Smartsheet Inc.
Q1 2020 Earnings Call Transcript

Published: 5 Jun 2019

[Operator:]

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet First Quarter Fiscal 2020 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. I will now turn the call over to Aaron Turner, Head of Investor Relations. You may begin your conference.

[Aaron Turner:]

Great. Thank you, Mike. Good afternoon, and welcome, everyone, to Smartsheet's first quarter of fiscal year 2020 earnings call. We will be discussing the results announced in our press release issued after the market closed today.

[Mark Mader:]

Thanks, Aaron. And good afternoon, everyone, and thanks for joining us today. The momentum with which we ended fiscal year '19 continued in Q1 with revenue reaching $56.2 million, representing year-over-year growth of 55%. The total number of all Smartsheet users across paid and collaborators is now more than 5.1 million. Smartsheet's work execution platform continues to deliver differentiated solutions that drive operational excellence for enterprises of all sizes across many vertical markets. We are well positioned to help organizations meet their digital transformation objectives by delivering the type of increased agility, collaboration and visibility that empowers teams and unlocks organizational achievement. Expansion within our base during Q1 included 34 companies increasing their annual recurring revenue, ARR, by more than $50,000, 13 of which increased their ARR by more than $100,000. Notable expansions occurred at customers such as Seagate, Arc'teryx, American Electric Power, Providence Health and DocuSign.

[Jennifer Ceran:]

Thank you, Mark, and welcome, everyone. As Mark mentioned, revenue came in at $56.2 million for the quarter, up 55% versus a year ago. Billings came in at $69.1 million, up 52% versus a year ago. Our dollar based net retention rate was 134% and our average annualized contract value or ACV per domain-based customer grew 48% year-over-year. We also added just over 1,300 net new logos to end the quarter with 80,280 domain-based customers. First quarter non-GAAP operating loss was $14.1 million as we continued to make investments in our platform and go-to-market capabilities, and non-GAAP net loss per share was $0.12. Operating cash flow was negative $9.2 million and free cash flow was negative $13.1 million. And we ended the quarter with a cash balance of approximately $209 million. Let me dive a bit more into revenue for the quarter. Of our $56.2 million in total revenue, subscription revenue was $50.3 million, a 57% increase versus a year ago. Services revenue came in at $5.9 million, up 38% versus a year ago and represented 10% of total revenue. The services revenue growth rate was tempered by the continued success of Accelerators, our pre-built solution. Accelerators reduced the consulting time required for deployment compared to configuring custom solutions and create an uplift to subscription revenue. We expect services revenue to be in the range of 9% to 11% of total revenue for the remainder of this fiscal year. Moving on to metrics. We continue to see strong growth in our larger customers. 6,779 customers are now paying us $5,000 or more per year, 518 are now paying us $50,000 or more per year and 189 are now paying us $100,000 or more per year. These customer segments grew year-over-year by 56%, 117% and 139%, respectively, and now represent approximately 68%, 29% and 19% of total ACV.

[Operator:]

Your first question comes from John DiFucci from Jefferies.

[John DiFucci:]

Thank you. I guess, I'll start off just talking about this quarter. So Mark and Jenny, your numbers look really strong here. I guess, if you can talk a little bit about what were you seeing strength from. Was it like - or how much of the strength is coming from sort of the core market, your seat additions versus some of the new things that are actually relatively new? I knew some of your Accelerators you had for a couple of few quarters now, but it's still relatively new. And Mark, you mentioned the GDPR Accelerator. How - maybe bring us up to speed on how many Accelerators you have. And then how much contribution beyond seat -- adding seats was in new business and could be attributed to some of these trends?

[Mark Mader:]

Okay. Hey, John. I'll speak to just what we're observing in terms of strength in market and then I'll let Gene speak to the Accelerator portfolio. One of the things that's encouraging as someone who's been here for 13 years now is that as the engineering team continues to grow, a lot of the things that are coming to market are what I would say fall into the core category. So when you think of the straight up the middle automation that we provide people and enhancements that I spoke to a second ago, these are things that are really getting traction, and the types of workflows that people are implementing, the majority of motion and demand we see continues to be from our core offering. And as our customers see improvements, whether it be on automation capabilities, they see signal in terms of us buying things like Slope and incorporating content mark-up or advanced PPM and forecasting, these are all topic areas that customers have been speaking about for years. So we see continued seat expansion as being the primary driver for the business. I would say the Accelerators are more signs of where we believe the offering set should go based on what people are looking to add in addition to straight Smartsheet licensing. And the GDPR Accelerator is a good example. While we have just gone to market with this offering and we think this is going to affect total addressable market in the - far fewer than our overall TAM, it's a really sort of niche higher value offering that we're going to be catering with this partner to the market on. The - I think the diversity in those offerings, some of them are broad-based, some of them are very targeted. Gene, you want to talk a little bit about how many we have now and sort of how their makeup looks?

[Eugene Farrell:]

Yeah. So John, we started the quarter with 5 Accelerators, including an IT PMO, Professional Services, M&A integration, Sales Rep Onboarding and Customer Engagements. During the quarter, we launched a Sales Forecasting Accelerator and we just - we literally just introduced the GDPR Accelerator. In fact, some of the marketing is - will be following shortly. And so we're continuing to invest. And one of the key learnings we've had there is that really partnering with industry experts in areas where there are best practices that we can incorporate an Accelerator is an area that customers have a lot of interest in. And GDPR is one where companies across the spectrum are really working hard to make sure they're in compliance. And I think last year was a real learning experience. And this is where we think there's an opportunity to bring a higher value solution to market and really help them ensure that they meet a critical regulation.

[John DiFucci:]

Okay…

[Mark Mader:]

I think, John, let me add. I think as we've spoke on a previous call, one of the benefits of having these offerings also is that it gains you access to people who are making strategic decisions at customer sites. And while it absolutely contributes revenue and bookings to the business, it also creates a relationship with a platform for introducing a mainline offering, and I think those play off each other very, very nicely.

[Eugene Farrell:]

Yes, for sure. For sure.

[John DiFucci:]

Okay. If you could - if I could just get a clarification, Mark. When you launch them with new automated workflows, that's an integral part of the core offering, that's what you're talking about there?

[Mark Mader:]

Yes.

[John DiFucci:]

That's not something in addition that you had to take...

[Mark Mader:]

Yes. No, that's an integral part of the core offering we launched this quarter. We introduced our multistep workflows that allow customers to build multistep approvals and update requests and really build much more complex automations in Smartsheet to eliminate manual effort across a spectrum of use cases.

[John DiFucci:]

Okay, great. Well, nice job guys. Thank you.

[Mark Mader:]

Thanks, John.

[Operator:]

Your next question comes from Stan Zlotsky from Morgan Stanley.

[Stan Zlotsky:]

Hey, guys. Thank you so much for taking my question. I wanted to start off with the sales organization. And you guys obviously hired a lot last year. And maybe just give us a quick update on what you saw for the quarter as far as sales productivity, both your inside sales reps as well as your outbound sales reps, and if there is been any changes as far as how you think about the hiring plans for the sales organization for the rest of the year? And then I have a quick follow-up. Thank you.

[Jennifer Ceran:]

Hey, Stan. This is Jenny. So we saw good productivity by the sales team for the quarter. Every team outperformed their goals. Also on the digital sales front, we started seeing some better momentum on that versus what we had seen last year. So some of the things we've been working on with respect to digital is actually helping. We're seeing some yield. With respect to the headcount, we added about 25 reps this quarter. We're approaching 250 reps, and we've added a bunch of reps now, a total of 11, to the U.K. office. And so U.K. team is ramping. They are doing well. We're seeing improvement in our international dollar net retention rates, which I think is really showing that having people on the ground, getting closer to the customer is the right strategy for us.

[Stan Zlotsky:]

Perfect. And Jenny, since we already have you, what is giving you the confidence in bumping up your full year billings outlook even on an organic basis outside of the $4 million contribution from the acquisition, and especially in light of the tougher compares that we have coming up in the second half of the year? That's it for me. Thank you.

[Jennifer Ceran:]

Yeah. Well, part of it, as you mentioned, was the benefit from our acquisition. We also saw outperformance versus the first quarter and just the overall strength of the business. We felt that we could increase that guidance.

[Stan Zlotsky:]

Got it. Thank you.

[Operator:]

Your next question comes from Mark Murphy from JPMorgan.

[Unidentified Analyst:]

Thank you. This is Pinjalim sitting in for Mark. And congrats on the quarter, guys. I'll ask a question on the competitive landscape since we're talking to everybody. But on some of the private players that we hear out there, Asana, Airtable , it seems like they're doing pretty well overall and growing rapidly and some has pretty good scale as well. And none of you guys are actually seeing each other that much, it seems like. Do you - I mean, do you think that at some point in time you'd bump into each other? Or do you think it's more of a different budget essentially that those guys are going after versus you?

[Mark Mader:]

I think, in some cases, Mark, in some cases, you do have different personas or groups who have preferences for certain brands, but I would say when your addressable market is coming up on 1 billion individuals worldwide, there is a lot of field to play in. And this is -- I think, what's happening is the category is getting established. You have multiple players all claiming to be successful. And what we see - we look very closely at competitive mentions on new opportunities, very closely competitive mentions on expansions. And as I've consistently said now for years, I don't think it's the right strategy to try and be the only player in every business because some of our customers have thousands of SaaS subscriptions, literally thousands. So your job is to be the biggest, to have the biggest footprint, deliver the most value and -- but I would say that the frequency with which we are seeing others in our pursuits has not meaningfully changed in the last two quarters.

[Unidentified Analyst:]

Got it. Thanks for that. And Jenny, on the dollar net retention, obviously pretty stable despite the increasing scale. I think you mentioned improvement in international on that metric. But is there -- was there any improvement on gross retention or churn as your lending are reduced…

[Jennifer Ceran:]

Yeah, there was. So our loss rate last quarter rounded up to 10%. We saw a 50 basis point improvement in that. So our loss rate now is -- rounds down to 9%. So we continue to see the trend. And as we get deeper into an existing customer, the product becomes stickier.

[Unidentified Analyst:]

Great. Thanks a lot.

[Operator:]

Your next question comes from Richard Davis from Canaccord.

[Richard Davis:]

Hey, thanks. Quick question. It seems to me that a key to kind of getting your customers successful is -- and happy is you need to have not only good training, but good customer success teams. And our field techs indicate you're doing well and obviously your numbers seems to validate that. But just as a broad question, how do you - I mean, obviously, more is better, but how do you kind of think about that effort. Some firms have - like I remember back in the day Ultimate Soccer gave away their training for free. You have some free stuff, but how do you just kind of think about titrating that out, balancing whatever success and cost? Thanks.

[Mark Mader:]

Hi, Richard. It's Mark. The - I look at it really it's multidimensional in the sense that people obviously play a huge role in customer success, but what we're also hearing from clients is that they want mechanisms where they can guide themselves, whether that be a community, whether that is through online training mechanisms where they get to set the schedule, and it really depends on the client's preference. You have some customers who won't take any significant strategic step without you by their side, by those who say we'd rather not have you work with us, we got it. So I think being mindful of those preferences -- and it does differ by vertical, by industry, by functional group. So it's having a -- I think having a portfolio of both people and then tooling that is sort of appropriate for who you're serving. And I would say, in some cases, we have what I would consider white glove service for our biggest, fastest-growing, highest value customers. In other cases, we really empower someone on a self-directed basis. So I think it's - I don't think there's one playbook with three plays in it. I think it's a very thick playbook with many, many plays.

[Richard Davis:]

Got it. That's super helpful. Thank you very much.

[Operator:]

Your next question comes from Bhavan Suri from William Blair.

[Arjun Bhatia:]

Hi guys, It's actually Arjun Bhatia on for Bhavan. Just wanted to touch on your domain customers, right? Your ACV is still - it's sub 3,000 per year. So it seems like there's a lot of room to increase this. Where do you think penetration levels are at existing customers? And what do you kind of see as the really low-hanging fruit geared to continue to grow this that number over time between either seats or upselling, et cetera?

[Jennifer Ceran:]

Yeah. I mean, I feel confident that the trend is going up. Like, it's been going up 48% to 50% every quarter. I don't see that changing materially. We've got a large number of customers as you can imagine. We're now in 95 of the Fortune 100. We're in over 75%. We have a presence in the Fortune 500. And yet, the average ACV is still on - it's above $50,000 for the Fortune 500 and just above $100,000 in the Fortune 100. So we still have just a long way to go. I think we're just not - we're not end-to-end right now in the enterprise. We have an opportunity to continue to grow that.

[Arjun Bhatia:]

Great. That's helpful. And then maybe another quick one. You've talked about reducing the friction in the buying process for customers. Just wondering where you are on these initiatives and whether you've seen more self-service as a result of some of the investments you've made over the past few quarters?

[Eugene Farrell:]

Yeah. Well, as Jenny mentioned earlier, we are seeing some fruits from the investments we've made on the digital sales side, both in improving the trial sign-up as well as the customer onboarding process. And so I think that we'll continue to invest there. We've got a long list of initiatives. And early returns are really positive, but I think we're just getting started.

[Arjun Bhatia:]

Great. That's helpful. Thanks for taking my questions.

[Operator:]

Your next question comes from Terry Tillman from SunTrust.

[Terry Tillman:]

Hey thanks for taking my questions as well. I guess, the first question, maybe, Mark, this is for you. I'm just curious, I mean, you guys are still adding lots of customers, like well over 1,000 customers a quarter. What I'm interested in is as this work execution market continues to mature and maybe the sophistication of the buyer starts - or is picking up, are you seeing a change in terms of when customers initially land, are they landing with more capabilities, bigger size or more use cases? And then the speed to that first purchase, are you seeing any change in some of those dynamics just because of the maturation of the market? That's the first multipart question.

[Mark Mader:]

Yes. I think - hey, Terry. I think the - it's helpful when you can solve something right out of the gate. I think if I were to come to you and say, hey, Terry. I got this amazing set of LEGOs. What do you want to build? I'd say we're going to be hanging out for quite some time talking about what we're going to build. But if I come to you and say, hey, I got this spaceship and here is the instruction set, and we're going to get this thing built in 60 minutes. You're like, great, let's do it. So I think when you come to someone with a set of automation capabilities or Accelerators or Control Centers and you connect to a real problem, it can mature and lead to close more quickly. So I would say though that, that doesn't necessarily mean that they start solving 10 things at once, but they attack that problem very quickly and they get success. So again, our whole enterprise approach isn't to let's solve 18 things for Terry out of the gate. Let's still solve a few high-value things and then position ourselves for growth over time.

[Terry Tillman:]

Okay. And maybe, Jenny, appreciated the color on the revenue and the billings contribution from 10,000ft. But on the $4 million, and I know it's not a big percentage of total billings, but confidence and visibility in that. Do they have a lot of late-stage activity already or is this visibility into the opening balance sheet? Just curious on the kind of the risk, if any, around the $4 million opening balance. Thank you.

[Jennifer Ceran:]

Yeah. I mean, we - there's really two things. One is kind of where were they when we acquired them on May 1. And clearly, they're selling product. It's a good product. We've also seen a lot of demand from our existing customers for a product like theirs. So it's also based on where we think we can sell into our customer base.

[Terry Tillman:]

Okay. Thank you.

[Operator:]

Your next question comes from Ittai Kidron from Oppenheimer.

[Ittai Kidron:]

Hi guys, nice quarter. I guess, I wanted to start where the conversation started in - with Accelerators. It was nice to see that it's going well for you. Mark, can you give us a little bit more color on what Accelerators are more popular than others? Are there specific verticals where this is seeing more success than not? And how do I think about what percent - I mean, do customers start sometimes with Accelerators, do you see that happening or they typically start with some of your core offerings and then move to Accelerators?

[Mark Mader:]

Hi, Ittai. I think with many of our bookings coming from expansion, a lot of these concepts are presented to people who already know Smartsheet. There is evidence. We had a couple of customers who did start with Accelerators as their out-of-the-gate move. So that was great to see, encouraging to see, but again, it's - those new bookings are a minority of our overall bookings. So it's – they are mostly relevant in those expansion settings today. I do think it gives you opportunity to go-to-market, right? If you're talking about offering a certain capability, delivering a certain value, you can market on that dimension. It's one of the things that we're excited about teaming with Anna on as she comes onboard and we take these offerings to market in a more declarative way, intentional way. And in terms of the popularity, Gene, you want to talk a little bit about what we're seeing activity wise?

[Eugene Farrell:]

Yeah. I would say our largest contributor to sales has been the IT PMO Accelerator. And interestingly, we have seen customers that deploy that against more than just IT. Many customers see the Accelerator and say, "Well, I've got actually places beyond IT where I want to go deploy that." It's also really important to remember though that when you start the conversation with Accelerator, it doesn't always end up closing as an Accelerator deal. Many times, a customer will get into it and say, wow, I love this capability, but I've got some unique needs. I actually would rather engage with your professional services team to build a bespoke solution. And so we really see Accelerators both as a catalyst for growth and actually selling Accelerators, but also in driving a broader discussion with customers.

[Ittai Kidron:]

Got it. And then, Jenny, just as a follow-up on the net expansion, I just want to make sure I understand your commentary here. I don't want to nitpick. Don't get me wrong, 134% is a great number. But you did talk about international expansion improving and I think loss rates declining. So am I gathering from this that expansion rate in the U.S. declined on a quarter-over-quarter basis?

[Jennifer Ceran:]

No. No, no. My comment was not quarter-to-quarter. It was year-over-year. It's our - our Q4 and our Q1 were the same dollar net retention rate of 134%. So looking at Q1 a year ago versus Q1 of this year, both the US rate and international rate improved.

[Ittai Kidron:]

Very good. How would you like us to think about this rate for the remainder of the fiscal year?

[Jennifer Ceran:]

Yeah. So right now, we are modeling on the kind of mid to high 120s, and that's a number that we would achieve by the end of the year, so by January of 31. And what we typically do is -- well, what we do is every quarter, as we get the next quarter's rate, we'll update that number, but we're modeling right now mid to high 20s -- 120s.

[Ittai Kidron:]

All right, good luck guys.

[Mark Mader:]

Thanks.

[Operator:]

Your next question comes from Rishi Jaluria from D.A. Davidson.

[Rishi Jaluria:]

Hey, guys. Thanks for taking my questions. I wanted to start off in terms of market awareness. And obviously, numbers are bearing out really well, but I wanted to get a sense for maybe some of the investments you're making in driving greater market awareness of your product because it at least seems from my perspective that, relative to the opportunity, Smartsheet is still a relative unknown. And I think alongside that, what would need to happen to maybe -- not that you don't already have a little bit of virality in your product, but what would it take to get the level of virality that we see in a lot of other adjacent areas within collaboration software like we see with Atlassian or Slack or even Dropbox? Thanks.

[Mark Mader:]

I think one aspect around awareness is what I would call just straight up marketing, marketing awareness. I mean, one of the reasons we teamed up with Anna here was to take this into a much more broadly here in the US and then also globally. And I think the other important part though in addition to marketing is build better product, build really good product that people love using where they engage with others. And we have been huge beneficiaries of sharing and viral motion over the years. It's why it's been so helpful to our expansion performance over the years. But when I think about the things that Gene is leading us on in terms of our product innovation, whether it be Slope on the content side, whether it be some of the things we've talked about -- tying all the way back to our roadshow, we talked about our vision around communication and how we integrate with teams and Slack and what we're doing natively to propel that, I think our hand is improving on that front. So we look very closely in what we see as catalysts happening in adjacent spaces and we're trying to be very thoughtful about how to fold some of those concepts into our offering. And with an ever-growing engineering group and a product team that is coming up with good plans, as I shared with Aaron yesterday, probably the most excited I've been in a couple of years in terms of product road map.

[Rishi Jaluria:]

Great. That's really helpful. Thanks.

[Operator:]

Your next question comes from Robert Simmons from RBC.

[Robert Simmons:]

Hi. Thanks for taking the question. Can you give us some color on FedRAMP? How big of an opportunity you see that as possibly being? And how quickly do you think it will show up in results?

[Mark Mader:]

So as I said in the last call, we reached FedRAMP Ready status heading -- that we reported out in Q4. And we are now in process. Officially, it's the next step within the move to full authorization. Again, the feds are deciding that time line. They control that fully, but we're confident that we're going to achieve that this year. In terms of the opportunity, we continue to see demand. While we have been waiting for a full authorization, our team, which is based in DC, has been working hard getting beta accounts setup. So we're in agencies. We're having conversations with them. We're deploying Smartsheet today. Again, it has not been fully activated, but the agencies are showing demand, showing signs of interest. And there's really not a huge surprise there to us in the sense that the agencies have been looking outside, seeing what's happening in the commercial realm, and they have seen what works, right? They see the emerging categories, whether it's in our category or messaging, and they're wanting to participate. So until we actually get authorization and deals start transacting, we're going to be somewhat muted in terms of forecasting, but we're really excited to get the puck on the ice.

[Robert Simmons:]

Great. Thanks.

[Operator:]

And that was our last question. At this time, I will turn the call back over to the presenters.

[Aaron Turner:]

Great. Thanks. Thank you all for joining us today. We look forward to speaking with you again next quarter.

[Operator:]

This concludes today's conference call. You may now disconnect.