just a very big quick.

Pick your question. So look obviously there is another vendor in this space going through an IPO process now I think a lot of investors are contemplating.

And a differentiation in this space and you've hit on some of this but since it's a conversation I'm, having a lot you know maybe I could just throw it to you like what would you highlight as kind of a 2 or 3 key areas, where you think smart he does he's really differentiate it and the market.

Yes, DJ This is gene Farrell to I'll take this 1 for us.

As Mark and Pete both have talked about and their prepared remarks, and the answers we've been very focused on being the enterprise leader and the CW on space and we really feel like our ability to execute project program process workflow at scale and across a diverse set of departments and.

Use cases that really can support the entire enterprise is really a key part of our differentiation and.

I think that doesn't mean, we don't continue to serve.

Teams and small departments and smaller companies really well to help them be more effective and driving work, but for for us, it's really about having the ability to scale and then do it securely and with compliance.

Very helpful. Thank you guys congrats.

Your next question comes from Stans Watzke from Morgan Stanley.

Perfect. Thank you so much guys I wanted to go back to that very impressive.

List of logos that are Mark you mentioned that are at the very beginning.

And maybe help us to contextualize.

Just the scale of the new logo acquisition and especially these large logo acquisitions that youre seeing on the platform.

Now versus what you were seeing obviously and.

Through 2020.

Challenge, but what are you seeing from as far as just you know large logo lands now versus maybe a year ago.

Well I think as we've shared in previous quarters. When you serve the vast majority of companies and a certain segment like the fortune..5 for example, it's really not about landing more logos, it's about serving them more fully.

So again when you look at those those mega caps.

And you look at diversifying into new departments, and adding more value, but it's so it's almost more like departmental lands as opposed to logo lands.

So that's really our run book in terms of how we're diversifying how we're looking for a reality within companies and how we coach and enable those mobilizers.

That's really that's really our primary run book I think I think logo lands in terms of those next generation and Mega caps, we target very carefully in terms of where we spend our capital on who we try to bring to the platform trying to identify those fast growers and get them to choose us early and we feel good about how that's going as well.

Got it got it and then does that makes sense and maybe a question a question for Pete just on the back of.

On the core selling motion for smart sheet is all about landing with your departmental deals and then expanding within them and certainly sounds like the expand motion as really up taking very very nicely with and net revenue retention going up to 125.

How should we be thinking about net revenue retention as we go forward for the rest of the year and we do think that Theres, a chance and maybe and maybe back half for this year, maybe a range of fiscal 'twenty 3 that we start to get back to pre pandemic levels and as far as net revenue retention.

And we're really pleased with where on net dollar retention rate came out for the quarter. It's the first quarter, where the net retention rate has gone up quarter over quarter that being said as I stated in my prepared remarks, we expect that to trend up moderately as we go through the year and that includes the fact.

There is potentially a headwind in Q3 as we bring on brand and photo which will be lapping its first year of about 1 to 2 points. So we expect that to grow through the year.

Got it thank you.

Your next question comes from Alex Zukin from Wolfe Research.

Hey, guys. Thanks for taking the question. So I'll start with it's kind of the same question, but maybe a little bit.

A little bit different depending on the segment, but.

Take us into what Youre seeing right now and those sales cycles around why is it as simple as the pandemic kind of created a pause that is now.

Become.

More clear in terms of the the strategy. These companies are taking with respect to their approach to the new way of working or is it something you've found and that's really working now post pandemic and the sales cycle. Both at the enterprise level, but then also on the federal side. This is a vertical and we've talked about a lot and you guys are I think much.

Further head and some of your competitors.

Getting traction here it seems as this kind of unlocked and a sense because we are hearing federal has meaningfully quick and their pace of digitization over the past few months and and even quarters and it and it seems like thats coming to bear and <unk>.

Coming to fruition from your results, but wanted to get more color on those 2 aspects.

Yes, I think in terms of last year Alex.

I would classify as expansion rates went from extremely robust 2 robust as opposed to a pause.

They were still very favorable so business continued to expand it.

It was really it was really good to see and the last quarter across the major industries, we serve see acceleration and net expansion rate tick up similar to our net dollar retention.

So I would say the clarity around and confidence that people have and investing in technology that seems to have improved but again it was not moving from a standstill. It was moving from already moving to something to be at a higher rate I would say the what's also helpful is when you have the ability to present to people and more cohesive stories to her.

How they can derive value from something they tend to buy more.

As opposed to having to navigate 20 premium capabilities. When you can say, okay. Here's choose 1 of 3 paths and here are the benefits and here's how quickly you can move it's easier for people. So.

And I think it's as much as market condition as it is to the inputs, we're providing I think on the government side. It remains a small but growing part of our business. What I was happy to see is the diversification and who was buying it wasn't just an agency O..2 we saw diversification or diversity across some of the non military agencies and our first D O D transaction.

Which was on the backs of our IL for authorization.

<unk>. So again I think the table setting up nicely. There for continued growth we're committed to that market and that's been a multi year investment and I would expect that to hit new heights for this year.

Perfect and then maybe just as a follow up first congratulations on filling.

On getting.

And of those material weaknesses and.

And kind of the 10-K that disclosure that you gave I wanted to ask given the strength and billings given the commentary and.

In terms of the renewal base from.

From last year, how should we think about billing seasonality as we as we go. This year you gave the full year number was there anything either 1 time or and item to consider.

We kind of look at our models for for the balance of the year with respect to billings that we should take into account.

As in my prepared remarks, as I stated.

And I've given you guidance for this quarter and for the full year. The only thing that I would tell you is the seasonality that you've seen historically has changed we don't have seasonality that we can predictably count on which is historical that you carry forward. The only thing I would tell you is in Q3, we acquired brand folder and you'll remember that as a part of the <unk>.

Billings pick up in Q3, there was 1 time deferred revenue.

Billings that we got which won't repeat again and.

And Q3 of this year.

Perfect. Thank you guys congrats on a great quarter.

Thanks, Alex.

Your next question comes from Rishi jewelry and from RBC.

Hey, guys. Thanks for thanks, so much for taking my questions first wanted to start.

And with going back to the large customers and yes.

And again, Mark very impressive list.

New logos and expansions.

Pete last quarter, you gave us some really interesting data points on the penetration rates and opportunity within large customers and and and I think we talked 10-K plus employees, obviously won't ask for an update on that every quarter, but can you maybe give us a sense for what progress youre starting to see with some of the initiatives that you laid out last quarter to grow the opportunity within.

Those customers and then I've got a follow up.

So rishi.

As I mentioned last time, our investment with pleated into what I call 3 areas and 1 of them hits. The 10000 employee customers. So it was about adding sales capacity. We have added sales capacity as we plan to for Q1 focused on all elements and enterprise sales team and across all of our other.

Sales team said goes to quota carrying capacity. We've also invested in resources that support those sales teams, including people, who helped with the customer outcomes and journey part of that conversation, we've invested and those 2 on the sales and go to market side of it. Additionally, we've also invested and product capabilities and dose <unk>.

Vestments are progressing well, where we are.

Continuing to widen the competitive moat as Mark described and the things where we're just completely differentiated from our competition. So we're making excellent progress on all elements of the of what I articulated last quarter.

Got it thanks that's helpful.

And then wanted to go to just a comment that was and.

The deck, which is around the ramping headcount and services putting margin implications. Aside can you maybe talk a little bit about.

Where the I guess, what's driving that increase and services head count are there certain areas that you want to focus on or is this primarily just services or was running hot and you're trying to get it back to a normal level. Thanks.

Rishi the simple answer to that is we finished Q4 as you remember with the very sort of significant billings number and that translates into just pure demand and needing to fulfill that demand. So hiring head count on the services side is the way to fulfill that demand and this quarter was about ramping that head.

So we're seeing broad based demand, which was not only in Q4, but in Q1 as well as I noted in my prepared remarks.

Alright wonderful thank you so much.

And probably Rishi.

Your next question comes from Arjun Bhatia from William Blair.

Yes, perfect. Thank you for taking my questions and congrats on the quarter.

Mark I wanted to ask about work apps, a little bit I think you gave some pretty impressive.

Adoption metrics last quarter and in light of the enterprise strength, where you are now starting to see I would just be curious to know if this is playing a tonne playing a role on the conversation with your enterprise customers at all or is it still too early to tell and then how should we just think about the monetization that might result from work apps adoption.

Yes, I'll, let I'll, let Jim speak to that I guess, the 1 comment I would start with is it's an element and it is an important element, but it's by no means is the only thing thats driving it and I'll have gene speak to how it coincides with our smart sheet advance as well.

Yeah. So the.

The way to think about workouts and is it really is the ability for a business user.

And not having to rely on it to build more curated.

App experiences, whether it be a desktop or mobile and so what we're seeing we launched in mid January what we're seeing is early signal from customers is they really love the ability.

And to package of work flow into kind of a complete app like experience and bring in both elements of the smart <unk> platform as well as.

Uh huh.

Elements of third party platforms, whether that'd be.

Dashboard from tableau or <unk>.

<unk> into that overall experience and so it really is at the solution level is where they're seeing the most value and we're seeing.

And enthusiasm and adoption as customers are understanding building and then starting to deploy solutions and we have a number of things on the roadmap that are going to enable that our customers actually scale that even more broadly.

True.

Integration with control center and other new capabilities that we're hearing feedback from customers on importantly, workouts is.

And that enabling technology that combined with smart sheet advance, which is really the premium capabilities that enable workflow and consistency at scale change management at scale connecting workflows across systems and not just in a data synchronization way, but also with things like data valid.

<unk> and more complex workflows across those systems via bridge.

Or the launch of day to shuttle, which reach.

Recently, we recently announced which gives you the ability to both upload and offload data between smart sheet and other big systems, those capabilities, including and advance combined with workouts really give us a pretty broad canvas to build solutions for customers across our <unk>.

Really broad set of use cases.

To speak to your monetization.

And to tweak your monetization question and the thing I would just add there is the way that smart sheet advances designed it's really designed to eliminate friction as customers grow and expand with us but over time as the number of users that they have using the platform increases.

Cost to advance goes up.

In connection with those connected users.

Perfect. That's very helpful and then if I can.

A follow up.

On wishes question around the services business and obviously as you go deeper into the enterprise work apps and advance and a lot of these more sophisticated capabilities that you are.

And just be curious how you think the role of your partners changes over time and would love to hear just where you are today and developing our partner ecosystem and especially for those larger enterprise customers and I may want.

Some more consultative.

Services and deploy smart sheet.

I think 1 of the things that Pete highlighted was with this demand wave that started in Q4 and and that's continued it's been an amazing opportunity for us to get our 600 partners activated so when we think about delivery. We don't think about just smart sheet delivering standalone, we think about and opportunity to bring those people within the family and deliver alongside of Us ceding.

And all of those ceding many of those services company. So in some cases those are on our services contracts, we are paying them a very good rate and we're seeding that knowledge within those teams, which then can go out and deliver standalone. We do have other partners like slalom, who are developing capabilities, where we fully expect them to be deliver high value large scale deployments.

On smartly. So I think this this demand and my my any concern in terms of tightening margins on services is muted by the fact that we're enabling those for those partners and and I think next year, we're going to be and a very favorable position, where you're going to have hundreds of partners delivering on our behalf.

Perfect. Thank you and congrats again.

Thanks.

Your next question comes from Scott Berg from Needham.

Hi, everyone and congrats on a fantastic quarter here I guess I have.

2 questions first of all don't know who wants to take this but.

On the enterprise strength, and I guess general upsell strength and southern net revenue retention, obviously ticked up 2 points. If you look at the company historically most of that movement was around seat expansions as you penetrated your customers more.

Mark you spent a lot of time on some of the new modules and some early adoption there, but we'll look out 2 or 3 years, how does that net revenue retention or absolute customer shifts from all what was merely seat driven before and it's something that's more of a mix of module driven along with Ctrip.

I think it's going to be it's going to be a blend Scott and I think what we're not doing is putting a quota on ourselves, saying, we must adhere to certain certain amount coming from users certain amount coming from from capabilities. So I listened to the customer see where they assign value.

The approach that we've taken to scaling work apps and monetizing is different from how we have licensed users and the past based on customer signal.

So I think we will continue to monitor it and we will continued I fully expect us to continue to growing the capabilities.

Elements further I think when you start introducing things like 10000, and feed and brand folder and you have those elements selling alongside.

And those are big tailwind opportunities for for for.

Diversifying the revenue streams.

So it's.

Again early days on smart should advance.

And we will be able to more fully reported on that in coming quarters.

Great and then if I if I look at the income statement and the quarter. Your sequential increase in sales and marketing is the largest and the customer and the company's history excluding.

Conference impact and prior third quarters.

Should we view that increase the spend it's about $6.5 million if were to break that up how much of that is head count versus maybe new marketing programs that you're targeting today. Thank you.

Scott.

Think of this as sequential first of all.

It's a seasonal element of how these dollars come out. So in Q1 typically there is a fair number of expenses, which are quarter related I think you would see that over time youre going to see the head count parts of this increase because sales and marketing this quarter driven large part of that's going to happen and we're going to see associated demand Gen spend which is good.

To make as you think about the sales and marketing as a percent of revenue climbed as we go through the year.

Excellent I'll jump in the queue. Thanks again.

Your next question comes from Brent Thill from Jefferies.

Hey, guys Joe on for Brent really appreciate the question Mark is an interesting point you made on the Mcafee integrations I'm just curious of recent security breaches and concerns about third party security posture.

Bert and upsell to some of the tiers that include the access controls and governance capabilities and if you view that as a competitive differentiator against some of your peers.

And I think some of these some of these elements are relatively new to the portfolio.

But we I would expect this to be and increasing frequency of conversation as you noted based on what's happening and market.

And some of these things are difficult to respond to quickly. So again in terms of things we got right. A few years ago. When we started investing in these areas. It has put us and a strong position to have a really strong engagement when security and that high bar.

As presented us presented to us to have to clear.

It's it's and someone who has been with the business for over 15 years now I remember vividly when especially some of the institutions and the financial realm.

And quite tentative in terms of adopting SaaS and now that some of these controls and security measures are in place, we're starting to see movement and that's a really great sign to see those very very critical companies per <unk>.

And as a passing grade and moving forward.

That's awesome to hear and and Pete maybe just a quick 1 for you any sense of what <unk> contributed billings wise on the quarter.

We were pleased with our brand for their performance.

Breaking out brand floater, because he have generally done that for the first year of acquisition, but in general really pleased with and for this performance.

Was it higher or lower than <unk>.

And generally I think Brian for you did really well and I would say it exceeded plan in line with a lot of our other businesses as I said, we were sort of.

Reported really strong quarter and and it was consistent with that kind of a performance awesome I appreciate the help guys.

Your next question comes from Michael Cherny from Wells Fargo Securities.

Hey, there thanks and good afternoon.

<unk> customer adds.

Really stands out as does the list of expansions previously referenced Mark went through on the call not going to ask you to read through all of those again, but the strength certainly seems unique for Q1. So just wondering if theres anything you can add around what drove that uptick and then the Q2 Billings guide calls for roughly flattish growth versus Q1, and so I'm just.

And if theres anything abnormal in and the strength you saw here to call out that informs that sequential outlook or if.

Just maybe some conservatism on the Q2 outlook as well thank you.

Michael I'll start with the billings guidance. So just as a recap when we started the year on year on year growth for Q1 represented approximately.

Call it 30% to 31% year on year growth.

And.

Based on our guide for Q2.

For calling at 37% to 38% year on year growth and the reason we see this confidence.

Is because of what I stated in my prepared remarks for Q1 larger number of deals and the pipeline shorter cycle times to close and just agenda and strength across all what I call customer sizes and transactions and so that's the way we're seeing it and what we are also sort of emphasizing is when you look at the annual <unk>.

On billings, we've actually raised that.

And excess of the beat and that's because we see this confidence filing through the rest of it.

For the second part of it I'll, let mark take that 1 yeah and on the on the customer expansion side.

It's really a continuation of what we saw in Q4 and I think during as we talked about last year, how our sales teams started to present value to people. When people really we are far more demanding in terms of being able to articulate the value that 1 derives from doing CDM and see Wm implementations I think the performance from Q1 is that we have.

Multiple quarters now under our belts, where we're talking and presenting in that way.

And again as I said quarters ago, I think that never goes out of favor.

So now when you have confidence growing and business combined with the presentation and value.

To better things.

But I think there was nothing I wouldn't say there was nothing there was nothing out of the ordinary we've had thousands of customers expanding every quarter for the last few quarters.

And we simply shared some of those names with you today.

That's all helpful. Thank you.

Okay.

Your next question comes from Steve Enders from Keybanc capital markets.

Hi, great. Thanks for taking my questions I just wanted to check I know the <unk> has been out now for for a couple of months, but I guess have.

Have you seen any kind of early impact from that on a market either driving.

And that our top of funnel conversion and are driving our existing customers to new use cases and quicker expansion there.

And anything that would help.

Yeah, Hi, Steve I'll take this 1 and I would say that phase..1 is launched we view the UI modernization is starting with a kind of a multi phased approach over the course of this year and then will be ongoing and the biggest the biggest uptick we've seen has really been.

And and engagement user engagement and overall.

Kind of speed of learning and understanding the platform.

And I think we will continue to see that as a net positive as we as we continue to make improvements and enhancements.

But that's that's really the big benefit that we've seen so far.

Okay, great and and.

And I know you made a few acquisitions and the past couple of years, particularly focus on on the marketing side.

And Rollouts and some newer modules there, but I guess what are you kind of seen as you go back and the customers and try and drive them to the to the market and apartments. Since you made those acquisitions and and what kind of strength have you seen.

And specifically for for marketing use cases, and he's our new products have been rolled out.

Well I think you heard 1 of the examples in Mark's prepared remarks talking about Uber and using workouts and their marketing group.

And <unk>.

Got countless other examples and customers that are using us for marketing use case and.

And as we have rolled out integrations with brand folder.

Improved integrations with 10000 feet, where we're seeing a lot of interest and it's.

Obviously a very.

And.

Top of mind space Theres, a lot of there's a lot of folks.

Going after that segment, but we feel really good about our offering and the unique value that we can deliver combining smart sheet and brand pull there and 10000 and fee and then.

A lot of the capabilities, we've added through proofing, and and content management and and.

Workflow.

Okay, great. Thanks for taking my question.

Your next question comes from Brett Knoblauch from Bambrick.

Hi, guys. Thanks for taking my question, maybe on the margin for Ryan.

And I guess, it kind of goes to and revenue mix, how should we think about that panning out for for the rest of the year should we assume.

Services growth at a similar level to what we saw and this quarter and maybe reinvest incremental gross profit from higher subscription gross margins into the business.

Great I think you've asked 2 questions and I was try and answer both of them..1 is about the outlook on margins and I'll start with that 1 first.

We reported a quarter, where we beat our op margin and our free cash flow guidance for the quarter.

But the quarter also gave us a lot of signals in terms of the size of the opportunity we fully intend to invest.

Based on our original guide for the for the year and take this amount we've over performed and put it towards the investment capital we intended so.

So that's 1 part of your question. The second part of your question was on services margin. I think you should start you should see our services margin as we get through this initial period of ramping of head count start to approach, where we have historically been and that should take a few quarters to get through our ramp utilization.

<unk> and instead of a new people and teams.

Perfect. Thank you.

And of course.

Your next question comes from Terry Tillman from Truest.

Hey, guys. This is Joe Meares on for Terry Thanks for taking the question.

You've owned branch holder for a bit now I'm just wondering on.

Circling back to the question and then he has progressed and how that's helping you.

How are you thinking about M&A going forward, what's your appetite how is the pipeline and how do you think about valuations right now.

Joe.

We acquired brand folder and.

I guess it was the.

Third quarter and of our third quarter of last year and we.

And we feel really good about the integration we feel really good about the way the team is performing and.

Yes.

And we feel we can we.

We feel better and better about all of our acquisitions as we continue to see them.

Kind of come into our product offering and the synergy we get with customers. So we feel really blessed there.

I'd say from a M&A.

M&A going forward, we will continue to view M&A as both a lever to accelerate value delivery for customers, where we see key capabilities that enhance the.

Utility, we can deliver to customers and improve engagement and overall customer experience.

But we're also.

Evaluating and constantly and looking at are there more strategic M&A.

<unk> that we could make too.

Accelerated growth and a more exponential way I guess is the way I think about it and create more of a step change and so I would say that none of that is.

Off the table, it's kind of all of.

And those things fit into how we think about our growth strategy over time.

But we're also.

We also think that part of the value of M&A is ensuring both strategic fit and.

Deals that makes sense from a value perspective, and so the last part of your question, how do I feel about valuations.

And I think and some situations.

Great value and we had and other situations.

And the multiples are pretty lofty right now and you really have to be thoughtful and clear on what the combined entity is going to create for you long term.

In order to really get comfortable with with spending at those levels. So.

And I'm not signaling anything to sandy and that's kind of how we think about the landscape today and you'll continue to see us be active.

That's super helpful. Thanks, guys.

Your last question comes from Bo Young Kim from Citigroup.

Hi, This is bill young on for Tyler Radke.

Just given the importance of advisory and consulting and all that you mentioned for sales channel both landmark and drive up so how do you feel about sales abilities for sales to execute and international markets and how would you characterize sales productivity and international markets relative to what you've seen and.

More established markets.

And I think 1 of the things Thats a real attribute of these types of this platform approach is that when you engage with someone initially and a comprehensive way they become trained on how to deploy it.

So when we think about investing in services and services team with 1 of our large customers, whose scaling with smart sheet advance that team becomes operators. So you don't have to go back to the service as well every time you want to make a configuration or expand with a net with another workflow. So that's a big plus as we think about international.

We have a very.

Good coverage on our partners today, and that's combining partner coverage with our 200 employees, who are today based and the UK and Australia New Zealand. So when we think about the seeds that have been planted those had been a plant that plant over the next 2 years and now it is really focusing on scaling.

Next next and June 8th we will be introducing smart sheet regions, which will be the first of which outside of the U S, which will be on the continent and Europe is 1 of those things that further and lets us unlock opportunity in those markets and smart sheet regions plural and we don't anticipate ending with Continental Europe we.

We'll continue to go to other regions and pair that with our on the on the ground sales teams and services capacity.

I think it is likely in international that we probably skew a little bit more towards partner as opposed to direct.

But again that will unfold more fully and the next year.

Okay.

Thank you.

And I'll now turn the call back over to the presenters.

Great. Thank you for joining us today, everyone and we'll speak to you again next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

And.

Yes.

[music] strong momentum.