Q1 2023 Smartsheet Inc Earnings Call
Or future events, except as required by law.
In addition to 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 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 first quarter earnings call for.
Fiscal year 2023.
Today I'd like to focus on three key areas, our solid Q1 with healthy growth in both revenue and billings are strengthening leadership position and collaborative work management project and portfolio management and digital asset management markets and how we are investing to deliver shareholder value in the years ahead.
While Pete will provide additional details I do want to highlight a few standout areas of our Q1 performance.
<unk> revenue for the quarter grew 44% year over year to $168 $3 million in billings grew 36% year over year to $180 $1 million.
We continue to see success on each of the land expand and climb aspects of our go to market motion.
On the land dimension, our previously discussed investments in simplifying packaging in the Onboarding process are paying off.
Q1 was a record quarter for new customer bookings and the highest net logo growth we've experienced since our IPO.
On both land and expand dimensions. The net new plans added in Q1 increased by more than four times versus Q1 of last year.
And on the climb dimension, we saw 57 domains expand their smart investment by $100000 or more in Q1 up 97% year over year, including an expansion of over $1 million. Additionally.
Additionally, we saw our churn rate in Q1 improved to a record low of 4% and we finished the quarter with more than $10 5 million smart sheet users.
We now have 33 customers with over $1 million and three customers that have over 125000 smart sheet users.
<unk> continues to provide the best in class value in the category as our collaborator model allows <unk> to achieve broad reach in a way that is both frictionless for the user and cost advantageous for the customer.
As customers realize the value generated from their smart deployments many up level their usage to include high value data intensive workloads.
This is evident in our market, leading dollar based net retention rates, which were 133% across our entire customer base and 149% for our customers with the IRR over $500000.
Our investment strategy is predicated on proven ROI with a focus on both near and long term free cash flow generation.
People are core to this investment strategy and people want to work in Smart Street.
In Q1, we exceeded our hiring objectives in both R&D and sales positioning us well for continued execution in FY 'twenty three.
We're looking at a tremendous long term market opportunity and we will continue to strategically and thoughtfully invest.
With that said, we're mindful of the current macroeconomic environment and have taken steps to ensure we maintain a high rate of topline growth and reached free cash flow breakeven this fiscal year.
As we've discussed in previous calls <unk> has a proven ability to expand across and climb up the value chain within organizations.
But also very important we continue to land new customers at an accelerating rate.
In the first quarter, we saw significant wins across a number of industries with companies looking to up level work management, including assured partners.
This smart sheet advance deal with one of the nation's fastest growing insurance brokers will help the company deploy a best in class project and portfolio management solution for their it project management office, there retail PMO and their security team.
We also saw new wins at companies such as the premium resort and residents brand Amman, The online Bank Moneyline Santander second home ownership innovator Picasso, <unk> E power sports and the department of the interior.
Looking at expand deals we closed in mid six figure expansion deal at a large European talent acquisition and management solution provider.
The leadership team overseeing the company's deployment efforts needed to transform the company's global delivery process still.
<unk> to standardize on our approach across 12 regions and with little real time visibility across their projects overruns were cutting into service margins.
<unk> will dramatically improve their ability to manage and planned projects and capacity.
With their move up to <unk> advanced gold and resource management. They are building a solution that will integrate with their existing enterprise business applications to enhance collaboration engagement and visibility across the company.
And with the help of control center, they will have a standardized and integrated approach to managing complex client engagements and a consistent manager that will bubble up into regional and portfolio dashboards.
This allows executive stakeholders to view Resourcing plans and resource availability and get a real time preview of the impact of those changes throughout the project lifecycle.
In the U S. We closed on a seven figure expansion at a major U S healthcare and insurance provider.
This customer scaled up to tens of thousands of connected users on our advanced platinum offering.
For a highly regulated customer like this smart sheets platinum features were key to deepening that relationship.
This customer also partner with us on building a custom smart solutions that replace some existing tools in their tech stack.
This group has generated over $10 million in savings by building solutions and smart sheet. According to their internal company survey.
We also closed Q1 expansion deals with mass mutual Alaska Air Marriott and Nielsen among many others.
Whether we're talking about one of the country's biggest health care companies or one of the world's largest insurers I'm encouraged by the executive level buying we're seeing throughout these organizations, which speaks to our client motion and.
In April I was in Sydney at a customer roundtable and at a certain point and executive responsible for digital transformation at a multibillion dollars gaming company explained to the CFO of a food distributor precisely how he should setup as analyst team to maximize value with control center.
This exemplifies <unk> ability to drive engagement and deliver real value up to the C level and enterprises.
Our competitive strength remains smart sheets ability to scale alongside our customers existing business systems.
Our enterprise grade PWM, and TPM capabilities allow us to integrate equally well with both current and legacy systems of record as well as collaboration tools like slack and teams and Webex data visualization solutions like tableau and power bi visual collaboration tools, such as Miro and Sigma and productivity solutions like.
Microsoft 365, and Google Workspace.
And while <unk> powerful collaborative work management capabilities continue to be a strong growth driver with brand folder or integrated digital asset management platform. We've added yet another important growth engine.
In March of this year, we launched the deep integration of our brand Fuller digital asset management platform with smart sheet.
By combining the best in modern work management with best in class Digital asset management, the integrated <unk> platform aligns marketing and creative work streamlining asset discovery and delivery and optimizing value through unified team and asset performance analytics.
Let me tell you about a value from one of our customers Mclaren racing and what they are realizing from this brand Fuller integration.
Mclaren adopted smart sheet with <unk> at the start of the 2022 Formula One racing season to streamline have a store manage and distribute rates stay content with.
With thousands of photos and videos taken at every race Mclarens team was spending countless hours manually organizing and distributing assets to their partners.
Now photographers and Videographers upload assets directly to brand folder and machine learning models automatically identify which logos are in each asset and sort them into collections saving mclarens team hours of work each week.
Partners, then access their respective collections to use Mclaren approved assets for their own marketing efforts, while Mclaren contract the usage of more than 100 terabytes of assets.
For years digital asset management systems were used almost exclusively in advertising and media production and while those industries still make up the lion's share of the customer base almost any organization that creates in stores digital assets of any kind photos videos pdfs architectural drawings of <unk> models is a potential customer.
<unk> is already simplifying digital asset management at Tech companies like Zoom and office Zero, a division of Okta financial services firms like LPL financial consumer goods companies like the cookware company and health care organizations like care, Oregon and envision healthcare.
In the future I believe we will see digital asset management systems used in functions far beyond creative and every industry architecture construction manufacturing legal services healthcare really anywhere digital assets need to be tagged stored searched and accessed efficiently.
We continue to make smart she's not only a more powerful but easier to get people up and running quickly with our product led growth focus this quarter. We introduced an on boarding experience, so thats, new and existing users get their project management system setup and shared with their team in just a few clicks.
This new experienced guides users and quickly building and sharing projects a simple interface walks users through creating their project and automatically creates reports in a dashboard organizing them within a team workspaces.
This experience will be applied to support hundreds of work management use cases in the quarters to come.
On the international front, our expansion is continuing with 100 team members now onboard in our Sydney location staffing underway in Japan, and EU bookings growing steadily.
One of our EU customers is the European arm of our global Medical Technology company focused on medical diagnostics medical imaging system and surgical devices.
Needed a solution to help improve consistency and collaboration on their major R&D initiatives.
The evaluation team chose smart heat in the solution would help improve their visibility and make collaboration much easier compared to their legacy <unk> system.
Moving into Q2 with solid momentum I remain very optimistic about fiscal year 2023 and beyond.
We have a strong category, leading position in high confidence and thoughtfully investing to capture the enormous market opportunity in front of us.
Our focus remains leading and for our customers, while making investments that deliver high rate of growth and free cash flow performance that enables us to control our destiny.
I look forward to talking with you later in Q&A, but for now I'm going to turn it over to Pete Pete. Thanks.
Thank you Mark and good afternoon, everyone. As Mark mentioned Q1 was a solid start to fiscal year 'twenty three.
<unk> exceeded expectations with strong revenue growth healthy gross margins and industry, leading unit economics.
To set the stage before we get into the numbers, we are focused in capturing our massive market opportunity with a view on our path to profitability.
The investments we are choosing to make are ones that exhibit strong proven rois that will drive not only durable top line growth for years to come but also deliver free cash flow generation in the medium to long term.
While we have not seen any macro impacts in our demand environment. We are electing to incorporate an element of macro related prudent into our Q2 and fiscal year revenue and billings guidance to account for potential headwinds.
I will provide more details at the end of my prepared remarks.
As a reminder, we highlighted on our Q4 earnings call. How we took steps in the first quarter to build out our field model to capture this market opportunity.
These steps include territory realignment to onboard our largest sales class in our history promoting productive quota carrying reps into manager positions and hosting an in person worldwide sales kickoff event to enable this team.
We believe these changes position us very well for continued growth for this year and beyond but as expected we had short term impact on some of our metrics in Q1.
I will now go through our financial results for the first 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.
First quarter revenue came in at $168 2 million up 44% year over year subscription revenue was $155 3 million reps.
Representing year over year growth of 44%.
Services revenue was $13 million representing year over year growth of 44%.
Turning to billings first quarter billings came in at $181 million representing year over year growth of 36%.
Proximately, 91% of our subscription billings were annual with 5% monthly.
Quarterly and semiannual represented approximately 4% of the total.
Multiyear billings represented less than 1% of total billings.
Moving onto our reported metrics the number of customers with <unk> over $50000 grew 50% year over year to 2516, and the number of customers with over $100000 grew 68% year over year to 1108.
These customer segments, now represent 57% and 42% respectively of totally IRR.
The percentage of ore coming from customers with IRR over $5000 is now 87%.
Next our domain average ACD grew 32% year over year to $7210.
As a reminder, we saw significant growth of our new customer acquisitions in Q1.
New customers typically begin this smart key journey, it's small dollar value.
Than our overall average ACB. These initial lands, but a small amount of pressure on our domain average ACB growth rate in the near term, but provide a healthy base for expansion in the future.
We ended the quarter with the dollar based net retention rate of 133%.
The full churn rate dropped further and now rounds down to a record low of 4%.
For the remainder of the year, we continue to expect our dollar based net retention rate to be above 130%.
Now turning back to the financials.
Total gross margin was 81%.
Our Q1 subscription gross margin was 87% we continue.
To expect our gross margin for FY 'twenty three to remain above 80%.
Overall operating loss in the quarter was negative $23 1 million or.
Our 14% of revenue.
As previously mentioned, we had a very strong quarter of hiring in Q1, which was above our expectations.
Additionally, we experienced lower than expected employee attrition rates in the quarter.
The combination of stronger hiring and lower attrition rates resulted in our operating loss to fall within our previous guidance range. Despite our revenue outperformance.
Free cash flow in the quarter was negative $9 1 million.
Now, let me move on to guidance.
Though we have not seen any discernible macro related impacts on our business. Thus far we are embedding an element of macro related prudence into our Q2 and full year revenue and billings guidance.
If ultimately we don't experience the macroeconomic impact on our demand environment. This would be a source of upside to our current revenue and billings guidance.
Additionally, we have identified areas of cost savings this year, which is reflected in our improved operating loss and free cash flow guidance.
For the second quarter of fiscal year 'twenty, three we expect revenue to be in the range of $180 million to $181 million.
non-GAAP operating loss to be in the range of 27% to $25 million and non-GAAP net loss per share to be between 21% to 19.
Based on weighted average shares outstanding of $129 million.
Q2 operating loss guidance impacted by the full weight of hiring we made in Q1, but we expect to see operating leverage in the second half of the year.
For the full fiscal year 'twenty three we are raising our revenue guidance to be in the range of $7 $56 million to $761 million.
Representing growth of 37% to 38% we.
We expect services to be 7% of the total revenue for the remainder of the year as partners play an increasing role in our services delivery.
Billings are expected to be in the range of $910 million to $925 million.
Representing growth of 38% to 40%.
We are improving our non-GAAP operating loss to be in the range of 86% to $76 million and net loss per share to be between 67% and 59.
For the year on approximately 129 million weighted average shares outstanding.
We are also improving our free cash flow guidance for the year to breakeven.
Okay.
To conclude Q1 was another solid quarter for smart sheet, we remain committed to working towards driving growth with margin improvement and are actively driving efficiencies across the company, while continuing to fund our key growth initiatives.
We have a huge market opportunity in front of US a world class team Cwm's category leadership powered by a business model that can generate growth and free cash flow in various market conditions.
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 press star followed by the number one on your telephone keypad.
First question comes from the line of Brent Thill with Jefferies. Your line is open.
Good afternoon, Mark I'm curious if you can expand on the economy, and what youre seeing and ultimately.
Thank you get worse before they get better how do you think about it.
You can take to mitigate any of the concerns about the macro.
So I think as we look at our leading indicators things like pipeline progression of pipeline in quarter.
I think we have an ability to adjust throttle and moderate spend.
Currently we continue to plow ahead very well.
<unk>.
The workout that we got in 2020, and 21 with Covid actually I think prepared a lot of businesses quite well, where we had a chance to operate in an environment, where there was uncertainty and it really put a lot of emphasis on how we present value around the solution. So I think a lot of the things we learned and enabled our sales teams with in 2020 actually.
Right into the slot that we're seeing today. The good news is we still see a lot of money changing hands in this category.
And we're moving forward I think partnering with Pete and he'll make some comments later around our investment strategy.
We have a lot of levers to pull but right now we're definitely leaning forward.
And you've mentioned on new client additions were really strong can you share any color what youre seeing there.
Yes, one of the things I spoke to in our earnings call. The last two earnings calls was our focus we've had such focus over the last few years around our enterprise offering and strength and capabilities moving up the value chain.
And we've really started a pair that now with getting much more assertive at the leading edge. So how do you land and more nodes at more businesses and it's not just winning new logos. It's also landing in more nodes at existing clients. So some of the things we've changed where their probe plant packaging I think has really made our land much more.
More accelerated and interestingly when I look at the various segments of employee signs fewer than 50 employees 50 to 200 202000 over 2000 10000 each of those segments is benefiting from this packaging, but it's beyond propane packaging is also the experience, we're serving up to people coming in and one of the things I mentioned in our analyst day at the begin.
End of the year was if I could have one thing I would want to have every new person to see smart heat to have perfect understanding of what's possible with smart sheets. So I think packaging is one and how we present our value is another and I think we're starting to really see that perform.
Thanks Mark.
Yes.
Your next question comes from the line of Terry Tillman with Truest Securities. Your line is open.
Yes, thanks for taking my questions as well I just had two questions.
The first question is for Pete in terms of you did actually talk about some short term potential impact and some of the Kpis I mean, you beat my billings number in the Kpis sounded relatively strong.
And it sounded like new logo activity I think I think Mark you had said it was record.
At least bookings value.
Could you maybe double click a little bit into that comment was it with some of the stuff you are doing at the beginning of the year on kind of sales kickoff and things like that that may have just impacted some of the enterprise business.
A little bit more on that and then I had a follow up question for Mark.
So Terry.
We mentioned the few things that we did at the start of the year, we onboard our largest class in sales and that involves splitting territories. It involved.
Promotion for people in the field involved in <unk>.
Actual sales kickoff event to get the whole field aligned so we saw that as a huge long term accident, but obviously had a short term impact for us some of the impacts we saw we still had really great customer ACD changes for the number of customers in those categories, but it was relatively muted.
His recent trends if you will.
Okay, Okay fair enough and I guess mark.
I love seeing the million plus customers I mean, I remember when it was single digits and now it's at 33 I'm curious how much is digital asset management within that large customer mix.
And have you thought about maybe putting some some gas on the fire in terms of with what you have with brand partners and the integration maybe have like dedicated sales teams and you're just really go after.
Digital asset management space aggressively. Thank you, yes, yes gas is definitely in the tank. We have we have added sales reps to our brand folder division the way in which we are we are teaming between people, who know digital asset management really really well and people who know work management really really well those are.
Starting to really play out and I would say it is when you look at the bookings impact brownfield are still relatively small compared to mainline CW AUM, but the resonance with customers is really interesting when I speak with executives and I hear them responding to the use case that they can understand it's very visual it's very compelling.
Easy value prop to convey.
We're seeing some really good uptake.
It is our fastest growing part of the business that it, albeit not not as significant yet as it will be in the future, but it's really starting to play well. So I believe that it will be part of almost all of our sales discussions within a year from now and right now we're getting one hundreds of sales reps fluent and how it works I think the good news is that use cases, we have.
Already developed.
Our easy and quite enjoyable to talk about so I think it's going to be actually quite natural for the sales team to pick it up.
It's great to hear thank you.
Yes.
Your next question is from the line of Michael <unk> with Wells Fargo Securities. Your line is open.
Hey, there. Thanks, good afternoon I appreciate you taking the questions.
Q1 billings grew 36%.
<unk> targets, you actually did a slight increase to the low end of the full year Billings guide to now 38% to 40% as well even with some of the commentary around just added prudence with macro assumptions. So maybe you can just help us step through those macro assumptions, how thats still translate sandwiches.
Continued confidence in higher billings growth throughout the course of the year and anything you can add around the shape of billings.
Also useful from our perspective, thank you.
So Michael this is Pete.
We have really very bullish about our business.
And we haven't seen any macro elements impacting our demand environment.
Choosing to incorporate an element of macro related prudent in Q2, and our full year guide to account for potential headwinds.
Look at the macro economy and the factors that are in there. We're just realizing that we may not have seen it in our math, we might not have seen it in our demand environment, we want to make sure that we're being prudent as we give you the guide.
The second part of it as it relates to the demand environment itself.
When we went through the.
Covid hit that took place last year, we saw a change in our losses and reductions we had record numbers related to the churn levels. So we haven't seen a day either so we're feeling really bullish about the business believes that have taken a prudent approach to guidance.
Okay. That's helpful.
<unk> mentioned a couple of times came in ahead of hiring targets. It looks like stock comp also increased in fiscal Q1 is there anything one time specific to be aware of around Q1 or anything you can say just around how best to manage stock comp going forward given the current employment market backdrop everyone's facing.
Yes, so we.
Looked at stock comp fairly closely our stock comp is a function.
The hiring we've done in previous years.
As you look at these set of our cohorts that layer on top of them.
We've seen that leads us out and stock based compensation and then the other element.
Recognizing is.
Lot of the grants we made pre IPO are now starting to wind off and replaced them with plants, which are at a much higher value, which is sort of the two drivers in our stock comp expense.
Helpful. Thank you Pete.
Of course.
Your next question is from the line of Keith Bachman with BMO. Your line is open.
Yes.
Hi, Thank you I have a lot of background noise. Some of that is my question.
Apologize for the malls.
I wanted to come back to us.
Thanks.
Previous quarter, you'd be billings by about 10% this quarter you'd be inside of that piece.
Paul.
Indicate the macro is not a factor is that.
Kind of a.
Skinny.
To speak this quarter is that because of the sales.
We are <unk> 13, or was there something else in the quarter.
And then my second question is just around <unk>.
And what I mean by that is providing us with the op guidance for this year free cash flow or excuse me.
April .
But how should investors think about the next year.
Steady progression towards our previously stated longer term targets or is there more of a.
Backend weighted so to speak to realize those longer term targets and thats. It for me. Thank you.
So Keith.
I will take your questions in order to your first question was about sort of what we are seeing in the bidding scientific the billings guidance that we provided to you with <unk> basically the changes we were making to drive our field model.
That included sort of the number of territories, we were creating the number of promotions. We made the actual having a sales kickoff global event for several days that was what we had baked into the into our guidance and that's exactly how the quarter played out there was no macro elements of demand factors that affect.
This the way we landed for billings in Q1.
The second part of your question was on how we think of the free cash flow in the op margin guide in the long term.
We are committed to driving free cash flow and op margin improvements in a steady and measured way as we go through the years and.
And we are tied to our longer term.
Model and guidance, we provided this guidance, we set up really sort of demonstrates that our belief is our model does generate free cash flow at scale and we're sort of in our guidance showing you a sort of the underlying elements that support that.
That train.
Okay, but the steady work the keyword is steady progression towards those goals. Okay. Thank you very much.
No problem.
Your next question is from the line of Scott Berg with Needham Your line is open.
Hi, everyone. Thanks for taking my questions.
I guess a couple here, let's start off with the one that I don't think anyone's directly asked at least at the moment. Pete you just talked about no macro impact in Q1 are you seeing anything so far yet in Q2 to help give some of the guidance.
That's a little bit more conservative as you mentioned.
You know Scott, we haven't seen anything that would be different relative to the any macro impacts in our demand environment are in fact seeing are deeply.
Deeply hyatt and ramping nicely building pipeline. So we're seeing a level of what I call a trend that's positive relative to February we expect it to play out.
Got it helpful and then from a follow up.
Mark you talked about the 33 customers that are more than $1 billion now that you have a couple of dozen of those almost three dozen are you seeing any commonalities around those expansions to that level or higher I assume it's not it's no longer just straight seat expansions youre seeing some of the other capabilities. So I didnt know, if theres any real commonalities and playbook.
So you can point to point to and replicate.
Yes, Scott I think you hit it on the head it is really a combination of people growing through both seat expansion.
And engagement inside and outside the company combined with capabilities and the capabilities is across a couple of dimensions. One is premium experiences, whether it's control center or data exchange with legacy platforms.
Things like brand folder, and then on the management and governance side I think the.
The neat thing that we're seeing is we're not only seeing the account $33 million play out. We're also seeing the stable of half million dollar customers climb nicely. So we're almost at a 100 customers that the half million Mark today. So it's not like we're adding to the $1 million and depleting the coffers at the half million dollars threshold and one thing also to note was we had our fastest ever.
Progression past from <unk> 5 million to $1 million in under five months. So I would say the degree to which we're helping on helping our clients understand the roadmap and why they should be stepping up investment that is playing out quite nicely, but this ability to speak to both the capabilities that they can that they can really attached to really important drivers in their business as.
Well as seat expansion that is the common thread across these customers.
Great very helpful. Thanks for taking my questions.
Thanks Scott.
Your next question is from the line of George <unk> with Oppenheimer. Your line is open.
Thank you for taking my question Mark just following up on the strong new customer activity Youre seeing is there any changes in the competitive environment.
How many of the opportunities have been greenfield, how much our head to head competition.
Yeah on those lands.
Those are typically not grounded in RFP those are high velocity.
Really self driven experiences for the most part.
So I can't really speak to what's what's going through the buyer's mind at that point, what I will say is we posted really impressive growth amidst a pretty active category.
And we're really encouraged to see that.
So I fully expect that well, while most of our new and expansion opportunities are people coming from graduating from sort of noncompetitive environment I do think that people.
We have choice in the market and it was really important for us to see.
Such progress at the leading edge, while also showing really good strength at the enterprise level.
And then maybe from a P.
Pricing perspective, when you are having your discussions with enterprises.
These larger deal.
How.
How do you feel about the pricing environment, how do you feel about the value based selling.
We feel great about it I think I think part of part of succeeding at scale is mapping to something that companies care deeply about.
So I think going in on purely quality measures.
Talking about <unk>.
Your connection with people driving purpose those are vitally important to why people use software, but absent a connection to an outcome that is tied to a dollar amount I think it becomes increasingly difficult for people to to really warrant very large expenditures in software.
So it's fundamental to our selling approach all of our and it's not just the largest of enterprise pursuits, I would say the upper mid market as well as starting to have these discussions and wanting to have these discussions.
Thank you.
Okay.
Your next question is from the line of Alex Zukin with Wolfe Research. Your line is open.
Hey, guys. Thanks for taking the question.
So just.
Maybe for you you mentioned that.
You guys are being prudent with respect to your guidance both for the second quarter and for the year I Wonder if you could dig into exactly what that means are you assuming lower close rates are you assuming.
A couple of deals slip out of Q2 into the second half are you assuming that some of the productivity from this ramp.
Ramping sales organization doesn't come through where that retention goes down I'd be curious just what assumptions you're baking in even though youre not seeing anything and then mark maybe for you I mean, given the valuation environments and the private side.
Are there any areas that are starting to look more interesting or attainable from a buy versus build perspective, given the reset in valuations.
Okay, what feedstock and I'm happy to answer that question Alex.
When we think about a little bit of texture on sort of how we think of these factors.
We don't expect that there'll be any issues with ramping we've seen the ramp of our reps worked really well Dave indicated well into the sales force, we see a good volumes progress appropriately what we imagine in the event of a macroeconomic impact would be.
Cycles, lengthening, which we haven't seen yet, but we're sort of giving the guide based on sort of that element of it. So that's kind of the backdrop of how we are thinking about it.
I think on the M&A side.
I think there is probably a little bit of an offset between what's happening in the public market and what private companies believe their valuation to be.
I can tell you that those are perfectly aligned yet.
But when I look at our team and how we're organized around the market map development. The priorities we have to both expand at the enterprise offer New solutions and then also drive high engagement and our product I think there's some really interesting opportunities that will be coming out in the next 12 months to 18 months, but it is predicated on.
The privates sort of recognizing that there's been a shift and I think there's still there's still room to have further shifting there.
<unk>.
Got it thank you guys.
Thanks, Alex.
Your next question is from the line of Robert Simmons with D. A Davidson your line is open.
Hey, Thanks for taking the question. So you revised those numbers upward for the year, but I was wondering what drove the food free cash flow exhibitions, notably more.
<unk> operating income expectations.
So.
To your question Robert the majority of our cost savings were tied to sort of think of it is head count growth moderation in the back half.
And while that improves right away sort of the spend element of cash when you think of op margin youre tied to things, which are more on an accrual basis to be in <unk>.
Revenue is recognized and subscription models. So you don't get the full impact of that on the op margin line. So that's the reason why we instead of giving you the guide on free cash flow and op margin debate.
Got it that makes sense and then last quarter you talked about some disappointments was there anything notable to report there this quarter.
Yes, I think one of the things that we're investing in our project and portfolio management capabilities, we're starting to.
Have opportunity to see opportunities to displace some of the legacy players in that category, where people are looking at ppm and <unk> as a composite and that's been that's been a welcomed welcome development at some of our larger clients.
Got it great. Thanks.
Yes.
Your next question is from the line of John Baugh with Jpmorgan. Your line is open.
Okay. Thank you.
I wanted to ask you on the guidance understanding that you have put a macro about.
In the billings guidance any way to understand the magnitude of that buffer.
How are you thinking of two points of growth or more I mean, any way to help investors understand that.
So we haven't quantified the level of what I call impact that would have because you can come up with various scenarios of how much impact you would have.
Relative to what scenario you choose but if you would flip the question and say what would we have done so without sort of that macro backdrop, we would have converted the outperformance in the quarter into the lift and guide. So that's what we would have done so thats. The best I can share with you is the thinking.
Got it understood and one for Mark.
Could you talk about maybe the wall to wall deployments and what are you hearing from customers into two different ways. One are you hearing customers talk more about wanting to go wall to wall with smart sheets and to hold.
Do you assess smart sheets ability at this point to drive organic growth.
Expansions from a production process standpoint.
Yes, it's an interesting having been in enterprise software for 20 plus years, it's typically the vendor that pushes wall to wall as opposed to the customer clamoring for wall to wall and it's a dynamic it's been around a long time and our philosophy for really since since we've.
Shown tremendous growth in the enterprise has been to earn the enterprise business. So the way we have been modeled from the start is we allow us to get tremendous reach with our collaborator model the degree to which we monetize those through an advanced offering or through license consumption that varies depending on the scenario. So I would say the ability for.
US to touch the vast majority of people in a company that is something that preceded the licensing event. So we speak about 125000 plus users engaged at over at more than three companies that is the model playing out I think one needs to really deliver maximum value for the client and to retain a healthy customer long term I think back.
Wincing when you monetize it with when they receive value is actually of Paramount importance.
What some companies get into their challenge is they sell a wall to wall adoption doesn't meet expectations. Two to three years later, there's a ratchet down and Thats when you see a pretty precipitous fall in net dollar retention that is something thats a game I've seen play out and it's something that we look to avoid.
I think the.
For our largest customers we do have a few where we're at is wall to wall per se, but again were very prudent and when we actually.
Lock in from an economic standpoint.
Understood. Thank you.
Thanks.
Your next question comes from the line of Jay <unk> with William Blair. Your line is open.
Hey, everyone. Congrats on the solid quarter, just wanted to double click on the strength, you're seeing with the new customers. I mean, four times growth that was that was awesome to hear.
But have you seen any changes to where you are landing within these customers I know it sounds like the pro Skus, helping you land more by early <unk>.
Down market, but have you seen anything with brand border. Some of these other new products driving deeper into marketing departments.
I think the brand photo move is one where it.
It's more of an.
An engaged selling motion as opposed to self discovered so I would say in our more mature nodes, where we have landed I think the brand pull discussions absolutely taking off quite nicely.
What we're seeing in our thousands of lands in these nodes is what I would call traditional straight up the middle CW AUM and it really gives us the opportunity to then expand from that.
In terms of in terms of whether we've seen a change in diversity, we already started in such a diverse spot industry functional group that I would say the areas, where we have where you see greater residences. Once we've landed where we can really go deep project portfolio. The brand forward work and marketing we have offerings now that lend themselves really well.
Well to that project Centricity, the marketing Centricity operation Centricity, and that's where a lot of our engagement activity is post land.
Great and then just a follow up question on enterprise.
<unk> seeing pretty pretty solid metrics in that but I'm just curious how much of that can be attributed to user expansion that youre seeing within customers versus the customer climb on the platform to more enhanced offerings like data shuttle or even work apps just given the prioritization for low code and no code.
Really going on in the market right now.
So the dollar based net retention rate, we see comes from two basic think of motions. One is the expand motion as people are picking up more seats and there is a natural virality to that motion. The second part of it is that.
It expanded what you can do with the product is vastly differentiated than anybody else in the space and would you find is the capabilities piece of it really picks.
Picks up strength, if you will we're seeing both of those levers that drive it but it is predominantly an expansion motion is still that drives the <unk>.
Calculation.
Great. Thanks for taking my questions.
Thank you.
Your final question comes from the line of Josh Baer with Morgan Stanley . Your line is open.
Great. Thanks for the question.
Wanted to ask one on the net new customer additions over 5000.
It looks like they were down year over year can you remind us does that reflect a focus on larger customers sales changes how should we think about that dynamic.
Yes so.
The dynamic Thats underway there is the <unk>.
Art I called out into the Q4 earnings script, where we were making a lot of changes in the.
We think of the field model splitting.
Splitting territories, adding sort of what I called promoted promoting people into jobs, having an in person sales kickoff event globally. Those are the things that drove sort of the change in year over year growth. If we saw in that segment. There is nothing fundamentally different that's happening over there and the demand vectors.
Yes.
Got it and then we talked about the improved free cash flow guidance in relation to operating income, but was just wondering with the stronger hiring and lower attrition.
Not sure if thats coming from head count. So I was hoping you could just double click on.
On the improvement there.
Are there areas that you're increasing focus as far as investments are pulling back. Thank you.
Yes, the majority of our cost savings are tied to sort of moderating our head count growth in the back half of the year.
We don't believe this will have a material impact on our growth because if you think of the nature of the Frontloaded nature of the hiring we've completed it sets us up really well to drive our billings and revenue goals.
And while rationalizing costs, we've looked at all as a business with sort of a focused effort looking at things which are supporting roles.
Cost savings associated tying in specific geographies.
And if you take the intent of this it's really looking at both people and programs most of which are sort of supporting ancillary spend not directly tied to.
Building pipeline or expanding our driving expansion. So that's been a little bit of texture on how we've come at it.
Sure.
Great I appreciate it thank you.
There are no further questions at this time I will now turn the call back over to Mr. Aaron Turner for closing remarks.
Great. Thank you Brad and thank you all for joining us today, and we'll speak with you again next quarter.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
Okay.
Okay.
Okay.
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