Q2 2023 Smartsheet Inc Earnings Call
Good afternoon.
And my name is Emma and I will be your conference operator today at this time I would like to welcome everyone to the smart She second quarter 2023 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.
To ask a question during this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press to Starwood. Thank you.
Aaron Turner head of Investor Relations you May begin your conference.
Thank you Emma good afternoon, and welcome everyone to smart sheet second quarter of fiscal year 2023 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. Godbolt today's call is being webcast will also be available for replay on our Investor Relations website and investors that smart she dot com. There is a slide presentation that accompanies pizza prepared remarks, which can be viewed in the events section of our Investor Relations website during <unk>.
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 S. E C. Dot Gov, although we believe that the expectations reflected in the forward looking statements are reasonable our actual results may differ.
Were 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 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.
Well 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, Eric and welcome everyone to our second quarter earnings call for fiscal year 2023.
Q2 was another strong quarter for Smart Street revenue in the quarter grew 42% to $186 $7 million in billings grew 44% to $205 $6 million as enterprises across the globe continue to deploy smart she does scale to solve their mission critical workflows.
In Q2, 62 customers expanded their smart sheet investment by over $100000 and 201 expanded by over $50000. We also added three more customers to the million dollar <unk> tier and now have 36 customers over this are our threshold.
We ended Q2 with air are surpassing $736 million and now have over $11 1 million smartphone users.
Q2 was another great quarter for our new business motion with new business bookings setting another quarterly record with.
New wins at companies such as payment processor repay United Health services hospitals, Bloomberg industry Group IMAX Midwest Vision partners. The broadcast management platform operative larger consulting and affinity health partners.
However, we are not immune to the changing macroeconomic condition in the month of July we started to see macro impacts on our business, including longer sales cycles, some yield compression and additional approval our players. These.
These impacts resulted in lower expansion rates.
Additionally, our previous guidance assumed a ramp time for sales reps, we hired at the beginning of the year to be consistent with what we've experienced in the past.
Wherever this ramp time has been slower than we anticipated.
We're investing in new enablement tools and training to improve productivity.
Given these factors, we're taking a thoughtful approach to guidance and electing to lower our full year billings and revenue guidance with the assumption that the current macro environment persists.
Well Pete will provide more details about how the changing macro economy is impacting our financials for the remainder of the year I want to update you on the status of our key growth drivers, namely our portfolio of capabilities products. Our success in the enterprise and brand folder.
Our portfolio of <unk> premium add ons that we refer to as capabilities continues to drive deep attachment within our customer base and further differentiate smart sheet from the rest of the Cwm's category.
Whether these capabilities are bundled in an advanced package or purchased individually they power our customers' most important workflows from data shuttle, which lets users act on data across multiple systems to control center that lets users build and operate a system of work across hundreds to thousands of projects or workflows to our <unk>.
<unk> digital asset management platform, our portfolio of capabilities lets customers connect to a range of workloads unmatched in the collaborative work management space.
These differentiated offerings give our customers the keys to unlock massive value within their organizations.
An example of this is the info blocks a leader in next generation DNS management and security that has increased its smart heat usage by close to four X since 2019.
As more teams and departments that info blocks adopted smart sheet, they began to see opportunities to create more integrated centralized workflows using premium capabilities.
Over time, they deploy data shuttle to setup, a sync between their CRM and smart sheet.
Advanced reporting capabilities that help summarize their data and enable faster more informed decision making in.
In Q2 info blocks upgraded to advance to access the full value of smart sheets premium capabilities and they plan to implement a scalable automated and secure <unk> solution using control center and dynamic view.
We're seeing more large customers deploy advanced to access multiple capabilities such as data shuttle control center data mesh and bridge for complex workflows, the need to integrate with other systems in their organization.
For example, the technology and consulting provider NV five implemented control center to automate the creation of their primary customer engagement templates to save time and achieve consistency, while still allowing for changes over time.
They are also using work apps and dynamic view to create custom views for field teams that only show them. The information that is relevant for their role helping ensure data security at scale.
And revenue from capabilities continues to grow rapidly and now accounts for 28% of our subscription revenue compared with 22% in Q2 of last year.
Advance, which packages various capabilities was included in 300 deals in the first half of this fiscal year, including those with buyer biopharmaceutical companies Sobey Crown roofing and waterproofing and illegal health research.
The growth potential for capabilities remains very strong through Q2, only around 7000 of our more than 100000 customers have deployed at least one capability.
Those customers are realizing significant ROI on their smartphone deployments and are expanding at a rapid pace.
This value realization naturally gets the attention of senior executives, who are increasingly involved in the decision making process.
This value based enterprise go to market motion has demonstrated an increase in executive leaders selecting <unk> as their <unk> platform of choice.
I'd like to highlight a few fortune 100 companies, where that's happening.
In Q2, a fortune 100 Entertainment company expanded its smart chief investment by over $700000, taking their total IRR to over $3 million.
With this expansion they migrated to the next tier of connected users for their advanced gold deployment.
This company has doubled the number of paid licensed users over the past year, adding roughly 3000 enterprise licensed users and has now tens of thousands of connected users and that number is expected to increase further as smart. She does now the central component in the Companys effort to consolidate the work management solutions. It uses.
An executive in their it department suggested that other cwm's platform used in the organization will be retire in favor of <unk>.
A fortune 50 pharmaceutical company more than doubled its <unk> to almost $1 million as its teams reliance marches to help them manage the spinoff of one of its divisions and we will continue to use smart heat and the resulting two companies.
Most important the expected ROI of its smart deployment is $3 million in just year one.
We also won an RFP at a fortune 50, food and beverage company to become their global standard for collaborative work management.
This company has a low six figure customer today. This RFP win sets the table for rapid growth over the next few years RF.
Rfps are still rare for our business, but this shows that in a rational head to head comparison Smart Street, one thanks to our years of investing in our platform to delivering extensibility scalability and security that businesses demand.
One more example, I'd like to share from Q2 as a fortune 10 technology company that expanded by over $1 7 million in Q2 accelerating our growth within this organization to a total of $7 $6 million.
Sure.
Last year, we became a globally approved cwm's platform for the company.
This approval has helped fuel significant adoption of smart sheet across several dozen large departments.
Previously I've emphasized the importance of our brand forward, our digital asset management platform is key to cementing our leadership in the Cwm's space.
Naturally we spend a lot of time understanding how to optimize workflow management for marketers.
One of our insights that marketers need to distribute content across more channels at higher velocity, while ensuring brand consistency.
Marketing teams are being asked to do more and more with fewer resources.
To meet customers expanded content distribution needs, we've acquired the leading brand management template ing and creative automation platform outfit.
Outfit will turbocharge brand folgers content distribution capabilities, making us a leader in the content automation and management space.
We're looking forward to introducing outfit and the many other exciting new smart <unk> features and capabilities to thousands of users at our engage 2022 customer conference taking place September 19 through 20 in person for the first time since 2019.
In closing the new economic reality organizations are facing has impacted a portion of our business yet we remain confident in our ability to deliver long term durable growth and profitability.
This confidence is due to our position in the market, our differentiated suite of capabilities and our market leading presence in the largest companies in the world.
We are carefully managing our resources to drive improved margins and we remain on track to achieve break breakeven free cash flow by end of this fiscal year.
And now I'll turn it over to Pete.
Thank you Mark and good afternoon, everyone. As Mark mentioned Q2 was a strong quarter that reflected durable growth the product set that powers. How work gets done in the largest enterprises around the world and the resulting business model that shows sustained progress to profitable growth.
We saw this in 40 plus percent revenue and billings growth dollar based net retention rate greater than 130% and gross churn that is at a record low of less than 4%.
In July we began to see macro related headwinds in the form of elongated sales cycles.
Procurement policy changes do compression and lower pipeline close rates.
This trend has continued into August .
We have incorporated those macro headwinds into our updated full year guidance and I'll provide additional details towards the end of my prepared remarks.
Regarding the composition of our customer base approximately 50% of our IRR now comes from enterprises with over 2000 employees with only a quarter coming from Smbs.
<unk> also remains very diversified with only 13% coming from our largest vertical.
As Mark mentioned, we recently acquired outfit to enhance our brand further offering.
We expect the revenue and billings contribution from outfit to be around $1 million each for the rest of the fiscal year.
I will now go through our financial results for the second 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.
Second quarter revenue came in at $186 $7 million.
Up 42% year over year <unk>.
Subscription revenue was $173 5 million.
Representing year over year growth of 43%.
Services revenue was $13 2 million rep.
Representing year over year growth of 24%.
Turning to billings second quarter billings came in at $205 6 million.
Representing year over year growth of 44%.
Approximately 91% of our subscription billings were annual with 4% monthly.
Orderly and semiannual represented approximately 4% of the total.
Multiyear billings represented approximately 1% of total billings.
Moving on to our reported metrics the number of customers that are over $50000 grew 48% year over year to 2000 and 738.
And the number of customers that are over $100000 grew 63% year over year to 1220.
These customer segments, now represent 58% and 44% respectively of totally IRR.
The percentage of <unk> are coming from customers with IRR over $5000 is now 88%.
Next our domain average ACD grew 28% year over year to $7557. As a reminder, we continue to experience healthy growth of new customers new customers typically begin their smart key journey at smaller dollar values then.
Overall average ACB.
These initial land put some 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 131% the full churn rate dropped further and is now below 4%.
Given the current macro environment, we see a scenario that would cause our overall dollar based net retention rate to be in the mid to high <unk> by the end of the year.
Now turning back to the financials.
Our total gross margin was 82% our Q2 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 $16 1 million or minus 9% of revenue.
Which represents a five percentage point sequential margin improvement.
Margin improvement was a result of cost saving initiatives, we discussed last quarter, which include included moderation of our hiring plan and cost rationalization.
Additionally, we led a significant portion of our revenue outperformance drop to the bottom line demonstrating the operating leverage inherent in our business.
Free cash flow for the quarter was positive $7 1 million.
Bringing our free cash flow total in the first half to negative $2 million.
Looking ahead in Q3, we have three large cash outflows that are unique to the quarter related to our engaged customer conference one extra payroll run in the quarter and our semi annual contractual payment related to a cloud provider.
Given these outflows, we expect our Q3 free cash flow to be negative $20 million.
Now, let me move on to guidance.
As we mentioned previously towards the end of July we saw macro related headwinds begin to emerge. These.
These headwinds continued in August and it impacted our sales productivity and ramp time for our newer sales reps.
Given these trends and our preference for Prudence, we are taking a thoughtful approach to our full year guidance and electing to guide into the assumption that the macro pressures to continue through the end of the year.
For the third quarter of FY 'twenty, three we expect revenue to be in the range of $193 million to $194 million.
And non-GAAP operating loss to be in the range of 21% to $19 million.
As a reminder, in Q3, we will host our first in person customer conference in three years, which we believe will result in incremental expenses of around $5 million on our sales and marketing line.
We expect non-GAAP net loss per share to be between 16% and 15.
Based on weighted average shares outstanding of $135 million.
Yes.
For the full fiscal year 'twenty three billings are expected to be in the range of $8 $70 million to $80 million.
Representing growth of 32% to 33%.
We expect our revenue to be $7 $50 million to $755 million representing growth of 36% to 37% <unk>.
We expect services to be 7% of total revenue.
We are improving our non-GAAP operating loss to be in the range of $75 to $65 million and non-GAAP net loss per share to be between 56% and 49.
For the year based on approximately 125 million weighted average shares outstanding.
This improvement in our profitability is due to cost reductions and efficiencies identified in non revenue generating areas of our business combined with a more measured investment posture. We articulated earlier this year and a careful evaluation of our expenses and policies.
We are maintaining our free cash flow guidance for the year of breakeven.
Sure.
To conclude smart sheet as a system of work able to scale for the largest most demanding businesses in the world.
With <unk> approaching three quarters of $1 billion and revenue growth in the high Thirty's I believe our value proposition positions us to deliver long term durable growth with improving margin and.
An outsized cash flow.
Now, let me turn it back to the operator for questions operator.
Thank you.
As a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
Did you ask today that you limit yourself to one question and one follow up.
Your first question today comes from the line of John <unk> with Guggenheim Partners. Your line is now open.
Thank you Ivy.
Question for Mark and then a follow up for Pete.
Mark your commentary about the strength of the quarter.
Agrees with our calculations anyway for new business in the period.
I realize there were some things that youre seeing in the macro environment. It makes sense to me to be.
<unk> posted more prudent regarding your outlook, but just to.
Vacation on the ramp time for new reps is the time required growing simply because of the macro backdrop or has the job gotten more difficult as you build out your platform I mean, I think about smart sheet years ago when I first.
Acquainted with you and it should.
Smart sheet the applications just it's a much more.
Sophisticated is still easy to use but it's more sophisticated and complex.
Application that I am just wondering if that job has just gotten.
More sophisticated requirements for the sales job.
I think the requirements have John but I've also seen the support mechanisms, we have around enablement and the tooling dramatically improved from the early days. So I think with that larger surface serve the offering in more value. We can deliver I think we have put good support structures in place for that so I would point to macro as being the largest impact.
And when you look at bringing in many new sales reps at the beginning of the year, where theyre being assigned existing accounts most of our bookings motion is expansion.
Those new reps are going to talk to existing customers and I think that relationship between the new the new rep who's trying to articulate value to an experienced customer I think during these times, there's a more pronounced effect that comes from it but we're supporting our reps were investing in new tooling and.
I think it's going to result in capacity that we get to Kerry next year as well. So I think there will be a payoff.
Okay. Good.
Good to hear Youre, not going to give them the earn out to say, it's a harder job thats great.
Pete.
Listen this is this looks like to us anyway, a really strong quarter and a big uptick from last quarter at least from the way we look at it and again I get to a prudent guidance here, but I'm. Just wondering when you gave the guidance are you assuming the macro backdrop, just sort of stays as it is or that it continues to soften through the.
Rest of the year.
So our assumption John is that the macro.
Economic backdrop stays fairly consistent and slightly weakened as we go through the year.
Okay, great. Thanks that makes a lot of sense to me okay. Thanks, a lot guys.
Thanks Sharon.
Your next question comes from the line of Terry Tillman with <unk> Securities. Your line is now open.
Great. Thanks, so much for taking the question. This is Robert on for Terry My first question relates to macro positioning I'm curious how does the playbook changed if at all for continuing to drive new logo strength that a tougher macro environment and what are some of the assumptions for new logo adds implied in the current guide and then I had one follow up thank you.
Okay.
So our assumption as you looked at your question was on <unk>.
Looking at sort of where we are seeing the macro changes in our environment.
I think we've seen it across the board we've seen it in all segments of our business.
And what I would say is that.
It's not it's not in any particular vertical it's spread across all elements of it and that's what we've assumed in our forward looking guidance extended what we saw in July and August all the way through the year.
And on the new logos, we continue to see with their quite a low entry point in terms of dollars.
Both the volume and the velocity has remained and as I speak to appears in other SaaS businesses. It's what many of US are seeing is that we're seeing on the more.
A critical eye coming to the larger expansion opportunities, where maybe there are additional layers of approval coming into play but on the sub couple of thousand dollars new business logo those are still flowing quite well.
Okay, great. Thank you and then as a follow up nice to see some impressive benefits stats on brand holder added Forrester last week, how his grandchildren ROI proposition been resonating with customers both for those who have adopted the solution and for folks who haven't and how might that evolve with the addition about that thank you.
While the addition of outfit is an interesting one because it's a response to what we're hearing from some of our larger enterprise opportunities, where they have larger teams who have larger production needs.
And that need for content automation really ties out to the enterprise opportunity. So I think it's a really strong it's a very favorable impact to brand pillars ROI statement.
But even at even in midsized companies I think theres still.
A lot of learning in the market right now about graduating from simply having your digital assets available to you to be able to tag them distribute them measure the usage of them and when people take the time to read that rois that in here from a rep. We're seeing very very positive response, we're still in that early phase of getting brand folder.
<unk> ramped on all of our reps so that co selling motion between our brand polo team in our mainline reps, that's something which we would expect to continue to strengthen throughout the year.
That's great. Thanks, so much.
Yes.
Yes.
Your next question comes from the line of Michael <unk> with Wells Fargo. Your line is now open.
Great. Thanks, I appreciate you taking the questions first is just kind of a higher level question and it ties into some of what you are saying and it's consistent with what we're hearing more broadly across software just signs of elongation more scrutiny and sales cycles deal decisions I'm, just wondering if youre, finding tangible SaaS around ROI or efficiency.
Gains are just how well equipped your sales team is to raise their hand and position us as these conversations just kind of just continue to layer on across software.
Yes, I think I think, especially when we're introducing our premium capabilities.
Those capabilities, either advanced which is the package of them or the one off capabilities I think those lend themselves.
Most strongly to an ROI statement and when people can move from qualitative to quantitative measures the confidence goes way up in the sales cycle.
I think what we're looking to do is how do you get more of those capabilities exposed to more people earlier.
So part of what we're doing on the engineering side over the next year is figuring out how we can get more of that portfolio exposed to people on a self directed basis as opposed to a human assisted sales basis. So I think it'll be very interesting to see next year, how that more self directed digital motion can open up more of the portfolio, but when you talk about.
Things like control center, and data shuttle and content automation lifecycle. It is grounded in doing more things letting the system do more things in an automated way that can tie directly to a human being or set of human beings not meeting to be as involved and thats, where people feel very confident in the formula and.
So my aspiration is how do we get more of those capabilities driven into the median buyer as opposed to 7000 of our more than 100000 customers.
That's super helpful. I think you've already gotten some questions just around the metrics on Q4 looks strong youre talking about.
Churn in the expansion rates holding in relatively well.
In terms of what you're guiding for is it is it fair to assume that more of those impacts show up on the net new side of your business and I know Theres generally a <unk> heavier billings dynamics. So just anything you can add around visibility you have into the existing base there given some of the uncertainty youre seeing.
Yes, Michael its <unk>.
If you look at the change in our billings guidance, which is.
The key part of the conversation is all in the existing expansion business and it's really net expansion side of it where this is playing out and if you sort of break it down into a few categories you would say.
Of the total change 1% of it probably comes from FX, 1% of it is almost tied to Europe .
<unk> economic weakness, we're seeing in Europe and have the balance of the numbers is probably 2% of it tied to just taking this large class of sales reps and getting them to the median level of productivity for our experienced reps and then the rest of it is in the in the macro changes out there.
So hopefully that gives you the color you're looking for.
Great you quantifying I think that's very helpful. Thanks.
Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.
Pete just on the margin.
Are you thinking about that.
Environment, we're in and the expenses that you are carrying going forward are you still holding your plan for quarter Robson.
You said you had planned in early year or are you tapping their rates embedded there as well.
To tighten up that approach.
Brent I think what we are focused on is driving operational efficiencies in what I call. The non revenue generating roles that we've got we've moderated our hiring plan focusing on ancillary and support roles that encore to revenue generating set of activities. If you will we've also taken the approach of.
What I call hiring.
In different locations and really focusing on things, which every expense dollar is important in taking the approach. If we will review every dollar and find efficiencies there as it relates to the sales rep and the quota class we feel really good about the capacity we are carrying in and its going to set us up really well not just for this year, but the way we.
Think of FY 'twenty, four and how that appears that we will make changes to our sales capacity based on set of management adjustments.
Onboard reps, but thats the plan.
Okay, and then just a quick follow up.
When you guys talk about some of the pressure you're seeing.
Is it is it more seat based are you seeing more seats or upsell to higher value inside the installed base what are you seeing there.
I think we're seeing it in two forms I think we're seeing it I would describe it in terms of customers who are earlier in the journey of seeing more of it so that could be a seed based expansion or their ability to buy capabilities in packages, you're seeing some of that but I think youre not seeing it as much in customers who are way down the journey.
With us and has seen the full value and David I would say expanding at rates, which were consistent with what we planned.
Thanks.
Your next question comes from the line of George ironic with Oppenheimer.
Your line is now open.
Thank you for taking my question, so maybe following up on that.
Sales investment priorities that you just talked about Pete can you give us some.
<unk> on the R&D priorities and how youre looking at the near term investment.
That's you're prioritizing now.
Yes, it's part of R&D is we hired a large class of our R&D.
The capacity, we need it early in the year and we continue to build that through Q2, instead of very targeted areas. We knew we needed to grow in.
So that's been the playbook, we're going to be looking at opportunistic hiring in R&D as we go through the year, but we're certainly not sort of index to the same level of hiring we had in the first half.
Okay, and maybe mark.
Following up on that can you give us a sense like you talked about the self service investment are there other areas.
From an M&A perspective, or a roadmap that you're really focused on.
Yes, as we head into engaged we're going to be announcing a number of things.
In late September and they really go across.
The entire portfolio from enterprise control and governance capabilities to scale capabilities and are in our control Center line.
Two experiential things that impact every new collaborator and every new person, who signs up for our service and I think one of the things one of the benefits we get from operating at scale is that we don't have to make choices at the expense of one of those important areas. So I really feel good about the investment balance we've achieved and we have not had.
To eliminate focus from any one of those important veins.
Thank you.
Your next question comes from the line of Rishi <unk> with RBC.
Your line is now open.
All wonderful thanks, so much for taking my questions.
Maybe first I wanted to start.
Just doubling down a little bit on brand folder and outfit. It does feel like you're maybe and please tell me if im wrong on this interpretation of industrial like you are kind of doubling down on the marketing use case I know this is a horizontal platform. There's virtually unlimited use cases, but can you maybe talk a little bit about the feedback that you've been getting from.
Our customers and prospects that led to kind of this motion to go deeper on the marketing side and then I have a follow up.
Yes, I think when you when you can identify a pattern of requests, especially within the enterprise class buyer.
Huge gift when you see a pattern emerge in terms of what multiple people want.
And this notion of.
Being able to store and classify and distribute content everyone gets that I would say the the importance of not just being able to create a template which is here's my digital asset I need to overlay some content on it but saying I need to do that at scale, because I'm running a campaign with 300 different assets there needs to be created if you don't have that.
Youre basically telling someone build it manually do 300 assets and what content automation does for you. It says define your frame heavier content, which will live in a smart sheet and then merge that and you do you can eliminate a lot of manual load within your design team like that is a really easily understood our concept.
What we're seeing within brand folder is that the residents of digital assets is starting to expand beyond marketers. So when you have people within health within construction within tech all keying off on that I think it's still early but we are definitely seeing signs of relevance outside of the marketing function, but I think the <unk>.
Content, where as we talk about quantifiable quantifying value the absence of those content automation I think puts you back and Fortunately there sort of a manual discussion, which is really counter to our thesis. So I think it's a really nice complement to what our what our brand promise has been.
Okay.
I Wonder if that's really helpful.
And then look I appreciate all the commentary around expense control, obviously, the prudent thing to do in this environment.
But maybe one that I'd like to drill down a little bit more on as the stock comp right. It definitely continues to get elevated right sbcs now about 25% of revenue Youre tracking close to 4% annual dilution like that and I would say, it's obviously, a massive way to analyze a bit but maybe taking a step back can you talk a little bit about your philosophy.
Be around stock comp and any kind of longer term or medium term plans you may have to kind of get stock comp down over time. Thank you.
So Rishi this is Pete.
Your question on stock comp, let's talk about the texture of how stock comp has created youre generally carrying a cohort of multi years of grants, which all their into set of annual compensation levels. They become a part of the stock Grant calculation, we're extremely mindful in controlling and managing this expense and it starts with how we think of <unk>.
Doc and how we think about leveraging it so we haven't taken the approach of what I call re greening our entire population we've taken a very thoughtful approach of saying, we're going to focus on selective number of highest coming into the business granting them stock on what we consider as a reasonable basis and really managing that the tour.
Stock grants first and then driving that into compensation expense and ensuring that we have outcomes that are acceptable to us. So that's been a part of a deliberate effort Mark myself and the management team has gone through.
Alright, Thats really helpful. Thank you Pete Thank you Mark.
Thank you.
Your next question comes from the line of Scott Berg with Needham. Your line is now open.
Hi, everyone. Thanks for taking my questions I guess I wanted to pivot a little bit and talk about outside a little bit more.
Small purchase price here.
Youre not obviously buying customers here, you're getting product on this says.
Just to understand a little bit more of a fit with branch folder and from a pricing product perspective is this something that can really drive.
<unk> in a significant way over time, it's developed.
Product as you want or is this more of a maybe a smaller add on that just helps trades Nielsen.
This differentiation from their.
A competitor set.
I think first Scott it would I really see it as an opportunity to improve our win rates with brand folder. So I think thats thats. The primary benefit there is evidence within their customer portfolio that larger organizations are signed significant value to this now. This is a it is that is an emerging set of evidence.
We see at scale some of those some of their customers being multiples of size of the average revenue that brand folder customer would have standalone. So we will we will integrate it we do see it as an add on for which we will charge as opposed to having it be a freebie.
Degree to which that will manifest itself in a meaningful adjustment to our revenue.
Early days, but I, absolutely see this as a buy up opportunity for customers, because theres such value associated with them.
Okay.
Got it helpful. And then following up on Keith's comments earlier about sales rep hiring this year.
Most of the.
I guess not necessary cost reductions with delayed hiring as a non kind of sales or revenue revenue generating positions here going forward in the rest of the half is should.
Should we take that kind of the same way around the.
The rest of the sales kind of ecosystem within the company outside of just the quota bearing sales reps.
Yes, I think you know we've taken the approach of the quota carrying field carriers. There's many of them in the in those roles were generally leaving that capacity sort of as the capacity to be able to deal with and help us to 'twenty four but their support roles in sales, which are required us like our moderated hiring plan.
In terms of infrastructure roles that support sales systems, those I consider more in the box of what I call. The rest of the folks who support the sales organization.
Got it very helpful. Thanks, Kevin.
Your next question comes from the line of Jacob Broberg with William Blair.
Your line is now open.
Hey, guys. Thanks for taking my questions.
Just wondering if you could talk more about the demand that youre seeing in some of the notes those newer products like work apps or data shuttle and brand owner and have any of these been more or less prioritized given the uncertain macro environment and some of the headwinds that you had experienced over the last month.
Yes, I would say the ones that are really resonating are the ones, where there is such a clear economic return on the decision. So data center is a great example.
To be manually managing ingress egress of data in your system or do you want to put it on our rails and hit the go button.
Super simple value prop so that one is probably the highest velocity simplest to describe.
I would say on the control center, one where it's analogous to data shuttle in the sense that do you want to have a program and replicated manually and do all of the portfolio management hand to mouth or do you want to put it on rails and control center and have it do it for you those are concepts, which are landing really well.
I would say on the on the brand solar side, the degree to which the company has big distribution needs. The degree to which it has content automation needs the degree to which it has a temporary need that drives the degree to which there is a strong ROI case for brand polar if it's simply I'd like to store my assets in a more digital more beautiful digital way, that's not really carrying.
The data fully so we're really mindful of understanding what that need is from the customer before we make that ROI promise, but again back to those back to those.
The data shuttles that control centers in the brand forward.
The ability for us to get our reps in a position where they can present that value is really really landing well with folks right now.
And one of the second part of your question was what's changing in the demand environment. So we've seen people really appreciate the impact of our premium apps call capabilities that really help us.
We are happy we want our salespeople the package because it's easier for them to consume and it helps the long term, but we are open in this environment and we are seeing customers elect in cases to buy the malachi because thats the way they want to consume them. So we have the flexibility in our model to do both and we're going to take the total addressable market.
Luis customers want a set of use it.
Yeah.
Great. Thanks, that's really helpful. And then can I just double click on some of the sales headwinds that you're experiencing is it really just a macro and training issue are there any territorial or quota restructurings that you plan to complete over the balance of the year.
So I think the <unk>.
Headwinds. We described were three park there was an elongated sales cycles. We were seeing we were talking about seeing some deal compression.
And then there was an additional levels of approval layers that were being introduced into the process. So those are the what I call macro elements that we were seeing across everything we were experiencing in our entire base. If you will the second part of your question was what was additional is we had taken.
Sort of a very large class introduced that into the field and what we found is that there was more ramp time needed to get these folks to be productive not theyre productive today, but there could be more productive relative to our experienced reps and thats. The effort, we are driving with single minded focus to get to.
Sounds great. Thanks for taking my questions.
Your next question comes from the line of Keith Bachman with BMO. Your line is now open.
Yes. Thank you.
I have a couple of really focused on margins and I want to kind of build on the previous question on SBC.
If I look at the your your operating loss is improving pursuant to your new guidance, yet even if I kind of look at Q4, it's still guessing.
Getting a little bit here, but negative 5% kind of operating margins and the broader question I want to start with us.
As we reflect on our models here, how do we get to improve profitability, what's the key attribute because here.
Your average ACB is still pretty small relative to your client base $700000.
So your sales and marketing is certainly high relative to most software companies.
So the question is how do you improve your reach and grow your ACD, but at the same time I think satisfy investors.
In fact, you can improve your margins not only prove but start to generate non-GAAP operating.
Profit dollars, but if you could just is it simply scale, but how do you sold that sales and marketing riddle and really reach the operating profitability.
So key to your question has two components to it and I'll speak to both.
The first thing we're seeing in our business is our largest customers are driving the greatest profitability for us. So as we get bigger just the natural migration of the model to a larger percentage of our business coming from these larger customers is an inherent lift in profitability.
The second part of that is when you think of like introducing newer products like Brian floater. What we do is we leverage our mainstream sales force in what we call our core.
Prime core Prime model, where we're not adding pro rata as sales and marketing dollars, who are leveraging an existing base to farm demand and using that as a uplift to our margin profile. So think of those as to is the two drivers, which would you think of the drivers as examples in the sales and marketing efficiency can.
And then there are things, which we achieve a scale the larger we get the more we get to use location geographic hiring.
Patiency and automation, which we get to build and we've taken a single minded focus in doing that effectively and efficiently and between those elements we ever storing these built out for this year, but we don't expect it to stop here, we expect it to continue into future years as well.
Okay. Okay.
Yes, I think investors like to understand what the.
Roadmap looks like but I assume we'll find out.
Your guidance.
A few quarters on 'twenty.
'twenty three.
Our FY 'twenty four excuse me, but you led into my second question is really how do you think about.
M&A and if you.
Other parameters that you think are about.
In terms of willingness to do deals that might positively or negatively impact your operating margin trajectory or theres any boundaries that you would not.
Not do a deal in terms of the margin impact if you could just talk a little bit more about the philosophy.
On M&A as it relates to the.
The impact of margins.
So Keith I would signal that we've used in the past has historically always been where customers and enterprise buyers are telling us that there is a demand and there is a clear established signal and why that's important is because youre, establishing that into where you can eke out a return in terms of topline sales dollars and growth.
So we are looking at Adjacencies, which fit that profile. That's the first thing we've done even with the most recent acquisition of outfit. It really helps our brand further.
Sales perspective in future fiscal years and Thats, what we are indexed on so you asked me about the boundary conditions will be.
Extremely thoughtful about return that acquisitions give us and that's been the metric we've been using what's the dilution impact. It has what's the accretion I expect the top line and how much trading against those.
Right, Okay, alright, well congratulations to result, given the backdrop.
Pretty solid so congratulations that's it for me many thanks.
Thanks Keith.
Your next question comes from the line of Ben Jelen Bora with J P. Morgan.
Your line is now open.
Great Hey, Thank you for taking the questions.
To go back to the elongated sales cycles comment could you give us maybe more texture around if it was more enterprise slash small to mid market business driven.
Was there any difference between the various geos and was the elongation largely turnaround in larger size deals versus smaller.
So.
When we looked at it there was a general elongation of sales cycle, but I think it was more pronounced in the enterprise because you think of the sophisticated buyer that looks at every deal and the mechanism they have to react to things before they are fully trends in the in the in their business. We saw that so thats kind of what we would.
<unk> is being elongated sales cycles by by segment or theater.
I see understood, Okay, and the other question I guess when I'm looking at the billings guidance.
I did this math pretty quickly, but it seems like the second half slow is about 10 points versus the first half and it seems like the slowdown was more pronounced during during 2020 when you do take the billings guidance off the table.
At that time.
Maybe maybe compare the two environments what are you hearing.
You are hearing from customers are seeing in the deals now versus what was in <unk>.
That July .
April July timeframe loss in 2020.
Yes, I think.
What we're seeing is the I think.
The conditions that we saw in 2020, we're quite new to people right. The reset of the reset of variables that many people have to face before so I would say there was while there is.
Some lack of certainty on what the how the conditions are improving or worsening.
I'd say, we're dealing with slightly more recognized set of variables that we did in 2020, what's changed for us internally what's different in 2020 as we had we.
We had a different set of inputs we were dealing with so this year, we brought on the largest class in company history in the first half we didn't do that in 2020. So how we're reacting is fundamentally to a different set of conditions in terms of what the buyers are going through where the commonality does it is there.
Asking for what's the value what is what has changed a little bit. This go around is not only what's the value. What's the return, but I would say theres more focus now on how quickly can you get that returned to me. So I'd say the time horizon around the return on the investment is probably made more pronounced than it was in 2020.
Understood. Thank you.
Your next question comes from the line of Steve Enders with Citi. Your line is now open.
Hi, great. Thanks for taking the question.
I guess I would ask all of it more on some of the go to market.
Aspects of the business. Thank you mentioned that you thought there was more you can do on the sales enablement side to try and.
To try and turn things around but how are you kind of feel about the levers that you could potentially pull in some of the different marketing strategies to put in place to train.
To try and get some better penetration and expansion rates on accounts.
I think one of the things that.
We welcome changes.
In past years, our engage conference has been a big driver in terms of customer education and understanding of possibilities and also spending time with our most valuable teams in person to develop account plans is the first time, we're doing three years registration for an in person event is going well that'll be that'll be that'll be an event, where we have thousands of people.
In Seattle.
So we have some of our largest teams our largest customers already signed up where you have teams of people showing up representing those companies. So that's a really positive variable.
I would say other things that were doing is <unk>.
Improving our product marketing and how we cross sell and cross introduce the portfolio that we know is single digit penetrated today, so big product marketing push in the second half is around developing new materials notches for enablement, but also to educate customers at the right time on what they could be doing with smart.
And I think part of that is through we brought on a new CMO at the end of last year, Andrew and his team are hitting stride in developing new things or hiring new product marketing team members and I expect that to start benefiting us in the second half. So we have some changing variables there should be positive as we exit this year and head into next.
Okay. That's helpful.
And then I guess kind of beyond the marketing <unk> and what Youre doing for handful are there I guess, how do you think about other verticals or other core use cases, you could go after and really kind of simplify the solutions that are kind of more tailored for some specific specific areas.
Yes, we're doing work right now on <unk>.
Identifying commonality around use cases within our largest customers. So we just presented to our board. This last week. The approach we're taking on how to have a more recommendation based set of use cases that we can introduce to our sales team. So there's commonality in the core value prop not so much.
Just like ppm in marketing, but like more specific granular functional use cases in certain areas certain industries, where we've been very successful. So so that is something which is very much in flight right now I think.
In terms of how our customers are responding to use cases, I would say we continue to see requests for more sophisticated capabilities I'll give you. An example for years, we sold the ability to manage projects is scale and when we talk about.
<unk> resource to them, which we do very well we have given people the ability to track resource allocation across their work great. The largest companies in the world. We're also saying help me understand the forecasting of that don't tell me how them aside but what type of capacity do I have looking forward across the skill sets I have there is a whole set of capabilities.
Project and portfolio management, and the management and utilization of resources that is being developed today, which is going to be coming out in the coming quarters. So we're extending the depth of some of these capabilities as opposed to say what are other simple things. We can do in adjacent spaces. So I think the differentiation in our category.
Winner long term will not simply be a very broad based set of capabilities that are simple, but have very very discrete differentiating enterprise capabilities that are deeply understood and in demand. So as we build our portfolio. It's not about just broad needs by deepening and so far we've seen those capabilities work really well.
Okay perfect. Thanks for thanks for taking the questions.
Yes.
Your next question comes from the line of Josh <unk> with Morgan Stanley . Your line is now open.
Great. Thanks for the question I think with with billings linearity I would assume weighted towards the end of the quarter I'm. Just wondering why the macro impacts that surfaced in July didn't have a more significant impact versus the 44% billings growth in billings outperformance in the quarter.
The impact that we saw in July was partly through July . So you saw some impact of it and frankly without that impact we hadn't even bigger quarter.
Quarter would've played out in billings.
So that's the trend we saw and I think we saw that trend play out or extend itself out as we went into August as well and which became the basis of our guide.
Okay.
Makes sense. So it was would you say may and June .
We're sort of in line with your expectations or.
Like kind of thinking month by month or are those actually.
Extra strong.
No I think month by month, they were fairly consistent with what we would have expected and what we've historically seen so.
There was no nothing unusual about may or June .
Okay, great. Thank you.
Yes.
Your next question comes from the line of Andy Vegas, Barry with Bahrenburg. Your line is now open.
Thanks for taking my question I guess first just a follow up on an employee side I mean.
Employee retention been an issue.
And particularly on the quota carrying side or have you not seen any changes.
We have not seen a meaningful change in attrition rates.
Great and then secondly, just on given the change in market conditions I, just wondered if you've seen an improved competitive environment, particularly from the smaller players.
Is that been unchanged.
But it's we don't there's not a lot of head to head as I said, when we have those those like those rare, but notable rfps, we're talking single digits in the quarter right. So it's difficult to say what the others are experiencing.
Again, most of our deals are not contested most of our businesses grounded and expansion, we're really committed to smart she already so it's.
It's difficult to say, what they are saying I think I think what we're benefiting from is where a lot of our demand comes from the usage of our products, where we're not overly reliant on the new marketing mechanism like advertising mechanisms.
Are seeing.
Through our now analysis that.
Theres been a little bit of a raising cost of people having to battle. It out for the next new dollar and Thats something that we Fortunately don't have to participate in this heavily.
Understood. Thank you.
Your last question today comes from the line of Robert Simmons with D. A Davidson your line is now open.
Hey, Thanks for taking our questions first to clarify one thing on the headwinds that you're experiencing are you seeing increased planned downgrades or use a contraction of clients or is it truly just how many kind of expense side of things.
Robert we're seeing it entirely on the net expansion side, our churn remains at a record low level and I shared that our churn rate is now below 4%. So it's all of the net expansion side that we're seeing these headwinds.
Got it great and then.
Have you built in any revenue benefits this year from holding engage in person or would that be upside to numbers.
So we built in some level of what I call.
What we would expect a modest amount of an improvement in our close rate based on what we're experiencing with engage in September but we haven't built in a big upside.
Got it that makes sense. Thank you very much.
You're welcome.
This concludes today's Q&A I'll now turn the call back over to Aaron Turner.
Great. Thank you so much and thank you all for joining US today, we will speak with you again next quarter.
This concludes today's conference call. Thank you for attending you may now disconnect.
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Thank you.
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