Q4 2022 Smartsheet Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Smart sheet fourth quarter fiscal 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
Aaron Turner head of Investor Relations you May begin your conference.
Thank you Josh good afternoon, and welcome everyone to smart sheets fourth quarter of fiscal year 2022 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 P garble.
Today's call is being webcast and will also be available for replay on our Investor Relations website at investors that smart Qi Dot com.
There's a slide presentation that accompanies pizza prepared remarks, which can be viewed in 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 and financial trends.
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 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, we do not assume any obligation to update these statements as a result of new information or future events, except as required by law.
In addition to U S. GAAP financials, we will discuss certain non-GAAP financial measures.
A reconciliation to the most directly comparable U S GAAP measure.
Measures is available in 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 Erin and good afternoon, everyone welcome to our fourth quarter earnings call for FY 'twenty two.
Before speaking to our results I'd like to start by sharing our thoughts and support or with the people of Ukraine and all of those affected.
Today, we'll be sharing the results of an outstanding quarter that rolls up to an extraordinary year, it's marching.
We will also discuss our proven strategy that reinforces my confidence in our growth trajectory and will keep us positioned at the top of the CW M category.
Well Pete will provide details I want to share some standout results first for the quarter and then for the year.
<unk> revenue for Q4 grew 43% year over year to $157 $4 million in billings grew 48% year over year to $224 million.
We closed out the year with more than 10 million smartphone users.
Q4 saw both a new quarterly record of 286 deals with more than $50000 and a new quarterly record of 98 deals with more than $100000 up 107% and 128% respectively year over year.
Given the acceleration of billings in FY 'twenty to the momentum in the business is very strong and I'm confident with the setup as we start FY 'twenty three.
According to October 2022 business at work study <unk> is now the most popular work management platform that businesses use alongside Microsoft 365.
In fact, <unk> is the only work management platform to appear on <unk> list of the eight most popular apps used in conjunction with him $3 65.
We have also been included as a top performer on the 2022 cap tariff short list of the highest scoring project management software products based on feedback from thousands of users.
Additionally, we've earned the most five star customer reviews, and both the CW M and P. P M categories of Gartner peer insights.
By delivering a no code enterprise solution in which more people and more teams can move more quickly to take action and drive outcomes that matter.
<unk> customers are realizing significant returns on their smart seed investments.
Our unique land expand and climb motion drives the category, leading dollar based net retention rate inclusive of all customers of over 134%.
We continued to make significant progress on improving the land motion.
The introduction of the pro plan simplification of our Onboarding processes and the success of our new business team has had selling advanced to new customers New business volume is at record levels in.
In fact, Q4 was a record quarter for new business bookings and a record quarter for the number of licenses purchased by new customers.
As customers graduate from basic productivity use cases to transforming larger operational workflows, we see uptake and acceptance across more departments.
We also continue to enable viral growth inside and outside of customer organizations.
By allowing free use of the product by anyone who was invited to collaborate we pull our customers extended teams partners and suppliers into that smart sheet environment letting them experience the benefits of smart heat firsthand.
Today with a best in class net expansion rate our expansion motion continues to fire on all cylinders in.
In Q4, we saw expansions from companies such as target Lucid Motors Herman Miller Zen desk beyond meat Packer General Mills dimer and goodwill.
But our growth is fueled by more than expanding our user base.
We continue to see success with smart heat climbing up the value chain as customers attachment mission critical workflows across systems and people within their organizations.
In FY 'twenty, two we saw global media conglomerate triple its error to over $2 million.
This significant growth was driven by both paid license additions of which they added over 1000 paid seats and advanced gold.
This organization added $300000 in <unk> in Q4 alone.
Our global wireless communication provider doubled their air are in FY 'twenty two through 14 separate transactions of $50000 or more of these represented sales to new departments as well as expansion across existing departments up leveling their smart smartly usage by attaching capabilities that allow groups to scale and integrate smart you'd workflows.
This land expand and climb scenario repeats itself again, and again, increasing the active user base within the <unk> ecosystem, which in turn leads to growth of our user license space and deployment in high value workloads.
Now I'd like to underscore some of the product developments that are fueling our growth in.
In Q2 of FY 'twenty, two we introduced smart heat advanced and created a new tiered way for customers to unlock the full potential of <unk> to scale.
Advanced silver enables businesses to orchestrate sophisticated programs projects and processes using tools like control center.
Customers can also create curated no code applications to drive workflows across internal and external collaborators using work apps and dynamic view.
In Q4, the total number of created work apps grew 28% quarter over quarter to over 69000.
With advanced gold customers get a comprehensive set of data integration capabilities that enable the import and export of millions of records to and from other systems using data shuttle and data table.
It can also trigger data processing workflows based on events using bridge as well as continuously synchronizing data between smart sheet and other systems using our real time connectors.
Data shuttle is now transferring over 3 billion records every month up from $1 7 billion in Q2.
At the top tier advanced platinum as key capabilities for organizations that desire additional levels of compliance governance and advanced policy measurement.
Okay.
The advisory practice in video one of the world's largest accounting networks purchased advanced gold in Q4.
Advanced will support many aspects of their business, including practice forecasting and planning portfolio performance tracking and standardizing cross functional projects across practice areas.
When we introduced advance our expectations with a new customers would use <unk> for a period of time for simpler use cases before moving up to smart sheet advanced.
Instead, we're starting to see a meaningful number of new customers choosing advanced from the start just in Q4 over 20% of the advanced deal. We closed were to new customers of smartly.
Advanced features resonates with customers in organizations of all sizes from $1 billion plus <unk> customers in the Fortune 502 organizations like the Olympia School District in Washington State.
The Olympias School district is using advanced to scale as they add more projects to develop a process for grants management.
They are looking to pave the way for other school districts to embrace technology solutions that can help them better serve their communities.
Our innovation velocity continues to produce as well. Some highlights include work insights, allowing users to automatically analyze and visualize data as a snapshot time series or cross tab.
Enterprise plan manager, ensuring all of an organization smart sheet plans fall of security governance and compliance requirements.
Unified resource management, making it seamless to build the best team for the job all from within one core smart should experience.
Just last week, we announced deep integration of brand Folgers top rated digital asset management capabilities into the <unk> platform after working with a diverse set of beta customers.
Enhancing the functionality between smart she didn't brand polar helps customers better align their marketing and creative work by streamlining asset management for.
For example, our content development manager at <unk> clinical can now manage the development of visual assets for the company's web site in one unified solution.
When creative spring assets into brand solar the integration is used to surface those assets and smart sheet manage approvals and reflect the completion of deliverables.
Customers can now see brand polar inside slight asset views downloads and shares within smart sheet, helping marketers make more informed creative decisions.
Since acquiring brand folder, we've extended the value of smart sheet across a broad set of use cases with customers like Ethan Allen Wynn resorts and U haul.
On the security front the threat landscape is rapidly evolving and intensifying more and more <unk> and <unk> are deeply inspecting critical data governance and controls capabilities, such as customer controlled encryption keys integrations with corporate directories and data loss prevention and classification systems granular sharing.
And egress controls are differentiating smart heat as the most enterprise ready cwm's platform in the market.
An example of the security first focus we're seeing comes from a top five investment firm, earning the trust of the VP of information security was a key step in getting it to adopt and promote smart heat across the organization.
With securities buying smart sheet was deployed across a number of use cases, including investment management capital analysis, and corporate strategy, representing a six figure expansion. In Q3. This was quickly followed by an additional expansion in Q4 to support several additional work streams.
We are in the middle of a massive greenfield opportunity with over 1 billion knowledge workers globally, where only a very small fraction of them have discovered the power of <unk>.
And while most of our deals involve replacing the status quo of highly manual processes and primitive tools like spreadsheets emails and presentations.
We are also displacing competitive <unk> products as well.
One such win was with a global production company that delivered thousands of events worldwide. The company initially engaged with smart heat, while using a competitive see wm product, but their existing solution lack the adaptability scale and integrations required to manage the full scope of their work.
We were able to demonstrate <unk> ability to meet their needs at scale. This includes delivering time savings and smoother customer handoffs from their sales organization using our Microsoft dynamics connector.
Informed resourcing decisions with smart resource management supplying their creative teams with best in class creative collaboration capabilities via brand folder delivering.
Delivering a better customer experience with dashboards and a mobile app that connects employees in the field.
Over the past few years, we've invested in high potential markets like Europe , Asia Pac and the U S Federal government.
In October of last year, we launched smart heat regions offering in the U enabling customers to establish plans with their content hosted in Germany.
Already we are unlocking opportunities and quickly gaining momentum with EU customers.
One of them are European biotech company is using <unk> to manage the release of its cancer treatment Therapeutics. The company started with our U S based region, but was unable to fully deploy smart sheet on the <unk> platform due to EU data privacy requirements.
But with our EU region. This company was able to invest in both <unk> enterprise and advanced silver leveraging control center and dynamic view to help scale, our therapeutic development workflows.
Building on our international investments, we established a sales office in Germany and will it be expanding into Japan This fiscal year.
To close we're positioned in the right place at the right time as the market for modern work management grows rapidly we.
We're hiring exceptional people and giving them the tools resources and latitude they need to do great things.
In a tight job market, we expanded our team by more than 600 people in FY 'twenty two.
I have never felt more certain about our success going forward customers are choosing <unk> in record numbers and the investments, we're making across sales marketing and product will directly support our growth for the years to come.
Now I'll turn it over to Pete.
Thank you Mark and good afternoon, everyone as Mark mentioned, we finished the year strong with Q4 results that exceeded our guidance across the board and culminated in accelerating billings growth on a full year basis.
We continue to experience strong momentum in our business fueled by increasing awareness of the smart chip platform continued success with our advanced offering and strong execution by our sales and product teams.
I will now go through our financial results for the full year and the fourth quarter.
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 release and presentation that was posted before the call.
For the full year FY 'twenty two we ended with total revenue of $550 8 million up 43% year over year billings of $661 5 million up 47% year over year operating loss of $34 2 million.
And free cash flow of negative $28 million.
We ended the year with annual recurring revenue of $638 million.
The year over year increase of nearly $200 million.
Next I will provide additional details on our fourth quarter financial results.
Fourth quarter revenue came in at $157 4 million up 43% year over year.
Subscription revenue was $145 7 million.
Representing year over year growth of 44%.
Services revenue was $11 7 million representing year over year growth of 34%.
Turning to billings fourth quarter billings came in strong at $224 3 million representing year over year growth of 48%.
Approximately 93% of our subscription billings were annual with 4% monthly.
Quarterly and semiannual represented approximately 3% of the total.
Multiyear billings represented less than 1% of total billings.
Moving on to our reported metrics the number of customers with <unk> over $50000 grew 55% year over year to <unk> 2354, and the number of customers with <unk> over $100000 grew 74% year over year to 1026.
These customer segments, now represent 55% and 41% respectively of totally ox.
The percentage of <unk> are coming from customers with over $5000 is now 86%.
Next our domain average ACD grew 37% year over year to $6977.
We ended the quarter with the dollar based net retention rate of 134% a three percentage point improvement from Q3.
The full churn rate dropped further and remains below 5%.
For FY 'twenty three we expect our dollar based net retention rate to be above 130%.
Now turning back to the financials. Our total gross margin was 82% our Q4 subscription gross margin was 87%.
We expect our gross margin for FY 'twenty three to remain above 80%.
Overall operating loss in the quarter was negative $14 5 million or 9% of revenue.
Free cash flow was negative $2 7 million.
Which over achieved against our guidance due to strong collections.
Now, let me move on to guidance <unk>.
Starting in FY 'twenty, three we will be reverting to a pre COVID-19 approach by providing billings and free cash flow guidance on a full year basis.
Given the growing seasonality in our business, we expect our quarterly billings cadence to be more weighted towards the back half of the year with the lowest percentage of billings on an absolute and growth basis occurring in the first quarter and then building towards the back of the year.
The factors that contribute to this growing seasonality or the expansion of additional territories internal promotions to quota carrying on management roles.
<unk> loaded hiring of new sales reps and an in person sales kickoff in March.
For the first quarter of FY 'twenty, three we expect revenue to be in the range of $162 million to $163 million.
non-GAAP operating loss to be in the range of 25% to $23 million.
And non-GAAP net loss per share to be between 20 and 18.
Based on weighted average shares outstanding of $128 million.
For the full year FY 'twenty three we expect revenue to be in the range of $750 million to $755 million.
Representing growth of 36% to 37%.
Billings are expected to be in the range of $905 million to $925 million.
Representing growth of 37% to 40% we.
We expect non-GAAP operating loss to be in the range of $90 million to $80 million and non-GAAP net loss per share to be between 70% and 62.
For the year based on approximately $128 5 million weighted average shares outstanding.
We expect free cash flow to be between negative <unk> 15, and negative $10 million.
Given the momentum in our business combined with incremental investment opportunities. We see this year global field capacity international expansion and brand awareness we.
We expect continuing targeted investments with both short term and multiyear impacts while modestly improving free cash flow margins.
To conclude.
We finished FY 'twenty, two with tremendous momentum, which we expect to continue into FY 'twenty three we.
We have high conviction.
In our long term growth opportunity and will continue to invest appropriately.
Now, let me turn it back to the operator for questions operator.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Michael <unk> with Wells Fargo. Your line is open.
Hey, there. Thanks I appreciate you taking the questions I guess first you mentioned displacing other CW and Cwm's and some wins in the prepared remarks anything else you could share mark around what's driving that and maybe you can also just spend a moment on what drives competitive differentiation differentiation for smart sheet today. Thank you.
Yes, I think while the while the bulk of the business is still are displacing I would say traditional tools and workflows.
We are seeing opportunities as we landed more nodes within a business too.
We really encroach on where other people may have presence.
And as companies are looking at larger investments. They are looking to in some cases rationalized if they can if they can move to one platform that meets their security compliance and functional needs Thats really a whim drives efficiency for them.
Again, it's more on the occasional front, but it was notable in the sense that we had a few really nice sized wins and growth opportunities that either happened displacing a competitor or we were growing very tremendously around the competitor who was in an account.
And again I think as we look at <unk>.
Why were succeeding.
It is really compelling to have a conversation with the customer when your confidence in your portfolio. When it's highly differentiated it's not a discussion on faster prettier.
Qualitative things, it's really things that are highly quantitative I think the advance offering where people can get their heads around scaled process with control center in such.
Integration with data shuttle those things others simply don't provide and that I think is proving out really nicely in the advance statistics, we've been able to post.
That's very helpful. Pete one more if I may the free cash flow margin guide getting close to breakeven in the coming year looks on pace for that 10% target level. The operating margin guide in that backdrop looks maybe a bit lighter than we would've expected. So could you remind us what might broaden the gap between those two margins in the coming year and then maybe we can revisit you ticked off of <unk>.
Things, where those investments are heading.
So Michael you should think of billings and free cash flow instead of going together and theyre sort of lagged by revenue and op margin. So when you think about sort of the gap, we are going to be hiring a sort of a fair.
The large capacity in the field to go after this opportunity Mark talked about that's going to represent itself in billings growth in cash flow, which is what's reflected in our guidance improving guidance provided.
There is a lag between the billings converting to revenue and that's what's reflected in the op margin guide. So you see that sort of following has lagged behind the free cash flow numbers.
Thanks, Nice job closing out the year I appreciate it.
Your next question comes from the line of Stan Slutzky with Morgan Stanley . Your line is open.
Hi, guys. This is Ben <unk> on for Stan.
First question from our end, maybe can we just dig into the investments, especially in this market environment.
Which seems to be paying more attention to profitability given sort of the large market opportunity. How has your team thinking about the tradeoff between.
Flowing through potential returns to top line beats of bottom line versus reinvesting back into the business.
Let's start there and then we can take it.
So then your question in terms of sort of where are we investing I'll take that as the first partner at the end I'll cover set of how we're thinking about it more broadly. So when you think of our investments, we're making investments in sales and marketing to go after this opportunity and in rank order, we're making investments with first in <unk>.
And global steel capacity, that's across the board, but it's focused on international with some.
And with greater emphasis on international and enterprise customers and.
And thats about ramping these people getting them productive and thats. The first part of it orders of magnitude that's about three points year on year. If you will the second part of it is global awareness think about it is top of funnel and mid funnel getting our customers to know our people to know who we are and lastly, we've got.
What sort of a resumption in in person customer engagement and field enablement spending starting to sort of get closer up to the pre COVID-19 level. So those are our three factors in sales and marketing that are driving it to your question of like how are we thinking about it.
Driving this business with a solid eye to our unit economics.
<unk> and the customer signal, we have been getting mark talked about the tremendous momentum we have seen that's really fueling sort of how we invest and then we're looking at the specific numbers in terms of how we metric. This thing the LTV to CAC. Those are the ways, we sort of think of that investment.
Got it that's helpful. And then maybe one more on fiscal 'twenty three billings guidance.
Essentially with billing guidance, implying let's say roughly like 38% growth.
Net revenue retention stays between low to mid 130 range. It almost feels like Theres limited implied new customer acquisitions. So maybe just walk us through how you think about the pace of new logo acquisitions for fiscal 'twenty three.
And what that's implied in the guidance there.
Yes, so you should think of.
If you think of the total bid for billings. It comes from like a few spots. It comes from new customers expansion of new customers and it comes from the numbers. We capture net dollar retention rate. So we've guided you to the numbers in terms of what net dollar retention rate expectations out of 130%, if we sort of stated there.
These levels, we expect healthy profit healthy set of contributions from new and expansion in new and as Mark said, we're focused on both ends of the spectrum the thinking of enterprise growth and were looking at number of logos, we landed the lower end as well as licenses and bad debt.
Got it thank you so much.
Your next question comes from the line of George <unk> with Oppenheimer. Your line is open.
Thank you for taking my questions, maybe just following up on the new business strength are you seeing any changes in the use cases that people start with smart sheet and can you also give us a sense of once they do start how quickly they start to cross across departments or start to expand across the board.
Yes.
We really haven't seen it. This is mark we haven't really seen a deviation from what's driven demand over the last couple of years. This notion of programs projects in process. I mean that is those are the three big vectors. Those are very deep veins, it's where most people start project oriented use cases are still the tip of the sphere.
The diversification that we see isn't really so much of a difference in.
The process of the area, it's more at the function that a serve so it may come in and marketing and branch into operation earned a finance, but we really have not seen a deviation from what we've observed in the last few years. It remains a similar land and expand and then client motion.
Alright, and Mark given the environment that we're seeing right now are you seeing any changes.
And with your European customers are they taken out a bit more cautious view of spending or making any other adjustments.
We have not seen it yet no.
The motion, we have around selling to existing customers landing new.
We have not seen a blip at all in any of our regions.
Alright have you bet built in in any conservatism in your guidance for tenants geopolitical outlook.
So George.
Sort of assumed the environment. We have today is largely similar so we have not assumed any big.
<unk> turns in the environment that turned negative, but we assume the current environment set of persistence is our assumption.
Okay. Thank you very much.
Okay.
Your next question comes from the line of Terry Tillman with <unk> Securities. Your line is open.
Yes. Thanks first can you all hear me okay.
Yes.
We can Terry.
Okay. Thanks.
Mark Pete and Erik Thanks for taking my questions as well.
The first question for you Mark is as it relates to the introduction of pro plan. What I'm curious about is what are you seeing so far in terms of the customer adoption is it smaller organizations or is this actually a lower friction way of actually getting mid size or bigger enterprises to get going and then I had a follow up for Pete.
It's all up and down the spectrum, Terry and when we see people starting it's not a it's not an S or an M.
Our large enterprise type statement people start from all size organizations.
The effect that we're seeing is improvement in conversion rates right people have a faster start and then it's our job to understand who's signing up and then to apply the field capacity that we have to make sure that if it is a large customer with high potential on an interest to grow that were there and ready to support them and if its a small customer putting the self directed.
Mechanisms in place, where they can thrive, but yes, it's really need to see.
The conversion rate improvement domestically and internationally across those different segments sizes.
Was there was there a question Terry Ed for Pete as well got it.
Yes, I did I did thanks, thanks for that Mark Yes, So Pete just a follow up question and I don't have my notes from the analyst day in front of me. So I apologize. So part of this is going to need some help regurgitating kind of.
<unk>, but you are talking about a pretty significant ramp in investing here for growth and I think you've called out some of those areas, including international sales capacity does this change kind of the path to $1 billion or just anything more about what this could mean in terms of that longer term kind of revenue ramp and getting to that target.
Thank you.
So Terry we're not changing set of anything relative to what we shared with you.
Essentially the only thing we've sort of given you is the guidance for fiscal year 'twenty three and the key salient points to takeaway from that are first of all we've guided you to a free cash flow margin that would imply an improvement year on year and that sort of a part of our trend driving to sort of what I call responsible growth.
Your next question comes from the line of Steve Enders with Keybanc. Your line is open.
Hey, great. Thanks for thanks for taking the question here I.
I guess I, just wanted to get a little bit better sense for how youre thinking about the investments you are making.
Sales capacity and it seems like.
Given all of your closest competitors so far have raised.
I'll, let them spend for this next year. So I guess, what kind of gives you the confidence in the ROI of those investments that you're putting the putting to work are you pulling forward any any sales higher than maybe we're thinking about.
From 24 before and how should we kind of think about the impact of this could potentially have on the model going forward.
Yes, I think the confidence is really driven by a convergence of a few factors. There is a massive uptake uptick in awareness of the category. That's first the second is based on some of the offerings, we have whether its new packaging, our new products, we're bringing into the portfolio of the product market fit is proving out and much.
Advance was new in Q2 of last year were almost three quarters into this now so the evidence is starting to really take take root.
The other pieces from a go to market standpoint, we are we have figured out the mechanism for landing somebody growing somewhat too modest contribution and then up through the tiers of $25 50 to 100 half a million dollars and beyond so that is a model that we feel very confident in and Thats a customer is reacting to customer signal as well not just sort of the state of the mark.
But overall.
And when you look at being deeply entrenched at the world's largest companies with a high ability to invest in this category you have to feed that's on the past calls I've often talked about when you see the Green light you must go.
Green light is on right now we have to follow this and and when you look at the LTV to CAC, which has been improving over the last year. It's improved from the high single digits. So like greater than 13, now that's not going to manifest itself in sort of the in year measures, but when you look at an LTV to CAC, which is north of 13 that gives you great call.
<unk> and longer horizon investments. So we are very much pushing the throttle forward.
Okay, that's very helpful.
I guess, the competitive kind of finer point on it sounds like it's becoming a more repeatable sales motion that.
They go to market teams are going after.
<unk> advances as kind of a part of that is that kind of the right way to kind of frame that.
Absolutely we have over 500 advanced transactions now at companies, both new mid size, all the way up to our largest customer. So we're pattern pattern matching off of that and it's something we're doing domestically in all the segments up and down.
Again, just riding that momentum.
And one question you asked Steve is whats the future model look like so.
We've talked about these field investments in the areas that Mark just mentioned there across all the major areas of opportunity.
And as these resources become productive we expect the resumption of scale across those Opex line items that the way you would model it.
Okay perfect. Thank you thanks for taking the questions.
Your next question comes from the line of Mark Murphy with Jpmorgan. Your line is open.
Yes. Thank you very much so I'm a little surprised.
Sequential billings growth in Q4.
He is just very strong it's actually stronger than your seasonal norms.
And we kind of been seeing the opposite.
The industry.
So.
I'm just wondering if there was anything unusual were there any.
One or two unusual mega deals or <unk>.
Discrete needle movers that might have affected that or is this something that was more broad based in Q4.
So the short answer is it was broad based just feel momentum customer interest nothing unusual nothing out of the ordinary as just solid demand as mark referenced in his earlier comments customers are seeing the value of this we're seeing progression across all elements of it Laurie.
Deals advanced the dollar based net retention rate is up we're just seeing it across the board.
Yes.
Not hands this quarter did not handled on a mega deal.
This is this is tens and tens and tens of 50 to 101 hundred plus K deals.
We welcome the Mega deal.
But this quarter did not hinge on that.
Yeah, Okay interesting.
Mark My second question is just from the from the perspective of building pipeline is currently more effective for you to emphasize.
<unk> management positioning or are actually low code no code just given there is so much buzz.
Around low code and Theres, so much imperative to try to put the pool.
There's products into the hands of the people that are kind of the subject matter experts.
I'm just curious if you're if you're kind of able to realize an extra tailwind.
Due to your strength and your linkage on the low code side.
I would say that I would say that building, but I wouldn't say that's the key tailwind I mean, the key tailwind as people now recognizing theres an investment opportunity that helps them unlock value that sits within their business units.
I have big opportunities to pursue stretched on my front, how do I unlock my business units to actually make progress so when they call. They don't call up and say, Hey, I'm working looking for work management platform, Hey, I'm looking for no conclusion to say I have a business problem. I think you can help and then our job is to map to that use case and that business that <unk>.
Business case that they articulate, but I would say that the predominant korma inbound isn't centered around no code or work management, but the nice thing is it's starting to feel natural to people like Hey. This is the area of product and technology investment that can that can enable my business team and Thats that is again, that's not a.
Philosophical selling more of that starting to hit mainstream.
Okay.
Final one Pete.
We're able to look within the sales and marketing budget.
Could you comment at all just on the spend on digital advertising or performance marketing.
As a as a percentage of revenue is that increasing or decreasing this fiscal year I'm, just I guess I'm just trying to understand.
That vector of investment versus direct field sales if you will.
So mark.
<unk> taken the approach that we think of demand Gen. We think of this marketing.
Marketing spend as being a combination of various channels. The PPC is one of the channels. It is not our biggest our biggest channels. How we organically have people find us through content. It's true viral adoption is through sharing so to answer your question, yes, our percentage of sort of spend is up but.
It's sort of consistent the way we've ramped it up for Q4, that's the way, we're staying with the set of our marketing investment.
Thank you.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Hey, guys congrats on the quarter.
Most of my questions have been asked but I guess that.
Two that come to mind are if we look at the.
Gradients, both around retention expansion, how much more room is there to go before we kind of hit the.
The absence of sub 5%.
Churn is among best in class at this point, how much lower can that rate go and also the 134 I think youre almost back to your all time highs of 135 is there as you unlock these new advanced motions as you unlock some of these new enterprise sales cycles and the climb motion specifically like this.
There I know, we're talking about $1 30, which is already I think an increase from what you.
You had mentioned before.
Associated next year, but like aspirational areas, we had new peaks to some extent and then I've got a quick follow up.
Yeah, Alex I would say we are still at the single single digit penetration within our customers as a whole so the upside, but when I think of achieving greatness you don't achieve greatness through us through expense savings.
Or or reducing your loss from five to $4. Two you achieve greatness by expanding and when it's paired with lower losses fantastic, but when I look at our even our largest accounts.
We have a number of accounts that you would consider wall to wall, but so many of our big accounts will have massive upside. So we typically guide based on the signals, we're seeing as Peter said with respect to be north of 130, this coming year.
We're not capping ourselves to say here's a Max we will continue to do things either expansion cross selling advanced capabilities, serving up adjacent offerings like damn I guess, we're not capping ourselves at all and I think we have a really exciting portfolio to cross sell in.
Got it.
And then I guess.
This is a two parter, but it's on everybody's mind to the point that people have asked you about the investment.
Dynamic for next year and investing to grow again, all three companies public companies in this category and probably some of the private ones as well has been spent or talking about spending more money investing to grow.
Is this a race for sure.
Therefore.
Coming out of Poland. The opportunity is even even kind of higher end to the point that you made I want to connect this to the point that you made around replacing.
One of the vendors. It's the first time I think you've talked about that on an earnings call at least.
I guess do you do that because you see more opportunities like that in the pipeline and you are now investing to take share to some extent.
I know those are two separate questions but.
Yes.
I guess humor fewer of the stream of consciousness, Yes, I guess, the first thing I'll say is our investment posture and thesis isn't based on reacting to someone else's someone else's move so when we think about investing in our field scale investing in our non PPC marketing. That's all those are all run those are all plays that we've identified based on what.
We're observing within our base.
Is there a race.
We are clearly looking to continue to optimize and to add more and more logos, which we proved out starting in the second half of this year.
I would say in terms of the displacement.
Our job to provide maximum value to our existing customers. If there happens to be another player who is present, we will gladly grow around them. We will do we will try and displace them, but in terms of where we spend our time. It is like we don't think the best return on investment is to go hunting for displacement if someone happens to be there absolutely take them out show greater value.
Consolidated but I wouldn't say the market is at the stage where that is the focal point for our company.
Perfect. Thank you guys.
Yes.
Your next question comes from the line of D. J Hynes with Canaccord. Your line is open.
Hey, guys congrats on the strong finish to the year.
Mark with the customers that are landing with advance are you taking a more active direct sales approach there or is that land is still largely a self discovery motion.
Those come DJ in an assisted motion so.
We think it's our duty to land somebody didn't really fulsome way, so thats, helping them understand what the what almost a guide book looks like to get started so when you when you deploy and advance the advanced platform with control Center dynamic view data shuttle Super useful for people to understand what those best practices are and I would say sometimes those are more.
Sophisticated processes, where customers are really hungry to say hey, how of others done it how can I de risk and how can I maximize my investments so whether that's through a sales rep or customer success or other functions. We have I would say there is a very strong customer appetite for that.
And again, one of the things that we're looking to do even more of as we build out our field our field capacity.
Got it and.
And then the follow up for you would just be around the numbers. So you grew head count and I was like 32% to 33% in fiscal 'twenty. Two what are your targets for head count growth this year kind of implicit.
And the operating loss targets that you gave us.
So DJ you know.
If you think about what Mark just mentioned the growth that we would get would be.
And various real estate help set of customers grow we're not sort of talking about reps anymore. How many we're adding we're going to add a significant number of these field roles and if you want to think of that in unit in terms of dollar terms. They gave you a rough sense of field capacity was approximately three points of operating margin operating <unk>.
<unk> change year over year as a part of the model.
Okay got it thank you guys.
Your next question comes from the line of Brent Thill with Jefferies. Your line is open.
Yeah.
Thanks, Marc the new business record levels. You commented on are you seeing any new dynamic there where youre starting larger youre seeing.
Multinational wins.
What color would you add to that.
Give us a little more granularity of what youre seeing on the new business side.
Pete No surprise I'm going to ask on the the operating loss.
A loss of $35 million of negative $90 million is a one.
Almost <unk>, what the street was expecting.
Many are asking us like at what point are you willing to kind of pull back the throttle where do you start to see leverage in the model or two years out three years out how do you think about the long term commitment to shareholders on returning to a positive bottom line.
Brad I'll start on the new side. So we're seeing we're seeing a modest improvement in contribution from new deals so of the thousands of new transactions that happen every quarter.
We're starting to see some evidence I think we had 20 advanced deals that are 20% of the new advanced deals were to new customers. So they are really the average is still while it's up 15%, 20% year on year, It's still a sub 2000 dollar figure. So it's not a huge contribution and we expect that to remain very speedboat light in terms of the lands Pete you want to add some color on the second half.
Yeah. So Brett you asked the question about the op margins. So let's start with sort of how we think of profitability. That's the broader question, you're asking when I think of profitability.
Free cash flow and billings as sort of your leading indicators.
And then op margin and revenue are the ones that lag so we've guided on free cash flow.
To be set of minus one to minus 2% an improvement from where we exited this year at minus four and if I go and I am not giving guidance for FY 'twenty four but if I take current course and speed and assume macro stays the way. It is it wouldn't be unreasonable to assume that we will be free cash flow positive in <unk>.
By 'twenty four.
Now the flip end of your question is what about op margin. So because revenue lags you should think of op margin is following in periods. After that is the way I would think of it.
So to answer your questions.
Yes, and I guess.
Youre not given the quota carrying ads, but when you think about if you pocketed.
The international business sales and brand awareness.
Is the bulk of it's going into sales so 60% of sales, 20% International brand awareness. The other 20, how would you how would you put that.
Incremental bucket is there an easy way to test explain that to all of us.
Yes, I would say that the biggest in rank order the biggest numbers in field capacity and within the field capacity you should think it's across the board, but there is a slightly higher weighting towards international and as well as to enterprise quota I think enterprise field capacity.
<unk> of that is your first element in smaller magnitude than you've got awareness. So you think of awareness as being mid funnel top funnel getting people to set of no smart cheated and be aware of who we are and then the smallest number of that is the <unk> or the portion of that has come about as a result of in person resumption.
So there is a customer event like engage which will host this year or it's a field enablement activities like our sales kickoff, we just launched.
Great. Thanks for the color.
Thanks, Brett.
Your next question comes from the line of Ashwin <unk> with William Blair. Your line is open.
Hi, everyone. Thanks for taking my question. This is Jake on for origin. So it sounds like top of funnel activity has never actually been stronger, but just kind of curious how much of this is driven by more category awareness versus the introduction of the <unk>, which could actually remove friction from initial customer adoption and then just on that front.
How are you approaching.
Investments in customer Onboarding and success teams as that size of the funnel continues to increase.
Well I think with every with every card that comes out of the chute in terms of what we're able to do in moving people up the curve and improving that healthy beat attack. It gives you more and more confidence in investing early for the right profile opportunity I would say in terms of how we weight the top of funnel mid funnel and the pro plan I think the pro plan.
Had immediate response, when we had multiple releases in the last two quarters I would say the investments we deployed in the second half and as we make these investments in Q1 and Q2.
There will be a bit of a delay on that I think the pro plan packaging had again almost instant overnight overnight response, so I do expect those both to contribute significantly this year.
And in terms of the in terms of how we are applying the resource.
More we see people expanding beyond seats expansion and into these other higher value areas. The more we say we think we can maximize it with an assisted motion. So again, we're only 5% to 600 advanced deals into it we have well over 100000 customers as a whole.
A lot of opportunity to put a really capable people out there.
And again with every quarter that passes I think we've refined how we deploy that capital.
Okay, and then just as a follow up so net retention obviously continues to be best in class kind of thinking about the expectation for next year, how should we bifurcate that between obviously youre still growing into a massive market with seen expansion, but also youre starting to see a lot of robust adoption for advanced so thinking about people.
Actually declining on the platform how should we think about the delta between those and how you're approaching your fiscal 'twenty three guidance.
So in our guidance. We gave you for billings was 37% to 40% and contemplate sort of an extension of the things we've been successful at if you start thinking about advanced <unk>.
You've done about 550 deals this year, we're expecting that to sort of continue into the next fiscal year think of it broader in terms of thought just advanced capabilities as a part for product suite, that's what's built in.
The second part of what you were asking was around sort of how do we visualize the net dollar retention rate.
If you think of this market we're going after we think the number is going to be bigger than 130 for next year and it sort of contemplate. The fact that we can get customers of different sizes that can have different models of how they expand but we're really bullish on the expansion potential that we have and being an industry leader today with expansions, we think that trend continues.
Yes.
Great. Thanks for taking my questions and congrats again on the great quarter.
Of course.
Your next question comes from the line of Scott Berg with Needham Your line is open.
Hi, everyone. Congrats on a good quarter and thanks for taking my questions I guess.
Hopefully, they're generally pretty quick the first one is on the replacement that you called out Mark.
And I think it was Alex I mentioned earlier.
First time on a public call how much of that is replacing a vendor just because the pie.
Platform doesn't handle this scale moving from I don't know 10 to 100 seats or to 1000.
Some of the capabilities premium capability that you all have added over the last couple of years.
I think that I think displacement is easiest when theres tremendous pain felt within a customer situation. So when theres breakage and they cant move past go that's prop and that they are forced to change you have other opportunities where you may see another player in there within a node a small node and they may see some synergies.
Some benefits administration, what have you the security benefit, but when theres breakage or they're unable to proceed that's the most pronounced in this case it was more of a breakage situation.
The account that I mentioned on the call, which talked about those $14 $50000 plus expansions.
We expanded around another cwm's player.
And it's just a fascinating queso that other vendor being within one team and we are sprouting all over the company right now and in that case, we may not displace that one node, but we're going to be in like 14 other nodes.
And so it's never quite as Theres not one pattern that we follow and you basically read and react to the situation, but again.
When people tap out and they cannot scale or they cannot proceed those are those would I would say the most straightforward replacements.
Got it helpful and then Pete from a follow up perspective, your share based compensation expense increased greatly in fiscal 'twenty two over 'twenty, one much faster than the rate of revenue growth.
Guidance for 'twenty three implies that that.
Kind of growth rate in share based comp accelerates, even further to about that's going to be up about 75% year over year. According to my math.
Why such an expansion around share based comp it seems to be kind of an outsized outlier, but also kind of yes.
There's some concern that there is some commonality between that and maybe some of the excess sales marketing spend that you all are active expenditure. Thank you.
So Scott let's break your question in two parts first 22 over 'twenty, one and then we can sort of talk a little bit and direction about 23.
The reason the stock based compensation expense goes up is because first of all.
Youre, replacing people, whose grants for year ago, where it is fairly low strike price and you're replacing that with personnel with a strike price is much higher adding significant number of people to the equation like as we've grown we've added 600 people net this year all of that becomes a part of the narrative on why stock based.
Compensation FY 'twenty, two significantly sort of higher as you stated in FY 'twenty, one and FY 'twenty three the same trend, we talked about adding sort of what I call field capacity. This is going to be in large part personnel and we're adding people into the equation, we are adding field roles in <unk>.
<unk> capabilities to take our customers to the next level. This is going to come with basically stock based comp that goes with it.
Excellent. Thanks.
Taking my question and congrats and good luck.
Thanks Scott.
Your next question comes from the line of <unk> <unk> with RBC capital markets. Your line is open.
Wonderful.
Erin Thanks, so much for taking my questions nice to see continued momentum in the business I guess, starting out I wanted to double click on the investments incrementally that you are making in driving more market awareness can you be a little bit more specific about kind of the areas that you intend to invest.
What youre, hoping to drive in terms of market awareness and is that specific parts within organization specific types of customers or is this more broad base that youre trying to go after and then I've got a follow up.
Yes, we really split it across three phases of the game, we have our top funnel, we have our Midtown where we have our bottom part of the funnel and when I look at the opportunity as I spoke earlier to call. It single digit percentage penetration within our largest accounts the opportunity is not just to put a lower in the water on expensive auction model.
<unk> get the next fish, it's how do you present yourself to the to the companies where you already have significant presence where you have a really good set of use cases. So ABM is a big part of that and again, that's like tailored AVM. So when we look at looking at the 90% penetration we have in the fortune one.
So many of the fortune five it's very very specific marketing into those into those areas.
Think theres opportunity also outside of the the PPC realm, which is in content that is really helping customers understand how they can apply CW AUM and digital asset management to their businesses and those have yielded really well for us over the years.
I think the other areas around the events that Pete spoke to we've been two years now in the Covid World. We're very much looking forward to our in person event kicking off again. This fall we plan to have engage in person, we expect that to be a very large very large event customers have been asking about it. We just had our sales kickoff which was amazing.
We're really looking forward to that in the second half of the year as well, but again I think the takeaway on the marketing side is when you look at the investments. We've made domestically. We are now looking to pair that with really smart international investments. So when we're talking about setting up the team in Germany, and getting into Japan, and it's not just put people. There is have the same type of support mechanisms.
Top mid and low funnel to make sure those people are successful.
So I would say the balanced attack, we have next year domestic and international and Thats really a sort of a signature point on the investment strategy.
Alright wonderful. Thanks, that's really helpful. And then just going back to the topic that everyone's talking about on the call which is that competitive displacement. Mark you gave the example of a customer our customer where there was another competitor there and you kind of grew up around them is not indicative of what <unk> seen in again I know, it's a narrow part of the business which is pumping.
Here that were hearing about.
Is that more indicative of it or are there actually.
Existing customers, where they maybe one department was using a competitor other departments were using smart seat and it was more of a consolidation.
Let's do everything on smart seat type way. Thanks.
Yes, those did those situations do happen occasionally, but when you look at where you get the return on your time the return on your time in trying to knock someone out of one node.
Versus landing in 14 nodes around that one the return is fantastic on the 14th.
And we're confident that over time when you do become the dominant brand within a large company and you can point to all of these business units.
Eventually it will tip your way entirely but again I don't think the best.
Best return on capital is to try and replace that one if there again isn't breakage occurring if theyre moving along happily and that one area, let it be induced land everywhere else and grow like Mad.
That's really helpful. Thank you so much.
Yes.
Your next question comes from the line of Keith Bachman with Bank of Montreal. Your line is open.
Many thanks, and I'm going to ask my questions concurrently since they are related.
To start with you can you help us bridge to 10% in FY 'twenty five up free cash flow margins, which you provided at your analyst day.
In other words, you're guiding to a negative 1% to 2% margins. This year should we just be thinking gradual steps to that.
And I know you answered previously on the bridge the operating income I'm still not clear what that means.
It follows.
Revenue in billings does that mean, if we thought about as a pretty significant loss three X. What everybody was expecting does that mean in FY 'twenty four.
Given the Billings guide you made that comes back more quickly than free cash flow and.
And my broader the reason I wanted to ask these concurrently Mark I wanted to bring it back to you you have mentioned a couple of times that you have single digit penetration, which you can see by the average.
Dollar per customer.
And your competitors are spending a lot of money during the course of what is calendar year 'twenty two.
Previously you had established I think that repeats predecessor that youre going to do 20% free cash flow margins and 25 at the analyst day, you cut it to 10.
The question is how do we what do you tell investors if there's concerns a year from now that the free cash flow targets. Because you have low penetration there is great opportunities the free cash into one operating margins targets don't get pushed out again.
You Havent generated free cash flow. We go back to 2016. So your company has been around for a while.
What comfort can you give to investors that ultimately you will generate meaningful free cash flow, if we look out into FY 'twenty five and beyond.
Yes, let me start and I'll have Pete follow I think it's really important here not to fall into the average trap and what I mean by that is when I say a single digit penetration I'm not thinking about that account that's approaching eight figures of revenue contribution.
So we have some accounts, where we are huge.
100000 people connected to our platform when you see that evidence and you see the ability and we go to market motion that can get you there and you see an LTV to CAC, which is north of 13, you invest in that.
If everyone was 6% yeah that'd be a problem. If you had no evidence of being able to climb effectively and efficiently that would be that would be more of a bold investment posture, but because we are seeing it because we are seeing record 100000 dollar deals record million customers being established that is whats, giving us on the inside great confidence in <unk>.
Going forward Steve.
So keep the.
Taking the sort of your question in two parts Center building Road Mark said there is a clear signal we are the metrics that support sort of what we're doing very specifically they are improving year over year and so we're seeing that but to your question on free cash flows.
First free cash flows we've shown we've seen as a leading indicator because it ties to billings.
And the first explanation that you would need is why does it why is free cash flow ahead of op margin and the reason for that is when you hire a sales team to get the Opex. It hits you delivered the billings at the end of the year, you're able to collect the cash but the revenue moves into the next fiscal year.
So that's why I'm talking about is a leading indicator now we've shown that as a leading indicator we have gone from minus 8% in 'twenty, one to minus 4% in 'twenty two we're guiding to 1% to 2% in 'twenty two negative all of these are negative numbers. So they are improving now and you look at it and you say what is the outlook as I said.
I feel comfortable in saying, we're not giving a guide for FY 'twenty four there is with current speed and of course, we should be cash flow positive as ingredient from that point on we are talking about something in FY 'twenty five that's two years out we're standing by the model. We shared with you at the Analyst day is nothing is changing there we're just showing you.
Some of the other building blocks along the way that gets you there.
Yeah, I guess, just mark to come back sorry to interject, but if I take your comments if you still see good growth opportunities it sounds like Youll.
Nice margins and free cash flow if you still.
See good growth opportunities so.
What I take from your answer on your current penetration rates and growth potential is.
As long as that potentials. There then youll youre optimized for billings growth, even over margins or perhaps I'm reading too much into your answer.
Yes, I think that's I think that's precisely what we're doing in this coming year.
And I think so when you when you think about when you think about the opportunity. That's ahead of us in this category.
This is not the time to be a 20% grower with 20% op margins.
This is not the time and our investment thesis and our desire our confidence in taking on the field capacity is grounded in the demand we're seeing with new the demand we're seeing with an existing domestically internationally. I mean this is a I would say a diversified pretty derisked situation for us.
And again, that's being in my 17th year of the firm now.
<unk> seen.
<unk> seen a lot of demand environment seen pullback and I have not seen a demand environment like we've seen right now.
Okay, I will cede the floor. Thank you.
Okay.
That is all the time, we have for questions I'd like to turn the call back to Aaron Turner for closing remarks.
Great. Thank you Josh and thank you everyone for joining us today, and we'll speak to you again next quarter.
This concludes today's conference call you may now disconnect.
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