Q3 2023 Smartsheet Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at.
Speaker 1: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet third quarter fiscal 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
At this time I would like to welcome everyone to the smart cheat third quarter fiscal 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.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you. It is now my pleasure to turn today's call over to Mr. Aaron Turner head of Investor Relations. Sir. Please go ahead.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead.
Thank you Brad good afternoon, and welcome everyone to smart sheets third 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, our CFO P. Garble today's call is being webcast and will also be available for replay on our <unk>.
Thank you, Brent. Good afternoon and welcome everyone to Smartsheet's third 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 Smartsheet CEO Mark Maeder and our CFO Pete Godwell. Today's call is being webcast and will also be available for replay on our Investor Relations website at investors.smartsheet.com.
After relations website at investors that smart Qi Dot com, there's a slide presentation that accompanies pizza prepared remarks, which can be viewed in the events section of our Investor Relations website.
There's a slide presentation that accompanies Pete's prepared remarks, which can be viewed in the events section of our investor relations website. During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends. These forward-looking statements are subject to a number of risks and other factors, including but not limited to.
During this call we will make forward looking statements within the meaning of the federal Securities laws. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends. These forward looking statements are subject to a number of risks and other factors, including but not limited to those described in our SEC filings available on our Investor Relations website.
And on the SEC's website at Www SEC Gov.
those described in our SEC filings available on our Investor Relations website and on the SEC website at www.SEC.gov.
Although we believe that the expectations reflected in the forward looking statements are reasonable our actual results may differ materially and adversely.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ materially and adversely. All forward-looking statements made during this call are based on information available to us as of today, and we do not assume any obligation to update the result of new information or future events except as required by law. In addition to the US GAAP financials, we will discuss certain non-GAAP financial measures.
All forward looking statements made during this call are based on information available to us as of today and we do not assume any obligation to update these.
As a result of new information or future events, except as required by law and.
In addition to the GAAP 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 and with that let me turn the call over to Mark Thanks, Eric.
A reconciliation of the most directly comparable US GAAP measures is available and the presentation that accompanies this call, which can also be found on our Investor Relations website. And with that, let me turn the call over to Mark. Thanks, Aaron. Hello, and welcome to our third quarter earnings call for fiscal year 2023.
Hello, and welcome to our third quarter earnings call for fiscal year 2023 today.
Today I'd like to focus on three topics, our solid performance in the quarter, how were improving our operational efficiency in the current macro environment and how delivering measurable ROI for customers drives our durable long term growth.
Today I'd like to focus on three topics, our solid performance in the quarter, how we're improving our operational efficiency in the current macro environment, and how delivering measurable ROI for customers drives our durable long-term growth.
Well Pete will provide additional details I wanted to call out some of our strong financials from the quarter.
Revenue for the quarter was $199 $6 million up 38% year over year.
While Pete will provide additional details, I want to call out some of our strong financials from the quarter.
We added $56 million in annual recurring revenue, bringing our total IRR to more than $792 million.
Revenue for the quarter was $199.6 million, up 38% year-over-year.
We added $56 million in annual recurring revenue, bringing our total ARR to more than $792 million.
We added many new customers in the quarter, such as recruiting software providers seek out monster energy the social good empowerment platform bond terror and Arizona beverages.
We added many new customers in the quarter, such as recruiting software provider SeekOut, Monster Energy, the social good empowerment platform Bonterra, and Arizona Beverages.
And we expanded smart sheets footprint significantly at the Casa AGC Biologics and Seattle Children's hospital among others.
And we expanded Smartsheet's footprint significantly at Picasa, AGC Biologics, and Seattle Children's Hospital, among others.
Our strong expand and find motion within our customer base continued with 235 customers expanding by $50000 or more and 79 customers expanding by $100000 or more.
Our strong expand and fly motion within our customer base continued, with 235 customers expanding by $50,000 or more, and 79 customers expanding by $100,000 or more.
We also now have 40 customers with <unk> over $1 million.
And we ended the quarter with more than $11 7 million smartphone users.
We also now have 40 customers with ARR over a million dollars.
Last quarter, we discussed how our new sales reps were ramping more slowly than sales reps from previous years.
And we ended the quarter with more than 11.7 million Smartsheet users.
Last quarter, we discussed how our new sales reps were ramping more slowly than sales reps from previous years.
This quarter, we saw improvements in quota attainment and pipeline generation from our newest reps, we exited the quarter with a record pipeline and so our pipeline conversion rate improve after macro related softening in Q2.
This quarter we saw improvements in quota attainment and pipeline generation from our newest reps.
We exited the quarter with a record pipeline and saw our pipeline conversion rate improve after macro-related softening in Q2.
We also made significant improvements to our profitability in Q3.
Our Q3, non-GAAP operating loss was negative $4 3 million.
We also made significant improvements to our profitability in Q3.
Significantly better than our guidance and a seven percentage point sequential margin improvement from Q2.
This improvement is a function of the adjustments we've made to our hiring plan for the year, our heightened focus on operational rigor and financial policies and inherent economies of scale in our business model.
We expect these margin benefits to persist, allowing us to improve our non-GAAP operating income and free cash flow guidance for the year and beyond.
The growth we experienced in the quarter came in large part from smart sheets ability to provide measurable ROI for customers as they navigate the macro backdrop.
For example in Q3, a fortune 50 healthcare company expanded its smart sheet investment by over half a million dollars.
Bringing their total smart <unk> to nearly $2 million.
Since moving to advance gold a year ago. They have seen a 56% increase in license growth as more teams across the organization Leverages advanced capabilities to managed programs and processes at scale.
Their data shuttle usage has increased almost 300% over the past year and we now have 85 workflows powered by our bridge integration product.
One of the biggest benefits this customers, saying some smart heat is improved efficiency, leading to a measurable ROI.
For example, one team used to workflow powered by bridge to automate complex manual process for managing staff changes and application requesting decreasing the amount of time spent on it by more than 50%.
We also saw a leading provider of customs brokerage and logistics upgrade to <unk> enterprise licensing and advance gold platform after determining that advance with saved them nearly 3000 hours of labor each year, those hours saved or delivering more than $300000 in ROI for the company, while giving it the ability to handle a larger volume.
A quick win transactions and improve employee engagement.
In another Q3 advance deal the leading integrated reporting platform provider, where kiva moved up to advance. So the professional services group could leverage control center and the <unk> Salesforce connector to implement a new project and portfolio management solution.
They chose <unk> as their PCM platform because it offers both introductory and professional great tools for project management that can scale to enterprise levels.
This solution also gives project managers insight into project risks and timelines and makes it easy for them to see all assignments and one view, helping reduce project cost overruns.
They estimate that in over three years, they will earn a 340% return on their smart investments.
On the innovation front, we launched several smart heat capabilities and experiences at our September engage conference, where we welcomed thousands of <unk> customers and partners in person for the first time in three years.
It was incredibly energizing and gratifying to connect with customers face to face and hear their smart feed stories HP Webex Abbvie and many more presented during breakout sessions and shared how smart heat is empowering them to solve tough problems deliver on promises and drive tangible results.
At engage we launched portfolio workouts, which combines the power of control center for managing large portfolios with the end users simplicity of workouts.
Our global Food services company recently chose portfolio work apps as the ppm solutions for its global transformation initiatives.
The company has a complex global operating model and portfolio work apps gives its portfolio managers the ability to create portfolio abuse tailored to specific organizational roles that span multiple regions countries and segments.
By leveraging portfolio work apps. The company now has a clear line of sight into any given initiative across the global matrix environment, allowing leadership to drive our strategic roadmap and achieve <unk> targets.
We're also deepening our investment in the ppm space by launching new resource management capabilities, such as capacity view that gives resource managers increased visibility of their capacity for planning and deploying talent.
We're continually refining our governance and security controls to meet customers' current and future needs.
At engage we shared details on data egress, a new layer of control over how smart T data can be exported outside of an organization.
Such robust security and governance capabilities, which protect confidential information via granular control are a key reason many companies choose our platform.
For example in Q3, a large mortgage lender chose smart heat over another cwm's solution. When the competitor solution was unable to comply with certain mandatory requirements.
This customer was impressed with <unk> enterprise grade security and like how easy it was for teams across various lines of business to start using the platform. Ultimately they felt smartly was the best platform to help them meet their goals for managing the business more securely and efficiently.
We also announced our new desktop application, which was enthusiastically received by people as worth of new ml powered home and re imagine search functions. These investments streamline the dailies market experience for all users by enabling them to find and act on their work quickly.
On last quarter's earnings call I mentioned, our acquisition of the outfit brand management, Templating and creative automation platform, which we have integrated with brand folder <unk>.
The synergy of the brand polar output solutions is already providing its value for customers in a meaningful way.
In Q3, we landed a $300000 plus deal with a major appliance manufacturer that will be using brand holder plus outfit as their single source of truth for digital asset management and production.
Each brand within the company will use brand polo to track and manage assets, helping reduce asset sprawl.
Outfit, who will provide a self service model for building automated asset templates that they can distribute to wholesalers and retailers to ensure consistent brand marketing.
This outfit powered content automation solution will help the company reduce of 14 to 16 week creative and distribution process to four weeks driving a 400% faster time to market for their marketing campaigns.
By providing transparent and efficient content creation distribution and tracking capabilities. The new system allows the company to utilize its existing in house creative team, while eliminating significant outside agency related costs.
As you've heard today, despite the current macro environment, we had a strong quarter and remain well positioned for continued growth.
Just last month in their Q4 2020 to report <unk> was named a leader in the Forrester wave for collaborative work management tools there.
The report recognized that smartly continues to provide an extremely broad set of use cases, among the leaders in this forrester wave.
And Thats smart sheet strengths are the extensive availability of work types flexible use case creation and end user automation capabilities.
With people under greater pressure to choose the right Cwm's solution for their needs reports like this are important in helping guide their decision making.
In closing Q3 was another solid quarter for our company, especially considering the global macro headwinds with our performance in the quarter. It continued focus on operational efficiency and the way we are delivering ROI for customers I remain confident in our ability to deliver long term durable growth with improving profitability now.
Now, let me turn it over to Pete.
Thank you Mark and good afternoon, everyone.
As Marc mentioned Q3 was a strong quarter that reflected durable growth and improving profitability we exceeded.
Our guidance on both the top and bottom line as customers continue to turn to smart sheet for their diverse set of mission critical work management needs and we benefit from improving economies of scale and an intense focus on operational efficiency.
We saw particular strength among our enterprise customers as these customers continue to deploy our capability based products to streamline their most mission critical workflows.
Capabilities due to 29% of subscription revenue in Q3 aided by strong growth in our advance offering and brand further.
I will now go through our financial results for the third quarter.
Yes, 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.
Third quarter revenue came in at $199 6 million.
Up 38% year over year.
<unk> revenue was $186 1 million rep.
Representing year over year growth of 40%.
Services revenue was $13 5 million representing year over year growth of 12%.
Turning to billings third quarter billings came in at $219 $6 million representing.
Representing year over year growth of 36%.
Approximately 92% of our subscription billings were annual with 4% currently.
Quarterly and semiannual represented approximately 3% of the total.
Multiyear billings represented less than 1% of total billings.
Moving on to our reported metrics the number of customers with over $50000 grew 43% year over year to 2962, and the number of customers with <unk> over $100000 grew 55% year over year to 1346.
These customer segments, now represent 60% and 46% respectively.
Total error.
The percentage of our air are coming from customers with <unk> over $5000 is now 89%.
Next our domain average ACD grew 25% year over year to $7951.
We ended the quarter with the dollar based net retention rate of 129%.
The full churn rate remains below 4%.
Given the current macro environment, we expect our adult our overall dollar based net retention rate to be in the mid 120 <unk> by the end of the year.
Now turning back to the financials. Our total gross margin was 81% our Q3 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 $4 3 million or negative 2% of revenue, which represents a seven percentage point sequential margin improvement.
Margin improvement was the result of cost saving initiatives, we discussed in previous quarters, which included moderation of our hiring plan and cost rationalization.
Additionally, we led portion of our revenue outperformance drop to the bottom line demonstrating the operating leverage inherent in our business model.
Based on our improved gross retention, we also moved to our four year amortization period for our Commission based commission expense from a three year amortization period.
This accounting change contributed about three points of margin improvement in Q3.
Free cash flow in the quarter was negative $4 6 million.
Now, let me move on to guidance before I go into the details a few comments on our approach to guidance.
The macro environment remains dynamic impacts near term visibility.
We are therefore electing to remain appropriately prudent as it relates to our topline performance.
For the fourth quarter of FY 'twenty, three we expect revenue to be in the range of 205 to $2 7 million and non-GAAP operating loss to be in the range of negative $220.
We expect non-GAAP net loss per share to be negative two two.
Two zero cents based on weighted average shares outstanding of $131 5 million.
For the full fiscal year 'twenty, three we are raising our billings guidance to $878 million to $885 million.
Representing growth of 33% to 34%, we're also raising our revenue guidance to $7 $60 million to $762 million.
Representing growth of 38%.
Expect services to be 7% of total revenue.
We are.
Moving on our non-GAAP operating loss to be in the range of $45 million to $43 million and non-GAAP net loss per share to be 31 to 30.
For the year based on approximately 130 million weighted average shares outstanding.
We are raising our free cash flow guidance for the year to $5 million.
To conclude.
Q2 was another strong quarter.
We continue to demonstrate our ability to drive durable growth with improving profitability as the most demanding businesses in the world turning to smart sheet for their mission critical and data intensive work management needs.
Now, let me turn it back to the operator for questions operator.
At this time, if you'd like to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of.
John <unk> with Guggenheim Securities. Your line is open.
Thank you. Thanks for taking my question I wanted to dig in on your comment about improved pipeline conversion given the soft softening macro backdrop.
You raised billings guidance for the year modestly, which is certainly positive as we think about next year are you assuming that pipeline conversion stays at current levels or improves throughout the year and then how should we think about pipeline conversion relative to workforce productivity.
Some of the investments you've made in the front and the Salesforce continues to ramp sorry for the long question. That's my bad habit.
John This is Pete.
I think your question in parts. The first part of your question was pipeline conversion.
Essentially what I talked about last time was.
Ramping our new reps, we saw our pipeline conversion as it related to rep productivity improve from that and what we saw in terms of the physical view closing and pipeline October was a strong month for us as it relates to pipeline closing. So those are the two elements of dimension onset of how pipeline can.
<unk> looked one from a rep standpoint, and the other from the business deals and how they closed.
Can you repeat the second part of your question you asked about side just wanted to take them in sequence.
Okay.
Ed.
As we think about next year.
Should we assume that pipeline conversion stays at the current levels.
Or should we assume it gets better or or who knows macro backdrop, maybe maybe that changes for the worst two how should we think about it or how do you how do you think about it.
As it relates to guidance.
Suddenly we haven't come up with guidance for next year, but what I would tell you is two things it's going to be a function of.
Sort of what the macro is because thats going to decide.
The number of deals and how those are progressing we will go into the year with a sales team, that's very ramped and thats going to be positive to conversion.
Okay.
All makes sense well, thanks nice job guys.
John .
Your next question is from the line of D. J Hynes with Canaccord Genuity. Your line is open.
Hey, guys congrats on a nice set of numbers here.
Mark one for you I'm curious how if at all us evolve the go to market messaging in the current environment.
Obviously rois important any sale you mentioned it several times in your prepared remarks, I'm wondering if there are certain products or use cases that get more emphasis in a tougher environment.
So I think when you break it down and it's most simplest terms were.
Helping companies drive revenue or achieve cost savings and when you can apply a program a process something of scale to one of the things that they're trying to achieve and using plain speak like that you typically have an opportunity to have a conversation. So when we think about things like control center data shuttle moving information more quickly and efficiently across systems.
Think about having fewer hands on things so you can get.
Shorter cycle times. These are all very hard ROI.
The calculations you can make so I think the shift the continued shift from the soft factors in terms of employee engagement, which is super important but harder to calculate a benefit from customers are responding to how we've oriented ourselves into such discussions and I think that goes across not only selling seats to somebody but also.
So introducing our capabilities, which are really the underpinnings for a lot of those calculations.
Yes.
That's helpful.
And then as a follow up look strong.
Strong quarter through conversion rates record pipeline that does it at all make you kind of rethink the moderation in hiring plans that we've talked about and I realized that stuff doesn't look around in 90 day cycles, but I guess I'm getting at kind of the commitment.
Longer term margin expansion based on what you are saying.
So I think we had a really robust start to the year. We brought on a healthy number of team members and we have not gone through.
A massive layoffs in our company. So we have retained really good strength, we've invested in ramping those individuals and as Peter said I think going into the end of the year with a ramp team a larger ramp team than we had a year ago that actually gives us quite a bit of confidence throughout and execute so I think we would be in a different position had we finished the year with a very heavy.
Re jettison all of that great talent, we brought up the year. So I feel like we're still the beneficiaries of some of those earlier in the year moves.
That's great to hear outlook, Congrats guys I appreciate the color.
Thank you.
Your next question is from the line of Brent Thill with Jefferies. Your line is open.
Mark you were on the CRM last time, we went through the recession, obviously youre in a completely different position than any learnings parallels that that.
That youre seeing in Kpis, you're monitoring going into the end of calendar 'twenty three.
Yes, I think I think one of the big lessons Brent is.
He has been quick.
And this whole notion survival of the quickest I think you have to pair that though with key thoughtful NSA.
We're not just solving for Q3, we're not solving for Q4.
24 is right around the corner PNR, starting talking about FY 'twenty five. So these are all important dimensions and I think one of the learnings is not to get too over rotated on that next 90 day window and I think Pete has been a great partner to me and helping manage some of that some of that balance. So I think thats, probably the largest takeaway.
Yes, I mean, Pete just as a quick follow up on the Rep productivity I mean.
It's kind of counter to what we're hearing at other companies what do you think inverted.
The quota attainment for you what what what what changed there was something that happened and then demand environment was it one particular.
Geography, what was was there anything you can put your pulse on because that's kind of counter to what we're hearing at other companies right now.
Yes, the rep productivity that I was describing with for our newer reps, we had a series of what I call well timed.
Absolutely meticulously defined initiatives of how we would ramp the newer rep into territories. They had never managed accounts. They had never managed and I think we're seeing the dividends of that play. So we've seen the productivity of those reps climb now remember we had a significant class that we ramped in so when you're looking at the weighted average of the impact.
And that many people getting ramped up with the systematic set a place that's what we're seeing.
I think it's also important brand to recognize that we are making a relative statement. We were not pleased with where we were last quarter in terms of rep productivity on certain cohorts, we're seeing improvement there. So heading in the right direction I think that is a statement, though against what we saw last quarter as opposed to <unk>.
Our exceeding at all levels on all fronts I think we still have good room to go to continue to improve.
Thank you.
Okay.
Your next question is from the line of <unk> Bora with Jpmorgan. Your line is open.
Oh, great Hey, thanks for taking the questions and congrats on the quarter.
Mark I, just wanted to understand a little bit I guess, it's a great quarter seems like numbers are great, but we are hearing.
A lot of consternation from other companies as well right.
Last quarter was.
<unk> faced some difficulties so I'm trying to understand how how does the macro feels for you is it is it the improvement that you did with it.
We did some of these messaging. Please that helped you this quarter versus the <unk>.
The normal discussions on a macro front is that kind of similar to last quarter.
Or is it does it.
Does it feel a little bit better or worse.
I think it feels quite similar I think the way we are engaging in those conversations are starting to produce yield for us.
But I would I would say that the toward the tenor within the customer environment is quite similar I would say how we're responding to that has has proven to be positive.
And I think that is a function of rescuing more confidence us being able to present these solutions in ways that resonate with them.
But I would say it's.
It is as much getting yourself higher in that priority list for customer consideration as opposed to the amount of budget customers have starting to swell again. So I think it is really our placement in that stack rank that's helping us.
Got it one follow up.
I wanted to ask you about <unk>.
Have some we have had some conversations with some of your customers.
Are talking about consolidation not just around the fourth management applications with consolidation of other third party apps in house apps scheduling app or something else rates, which are being built on top of work apps.
Are you seeing that is that kind of the driver for the enterprise planned SKU.
At this point, where people are trying to save money do more with less.
Yes, I think anytime you have the beautiful thing about the platform as opposed to appoint tool is that it can be utilized in a multitude of ways I think anytime someone sees.
A set of technologies that they can utilize across multiple use cases and drive a higher yield for an amount of spending thats a good thing.
I think <unk> is a contributing force there I wouldn't say work apps is the tip of the spear. It's one of a whole multitude of things that we're presenting to clients I think in the coming years I think work apps will continue to gain steam the release, we had an engage by connecting it to control center, which has been a really successful offering for us customers are really happy to.
See that I think we'll see some benefits of that marriage between cost control center and work apps in the quarters to come.
Got it. Thank you so much I'll get back in the queue.
Your next question is from the line of Josh Baer with Morgan Stanley . Your line is open.
Great. Thanks for the question and congrats on a strong quarter wanted to ask one on macro and sort of in relation to guidance.
We can see the deceleration in the implied Q4 billings guidance and the commentary just around the.
Decline in the net retention rate. So I was hoping you could talk about some of the macro assumption that's embedded in that guidance and when you talk about prudence.
What does that mean, if you could add some details there.
Absolutely so Josh.
The growth of <unk> implied in our billings guidance is a function of the strong comp from Q4 from a year ago, and we've combined that with sort of a prudent outlook given the macro environment.
It includes an expectation of lower customer budget spending sort of compared to prior periods.
And Thats, what substantiates the macro in your question, which is we're seeing a macro.
Worsening, but the good news is when I gave you guidance a quarter ago. I gave you a composite guide of Q3, and Q4 and we had projected that.
Q4 would be softer given a worsening macro that was built in so that's the basis of the assumption.
Okay, great that makes a lot of sense and then if you could just add any commentary on the linearity.
Sort of demand trends month to month throughout the quarter and into November .
How have you been seeing things get worse over the last months.
Leading into Q4.
So the.
October was a strong month for us relative to the what I call the close rates in the pipeline close rates we saw.
And you know November turned out steady to our expectations, we expected the macro cycle to be in play and produce results that are very consistent with our expectations. So remember in Q4. There is a great deal of business to be booked in December and January so that's what's built into our assumption as we've guided.
To the.
Great. Thank you.
Sure Josh.
Your next question comes from the line of Scott Berg with Needham Your line is open.
Yeah.
Hi, everyone. Congrats on the good quarter and I guess that two questions here first of all Pete you talked about capabilities, where I think it was 29% of revenues in the quarter.
As the company continues to move up market more what does that mix look like at kind of I don't know notes peak levels and then how should we think about the <unk> lift that you are gaining.
From those customers that are adding on some of these capabilities.
So the Omega metal steeped into sort of where we see capabilities.
And I think when you talk about the percentage of capabilities of total it sort of implies that there isn't.
We're going to be as much growth on the user license part of it we see both as really solid drivers we see.
<unk> use case, if you remember that the information Mark provided on the latest reports we have a wide variety of use cases that drive.
What I call our expand motion.
Capabilities as the client piece of it we think of that number has been is growing over time, because they are fast growing relative to our core licensing business and we gave some guidance during our last analyst day on how big they could be but we're scratching the surface on that part of it so I do feel like as customers start to unlock.
The scale that they need after they've deployed the solution youre going to see more and more customers small and large start to use them in the most demanding ways.
Got it that's helpful and then from a follow up perspective, maybe this is for Mark.
Wanted to see can you talk about the competitive environment a little bit.
And I asked the question. The framework you had a competitor report their results Tonight that were not nearly as strong as yours will go with that are.
Are you seeing anything different out there that might be driving the strength of your business versus others, maybe not being as well. Thank you.
It's harder for me to make a relative statement Scott I think as I said earlier I can share what what customers appear to be responding well to our offering and I think the capabilities.
Alongside the core licenses that is a composite that people are responding to it.
And it manifests itself not only in growth, but also retention. If you have multiple value points that you can deliver to somebody I think you have a healthier relationship.
And I think thats, helping drive our business.
Great Thats, all I have congrats on a good quarter.
Thanks Scott.
Your next question comes from the line of George <unk> with Oppenheimer. Your line is open.
Thank you for taking my question and also my congratulations.
Mark maybe.
Could you give us a bit of perspective on the desktop app.
What kind of feedback you're getting.
From mid March at this point.
Yes, George I think one of the things that's always set aside funding over over the many years. We've been doing this is some of that software companies get so excited about the next most extremely high value austere feature.
Some of those but I really want the easy thing.
And I think the desktop App has such a beautiful example of that where people want to see it in the tray on their machine they want to be able to get quick access to it. They don't want the task that represent all their work and smartly commingled with a bunch of other tabs and their chrome or Safari browser.
Microsoft browser. So these are very simple things that people respond to and I think when somebody is living in your App and you can make their life easier either through a better design or more quicker access we're thankful for it.
I think I think some of our team members were surprised at engage and this is something which you just can't substitute with a digital conference. When you look at the number of people queued up at our booth wanting to learn about this Spain versus many other things you really get the palpable sense for Wow. This matters and the desktop App is one of those it's been something we.
Been working on for some time.
Thousands of people many thousands of people are using it today I think it's still an EAP it'll be released shortly broadly so we will continue to invest behind that.
And with that maybe and can you give some perspective on when people are in the App are you seeing them engage with multiple products in a more.
Broadway with an overall platform.
When you say more products, you mean more elements of our product or integrations with more and more elements of the old product.
Yeah, and I think I think as we as we dovetail things like brand folder into the experience in our resource management more into our core experience.
By lowering the hurdle Hyatt for people to easily to reverse yes, we are seeing that happen. The one thing that I'm quite looking forward to and I shared this on our prior call as we remove further remove the friction from people being able to explore our entire portfolio.
As Pete said, a second ago.
Today, a lot of those capabilities are our really our consultative sale and were prepared in the engineering team are working on continue to let people discover explore realize the value and then ultimately by those in a self directed manner. So I think in the coming two years youre going to see a much greater diversity.
And people using more things in our product because we're lowering metrics.
Thank you.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Hi, This is Ethan <unk> on for Alex Zukin.
Congrats on the quarter I wanted to ask about I appreciate the color for where NII will grow next quarter, but as you think about looking into next year is the Midland 20 Green is the right way, we should think about just where NR will stabilize and if we look to next year, It's high Twenty's growth the right way, we should be thinking about it.
Okay.
We're not talking about next year, because that's the part of the whole construct of how we see next year is related to what we see bookings billings all of those elements. So it's a little premature to talk about sort of where that number will be I think longer term, we see great capability for that number to grow just based on our history.
Instead of the products, we've got in the pipeline. So that's the way I'll leave it.
Great and then congrats also sanctioned the great improvement in incremental margins from negative 20 to negative 3%. I guess is this kind of the pace and rate, we should think about margin improvement going forward.
How are you thinking about balancing I guess <unk> Martin with Chris So, there's a little bit more and we expect a little bit more on the margin side and also just wanted to ask is.
10% pretax margin for calendar 'twenty four still on the table.
So Ethan I appreciate the question.
<unk>.
We've made significant strides by really focusing on operational improvements and moderating hiring so we've seen that play out in the margins you've just seen.
What I would tell you is we're going to continue that effort by trying to go after efficient growth and thats going to be something we will continue for several years as we go through it.
That being said, we're not going to specific callouts of how much margin improvement does and what created Cliff said thats a little bit of work to be done before we get to that point.
Okay.
Thank you guys and congrats again on the good quarter.
Thanks.
Your next question comes from the line of Rishi Galeria with RBC capital markets. Your line is open.
Hi, This is Richard polling on for Rishi jewelry, Ed. Thanks for taking my question I guess, just just in terms of the macro environment.
What you saw 90 days ago.
Any way to kind of bifurcate, what you are seeing between SMB and enterprise and just kind of is there any pockets of either demand improvement demand softening that you'd call out within that.
So Richard this is Pete what we've seen is we've seen if you could parse the segments of the market differently.
I would say in the U S mid market, we've seen sort of global impacts more broadly so.
I would say we've had strength in the enterprise based on just the number of transactions, we've been able to book with these enterprises. So those would be like the texture on it I think you were looking for that level I think in terms of verticals, we've seen strength in <unk>.
Manufacturing, our global energy architecture constructive architecture.
Construction, if you will.
And some of the weaker verticals for us have been technology, probably consumer goods and media if you will.
Great. That's very helpful. And then just as I think about SBC and in stock based compensation came down nicely in the quarter.
Should we expect that to continue to trend down and just kind of any update on your thoughts around how you think about stock based comp.
Yes stock based comp is.
Really important to us because it's a key element of how we look at the business.
I think you should expect a few things to happen US answer your question, Greg The outfit do we expect stock based compensation in the future to decline as a percent of revenue yes. It should decline that's the way the results will come out now when you think of stock based compensation think of it as a number of people times, how much you offer them being the driver.
We essentially going forward moderated our hiring plan because we don't need to hire at the same pace. We are doing this very differently. So what youre going to see the positive impact in the number of people, we're bringing in and the impact. It has on stock comp that being said stock comp is dictated by the history of what you've done in the past so when you look.
It is a large part of it is already set by the prior hires that we've put in place. So those are the two effects.
Play into the total stock comp that gets created and we're focused on making sure that it goes down year over year as a percent of revenue.
Wonderful thank you.
Of course.
Your next question is from the line of Terry Tillman with <unk> Securities. Your line is open.
Great. Thanks for taking the questions and congrats on the quarter. This is Robert on for Terry curious to get an update on the newer onboarding experience in some of the other recent initiatives around helping users start quickly have you all started to see greater usage and penetration with newer customers today versus newer customers from say a year ago and would've been.
Specific drivers of that if so thank you.
Yes, we have a number of measures that Robert and one of the things that we've seen a nice uptick in is the percentage of new participants who are successful in creating their first solution. The first thing that they are starting to track work with we.
We saw really nice improvements in that.
That was one of the early success factors that we were trying to solve for there are a number of other design elements that are being rolled in later this quarter are targeted for Q1, and Q2, which I think will will also have a beneficial.
Results in terms of conversion rate.
But really pleased with what the team has put out there in terms of improving that experience one other really nice benefit from what the team put in.
We have greater visibility into what some of these intent is and that can come on a few fronts. The more we understand someone's intend the better we can serve them. Both in terms of consulting advising templates to them, how we support them. So overall helps us serve better helps someone get navigated and started better so pleased with the improvements.
That's great.
One quick follow up open and dive a little deeper on brand folder, how the attach rates and penetration for the solution been performing relative to expectations and what trends are you seeing in the overall digital asset management market from a demand perspective. Thanks, so much.
Okay.
So Robert we were pretty pleased with our performance with brand folder.
We're seeing broad residents as people look at the combined brand forwarder Smart <unk> solution together I think what's really helped is one the customer impact which comes from both those solutions together and this year, we launched a model where we basically turned on our core smart sheet sellers to help in selling brand forward.
That's great.
Pretty good dividends for us as well.
As far as the digital market and brand for I'll, let mark speak to that a little bit I think there is still a huge opportunity for us to educate our customers and prospects about what's available to them and I think when we have examples that we can point to like this big appliance manufacturer who's doing pretty impressive stuff in terms of content automation.
A lot of times, when we share those stories with people, they're unfamiliar that's even possible. So I think well digital asset management has been around and sort of many some customers are fluent in the majority or not and it's still in an education phase I think with our as we've talked about ramp of reps. We talked we talk often about our newest cohort I also think.
About rep ramping and productivity with our existing reps on new lines of business like <unk> outfit and I think I.
I would say the median wrap on our team who has experience is much better suited today to speak to that value proposition.
Again, I think it's a very different phase in terms of stage in terms of market understanding.
And we're leaning into.
I appreciate the color. Thanks again.
Yes.
Your next question is from the line of Jay <unk> with William Blair. Your line is open.
Hey, guys congrats on the great results.
You talked a lot about cost rationalization and the moderation of your hiring plan, helping on the on the margin front given you beat by over $16 million on the operating margin front.
Could you dig a little more into the areas you're finding leverage in the model and then when we think about the moderation in hiring do you expect that to continue into next year when comparing it to this year's hiring plan.
So the $16 million of Beecher referencing is for the quarter. So I just wanted to make sure I answer your question.
Yes for the quarter.
So I would say the two elements of that deep are coming from all laid out for you.
We have the beat is coming from the revenue leverage that we've had as we've moderated and control costs. So revenues have gone up we've moderated our hiring and people related costs that go with it that's produced sort of more than half the effect.
<unk> 3.3 percentage points of it has come from we've looked at the customer duration that's associated with that.
Greater gross retention rate and Thats been a lower commission expense that's accounted for about 3% of it. So that gives you some texture and the rest of it is just hardcore operational cost containment looking at every dollar that you are spending and asking whether it has value in terms of priorities you've set up.
That's the first part of it and the second part of your question was on hiring in the future. We don't expect to have a similar sized high end class coming on board and hiring expectations in the future will be significantly smaller so we're going to see the benefit that we've created this year in a continued manner next year.
As we think of the operating leverage.
That's really helpful context, and then and then some of your peers have called out some headwinds from a user perspective, given slower hiring rates and some layoffs at tech companies have you seen any large customers reduced head count as a result of those headwinds or just given your enterprise customer base and that focus are you more immune to those issues and some others.
Cheers.
So I think for the last.
I'll call it five years, our whole mindset about penetrating the enterprise has been what we call. The earned enterprise. So we don't do is we don't go in and sell what we think at the time of the <unk> deal and go wall to wall.
We say how can we mobilized how can we deliver value and then we grow over time with them because very few of our large customers are cobalt small where your dollar expansion is reliant on the next person Bay higher we're actually somewhat insulated from that the other piece. That's helpful to us is because some of our IRR is grounded.
And value components that we call capabilities, it's actually not tide, absolutely user license.
And if you want to keep benefiting from that you will keep subscribing to it but it has not changed on that next higher and I think thats, where our mixed model or a hybrid model is turning out to be quite helpful.
That's really helpful. Congrats again on the great quarter and thanks for taking my questions.
Thanks.
Your next question comes from the line of Steve Enders with Citi. Your line is open.
Hi, Thanks for taking the question. This is George on for Steve just want to Echo Congrats on great execution in a difficult environment I wanted to circle back on the discussion earlier about rep productivity I think when you were talking last quarter you were talking about.
Expected improvements over the forward three to six month timeframe. So I'm just curious obviously, we've seen improvements over the first three months what are you thinking about how are you viewing improvement.
In Q4 and is there any any of that baked into the guidance. Thanks.
George This is Pete I just wanted to quickly say.
Really pleased with how the field teams have sort of gone about.
Improving productivity of newer reps, who start and we've seen the benefits of it as they become productive our expectation is we will continue to see productivity improvements in those reps because our plans involve multi quarter changes and how we get them productive.
Baked into our guidance, if you think of our guidance as an overlay of improving new rep productivity combined with the macro that we have.
Thoughtfully and prudently considered.
Got it that makes sense and then just one quick follow up on the billings upside came in quite ahead of at least.
What we were modeling I'm wondering if you could just dig into kind of what drove that upside and if theres anything unusual or onetime in nature that we should be aware. Thank you.
George There was nothing unusual or one time in one time nature in those numbers. So it's org.
Organic bookings, which translates into billings.
Great. Thanks for taking my questions.
Of course.
Your next question is from the line of Michael <unk> with Wells Fargo. Your line is open.
Hi, This is Michael Berg on for Michael <unk>. Thanks for taking my question and congrats on a great quarter I wanted to dive into experiencing rates again quickly.
So they have been pretty nicely in the quarter I know the exit rate expectations are still the same maybe it was a discussion on.
Potential seat expansion issues, you can walk us through the mix of seats versus capabilities on driving that expansion rate number and does that change meaningfully over the past quarter or two thank you.
Yeah.
Yeah.
I'll start with the question and then from a metastatic point Mark will chime in in terms of how that's operating we're not seeing a big difference between the seats and the what I call capabilities, obviously capabilities are still growing faster than the C. Part of it and thats factored into the expansion rates we.
We gave you some stats on capabilities, we said that there are 29% of revenue and if you looked at them sort of a year ago. There were 24%. So clearly people are expanding with capabilities, but youre seeing a healthy mix of people with seats as well in that mix. So that's kind of a meta point if like how.
<unk> expansion rates are moving.
I don't think I have much to add to that.
Okay.
That's it for me thank you.
Thanks, guys. Thanks, Michael.
Your next question comes from the line of Jason Ader with Moffat Nathanson. Your line is open.
Hi, guys. This is Tyler on for Jackson. Thanks for taking our question just to dig a little bit deeper on to that expansion kind of the timeline that you guys are seeing.
Is the timeline for expansion slowing at all or do you kind of see that slowing in the near term future here or has that kind of remain constant.
And what you've seen historically.
So the if you think of expansions and you convert them into the into its core fundamental youre talking about bookings and how quickly. They materialize. Obviously expansions are a key part of bookings and billings. So you should think of it as being we've seen an elongation in sales cycles.
And we've seen deal compression so let's talk about how that actually plays itself out the way we've seen elongation as people just take longer with the number of potential reviews that take place for any purchase those are happening. The second part of it is the deal compression the way that would happen with these capabilities and expansion is you can either buy.
Our package, which is nicely packaged up value in advance are you can still buy pieces of it we don't tell customers, how they should buy it but they buy it.
Archive capability that hit a specific need those represented by the <unk> looks like capabilities Youre getting a smaller bite in bookings, obviously over time youre going to get all the bookings, but it means a different size. So thats how expansion play out.
Okay, Great. That's helpful. And then I guess just in terms of next year's budgets.
Historically are you able to attribute.
A decent or a majority of revenue growth to it budget expansion, how do you see it playing out.
If it budgets kind of come down next year do you see that as having any meaningful impact.
On the top line growth.
So I would say that the budgets for our funding Columbia Youre dealing with this isn't one purchaser in one department there are hundreds and thousands of people in enterprises, who are buying it. So you have as much if people with line of business budgets that are buying it as they are it folks in there. So I think it's fairly broad based in terms of budget.
<unk>.
That makes sense. Thank you.
Of course.
Your next question comes from the line of Fred Lee with Credit Suisse. Your line is open.
Thank you gentlemen, if youre, taking my question very nice quarter, particularly in this environment.
I was wondering if youre seeing any change in behavior from your competition, specifically privately held companies that might be slowing down their investment in marketing spend quick.
Quick follow up after that.
No I mean, given given the thousands of transactions, we do in the quarter.
The median transaction is still really.
It really helping somewhat progressed from their status quo, which isn't grounded in.
A CW and player and getting industry demand for the first time, so it's difficult for us to speak it would not be really well well grounded for us to speak to these huge patterns that we see.
We have seen you do see it manifest itself in some other ways in terms of.
You definitely get a sense that those companies are hiring less I think some of the people who joined companies who have now been let go.
Obviously talked to people in the community and I think theres less chatter around people considering going to such companies I think thats one of the things that are more established tech companies will benefit from in the next in the coming quarters.
In terms of what we're seeing in market.
Nothing that we've really heard from customers on that front.
Thank you and just a quick follow up on the net retention metric you mentioned mid <unk> by the end of the year.
Wondering if you could drill down a little bit on what.
What's contributing to the sequential decline in that metric.
So Fred.
Net dollar retention rate metric is.
Full year look back so if we look at what happened over the full year. If you will so when you think of what comes into the calculation. When we report out at the end of Q4 is it going to be replacing a very strong quarter with a macro that was very different expansion you that was very different without something thats in a different macro phase. So you.
Just swapping out one quarter for the other and Thats why you see.
The look back of a full year in expansion rates dropping to where we've guided.
Understood. Thank you very much and great quarter of course again.
Thank you.
There are no further questions at this time I will now turn the call back to Mr. Aaron Turner.
Great well, thank you for joining us everyone and we will speak with you again next quarter.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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