Q2 2023 Smartsheet Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the smart sheep second quarter fiscal 'twenty 'twenty four conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press to start one thank you.
Aaron Turner head of Investor Relations you May begin your conference.
Thank you Emma good afternoon, and welcome everyone to smart sheets second quarter of fiscal year 2024 earnings call. We will be discussing the results announced in our press release issued after the market close today.
Today, our smart sheets, CEO , Mark <unk>, and our CFO Pete thoughtful today's call is being webcast and will also be available for replay on our investor Relations website at investors <unk> com.
A slide presentation that accompanies pizza prepared remarks, which can be viewed in the events section of our Investor Relations website.
During this call we will make forward looking statements within the meaning of the federal Securities laws. We have based on 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 relation.
<unk> web site and on the SEC's website at Www Dot SEC Dot Gov, Although we believe 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 of all information available to us as of today, we do not assume any obligation to update these statements as a result of it.
<unk> or future events, except as required by law.
In addition to the U S. GAAP financials, we will discuss certain non-GAAP financial measures. The reconciliation to the most directly comparable U S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our investor Relations website.
With that let me turn the call over to Mark.
Thank you Eric and good afternoon, everyone welcome to our second quarter earnings call for fiscal year 2024.
While Peter will provide additional details I'd like to highlight a few areas of our Q2 performance and share our continued progress in our leadership of the enterprise work management market.
Smart sheet revenue for the quarter exceeded our guidance and grew by 26% year over year to $235 $6 million in billings grew 18% year over year to $243 $1 million.
In Q2, we generated non-GAAP operating margins of 8% and free cash flow was $45 $5 million.
We ended the quarter with annual recurring revenue of $933 million and more than $13 4 million smart sheet users.
75 customers expanded their smart sheet investment by more than $100000 in Q2, and 232 companies expanded by over $50000.
Additionally, we closed three transactions over $1 million and now have 51 customers, where there are over $1 million.
Enterprise expansions for the quarter included Airbus U S. Hewlett Packard Enterprise Iron Mountain and Pacific Life Insurance company, among others, and we saw new customer wins at organizations, such as <unk> equity Group Holdings in New York University.
We now have over 9400 enterprise customers, which we define as organizations with over 2000 employees.
These customers make up over 50% of our <unk> and our posting <unk> well above our overall race.
Our execution within the enterprise continues to be recognized by industry analysts and peer review sites.
He also being named a leader in Forrester collaborative work management tools wave IDC published a report in July recognizing smart she does a vendor whose shape the year in 2022. Additionally.
Additionally, smart she received the distinction of being our customers choice and the 2023 Gartner peer insights voice of the customer and the collaborative work management market segment in Q2.
<unk> received the highest rating in the highest percentage of customers willing to recommend the platform at 98%.
Our portfolio of capabilities continues to be a core differentiating factor in our success in the enterprise our.
Our customers leverage our capabilities to attach the smart chief platform to mission critical projects programs and processes.
In Q2 capabilities, we're present in each of our top 10 expansions.
Smart sheet advance, which is a bundle of our capabilities had a strong quarter as well we closed 216 advanced deals in Q2, an increase of 50% versus Q2 of last year.
To expand on this here are some additional details of our three largest deals this quarter.
Our big four consulting firm signed a seven figure deal with us to streamline client engagement simplify internal and client status reporting and automate a variety of processes across the organization.
With smart sheet advance, enabling the firm's business transformation. This customer estimates they have already saved $7 $5 million across 590 projects completed as of May of this year importantly.
Importantly, data subtle is allowing them to pull information from disparate data sources to quickly create reports without needing to develop costly direct integrations with proprietary systems.
We will also use smart sheet to more effectively bid on engagements with clients and more efficiently plan track and manage resources and budgets.
This firms increasing client facing use of smart heat will also showcase our platform to their portfolio of blue chip clients during engagements.
We also signed a seven figure expansion with a large global retailer where smart she is being used to drive business transformation across multiple divisions and its fulfillment centers smart sheet is helping leadership man of strategic planning and operations and as they grow their brick and mortar locations, they're using control center to help manage new construction and store remodels.
Smart sheet advance also plays an important role in the company's retail marketing organization, where it supports their budget management marketing and creative operations.
Also in Q2, we closed a seven figure brand folder deal with a fortunate 15 company.
This customer will use <unk> to consolidate its tech stack, while enabling marketing teams to eliminate manual processes and streamline the storage and management of digital imagery and video content.
Brand folder will help power their websites and mobile apps to reduce version control issues and helped the team deliver a better online experience for customers and more efficiently generate millions in online revenue.
As the leader in Enterprise work management, our customers are running mission critical programs and processes at significant scale on smart sheet, whether that's tracking the sourcing of millions of parts for a manufacturer or running programs with tens of thousands of projects. The <unk> platform continues to be the choice of customers needing to.
Operator at enterprise scale.
Scale will continue to be one of our biggest differentiators, our platform's ability to scale allows our customers to leverage smart sheet to build sophisticated solutions that run the kind of complex workloads that enable organizations to achieve their goals.
Over the past 12 months, we've gone from supporting hundreds to thousands of concurrent projects with every control center blueprint.
Soon customers will be able to run tens of thousands of concurrent projects per blueprint.
Another element of scale as our commonly used and powerful computational feature cross sheet sell linking.
It enables our customers to aggregate data across thousands of active and completed projects to build reports and dashboards to communicate program or portfolio health and progress.
We increased the cell links limit from 30000 to half a million per seat and we're aiming to achieve another 10 X increase in scale next year to get to 5 million cell linked per sheet. So customers can manage more interconnected projects.
Additionally, in Q2 platform improvements resulted in Formula computations, running 10 times faster.
In sum these enhancements enabled our customers to now manage significantly larger programs and portfolios quickly aggregate and compute data at scale and visualize information in real time to achieve greater efficiency across their global operations.
And recently, we also made it easier for our customers to find and derive value from two of our most used premium capabilities data shuttle and dynamic view through self discovery, our customers can now easily get hands on experience with these powerful and popular capabilities without needing to engage with a salesperson.
Data shuttle automate data movement between other systems of record and smart sheet. So customers can quickly visualize and act on this data in their projects programs and processes dynamic.
Dynamic view power secure and confidential workflows across vendors or internal processes by enabling personalized views of the data and chiefs and reports.
By creating curated views teams simplify error prone manual work typically done over email and messaging.
We commenced the rollout for self discovery across both data shuttle and dynamic view for our business enterprise customers at the end of Q2 by the end of September we will complete the rollout.
Okay.
Following the July announcement of smart sheets integrated generative AI capabilities. Three features are currently being used by customers in private beta.
Our plan is to make these and others more broadly available after our engaged customer conference in September .
AI assistant and air solution builder will be available to all customers to get started more quickly and to deliver value faster. These.
These features enable our customers to continue moving their projects and processes forward without leaving their workflows leveraging our AI features to creative solutions by describing their needs.
With respect to monetization.
Our formula builder, AI content generation and AI insights will only be available to paid users on enterprise plans. We expect these powerful features to incentivize plant upgrades and expansions in some instances, we expect customers to also purchase higher usage tiers based on need.
<unk> image capturing people tagging of basic image EDA image editing will also be available in multiple usage tiers as part of brand folders pricing plans.
Overtime. These features should become a meaningful catalyst for free to paid license conversion and enterprise plant upgrades.
Heading into the second half of FY 'twenty, four we remain well positioned for efficient growth powered by the creativity and energy of thousands of <unk> team members and partners worldwide.
Our team's dedication and hard work serves to enhance the <unk> platform and drives our success with customers.
In less than two weeks at our sold out engage customer conference. We will unveil how we are changing the way organizations operate and innovate faster at even greater scale.
We are rapidly evolving our entire platform to extend our leadership position from the expansion of features to governance to scale and to Jan AI.
And across all these areas, we're looking forward to enrolling our customers in the future of smart shapes.
Now, let me turn the call over to Pete.
Thank you Mark as Mark mentioned, we outperformed all aspects of our guidance in Q2, demonstrating the durable top line growth and free cash flow inherent in our business model.
<unk> grew 27% to $933 million and we are well on our way to surpassing 1 billion.
In <unk> by the end of the fiscal year.
In Q2, we saw some signs of macro stabilization, particularly with our enterprise customers and with smart sheet advance.
However, we are still seeing elements of budgetary caution across our customer base, which is impacting our higher velocity transactions and sales cycle duration.
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 $2 $35 6 million up 26% year over year.
<unk> revenue was $221 $5 million representing year over year growth of 28%.
Services revenue was $14 1 million.
Representing year over year growth of 7%.
Revenue from capabilities made up 32% of subscription revenue.
Turning to billings second quarter billings came in at $243 1 million representing.
Representing year over year growth of 18%.
Approximately 94% of our subscription billings were annual with about 4% monthly.
Quarterly and semiannual represented approximately 2% of the total.
Moving on to our reported metrics the number of customers with <unk> over $50000 grew 30% year over year to 3552.
And the number of customers that are over $100000 grew 36% year over year to 1665.
These customer segments, now represent 64% and 50% respectively of total E. R. R.
The percentage of our rare are coming from customers with <unk> over $5000 is now at 90%.
Next our domain average ACD grew 17% year over year to $8863.
We ended the quarter with the dollar based net retention rate inclusive of all of our customers of 121%.
The full churn rate was 4%.
We expect to exit FY 'twenty four with the dollar based net retention rate inclusive of all our customers of around 116% to 117%.
Now turning back to the financials, our total gross margin was 83%.
Our Q2 subscription gross margin was 87% we expect our gross margin for FY 'twenty four to remain at or above 82%.
Overall operating income in the quarter was $19 2 million or 8% of revenue.
Free cash flow in the quarter was $45 $5 million. This brings our first half free cash flow to nearly $77 million.
For modeling purposes in Q3, we have three large cash outflows that are unique to the quarter.
These include expenses related to our engaged customer conference one extra payroll run in the quarter and a semiannual contractual payment related to a cloud provider.
Given these outflows, we expect our Q3 free cash flow to be around $5 million.
Now, let me move on to guidance for the third quarter of FY 'twenty four we expect revenue to be in the range of $240 million to $242 million.
And non-GAAP operating income to be in the range of 8 million to $10 million.
We expect non-GAAP net income per share to be eight to nine.
Based on diluted weighted average shares outstanding of $139 million.
For the full fiscal year 'twenty four.
We now expect revenue of $950 million to $953 million representing growth of 24%.
We expect services to be 6% of total revenue.
We expect non-GAAP operating income to be in the range of 62 million to $67 million.
Representing an operating margin of 7% and non-GAAP net income per share to be 53 to 57.
For the year based on 139 million diluted weighted average shares outstanding.
We are reiterating our FY 'twenty for billings growth of 20% and raising our free cash flow guidance for FY 'twenty $4 million to $120 million.
Also for modeling purposes, we expect our Q3 billings to be 24% of our full year billings.
To conclude Q2 was highlighted by outperformance across all aspects of our guidance.
Enterprises across the world continue to leverage smart sheet to power their most sophisticated workflows and we look forward to showing the next evolution of our market leading platform at our engaged customer conference in two weeks.
Now, let me turn the call over to the operator operator.
Thank you Andrew.
A reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question today comes from the line of Terry Tillman with tourists.
Your line is open.
Yes, thanks, good afternoon, and nice to see the billings and profit and cash flow upside in the <unk> I hope you're all well.
We've heard about a report and even folks asking us about one of your enterprise customers Cisco potentially migrating away from smart she didn't know they've been a long standing customer I don't know if you can talk about this but is there any truth to that and just generally what's the health of some of your larger longer standing enterprise customers and then I had a follow up.
Hey, Gary Thanks for the question, Yes, we are aware of that report and it is it is not accurate.
In Q2, Cisco signed a multiyear multimillion dollar extension with us.
With respect to the health of the large customers.
We had a really nice milestone reached and going north of 50 customers contributing over $1 million of IRR, we hit a new high watermark on our over half million dollar accounts, almost getting to 150 or 149 today.
I really like the stable of customers. We have that are growing that are about to become our next seven figure customers plus so again really pleased with the progress, we're making there and I think.
Their remarks I had around the improvements we have in our scale and the sophistication solutions I think it plays directly into any of our support those types of customers.
That's great that's great to color there. Thank you so much for that market I guess just a follow up question is you all have added a lot of sales capacity really going back from last year and as we look through the rest of this year. How are you feeling about where you are kind of scorecard in terms of the productivity ramp of these new sales reps do you see that inflicting more in <unk>.
<unk> or is this kind of more of a multi quarter thing, we're still there's more benefits and fruit of the labor into next year around the ramping sales force. Thank you.
So Terry this is Pete when we look at the sales force productivity, obviously that suffered because of the macro we've seen that play out and primarily because of the high velocity transactional business that has impacted that so.
We see continued progress in our enterprise sales rep productivity, which grew quarter on quarter, we're expecting that to continue into the future and maintain.
Thank you.
Your next question comes from the line of Josh Baer with Morgan Stanley . Your line is open.
Great. Thank you for the question and nice quarter I wanted to ask one on the on the billings outlook for the rest of the year, 20% for the year, 24% in Q3, Thats like 17% growth I believe and then that.
That leaves 24% year over year growth for Q4, any anything that you could.
Talk through sort of those dynamics of the step down in billings in Q3, and then a reacceleration in Q4, whether it's the <unk> billings dynamic comps.
Or anything one time or just kind of thinking about that trajectory.
Josh It comes down to something very simple it comes down to the comps that we're looking at if you look at Q4 of last year.
If you looked at the year on year growth. It was the slowest growing quarter of the year. We grew at 28% year on year that was down from 36% in Q3. So it's just the comps that look to create the impression of acceleration, but when you look at the two year stack like you just go back to 2022, which is a fairly normal.
Here and you look at what we've achieved in the first half.
And you take the billings guidance, we've provided and you create an implied view, you'll see that that implies a <unk> in the second half compared to what we have delivered in the first half.
Okay. That's really helpful. And then I wanted to just ask on the <unk>.
AI AI features that are being tested in private beta now.
The feedback any sense for how many customers are using these features and then also what's the interest level from the broader customer base on around AI. Thank you.
I think there is a real hunger for getting educated on how to apply AI to systems that they already understand I think the best way to land a new concept with someone who has two injected into something they've already used as opposed to trying to land them on a brand new concept considering a femoral away. So the interest rate is very high we've controlled the release of this.
We kicked off what four or six weeks ago and.
We really look at planning on opening the top on this at engage we want to really create a nice curated experience for all of our customers and do that in a very methodical yet expanded way. So I do expect over Q3 for that number to expand to many thousands of customers who are using this the things we've heard so far validating.
People are saying they are seeing a dramatic reduction in cost to doing things like building visualizations with dashboard widgets, which is our AI insights product and we've started to also show some of our customers. What we're doing on those premium AI features around formula building and content generation the thing I love.
Love about these areas is that they have extraordinarily high foot traffic in our products today.
Nearly half of our inquiries on our community and our support dimensions are in the context of computational logic theyre trying to build into these workflows and that's exactly what this addresses so I think the relevance of the applied AI that we're introducing is extraordinarily high.
I think one of the reasons why engaged sold out a month before Showtime.
People are really interested in some of these things. So we'll have a lot more to report out on this at the end of Q3 11, we get thousands of customers through the chute on this I am expecting quite favorable things.
Great. Thank you Mark.
Your next question comes from the line of Jacob <unk> with William Blair.
Your line is open.
Hey, thanks for taking the questions.
A bit more about the retention expansion dynamics this year and what's happening at renewal time, just given the macro it seems like gross retention is pretty steady and customers are expanding.
Where are they spending most is that more on the advanced capabilities from our new products like brand told or an outfit starting to layer in more meaningfully just given you called out that seven figure deal on brand owner would be great to get that commentary.
Yes, I think what we're seeing is we're seeing expansion sort of coming across both in our seats as well as in our capabilities a little more of a slant towards capabilities because in solution selling people need a lot of the capabilities tied to the so you're seeing a little bit more of that.
In general.
The dynamic we've had is.
Our expansion rate is the one that fluctuate our gross churn has remained fairly steady at 4% and this expansion is the piece that comes with the sort of macroeconomic forces that come into play now we're balancing that with some of these sales discovery of features that we're rolling out in the back half of the year, which I am.
Pretty excited about.
Okay, Great and then helpful commentary on jet and monetization and how that is going to track with enterprise SKU ourselves and for you to pay conversions will you start monetizing that right. After engaged so could we see some incremental benefits in Q4, and maybe Q1 of next year and then Pete is there anything we should keep.
In line on the expense side of the house as it relates to AI.
Okay.
We have not yet set the time or the date for the <unk> of those features it's all about enabling customers right now what we will what we are giving our customers clarity on is at what plan level that will be available for them post ta.
So we have not baked that into our second half numbers at this time.
But again working very hard to make sure its positioned well for this upcoming year.
And to the second part of your question in terms of what do we baked into the plan there is no.
$1 of revenue baked in for AI in the back half that I guided to but what I would tell you is we've assumed some costs hitting us as customers in beta and other farm start to try out the product.
It's very small.
Great. Thanks for taking my questions.
Your next question comes from the line of John <unk> with Guggenheim Securities. Your line is open.
Hi, This is <unk> John .
Thanks for taking the question My first question again on the billings growth. It's good to see that you maintained the guidance there.
Can you maybe talk about.
What kind of visibility you have.
Into the second half the year.
If you can maybe talk about renewals expansions and others that will be super helpful.
Yes. So you know when you start to think about some of the indicators, we view to give us that confidence starts with how we closed Q2, we closed Q2, I thought fairly well with improved execution from our field team that was part one of it but what we also saw on top of that with the pipeline entering.
Q3 was healthy and when you couple of both those elements with the fact that our close rate on pipeline, we entered the quarter with a strong and maintaining strength, that's what gave us the confidence in the back half guide on billings.
Awesome Awesome <unk>.
And then Mark you mentioned about.
Discovery.
Starting off with Dana shuttle and dynamic view.
What prompted.
Prompted that.
Sort of like what are you trying to achieve from it and any kind of early feedback that would be.
That would be super interesting.
Yes, I think it's all about putting customers in a position to be able to act quickly.
One of the one of the wonderful comments from a customer who who saw.
Data shuttles through self discovery called out.
Her customer success manager incentives. Thank you so much for releasing this new feature.
Feature has been there a long time, but now it's fully visible to that person and she was able to start benefiting from it.
So the purpose is how do you reduce friction and make your median customer available of all of your strengths that you can bring to bear and if you gave that behind a discussion with the sales rep.
At closing down so what youll see at engage in addition to these two features that we've put in self discovery now is a real push to unify our experiences and to make those available to as many people as possible and when we think about serving all of the companies. We have the customers. We have in the U S were very U S centric today. So when you are solving.
And serving.
Asia Pacific Japan, EMEA. The more you can put in front of somebody where it's not dependent on human interaction the better. So that is the whole thrust behind the self discovery piece.
And again, we're it's in front of thousands of companies now it will be in front of tens of thousands of companies by end of September and I would expect that to start driving lead growth and again as Pete and I plan for a second half we have not baked this into our numbers yet so not in either Gen AI nor self.
<unk> have been factored at this time.
Great. Thank you.
Your next question comes from the line of pendulum Bora with J P. Morgan.
Your line is open.
Thank you very much for taking the questions and congrats on the quarter.
Pete I wanted to go back to the Billings guide a bit obviously a good.
<unk> quarter. It seems like billings was held a <unk> guide, but you kind of kept us to full year.
I mean, we appreciate it I guess, given the macro and conservatism.
In that front, but.
Is that it is that just a prudent.
Conservatism that we should read into the guide or was there any kind of.
We look forward in the first half versus the second half.
Or is there any risk that you see in the in the second half for some of the renewals that you that you have coming.
So pendulum what I would tell you is there is no pull forward in the business that we reported for Q2, what I would tell you is at the start of the year when Mark and I set out the guide for billings, we looked at the macro view of it there's a lot of things that happened within the quarter you got some feedback on that in Q1, we got a different set of fee.
Back in Q2, but looking at the puts and takes in our composite we feel good about maintaining the guided a 20% billings growth.
Okay got it.
And Mark obviously, you have a lot of VIP churn is coming out and Youll hear more about it.
But I wanted to ask you about this large base of free collaborators that you have.
I'm wondering as you roll out DVA features and start monetizing them do you see kind of a big opportunity to accelerate that CDP conversion.
As you have kind of a second trigger point now with AI.
I do I think the more value you presented somebody the more opportunity you have for them to convert to a paid customer for many many years. This notion of pay a paid license and smart sheet was predicated on someone's right to create an asset achieved a dashboard report et cetera, we're now over the next.
In the coming quarters, introducing capabilities that are incremental to what <unk> been able to do that will be reserved for paid licensed users. So we're giving people more opportunity to have a reason to subscribe and when I think about how these hobbies.
The smart city deployments are.
<unk> you have people, who create assets who share them with others and then you have many analysts who work with that data and I think the Gen. II work is quite interesting because it really enables those people who are manipulating today are trying to get insights from the data, giving them a mechanism to do their work faster and more cheaply and I think when you have that.
I'd say the ability to argue for a license is quite compelling I mean in the Grand scheme of the total cost of an employee Virgin AI license costs or the license is quite trivial. So I really love. The fact that we're moving away from this notion of only creators need licenses to if you really want to be effective in the most high impact way.
You should also get a license and I think that will bode really well we have a huge population measured in millions of people who are actively engaged who do not pay us today, and we're giving them reasons to subscribe.
Got it thank you very much.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Hey, guys. This is Ethan broke oncology again, congrats on the quarter.
I appreciate the color around the <unk>.
Exit rate I'm just curious if this is.
Also how you think about where enter off trends potentially a trough thing, it's kind of a bottom and as you called out some stabilization on the enterprise in the quarter.
Ethan I think when you think of.
What our future outlook on <unk>, It really comes down to sort of what is the future projection on growth.
It's something that we have to play out essentially this year, we have to see the impact of the actions Marc talked about in terms of AI self discovery and Thats really going to determine in a lot of ways, where the <unk> goes so it's a little premature to sort of call that at this point.
Okay.
That's helpful and kind of a follow up there.
Monetization strategy and the timing around the journey on futures.
I'm just curious when do you expect that to start becoming an impact on net retention as customers kind of the interest.
Today more of the platform and just also as well on gross retention, which is still holding in very strong.
So even when you think of the net retention impact of AI features I think it comes down to people actually getting their hands and those features using those features in context of the work. So I think when you get more real data on what customers are doing with it informs this exact things youre asking about which is.
What do I think about net dollar retention rate do I expand which people expand what use cases, they expand to all of that comes about as kind of I call. It the second order impact of them trying to product.
Okay. That's great. Thank you very much and congrats on the quarter.
Thanks Ethan.
Your next question comes from the line of Brent Thill with Jefferies. Your line is open.
Thanks, Mark I'm, just curious if you could characterize the selling environment I know Q1, it was <unk>.
A little slow out of the gate seems like that's not a snap back in Q2 and I mean, how much of this is just snapback from things that slipped from Q1 to Q2 versus.
Versus a better environment, if you will.
I think the environment plays absolutely plays a role, but I would also say as you go through the year. The account plans that you've put in motion and started to define in the Q1 and Q2 should start to produce more fully in the second half. So I think the the.
The convenient and to save all the macro does this macro does that I think if you. If you run your playbook well you should see those things that you've set up in the first half start to contribute in the second so I would say we are benefiting from right now and we're starting to benefit in Q2 from some of that planning we had done early in the year you start solution selling framing framing the value of these things.
I would expect that to continue in Q3 and Q4.
And then just a quick follow on to that this whole thing of consolidation. There are a lot of point solutions out there you have COVID-19.
Effectively bought one and everything are you now seeing any tailwind to you we've got to get in this consolidation of move in move everything over to smart straw from the five other tools, we cobble together.
During the pandemic.
I would say consolidation in Britain is more common if an environment has multiple substantial subscription agreements in place.
Very often I would say our largest transactions or someone.
Basically anchoring anchoring on us for their strategy for the next X years.
In the context of there being a small deployment of some other provider that's really not the pay off the payoff isn't hey, how can we save $32000 by powering something down its all about how do we derived yield from a very big smart seed investment there have been a few cases over the years, where there's been a few hundred thousand dollars deployment of company and US where we've won where it is.
Displacement, but I would say companies are more focused on making the decision platform. They want to bet on and then containing the existing usage of another tool as opposed to eradicating at the yield on eradication is just not that high and I think a lot of people don't want to.
Sort of unseat a division or a small team.
Just because of the payoff isn't that great. So I would say still hyper focus from our largest clients on making platform choices for future growth.
And consolidation, we havent really seen tick up that much in terms of the theme that's driving these big deals.
Just a quick follow up for Pete any any downsizing in the largest deployment customers are out there there's been.
Some noise in the channel I just wanted to clarify that we've been getting many questions.
Well, yes, or no is fine.
No.
Very clear thank you.
Yeah.
Yes.
Your next question comes from the line of Scott Berg with Needham Your line is open.
Hi, everyone nice quarter two questions for me Pete wanted to start with your comment on macro stability that you said there was quote unquote. Some macro stability can you help us unpack that a little bit in terms of what you meant there in particular thank you.
Yes, I referenced the macro stability in the context of the enterprise customers.
As I said some of this is our selling efforts getting sort of more refined and approach and the second is as you build out plans with customers just the enterprise play as these things develop as customers put together plans at the start of the year and grow those through the end. So we saw that manifested.
Sales in higher sales productivity and attainment of the enterprise team. So that's what we saw play out.
Got it helpful and then Mark you.
But you talked about a lot of several new modules that are coming out whether their AI based or other items here. This fall and into next year, but how should we think about what what might be the next advance to the next data shut all our control center or something that will have a meaningful cross sell opportunity that we can talk about.
Maybe 12 to 24 months.
I think a few things we've had in the portfolio Scott that have.
<unk> not been fully presented to all of our customers will be presented to them in the coming year. So when I think about that.
The value, we deliver to certain customers with our advanced resource management, our brand folder experiences.
You should expect those to come mainline in the coming year, So what I mean by that is.
The average user who interacts with smart she will have a pathway to seeing what those platforms can provide and start to engage with those and I think the largest one of the largest revenue opportunities for us is in getting these capabilities into more hands of into the hands of more customers. Today, we are mid single digits.
On our capabilities it already produces contributes north of 30% of our revenue.
So I think one of the fastest passed in our next $1 billion of IRR is to really proliferate this value into the base.
So I think we're always tempted by the next newest thing <unk> is a great example of our next newest thing that we acted on it I think going to bring a ton of value, but as youre doing that don't forget about what's in the portfolio and how you maximize that I think that will be actually as big a chapter in our history as Jen AI will be.
Yes.
Excellent. Thanks again.
Yes.
Your next question comes from the line of Keith Bachman with BMO capital. Your line is open.
Hi, many thanks and on the cash flow performance looks particularly solid this quarter. So congratulations on that I wanted to go back to the dollar based net retention though.
You mentioned for a prior question you didn't want to call the bottom, but what are the contributing factors taken it down from say 121. Two I think you said 116 117, I'm just surprised because a lot of the comments have been stay.
Stabilization product portfolio is actually improving may not contribute near.
Near term, but what are the contributing factors from there and at least how do you want us to think about.
The puts and takes associated with where that may stabilize because it sounds like the portfolio is getting much richer.
But I don't want to get too far ahead of ourselves, but maybe any puts and takes we should think about and what are the contributing factors taken it down to 2016 was 17.
So when I look at your question and I break it down I would go back and say youre going to find that there's three elements of it there's gross churn, which isn't changing a lot the reductions weaker I call. It picking up modestly dialogue, which is sort of moving up with the phase of the economy, where and it all comes down to <unk>.
Expansions and how that's moving so our view on net expansions is as you look at the progression of the quarters and the play too we're going to continue to see net expansions be pressured, especially I mentioned elements like transactional business, that's growing that transactional business hasnt recovered it's still face.
The pressures of the macro headwinds we've seen so that's what's contributing to this.
Okay, and anything you want us to keep in mind as we look out over the horizon again, it just seems simplistically your portfolio is getting better.
It is getting better is the only thing I'd say is the laws of physics supply to anything you put out there. When you think of all the things Marc mentioned, we're super excited about those thousands of customers who've never ever purchased a capability get to experience it but the time it takes for them to try the capability experience. It go through their process.
How it applies to their work all of that takes time, so I don't see that as contributing we haven't built that into the contributions into the back half of the year, that's a wait and see after they've tried it.
Okay, Let me transition to Mark for my second question, though particularly interested in the free to paid scenario.
Is there any dimensions, you could give us about.
What that ratio looks like in other words.
What is your your installed base in total.
And how much of that is paid and how should we be thinking about you mentioned <unk>.
I agree it could be a contributing factor to may be changing that right to get greater conversions, but anything you want to call out and if you could give us some more specifics on what does that installed base look like today.
Hmm.
Yes, I think what I'd be comfortable sharing is that the majority of the people who engaged on the platform today are free collaborators. So those people have been invited to paid instances of smart beta and they are contributing many of them contribute actually changing data not just viewers, but actually.
Hitting and workflows, we see that population as the most.
I guess, the deepest vein, we could probably tap and getting them to flip to paid.
We don't we don't give a hard ratio I think it is useful though to see that it is the majority of people engaged in smart heat today. So we've run this play for what 18 years now where we've had the paid creator who paid licensee who can create and everyone else is is.
Basically three participants.
The reason, we're able to make this move now is because the portfolio has gotten to the point, where so much value is available and we've made a decision on certain things that deliver a ton of value and it just doesn't make sense to have that just really distributed to everyone. So but this is really the first time, we're doing it and I think there is we will remain.
I would say leading in category in terms of what those participants can do but we're also we also very much believe that we should get value for that paid for the value. We have delivered and I would say in the next two quarters, we're going to learn a lot about the reaction to your question around Shouldnt you start benefiting from that I think we will benefit from that.
But again it comes down to timing right. We gave a guide for <unk> for end of the year. We also shared that we arent going to be flipping GAA likely in the second half of the year. So it really is in FY 'twenty five type opportunity and we'll articulate that as we head into next year.
Okay fair enough. Many thanks and look forward to seeing you guys in a couple of weeks cheers.
Thanks.
Your next question comes from the line of Michael Berg with Wells Fargo.
Your line is open.
Alright, Thanks for taking my question just one quick one.
Philosophically on guidance, you had a very strong quarter across the board.
But didn't raise billings guidance at all and we only raised by the beach for the rest of the metrics. Maybe just help US understand are you incorporating incremental conservatism just given what youre seeing more stabilization of the macro just would love to hear your thoughts on if there's any change in the guidance philosophy. Thank you.
So Michael no change in the guidance philosophy, obviously given the.
Macroeconomic forces we've seen we've just embedded that conservatism into our thinking now you mentioned that we haven't raised the guide if you think of the two ends of that guide we actually raised our guide on op income quite significantly if you notice we beat by about $11 million this quarter and our raised at the midpoint is about 17.
So we're taking that approach as we think thought about being raised.
As we sort of progress through.
Each quarter.
Thank you.
Your next question comes from the line of Jackson Ader with Moffett Nathan Your line is open.
Hey, good evening guys.
First question is for you on the improvement in the enterprise or on the macro environment should you or should we I guess expect that if that improvement were to continue would that show up in a in a rebound maybe a net customer additions or would it show up more in may.
Maybe the enterprise segment and <unk>.
Jackson, I think that would chew up more dominantly in the enterprise and Dr.
That we would see internally.
And then as far as just a follow up as far as what we could see in the public metrics.
And I guess I'm really getting after it.
Should we expect net additions in any of these kind of customers strata, whether it's 5050 thousand $100000 in spend.
Two to reverse and start to see some year over year growth in the net additions in a particular quarter.
We are seeing net additions if you think of our largest customer the sizes cohorts 100, K, we saw 30% growth. There I think as you start to go through the to the build of the future quarters, either you're going to see that progress continue because customers are going to rely more on us and.
Come up with more projects that they gave us.
Mark mentioned, the customers, which are even larger I think he mentioned.
Customers, who pay us more than half a million dollars that population is going to grow as we go through the year. That's the way Youll see it we don't report on all of those metrics all the time, but as we get more data, we'll be sure to sort of think of sharing that.
Sure Okay. Thank you.
Your next question comes from the line of Jason <unk> with Keybanc. Your line is open.
Great. Thanks for taking my questions.
Maybe first on the high velocity side I think you said you are still seeing some pressure there.
Maybe to ask this more plainly in the quarter compared to last quarter did you see it get marginally better worse or is it pretty much the same as last time.
This is about the same.
And then last quarter, you also talked about increasing marketing efforts to offset some of the weakness you are seeing on this high velocity side I am curious how the effectiveness of these marketing efforts are going.
So Jason we didn't describe that as a last quarter as.
To support the weakness, we just talked about things we're doing incrementally. So let me give you a quick status on how we've done we're pretty pleased with the quality of the leads that have come out of the program, but given that this was focused on.
Our largest enterprise customers and the fact that the timing is fairly recent if you look at the conversion dynamics for these enterprise customers, we would expect to see a small benefit this year, but a larger benefit as we go into FY 'twenty five so that's the way this is likely to play out.
No. Thanks for the clarification and helps a lot.
Of course.
Your next question comes from the line of Robert Simmons with D. A Davidson.
Your line is open.
Hey, Thanks for taking the question so it sounds like enterprise, maybe got a little bit better.
<unk> business was still kind of weak.
Could you also give us some color by geography.
Vertical.
Robert So if you think about.
Our top what I call this four verticals and bookings this quarter.
I think manufacturing healthcare finance and retail and I think that's just the size of the verticals, but if you look at the ones that got what I call, which were strong year on year, I'd, probably say, it's consumer goods and education Youll.
Youll see those in live entertainment kind of sign of the times and probably the ones that werent strong relative year on year growth Youre looking at media and production and technology.
Got it got it that makes sense helpful. Rather.
And then so you raised your income guide.
Or did you raise the revenue guide for the year I guess are there specific areas that you're cutting back on or just kind of like trimming your sales a little bit in which areas are you kind of putting more money into.
So Robert.
If you think about the delta between set of how we've increased.
Increase our margin versus the actual revenue outperformance I would say some of the margin improvement comes from the fact that we are just flowing revenue beat straight into margin, but on top of that what we're also doing is we're being extremely thoughtful and operating efficiency.
When we hire whether we replace a role are not where we hire and looking at every non revenue sort of investment and scrutinizing. It kind of the I was laughing telling mark the other day I think thats just the role of the CFO and finance, Oregon, what they do so this is what I call no fault cost reduction that plays out into margin.
That's what you're seeing play through.
Got it thank you very much.
Yeah.
From Robert.
Your next question comes from the line of Steve Anderson with Citi.
Your line is open.
Alright, Thanks for taking the question. This is George on for Steve just wanted to follow up Bryan folder last quarter, I think you called out some demand headwinds, but in your prepared remarks called out a pretty significant wins. So just an update on the demand environment. There. Thank you.
So Georgia.
If you think of the <unk> marketing solutions and brand floaters is the major part of it.
Our quarter on quarter, if you looked at it that performance improved and we did call out a big deal, which is the largest in brand for the history that we booked in Q2 as well.
Brand forward or is it part of the marketing budget, which is experiencing obviously the impact of the macro environment, but we're learning to sort of go after that business by listening to customers and try to fit how we've described the benefits and in Rois. So we're seeing that pay off a little bit for us.
And we're being very smart about even how we think of pricing and packaging more of that to come when we go into the engage conference.
Great and then a quick follow up.
Called out some stabilization in the macro anything notable on linearity through the quarter. Thank you.
No theres nothing unusual we always see our our first must be the smallest in the last month is the biggest there was nothing unusual about the linearity if you will.
Your next question comes from the line of Ryan Macwilliams with Barclay.
Your line is open.
Hey, Thanks for taking the question. This is Pete Newton answer Ryan Mcwilliams.
Please proceed like the sequential customer as improve across all sizes required for T. K.
What would you say drove that step up and then how would you characterize those conversations with customers that you are moving from one of those visit physicians to the higher one.
I think customers are looking for a conversation that goes beyond do you need more seats.
And when I think of what our teams are able to present to them now it's really a portfolio of solutions do you want to talk about how you set yourself up for strategic transformation you want to talk about how to drive efficiency in their marketing realm or do you want talk about how to execute.
Execute modern project management and now starting to inject the Hai pieces. So you have multiple themes that are hitting.
And the way, we monetize both through the licensing of seats and through these capabilities.
More opportunities to deliver value and get paid for that so I think we're starting to we're continuing to see the benefits.
Both to the progress on the advanced sales.
It was great to see that people are seeing value across that entire portfolio, and saying, hey, I'm going to step into that bundle and get the benefits from all so I think the greater the degree to which we can continue to see success on the capabilities combined with seats I think will manifest itself in this 50, K 100 K five.
K levels stepping up.
Yes, I think thats, probably the key driver that I would point to.
Perfect. That's very helpful. And then if you could comment is on average deal size closed throughout the quarter or was there was there any differences later in the quarter versus earlier.
Sir.
The average deal size I want to make sure I understand your question is does the deal size that played out as we went through the quarter or was it the deal size in comparison to.
Some other period.
As you trended through the quarter, just trying to get a glimpse of how the linearity looked.
Yes, the deal size typically as you would think the larger deals book more towards the end of the quarter. So the deal size did grow but it grew sort of consistent with our seasonal expectations.
Okay perfect. Thanks for the color guys.
No problem.
This concludes our Q&A session for today I'll turn the call back to Aaron Turner.
Alright, great. Thank you for joining us this quarter and we'll speak to you again soon.
This concludes today's conference call you may now disconnect.
[music].
Yes.
Yes.