Pluralsight Inc
Q3 2019 Earnings Call Transcript

Published: 30 Oct 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2019 Pluralsight Earnings Conference Call. At this time, all participants' line is in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Mr. Mark McReynolds, Director of Investor Relations. Sir, please go ahead.

[Mark McReynolds:]

Thank you. Good afternoon, and welcome to Pluralsight's third quarter 2019 earnings conference call. With me today are Aaron Skonnard, Co-Founder and CEO; James Budge, CFO and Ross Meyercord, our new CRO. Some of our remarks will include forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our SEC filings.

[Aaron Skonnard:]

Thanks Mark. Good afternoon, everyone. And thanks for joining our Q3 2019 earnings call. We had had a solid quarter and improved many of our growth metrics demonstrating that the operational improvements we put into motion at the beginning of the quarter are working. I met with over 90 customers and prospective customers since our last earnings call. In every meeting, there was clear need for tech skills transformation at scale and strong recognition for how we can be that solution. I am happy with the progress we made on the quarter and recognized we still have work to do. B2B billings grew 32%, total billings grew 28%, revenue grew 34% and our guidance for 2019 remains inside the range we provided and reiterated earlier in the year. We are seeing signs of improvement and I am confident this will continue under our new Chief Revenue Officer, Ross Meyercord. Over the course of the last few months, I met incredible CRO candidates from some of the best software companies in the world. Ross stood out as the best bet for Pluralsight. He brings a unique combination of skills and experience to our business. In his most recent role as EVP of sales at Salesforce, Ross led the North America sales team responsible for upselling and cross-selling into large existing enterprise customers. He also managed the sales strategy, business development and sales operations of the North American enterprise business. In his previous role at Salesforce as CIO, Ross lived the real life role of our typical buyer. He understands the mindset of those we sell to, and how to best position the product. He scaled the organization, processes and applications that supported the business during this period of remarkable growth.

[Ross Meyercord:]

Thanks Aaron. It's great to be here. And what an exciting time in the evolution of the company. As a former tech leader, I see a rare opportunity to solve the massive problem that impacts every organization in the world. The need to transform tech skills at scale in a way that aligns with their tech strategy I was a CIO in a customer portal site. I understand what keeps tech leaders up at night, having the right skills to execute and deliver for their business. I look forward to working with my network of tech leaders to help provide the fastest path to skills development. I also see the opportunity to build a strong channel motion of Pluralsight, which is something I know firsthand from my 22 years at Accenture. I'm confident that the sales team here is focused. I'm looking forward to implementing the operational rigor necessary to further grow the business.

[Aaron Skonnard:]

Thanks Ross. We're really happy to have you here with us. I'll share more later in the call about our progress with new and existing customers and our partners, but first I'd like to turn the call over to James to review the numbers. James?

[James Budge:]

Thanks Aaron. In Q3, improved execution drove billings growth of 28% to $92.1 million and revenue growth of 34% to $82.6 million. Our B2B Billings increased by 32% to $80.7 million. Learning expanding is one of the top strengths of our business as we work with customers to become a solution that is prioritized at the organization level, not just within a few departments. The evidence that this is working is the growing number of customers with larger deal sizes. By the end of Q3, we saw a 51% increase in customers with annual Billings of over $100,000, and 81% increase in customers with annual Billings exceeding $500,000 and a 91% increase in customers with annual Billings exceeding $1 million. As of the end of Q3, our Top 25 customers have now expanded to 23x their initial purchase. The continued growth in our largest accounts demonstrates the value we continue to provide, which has helped keep our net revenue retention above 120%. Our go-to-market efforts in Q3 were mostly focused on our high-end commercial and our enterprise customers, which resulted in our highest average deal size to date, up 30% higher than the same period a year ago. The trade-off in Q was a higher percentage of churn in our smaller accounts, which offset the new logos we added in the quarter.

[Aaron Skonnard:]

Thanks James. We have a lot to be proud of with our Q3 results. Let me share some of the positive themes that I saw in the quarter. As James mentioned, we had nearly 100% growth in our largest customers and we continue to sign new customers from all verticals. For example, this quarter we signed one of the largest and oldest banks in the world. We also signed a top European auto manufacturer, a Fortune 500 American Farm Machinery Company and one of the world's largest telcos companies. These new customer wins continue to demonstrate that our platform works for any industry at scale. Having spent so much time with customers recently, I'd like to share an example that is a great illustration of a company that is turning cashiers into engineers with the help of Pluralsight.

[Operator:]

Your first question comes from the line of Saket Kalia of Barclays Capital. Your line is open.

[Saket Kalia:]

Thanks for taking my questions here and welcome, Ross.

[James Budge:]

Hey, Saket. Happy birthday from all of us here.

[Saket Kalia:]

Thanks James. Maybe for you, Aaron, as you reviewed last quarters performance, I guess in a post mortem and I know we talked a lot about this at the Analyst Day, but as you dug deeper, can you just talk about what role competition played, if at all in last quarters result and this quarter frankly? And maybe just broadening that question, can you just give us an update on what you're seeing competitively from the likes of LinkedIn learning and others in the space?

[Aaron Skonnard:]

You bet. We're seeing very little impact directly related to competition. As I dug into the win-loss data for both Q2 and Q3. We saw very little impact in terms of dollars impacted that the salesforce would have attributed to competition. More broadly, when we look at the space and especially the larger deals that we're now penetrating much more deeply, we are positioning ourselves as the go-to-platform for tech skills, transformation within these companies which means we're selling through the tech leader not into HR, which allows us to happily coexist with any of those other products you mentioned. So I think that's a big reason why we don't see direct impact due to competition today. And I think if you, you mentioned LinkedIn specifically with their recent announcement that they're moving more towards an LXP model, a learning experience platform. I think that signals to some degree their move to be even more horizontal in nature whereas Pluralsight's recent investments and decisions such as the acquisition of GitPrime have signaled that we're going even deeper in our vertical and tech. So I think our strategies are very different and also to some degree very complementary.

[Saket Kalia:]

That makes sense. Aaron, maybe my fault but just stay with you. To your point in your prepared remarks, a very evident that you spend a lot of time with customers in the quarter. I'm curious what's the tone that you heard from customers on their willingness to invest in a tool like Pluralsight in the face of what frankly some could speculate could be a softer macro backdrop in 2020?

[Aaron Skonnard:]

Yes. It's --I've been paying close attention to that because I'm curious about what happening in 2020 likes everyone else there. And I'll tell you that the senior C-level buyers that I'm talking to are looking at this tech skilled investment as a critical aspect to succeeding on their long-term technology strategy. So I think that makes the macroeconomic situation come less into play than perhaps in other areas, but I would acknowledge they're still probably some concern there. But we're seeing a strong need for this in the marketplace overall.

[Operator:]

Your next question comes from the line of Brian Peterson from Raymond James. Your line is open.

[Brian Peterson:]

Hi, gentlemen. Thanks for taking the question and congrats on a strong Billings number. So it sounds like Flow is doing really well out of the gate. I'm curious how are those conversations been with customers? I'm curious if the success is, you've seen at least so far has mostly been with Pluralsight customers or are you seeing new prospects coming into the fold as well?

[Aaron Skonnard:]

Yes. We're seeing a lot of strength on both sides of that today. We mentioned our first seven-figure win with Flow and that particular deal has already led to another deal on the pipeline for Q4 which is another seven-figure deal for skills. So a great example of a customer who started and landed with Flow that's now cross- selling and transitioning to skills and we've also activated our entire salesforce with a referral model to send leads and pipeline from our existing skills customer base over to the Flow team, but remember they're operating independently today as a standalone go-to-market team and we'll be doing the full integration with an overlay model in 2020.

[Brian Peterson:]

Got it, thanks Aaron. And James, I appreciate the color on the retention dynamics, but can you bifurcate that a little bit? Was that a function of users or did we see a little bit of pickup and churn on the logo side? And if it's the latter, any commonality and what drove that? Thanks.

[James Budge:]

Yes. On the user side probably nothing unique to Q3. We do have some churn here and there on the user side, nothing different in Q3. On the customer side, we did have more churn on the logo side down at the lower end of the business as we focused on the higher end. We are deploying more resources there. We're dropping our coverage model, so we pick up more of those smaller end customers, and make sure we retain them. And that's something we need to do better on as we move forward. But that was the impact in Q3, a little bit more churn at the lower end of the business.

[Operator:]

Your next question comes from line of Arvind Ramnani from KeyBanc. Your line is open.

[Arvind Ramnani:]

Hi. Congrats on the good numbers, my first question is you provided a lot of color at Pluralsight live about the infrastructure you build around the sales and sales process. And can you just provide an update on how much of that infrastructure is permanent or is that still sort of evolving? Just to make sure that you kind of really incorporate some of the additional feedback you're getting from new leadership.

[Aaron Skonnard:]

Yes. A lot of the quick fixes and adjustments we've made in terms of sales process and execution have laid the foundation for a new permanent model that we will also continue to innovate and incrementally improve. And we're already seeing some great improvements and our predictability and clarity as a result of those key changes. And with Ross coming on Board, he's also very quickly identifying further improvements that can be made. Anything you'd like to add to that, Ross?

[Ross Meyercord:]

Yes. Arvind thanks. I'm -- as I jump in here we've got a great team and adding in my external perspective here. I think there's some opportunity to continue to optimize the existing processes and shore up a couple of the areas.

[Arvind Ramnani:]

Great. So I mean I guess that at live I mean I guess, Ross, while you are probably going through the interview process, one of the concerns that I guess that was raised was essentially the new unnamed CRO would come in and essentially going to upset the kind of the dynamics of the team and culture. Are the steps you are taking to make sure that that there's not like a spike in attrition or some of the kind of the good part of the sales kind of gets retained with you taking over the process?

[Ross Meyercord:]

Yes. Arvind thanks. I've had an opportunity even before I joined to meet the senior leaders around the world. And I'm really confident that we have a great leadership team in place. I'm still getting a chance to meet all the way down through the organization. But I'm confident we have a good team in place now. And as James articulated, we're continuing to add a lot of capacities. We have the opportunity to continue to add the right resources in right regions to help us scale for success.

[Aaron Skonnard:]

And I would add on, Arvind that this is an excellent time for Ross to be entering the business in terms of the timing within the year in preparation for 2020, which allows him to further impact the very questions you're pointing to. And things like commission plans and coverage model and territory assignments. And so the timing is very advantageous and we think that will help bolster confidence across the salesforce moving into the New Year.

[Arvind Ramnani:]

Great and just last question for me on Flow, I mean clearly you are seeing some good commercial success. Can give us an update a little bit on the integration of Flow with the core offering? And as we look forward to the next six months or so, will the combined or a tighter integration with the core offering drive kind of even bigger deals or sort of or most of the integration is already put into place?

[Aaron Skonnard:]

Now there's a lot more integration still to do, which we're actively working on both the product side, as well as the go-to-market side of the business. And so I'll just address it across both of those independently. The product integration has been underway since day one of signing the deal. And we've already released some simple experiences that bring some of that integration to life today. So we're continually releasing some value experiences to our customers before we get to the holistic unified offering that will be released at some point in Q1, 2020. That unified offering will give us even more ability to extract additional value from our customer base, and the existing customers who are currently using skills. And now on the go-to-market side, we have not done a lot of integration yet and that was intentional because we didn't want to disrupt the ongoing sales execution and sales plans for 2019 across the salesforce. So they're operating independently. There is a lead generation referral model with incentives attached to it that encourages our core sales reps to refer business over to the Flow sales reps. and that's happening and we're seeing a lot of good success from that. But the bigger impact will happen in 2020 when we introduce an overlay model, so we'll have overlay Flow specialists supporting our entire army of sales reps that are going to be selling both products. And now that you'll see the big uptick in pipeline and obviously future TAM and opportunity.

[Arvind Ramnani:]

Great. Yes and I guess one of the things you had mentioned when we spoke last was there should be a big part of driving essentially bill rate sort of increases or a kind of price increases and assume that something is you are still taking with.

[Aaron Skonnard:]

Yes, no, Arvind, definitely a customer that has skills and flow we would expect certainly to have them pay more than each of those independents. So definitely expect price increases as a result of flow going into the market on a combined offering in 2020. We're still working through what that increase ought to look like. So don't have a specific number for you right now, but we'll have that in the next few months.

[Operator:]

Your next question comes from the line of Sterling Auty from JPMorgan. Your line is open.

[Sterling Auty:]

Yes. Thanks. Hi, guys. So want to just start off with, Ross. You mentioned some improvements and processes et cetera. Can you give us maybe one or two examples of the things that you'd like to come in and focus on along those lines?

[Ross Meyercord:]

Yes. Thanks Sterling. It's early days here for me as I'm walking through the company, but as we are working through specific issues and opportunities, you are really seeing the opportunity to bring in best practices that I've learned from my days at Accenture, from our experiences at Salesforce here to bear. I never in guard the things as broad as forecasting how we do territory planning, how we do estimate et cetera. So really across the board. I think a number of opportunities to really tune what has already been working well for the company.

[Sterling Auty:]

Okay, great. And then, James, one follow-up question for you. You talked about with the investments next year, cash flow going negative. But I wasn't clear, are we talked about cash from operations or free cash flow? And do you expect it to be negative every quarter through the year or perhaps break into positive cash flow for maybe let's say the fourth quarter?

[James Budge:]

Yes. More the latter, Sterling, where because of the building that we're finishing up here in the first half of 2020, tough to be free cash flow positive for at least the first half. Once that -- the big expenditures around that go away and we get into more efficiency in the back half of the year. We would expect to exit fourth quarter. So I think to be very specific, it probably looked negative in the first three quarters and start to trend positive in the fourth quarter. I might just maybe just super quick. I just want to add on to what Ross -- and one of the things that I really love about Ross also that I know he's going to big here as well, he is the whole channel opportunity we have. We've done really well with our cloud partners and there's huge opportunities in my mind to go deeper into some of the systems integrators and obviously with Ross' background we've got a tremendous opportunity there.

[Operator:]

Your next question comes from the line of Corey Greendale from First Analysis. Your line is open.

[Corey Greendale:]

Hey, good afternoon. First question I had and someone asked about the price opportunity around Flow. One of the questions that I think it's been on some people's minds since last quarter is more the same product basis pricing and whether some of the Flow Billings is because of customer, increased customer pushback on price or on repeated price increases. Can you just comment on kind of how much you think that dynamics impacting the company? What you expect for kind of future same product price changes?

[Aaron Skonnard:]

Yes. I mean look that the price increases given the value that we provide even prior to Flow has been going up over the last couple years. I think we've been open that a couple of years ago, our average billing rates were around 240 and now they've increased to well over 300. And they increased again in the third quarter relative to all the prior quarters. So we don't feel like, there's always no customer loves to have their price increase including me, when I'm a customer. But when you compare that to the value of the product and the platform we provide it's usually pretty well accepted that we have opportunities to increase price and we've seen that through this year. With GitPrime or Flow as we roll through into 2020 that add a massive amount of value to a customer and so we definitely expect those price increases to continue to average, on average go up.

[Corey Greendale:]

Okay and you talked in a couple of ways about changes to sales structure around the integration. Maybe could you give us just little detail around kind of the sales planning process and where it sat this year versus last year and if there's any insight you can give at this point on just are you going to have a full-blown separate farmer team plus hunter team. You're going to do like an SMB versus Enterprise or just some thoughts that how the sales going to structured, salesforce can be structured next year.

[Aaron Skonnard:]

Yes. Corey, this is Aaron. We are in really good shape this year in our planning cycle from a timing perspective, much better, in much better shape than we've ever been in prior years. We're very committed to hit the ground running in January with clarity at the rep level around territories and accounts. And we've worked back from that with a very clear set of milestones and date driven deadlines to ensure that we are making all the key decisions that have to be made at the right time. And this is another reason why so it is advantageous for Ross to be coming in right now when he is because it gives him time to participate in that progress, where a lot of the key sales level specific decisions are made. And those are critical decisions to get everything right and to ensure sales rep retention and setting those teams up for success next year. So at a high level, I would say we're in really good shape from a timing perspective. And we're continuing to hit all those deadlines as they come week by week. And we're really encouraged by where we're at today as a result. So what was the second part to your question, Corey?

[Corey Greendale:]

Good to hear on the first part. Second part just about any preliminary thoughts on the sales structure, hunter versus farmer teams, and thank you.

[Aaron Skonnard:]

Yes. We are making some changes, some shifts going from 2019 into 2020 specifically on that front. We do see moving to a more traditional hunter farmer model, which we've been experimenting with in 2019. So that won't be a massive shift. We've already learned quite a bit through our experiences this year. But we do believe that we'll continue to deliver more net new Billings and better focus on the right types of expansion opportunities. And of course the renewals. So you will see some of those shifts. We can share more detail around what that looks like specifically on one of our future calls.

[James Budge:]

Yes. I might just add, Corey, it's a model it's not too dissimilar than what salesforce has and they're kind of the Apex of how people have to think about their SaaS models. So certainly something that Ross is familiar with managing.

[Operator:]

Your next question comes from the line of Terry Tillman from SunTrust Robinson Humphrey. Your line is open.

[Terry Tillman:]

Thanks for taking my questions here. Aaron and James, Ross and Mark. Hopefully I got everybody there. First question, Aaron, just relates to you in terms of the tech or cloud ecosystem partners. Microsoft definitely is been there for several years and I think a meaningful contributor to the business. I would love some more specifics on AWS and Google in terms of their alignment. I mean are there some hard targets or somewhat hard targets in terms of how they're actually going to drive revenue and just maybe in the spirit of about seven parts of to the question. Just where are we in terms of overall tech or cloud partners in terms of how much of the business they're driving out? And then have a follow-up.

[Aaron Skonnard:]

When you ask about targets, do you mean internal sales targets, billings targets or something else?

[Terry Tillman:]

Well, you got me now, let me correct, yes billings or just revenue.

[Aaron Skonnard:]

Yes I got it. Okay. We don't break down and create targets by partner internally, but does look at each of these significant vendors as a source of pipeline and future opportunity for the business. And in many cases they're influencing business for us which would then show up in different parts of our enterprise or commercial business. So like the benefit of working with the Microsoft like we have over the last decade is we're partnering with them to produce content in many cases bespoke content that we then deliver out with them to their ecosystem of developers, which then touches all the other companies that we sell into. And with our land and expand motion, they didn't bring us into their companies and off we go to produce more billings there. So it's -- we see the impact of those three partners as more focused on pipeline versus direct billings over time and we're continuing to figure out better ways to cooperate with them and to work in tandem with them to produce more of those bills. It is more like a channel model. And so we're focusing more on it from that perspective than we are from the direct billings perspective. Although at times we do derive direct billings from those partners when we sell directly to them. Anything you want to add to that, James?

[James Budge:]

Yes. I'll just add in there, Terry, that today the direct or indirect contribution that comes from those partners is about 7% to 8% of our billings and as we mentioned at our Investor Day between those cloud partners and some of the systems integrators are like Accenture, Fujitsu and others, we expect that total contribution to grow to over 20% over the next three to four years.

[Aaron Skonnard:]

As a good example of this, Terry, the Jedi contract that was just awarded to Microsoft, that's a massive contract obviously. There's a great example of the theme, the trend that's playing out right now for us with big organizations everywhere including the federal government of the United States moving everything to the cloud. And given our relationship with Microsoft, we are perfectly positioned to partner with Azure and Microsoft in assisting the federal government with that transformation, which will require a massive transformation of those underlying tech skills,

[Terry Tillman:]

Yes. That's great. Well, you've got Ross on the call. Can ask him my follow up question? Is he still there or is he going to run away from me? Okay. Well, Ross, you've worn a lot of hats, CIO, SI and then running big sales ops and big part of P&L salesforce. We're in kind of a little bit of -- we're sure where we're going to go in terms of a macro perspective and just economic activity. Just knowing that the backdrop is a little bit maybe less certain what do you think of the two products are easier to sell in a more uncertain timeframe? And I'm sure you would love both these children the same, but I want you to tell me Skills or Flow, what would be the wedge? What's the spear, tip of the spear into a new account given kind of the macro backdrop, if you can answer that? Thanks.

[Ross Meyercord:]

Absolutely, Terry. Well as a father of three children, I'm well familiar with the who do you love more dad. But what I would say is I'm equally excited about both products, but for different reasons. I actually last night went through our internal session for Flow. And I couldn't be more excited about the opportunity to provide engineering leaders, the level of business metrics that the rest of their counterparts and we have and I'm super excited about going to talk to my contacts and our existing customer base to really be able to talk to them about the benefits of Flow. On the other hand and I look at the opportunities with Skills, and really just the growing need for organizations that go through that tech skills transformation. And I think it's absolutely the right product to solve that business problem that really all entities have. As an Aaron talked about, it's not just public companies; it's private companies; it's nonprofits, it's government organizations. The skills transformation is really a global challenge that I'm excited about Skills really helping solve. So I guess in the end, I love my children equally.

[Aaron Skonnard:]

If I could jump in and throw in my two sense, if large tech organizations are being pushed to become more efficient then I think that does create more demand for Flow because it surfaces efficiency metrics that are useful to those tech leaders, so it'll be interesting to watch this play out.

[Operator:]

Your next question comes from the line of Scott Berg from Needham. Your line is open.

[Scott Berg:]

Hi, everyone. Congrats on a good quarter and thanks for taking my questions. Yes, Aaron, first one probably for you. I can't remember if you its you or James that talked about Billings or expectations Billings improve anomaly from this mid 20s level over the next couple quarters. I guess how should we think about that? Is that because you feel on the new sales side things have stabilized to a point where you're generally happy with or is that improvement driven maybe by an improvement in gross retention?

[Aaron Skonnard:]

Yes. we see -- the reason we're saying marginal for the next few quarters is because of the sheer amount of change and transformation we're going through here internally as Ross comes in. And we really start to execute on the new 2020 strategy. So that's why you're hearing a little bit of caution in our language. And the further we get into 2020 the more optimistic we are about that billings growth strengthening due to both increases in gross retention. We expect to see a clear impact there from the investments where we're making in customer success and other operational process improvements. And we also expect to see improvements with net new business given the direct focus with the shift to a hunter farmer model. So we expect both of those metrics to rise and the further we get into 2020 the more both of those will strengthen.

[Scott Berg:]

Got it, very helpful. And then, James, I just wanted to follow up in the expense commentary for next year about the investment. Should we think about those investments strictly on the sales side, sales capacity side or are there other investments there to maybe consider for the first half year?

[James Budge:]

Yes. Definitely sales and marketing line is where you'll see that. The tech and content line, the G&A line will probably look fairly similar relative to as a percentage of revenue, but sales and marketing line will increase in 2020 relative to 2019.

[Operator:]

Your next question comes from the line of Jeff Meuler of Baird. Your line is open.

[Jeff Meuler:]

Yes. Thank you. Want to better understand the smaller account churn that is occurring. Is this an issue of usage at that end and kind of needing a more intensive process to I guess activate usage? And if is that the case or is it something else? And any reason why it's occurring increasingly now?

[Aaron Skonnard:]

Yes. I would say given what we mentioned in the call, an increased focus, a shift in focus across the business towards the larger deals which we've emphasized a few times today caused us to take our eye off the ball a bit more on the smaller accounts. And there's a big part of the smaller accounts that got very little coverage in both Q2 and Q3. And so we have seen that shift and the churn in those smaller accounts increased. And so we've been actively working to shift that focus into 2020 coverage model. So there are specific coverage model shifts that will occur in January that will ensure that a much larger portion of those smaller account dollars are covered by CSMs with a one-to-many coverage ratio. And we will also introduce a new digital motion that coverages all of the remaining dollars. And those things have not been happening to date. And so I think what you saw in the last few quarters is as we started to see more and more demand for the larger and larger deals, more of the company's time focused resources shifted to those deals and that caused a little more churn in those smaller accounts.

[James Budge:]

And maybe the only thing I'd add there, Jeff, is since you brought in usage. I know we shared a bunch of usage metrics at our Investor Day. I would just add anecdotally those haven't changed materially. We viewed them as really good back in August when we met with many of you here. And we still view them as really good and so we're really confident in the usage of our customers in the platform. It's really more as Aaron mentioned, it's something we can go correct on our own and we plan to do that.

[Jeff Meuler:]

Got it and then a second question on gross margin. I guess I'm surprised to see a pretty sizable upside surprise on gross margin. I would have thought it would take longer to see the expansion as the usage of the courses take time to migrate to the lower author payout rate courses. So what drove that? And are there specific expenses that you're managing in the cost of revenue line? Thanks.

[James Budge:]

No. I mean, look, you got it. The majority of the expense there are the author fees and I would just note here that our author NPS is at an all-time high, well above 60 which is fantastic and we have 63% more of our authors making over $100,000 than they did a year ago. So everyone's handsomely paid and what you're seeing in the margin line is the impact. Some of the lowering of those average commissions or fee rate that we pay and that's the primary driver there.

[Operator:]

Your next question comes from the line of Brad Sills from Bank of America. Your line is open.

[Brad Sills:]

Hey, guys. Thanks for taking my question. Earlier in the call you mentioned, longer sales cycles, I think -- is that just a result of you going after a larger deal so naturally they're going to have longer sales cycles? I guess where the sales cycles today are and you expect some improvement there? Just any color on that comment please.

[Aaron Skonnard:]

Yes. James can speak to the specifics on the length of cycle, but the quick answer is, yes, given the shift in focus these larger deals. We're seeing a lengthening of that cycle, not super dramatic but it is it is lengthening. And also a little more variability in predictability of closed date obviously. And when you have a large number of large deals in your pipeline targeted to close at the end of the quarter that are all very binary in nature that does introduce a little bit of variability there, like we saw represented in Q2. So we're working very carefully to ensure that we're conscious of the lengthening deal cycle and getting our arms around the predictability of how many of those deals will actually close when we think they will close. James, you want to add?

[James Budge:]

Yes. Happy to. Thanks Brad. And I think, Aaron, hit it there but in general an enterprise or large commercial deals going to be around six to nine months for the deal cycle. A mid-market deal is going to be sort of in that three to six month range and a small deal could be short as a month. The cycle there hasn't changed much but what you're seeing is as more of our businesses shifted to that enterprise are hiring commercial deal, a higher percentage of our billing shifting into that mix. You just have an overall waiting shift to the longer sales cycle. So that's what we're seeing and that's how we look at it.

[Brad Sills:]

Understood. Thanks guys. And then, Ross, earlier you had mentioned the opportunity to go after the SIS channel here, just curious any color on kind of how you would go to market with the SIS? Is this part of a bigger cloud project you could add some training to that? Or is it even a standalone sale opportunity to sell training separately?

[Ross Meyercord:]

Yes. Brad, I think all options are still on the table for us. We have a series of meetings over the next weeks and months to really explore with the number the SIS. What we think makes the most sense for both of us, but from my experience really we can have the fantastic solution we have with our SaaS offerings that SIS can wrap with their professional services and are even potentially additional software they wrap around ours, as when it becomes a really win-win for both organizations. And that's really what can propel a successful channel model.

[Brad Sills:]

Great. Thank you and then, James, last one just on net revenue retention. I think you said it was north of a 120%. I think last quarter was 126, was it similar to what we saw last quarter or just over 120, any color there please.

[Aaron Skonnard:]

Yes. It dropped from 126 to 124 because of the churn we mentioned, but as we get our arms around that put more resources around our customer success, we definitely see a path back into the high 120s again as we move through next year.

[Operator:]

Your next question comes from the line of Brett Knoblauch from Berenberg Capital. Your line is open.

[Brett Knoblauch:]

Hi, guys. Thanks for taking my question. This was really on the gross margin impact on -- also based during starting of the total revenues. How does that work with -- given they are not really course content related revenue?

[Aaron Skonnard:]

Hi, Brett. I think got most of the question. I think you're asking about how the GitPrime model does or does not impact our gross margin. Is that what I heard?

[Brett Knoblauch:]

Yes just because the author is technically that revenue is not coming from courses they create. So they shouldn't get, I guess compensated but --

[Aaron Skonnard:]

Yes, no, you're absolutely right. There isn't the author component, so they don't have two thirds of their cost of goods sold. I shouldn't say they. They're part of us now but the Flow gross margin not impacted by the author fee model that Pluralsight has historically had. But there are other costs of their model that Flow through cost of goods sold as well that put them in roughly equivalent to the same gross margins that we have so when you net it all out, it doesn't -- the model that we inherited from GitPrime doesn't have a material impact one way or the other.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to Aaron Skonnard. Sir?

[Aaron Skonnard:]

Okay. I'll just close with the big thanks. All of our customers, our shareholders, our authors and our team members for your continue support. We look forward to speaking with you all again next quarter. Thanks everyone.

[James Budge:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect.