Smartsheet Inc (SMAR) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet First Quarter Fiscal 2023 Earnings Call. (Operator Instructions)

It is now my pleasure to turn today's call over to Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead.

Thank you, Brent. Good afternoon, and welcome, everyone, to Smartsheet's First Quarter Fiscal Year 2023 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today. With me today are Smartsheet's CEO, Mark Mader; and our CFO, Pete Godbole.

Today's call is being webcast and will also be available for replay on our Investor Relations website at investors.smartsheet.com. There's a slide presentation that accompanies Pete's prepared remarks, which can be viewed in the Events section of our Investor Relations website.

During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends. These forward-looking statements are subject to a number of risks and other factors, including, but not limited to, those described in our SEC filings available on our Investor Relations website and on the SEC website at www.sec.gov.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ materially and adversely. All forward-looking statements made during this call are based on information available to us as of today. We do not assume any obligation to update these statements as a result of new information or future events, except as required by law.

In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation of 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, Aaron, and good afternoon, everyone. Welcome to our first quarter earnings call for fiscal year 2023. Today, I'd like to focus on 3 key areas: a solid Q1 with healthy growth in both revenue and billings; our strengthening leadership position in collaborative work management, project and portfolio management and digital asset management markets and how we are investing to deliver shareholder value in the years ahead.

While Pete will provide additional details, I do want to highlight a few standout areas of our Q1 performance. Smartsheet revenue for the quarter grew 44% year-over-year to $168.3 million, and billings grew 36% year-over-year to $180.1 million. We continue to see success on each of the land, expand and climb aspects of our go-to-market motion.

On the land dimension, our previously discussed investments in simplifying packaging and the onboarding process are paying off. Q1 was a record quarter for new customer bookings and the highest net logo growth we've experienced since our IPO. On both land and expand dimensions, the net new plans added in Q1 increased by more than 4x versus Q1 of last year.

And on the climb dimension, we saw 57 domains expand our Smartsheet investment by $100,000 or more in Q1, up 97% year-over-year, including an expansion of over $1 million. Additionally, we saw our churn rate in Q1 improve to a record low of 4%, and we finished the quarter with more than 10.5 million Smartsheet users. We now have 33 customers with ARR over $1 million, and 3 customers that have over 125,000 Smartsheet users. Smartsheet continues to provide the best-in-class value in the category as our collaborator model allows Smartsheet to achieve broad reach in a way that is both frictionless for the user and cost advantageous for the customer.

As customers realize the value generated from their Smartsheet deployments, many uplevel their usage to include high-value data-intensive workloads. This is evident in our market-leading dollar-based net retention rates, which were 133% across our entire customer base and 149% for our customers with ARR over $500,000. Our investment strategy is predicated on proven ROI with a focus on both near- and long-term free cash flow generation.

People are core to this investment strategy and people want to work at Smartsheet. In Q1, we exceeded our hiring objectives in both R&D and sales, positioning us well for continued execution in FY '23. We're looking at a tremendous long-term market opportunity, and we will continue to strategically and thoughtfully invest.

With that said, we're mindful of the current macroeconomic environment and have taken steps to ensure we maintain a high rate of top line growth and reach free cash flow breakeven this fiscal year. As we've discussed on previous calls, Smartsheet has a proven ability to expand across and climb up the value chain within organizations. But also very important, we continue to land new customers at an accelerating rate.

In the first quarter, we saw significant wins across a number of industries with companies looking to up-level work management, including assured partners. This Smartsheet Advance deal with one of the nation's fastest-growing insurance brokers will help the company deploy a best-in-class project and portfolio management solution for their IT project management office, their retail PMO and their security team.

We also saw new wins at companies such as the premium Resort and Residences brand; [Aman], the online bank of MoneyLion; Santander; second home ownership innovator; Picasso; Volcon ePowersports; and the Department of the Interior. Looking at expand deals, we closed a mid-6-figure expansion deal at a large European talent acquisition and management solution provider. The leadership team overseeing the company's deployment efforts needed to transform the company's global delivery process. struggling to standardize on our approach across 12 regions and with little real-time visibility across their projects, overruns we're cutting into service margins. Smartsheet will dramatically improve their ability to manage and plan projects and capacity.

With their move up to Smartsheet Advance gold and resource management, they're building a solution that will integrate with their existing enterprise business applications to enhance collaboration, engagement and visibility across the company. And with the help of Control Center, they will have a standardized and integrated approach to managing complex client engagements in a consistent manager that will bubble up into regional and portfolio dashboards. This allows executive stakeholders to view resourcing plans and resource availability and get a real-time preview of the impact of those changes throughout the project life cycle.

In the U.S., we closed on a 7-figure expansion at a major U.S. health care and insurance provider. This customer scaled up to tens of thousands of connected users on our advanced platinum offering. For a highly regulated customer like this, Smartsheet's platinum features were key to deepening that relationship. This customer also partnered with us on building out custom Smartsheet solutions that replace some existing tools in their tech stack. This group has generated over $10 million in savings by building solutions in Smartsheet according to their internal company survey.

We also closed Q1 expansion deals with MassMutual, Alaska Air, Marriott and Nielsen, among many others. Whether we're talking about one of the country's biggest health care companies or one of the world's largest insurers, I'm encouraged by the executive level buying we're seeing throughout these organizations, which speaks to our client emotion.

In April, I was in Sydney at a customer roundtable. And at a certain point, an executive responsible for digital transformation at a multibillion-dollar gaming company explained to the CFO of a food distributor precisely how he should set up his analyst team to maximize value with control center. This exemplified Smartsheet's ability to drive engagement and deliver real value up to the C level in enterprises.

Our competitive strength remains Smartsheet's ability to scale alongside our customers' existing business systems. Our enterprise-grade CWM and PPM capabilities allow us to integrate equally well with both current and legacy systems of record as well as collaboration tools like Slack, Teams and Webex, data visualization solutions like Tableau and Power BI, visual collaboration tools such as Miro and Figma and productivity solutions like Microsoft 365 and Google Workspace.

And while Smartsheet's powerful collaborative work management capabilities continue to be a strong growth driver with Brandfolder, our integrated digital asset management platform, we've added yet another important growth engine. In March of this year, we launched a deep integration of our Brandfolder digital asset management platform with Smartsheet. By combining the best in modern work management with best-in-class digital asset management, the integrated Smartsheet platform aligns marketing and creative work, streamlining asset discovery and delivery and optimizing value through unified team and asset performance analytics.

Let me tell you about a value from one of our customers, McLaren Racing and what they're realizing from this Brandfolder integration. McLaren adopted Smartsheet with Brandfolder at the start of the 2022 Formula One racing season to streamline how they store, manage and distribute race day content. With thousands of photos and videos taken at every race, McLaren's team was spending countless hours manually organizing and distributing assets to their partners.

Now photographers and videographers upload assets directly to Brandfolder. And machine learning models automatically identify which logos are in each asset and sort them into collections, saving McLaren's team hours of work each week. Partners then access their respective collections to use McLaren approved assets for their own marketing efforts while McLaren can track the usage of more than 100 terabytes of assets.

For years, digital asset management systems were used almost exclusively in advertising and media production. And while those industries still make up the lion's share of the customer base, almost any organization that creates and stores digital assets of any kind, photos, videos, PDFs, architectural drawings or 3D models is a potential customer.

Brandfolder is already simplifying digital asset management at tech companies like Zoom and Auth0, a division of Okta, financial services firms like LPL Financial, consumer goods companies like the cookware company and health care organizations like Care Oregon and Envision Healthcare. In the future, I believe we'll see digital asset management systems used in functions far beyond creative in every industry, architecture, construction, manufacturing, legal services, health care, really anywhere digital assets need to be tagged, stored, searched and accessed efficiently.

We continue to make Smartsheet not only more powerful but easier to get people up and running quickly with our product-led growth focus. This quarter, we introduced an onboarding experience that lets new and existing users get their project management system set up and shared with their team in just a few clicks. This new experience guides users in quickly building and sharing projects. A simple interface walks users through creating their project and automatically creates reports in a dashboard, organizing them within team workspace. This experience will be applied to support hundreds of work management use cases in the quarters to come.

On the international front, our expansion is continuing with 100 team members now on board in our Sydney location, staffing underway in Japan and EU bookings growing steadily. One of our EU customers is the European arm of a global medical technology company focused on medical diagnostics, medical imaging system and surgical devices. They needed this solution to help improve consistency and collaboration on their major R&D initiatives. The evaluation team shows Smartsheet and the solution would help improve their visibility and make collaboration much easier compared to their legacy PPM system.

Moving into Q2 with solid momentum. I remain very optimistic about fiscal year 2023 and beyond. We have a strong category-leading position and high confidence in thoughtfully investing to capture the enormous market opportunity in front of us. Our focus remains leading in for our customers while making investments that deliver high rate of growth and free cash flow performance that enables us to control our destiny.

I look forward to talking with you later in Q&A. But for now, I'm going to turn it over to Pete. Pete?

Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q1 was a solid start to fiscal year '23. Our results exceeded expectations with strong revenue growth, healthy gross margins and industry-leading unit economics.

To set the stage before we get into the numbers, we are focused on capturing our massive market opportunity with a view on our path to profitability. The investments we are choosing to make are ones that exhibit strong proven ROIs that will drive not only durable top line growth for years to come, but also deliver free cash flow generation in the medium to long term.

While we have not seen any macro impacts in our demand environment, we are electing to incorporate an element of macro-related prudence into our Q2 and fiscal year revenue and billings guidance to account for potential headwinds. I will provide more details at the end of my prepared remarks.

As a reminder, we highlighted on our Q4 earnings call, how we took steps in the first quarter to build out our field model to capture this market opportunity. These steps include territory realignment to onboard our largest sales class in our history, promoting productive quota-carrying reps into manager positions, and hosting an in-person worldwide sales kickoff event to enable this team. We believe these changes position us very well for continued growth for this year and beyond. But as expected, we had a short-term impact on some of our metrics in Q1.

I will now go through our financial results for the first 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.

First quarter revenue came in at $168.3 million, up 44% year-over-year. Subscription revenue was $155.3 million, representing year-over-year growth of 44%. Services revenue was $13 million, representing year-over-year growth of 44%.

Turning to billings. First quarter billings came in at $180.1 million, representing year-over-year growth of 36%. Approximately 91% of our subscription billings were annual with 5% monthly. Quarterly and semiannual represented approximately 4% of the total. Multiyear billings represented less than 1% of total billings.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 50% year-over-year to 2,516 and the number of customers with ARR over $100,000 grew 68% year-over-year to 1,108. These customer segments now represent 57% and 42%, respectively, of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 87%.

Next, our domain average ACV grew 32% year-over-year to $7,210. As a reminder, we saw significant growth of our new customer acquisitions in Q1. New customers typically begin their Smartsheet journey at small dollar values than our overall average ACV. These initial lands put a small amount of pressure on our domain average ACV growth rate in the near term but provide a healthy base for expansion in the future. We ended the quarter with a dollar-based net retention rate of 133%.

The full churn rate dropped further and now rounds down to a record low of 4%. For the remainder of the year, we continue to expect our dollar-based net retention rate to be above 130%.

Now turning back to the financials. Our total gross margin was 81%. Our Q1 subscription gross margin was 87%. We continue to expect our gross margin for FY '23 to remain above 80%. Overall, operating loss in the quarter was negative $23.1 million or 14% of revenue. As previously mentioned, we had a very strong quarter of hiring in Q1, which was above our expectations. Additionally, we experienced lower-than-expected employee attrition rates in the quarter. The combination of stronger hiring and lower attrition rates resulted in our operating loss to fall within our previous guidance range despite our revenue outperformance. Free cash flow in the quarter was negative $9.1 million.

Now let me move on to guidance. Although we have not seen any discernible macro-related impacts in our business thus far, we are embedding an element of macro-related prudence into our Q2 and full year revenue and billings guidance. If ultimately, we don't experience a macroeconomic impact on our demand environment, this would be a source of upside to our current revenue and billings guidance.

Additionally, we have identified areas of cost savings this year, which is reflected in our improved operating loss and free cash flow guidance. For the second quarter of fiscal year '23, we expect revenue to be in the range of $180 million to $181 million, non-GAAP operating loss to be in the range of $27 million to $25 million, and non-GAAP net loss per share to be between $0.21 and $0.19 based on weighted average shares outstanding of $129 million.

The Q2 operating loss guide is impacted by the full weight of hiring we made in Q1, but we expect to see operating leverage in the second half of the year. For the full fiscal year '23, we are raising our revenue guidance to be in the range of $756 million to $761 million, representing growth of 37% to 38%. We expect services to be 7% of the total revenue for the remainder of the year as partners play an increasing role in our services delivery.

Billings are expected to be in the range of $910 million to $925 million, representing growth of 38% to 40%. We are improving our non-GAAP operating loss to be in the range of $86 million to $76 million and net loss per share to be between $0.67 and $0.59 for the year on approximately 129 million weighted average shares outstanding. We are also improving our free cash flow guidance for the year to break even.

To conclude, Q1 was another solid quarter for Smartsheet. We remain committed to working towards driving growth with margin improvement and are actively driving efficiencies across the company while continuing to fund our key growth initiatives. We have a huge market opportunity in front of us, a world-class team, CWM category leadership powered by a business model that can generate growth and free cash flow in various market conditions.

Now let me turn it back to the operator for questions. Operator?

(Operator Instructions) Your first question comes from the line of Brent Thill with Jefferies.

Mark, I'm curious if you can expand on the economy and what you're seeing. And ultimately, if things get worse before they get better, how do you think about the steps that you can take to mitigate any of the concerns about the macro?

I think as we look at our leading indicators, things like pipeline, progression of pipeline in a quarter, I think we have an ability to adjust throttle and moderate spend. As Pete remarked, currently, we continue to plow ahead very well. I think the workout that we got in 2020 and '21 with COVID, actually, I think, prepared a lot of businesses quite well, where we had a chance to operate in an environment where there was uncertainty, and it really put a lot of emphasis on how we present value around the solution. So I think a lot of the things we learned and enabled our sales teams with in 2020 actually fit right into the slot that we're seeing today.

The good news is we still see a lot of money changing hands in this category, and we're moving forward. I think partnering with Pete, and he'll make some comments later around our investment strategy. We have a lot of levers to pull. But right now, we're definitely leaning forward.

And you mentioned new client additions were really strong. Can you shed any color on what you're seeing there?

Yes. One of the things I spoke to in our earnings call, the last 2 earnings calls was our focus. We've had such focus over the last few years around our enterprise offering and strength and capabilities moving up the value chain, and we've really started to pair that now with getting much more assertive at the leading edge. So how do you land in more nodes at more businesses. And it's not just winning new logos, it's also landing in more nodes at existing clients. So some of the things we've changed with our Pro Plan packaging, I think, has really made our land much more accelerated. And interestingly, when I look at the various segments of employee size, fewer than 50 employees, 50 to 200, 200 -- over 2,000 and 10,000, each of those segments is benefiting from this packaging. But it's beyond pro plan packaging. It's also the experience we're serving up to people coming in.

And one of the things I mentioned at our Analyst Day at the beginning of the year was, if I could have one thing, I would want to have every new person who sees Smartsheet to have perfect understanding of what's possible with Smartsheet. So I think packaging is one, and how we present our value is another. And I think we're starting to really see that perform.

Your next question comes from the line of Terry Tillman with Truist Securities.

I just had 2 questions. The first question is for Pete, in terms of -- you did actually talk about some short-term potential impact in some of the KPIs. I mean, you beat my billings number and the KPI sounded relatively strong.

And it sounded like new logo activity, I think Mark, you had said was a record at least bookings value. So could you maybe double-click a little bit into that comment? Was some of the stuff you were doing at the beginning of the year on kind of sales kickoff and things like that, that may have just impacted some of the enterprise business? I just love a little bit more on that, and then I have a follow-up question for Mark.

So Terry, we mentioned a few things that we did at the start of the year. We onboarded our largest class in sales, and that involves splitting territories. It involved promotion for people in the field. It involved an actual sales kickoff event to get the whole field aligned. So we saw that as a huge long-term accelerant but obviously, had a short-term impact for us. Some of the impacts we saw, we still had really great customer ACV changes for the number of customers in those categories, but it was just relatively muted to our historic -- our recent trends, if you will.

Okay. Okay. Fair enough. And I guess, Mark, it's -- I love seeing the $1 million-plus customers. I mean I remember when it was single digits, and now I think you said 33. I'm curious, how much is digital asset management within that large customer mix? And have you thought about maybe putting some gas on the fire in terms of with what you have with Brandfolder and the integration, maybe you have like dedicated sales teams and you just really go after the digital asset management space aggressively.

Yes. Terry. Gas is definitely in the tank. We have added sales reps to our Brandfolder division. The way in which we are teaming between people who know digital asset management really, really well and people who know work management really, really well, those are starting to really play out.

And I would say it's -- when you look at the bookings impact, Brandfolder still relatively small compared to mainline CWM. But the resonance with customers is really interesting. When I speak with executives, and I hear them responding to the use cases they can understand it's very visual, it's very compelling. It's an easy value prop to convey. We're seeing some really good uptake.

It is our fastest-growing part of the business today, albeit not as significant yet as it will be in the future. But it's really starting to play well. So I believe that it will be part of almost all of our sales discussions within a year from now.

And right now, we're getting hundreds of sales reps fluent and how it works. I think the good news is the use cases we've already developed are easy and quite enjoyable to talk about. So I think it's going to be actually quite natural for the sales team to pick it up.

Your next question is from the line of Michael Turrin with Wells Fargo Securities.

Appreciate you taking the questions. Q1 billings grew 36% above targets. You actually did a slight increase to the low end of the full year billings guide to now 38% to 40% as well, even with some of the commentary around just added prudence with macro assumptions. So maybe you can just help us step through those macro assumptions, how that still translates into just continued confidence in higher billings growth throughout the course of the year? And anything you can add around the shape of billings, also useful from our perspective.

So Michael, this is Pete. We are really very bullish about our business. And we haven't seen any macro elements impacting our demand environment. We were choosing to incorporate an element of macro-related prudence in Q2 and our full year guide to account for potential headwinds. If you look at the macro economy and the factors that are in there, we're just realizing that we may not have seen it in our math. We might not have seen it in our demand environment. We want to make sure that we are being prudent as we give you the guide.

The second part of it as it relates to the demand environment itself. When we went through the COVID hit that took place last year, we saw a change in our losses and reductions. We had record numbers related to the churn level, so we haven't seen it there either. So we're feeling really bullish about the business, but we've sort of taken a prudent approach to guidance.

Okay. That's helpful. You've mentioned a couple of times came in ahead of hiring targets. It looks like stock comp also increased in fiscal Q1. Is there anything onetime specific to be aware of around Q1 or anything you could say just around how best to manage stock comp going forward given the current employment and market backdrop everyone is facing?

Yes. So we've looked at stock comp fairly closely. Our stock comp is a function. It's the hiring we've done in previous years. As you look at these sort of our cohorts that layer on top of them, we're seeing that play itself out in stock-based compensation. And then the other element we are recognizing is a lot of the grants we made pre-IPO are now starting to wind off and we're going to replace them with grants, which are at a much higher value, which are sort of the 2 drivers in our stock comp expense.

Your next question is from the line of Keith Bachman with BMO.

I have a lot of backdown noise. Someone asked my questions currently, and I apologize for the noise. First, I wanted to come back to the previous question. The previous quarter, you beat billings by about 10%. This quarter, you beat billings by about 2%. You indicate the macro is not a factor. Is that -- is there kind of a skinny beat, so to speak, this quarter? Is that because of the sales reorg that you referred to? Or was there something else in the quarter? And then my second question is just around live path. And what I mean by that, you've provided us with the op guidance to this year, free cash flow positive -- excuse me, neutral.

But how should investors think about the next year? Is there a steady progression towards your previously stated longer-term targets? Or is there more of a back-end weighted, so to speak, to realize those longer-term targets? And that's it for me.

So Keith, I'll take your questions in order. So your first question was about sort of what we're seeing in the billing side of it. The billings guidance that we provided to you was factoring basically the changes we were making to drive our field models as that included sort of the number of territories we were creating, the number of promotions we made, the actual -- having a sales kickoff, global event for several days. That was what we had baked into our guidance, and that's exactly how the quarter played out. There was no macro elements or demand factors that affected this -- the way we landed for billings in Q1.

The second part of your question was on how we think of the free cash flow and the op margin guidance long term. We are committed to driving free cash flow and op margin improvements in a steady and measured way as we go through the years. And we are tied to our longer-term model and guidance we've provided. And this guidance we've set up really sort of demonstrates that. Our belief is our model does generate free cash flow at scale. And we're sort of in our guidance, showing you sort of the underlying elements that support that frame.

Okay. But the study -- I mean, the key word is steady progression towards those goals.

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

I guess a couple here. Let's start off with the one that I don't think anyone's directly asked at least at the moment. Pete, you just talked about no macro impact in Q1. Are you seeing anything so far yet in Q2 to help give some of the guidance that's a little bit more conservative as you mentioned?

Scott, we haven't seen anything that would be -- that's different relative to the -- any macro impacts in our demand environment. We're in fact seeing our people we've hired and ramping nicely, building pipeline. So we're seeing a level of what I call trend that's positive relative to some where we expect it to play out.

Got it. Helpful. And then from a follow-up. Mark, you talked about the 33 customers that are more than $1 million. Now that you have a couple of dozen of those, almost 3 dozen. Are you seeing any commonalities around those expansions to that level or higher?

I assume it's not -- it's no longer just straight seat expansions, you're seeing some of the other capabilities, but I don't know if there's any real commonalities in playbooks that you can point to and replicate.

Yes. Scott, I think you hit it on the head. It is really a combination of people growing through both seat expansion and engagement inside and outside their company, combined with capabilities. And the capabilities is across a couple of dimensions. One is premium experiences, whether it's control center or data exchange with the legacy platforms, things like Brandfolder and then on the management and governance side.

I think the neat thing that we're seeing is we're not only seeing the count of $33 million play out. We're also seeing the stable of $0.5 million customers climb nicely. So we're almost at 100 customers at the $0.5 million mark today. So it's not like we're adding to the $1 million and depleting the coffers at the $0.5 million threshold. And one thing also to note was we had our fastest ever progression passed from $0.5 million to $1 million in under 5 months.

So I would say the degree to which we're helping our clients understand the road map and why they should be stepping up investment, that is playing out quite nicely. But this ability to speak to both the capabilities that they can really attach to really important drivers in their business as well as seat expansion, that is the common thread across these customers.

Your next question is from the line of George Iwanyc with Oppenheimer.

Mark, just following up on the strong new customer activity you're seeing. Is there any changes in the competitive environment? How many of the opportunities have been greenfield? How much are head-to-head competition?

Yes. On those lands, those are typically not grounded in RFP. Those are high velocity, really self-driven experiences for the most part. So I can't really speak to what's going through the buyer's mind at that point.

What I will say is, we posted a really impressive growth amidst a pretty active category, and we are really encouraged to see that. So I fully expect that while most of our new and expansion opportunities are people coming from graduating from sort of noncompetitive environment.

I do think that people have choice in the market. And it was really important for us to see such progress at the leading edge, while also showing really good strength at the enterprise level.

Yes. And then maybe from a pricing perspective when you're having your discussions with enterprises and on these larger deals, how do you feel about the pricing environment? How do you feel about the value-based sales selling?

I feel great about it. I think part of succeeding at scale is mapping to something that companies care deeply about. So I think going in on purely quality measures, talking about better connection with people driving purpose, those are vitally important to why people use software.

But absent a connection to an outcome that is tied to a dollar amount, I think it becomes increasingly difficult for people to really warrant very large expenditures and software. So it's fundamental to our selling approach, all of our -- and it's not just the largest of enterprise pursuits. I would say the upper mid-market as well is starting to have these discussions and wanting to have these discussions.

Your next question is from the line of Alex Zukin with Wolfe Research.

So just maybe for you. You mentioned that you guys are being prudent with respect to your guidance, both for the second quarter and for the year. I wonder if you could dig into exactly what that means. Are you assuming lower close rates? Are you assuming a couple of deals slip out of Q2 into the second half? Are you assuming that some of the productivity from this ramping sales organization doesn't come through or that retention goes down? I'd be curious just what assumptions you're baking in, even though you're not seeing anything.

And then, Mark, maybe for you. I mean, given the valuation environments in the private side, are there any areas that are starting to look more interesting or attainable from a buy versus build perspective given the reset in valuations?

Okay. I'll let Pete start, then I'm happy to answer that question.

So Alex, when we think about a little bit of texture on sort of how we think of these factors, we don't expect that there will be any issues with our ramping. We've seen the ramp of our reps work really well. They've integrated well into the sales force. We see our deal volumes progress appropriately. What we imagine in the event of a macroeconomic impact would be due cycles lengthening, which we haven't seen yet but we're sort of giving a guide based on sort of that element of it. So that's kind of the backdrop of how we are thinking about it.

I think on the M&A side, Alex, I think there's probably a little bit of an offset between what's happening in the public market and what private companies believe their valuation to be. I can tell you that those are perfectly aligned yet. But when I look at our team and how we're organized around the market map development, the priorities we have to both expand at the enterprise, offer new solutions and then also drive high engagement in our product. I think there's some really interesting opportunities that will be coming out in the next 12 to 18 months, but it is predicated on the privates sort of recognizing that there's been a shift. And I think there's still room to have further shifting there occur.

Your next question is from the line of Robert Simmons with D.A. Davidson.

So you revised both numbers upward for the year, but I was wondering what drove the improved free cash flow expectations, notably more the improved operating income expectations?

So the -- to your question, Robert, the majority of our cost savings were tied to sort of think of it as headcount growth moderation in the back half. And while that improves right away sort of the spend element of cash, when you think of op margin, you're tied to things which are more on an accrual basis, the way revenue is recognized in subscription models. So you don't get the full impact of that on the op margin line. So that's the reason why we've sort of given you the guide on free cash flow and op margin the way it is.

Got it. That makes sense. And then last quarter, you talked about some displacements. Was there anything notable to report there this quarter?

Yes. I think one of the things is we're investing in our product and portfolio management capabilities, we're starting to have opportunities to display some of the legacy players in that category where people are looking at PPM and CWM as a composite. And that's been a welcome development at some of our larger clients.

Your next question is from the line of Pinjalim Bora with JPMorgan.

Pete, I wanted to ask you on the guidance, understanding that you have put a macro buffer in the billings guidance. Any way to understand the magnitude of that buffer? Is it -- are you kind of taking off 2 points of growth or more? I mean, any way to help investors understand that?

So we haven't quantified the level of, what I call, impact that would have because you can come up with various scenarios of how much impact you would have relative to what scenario you choose. But if you would have slipped the question and say what would we have done without sort of that macro backdrop, we would have converted the outperformance in the quarter into the lift in guide. So that's what we would have done. So that's the best I can share with you is the thinking.

Got it. Understood. And one for Mark. Mark, -- can you talk about maybe the wall-to-wall deployments, what are you hearing from customers into 2 different ways? Like one, are you hearing customers talk more about wanting to go wall to wall with Smartsheet? And two, how would you assess Smartsheet's ability at this point to drive organic wall-to-wall expansions from a product and process standpoint?

Yes, it's interesting. Having been in enterprise offer for 20-plus years, it's typically the vendor that pushes wall to wall as opposed to the customer clamoring for wall to wall, and that's a dynamic that's been around a long time. And our philosophy for really since we've shown tremendous growth in the enterprise has been to earn the enterprise business. So the way we have been modeled from the start is we allow us to get tremendous reach with our collaborator model. The degree to which we monetize those through an advanced offering or through license consumption, that varies depending on the scenario.

So I would say the ability for us to touch the vast majority of people in a company, that is something that precedes the licensing events. So we speak about 125,000-plus users engaged at over -- at more than 3 companies, that is the model playing out.

I think one needs to really deliver maximum value for the client and to retain a healthy customer long term. I think balancing when you monetize it with when they receive value is actually of paramount importance. I think what some companies get into the challenge of is they sell a wall-to-wall adoption, doesn't meet expectations. 2 to 3 years later, there's a ratchet down, and that's when you see a pretty precipitous fall in net dollar retention. That is something -- it's a game I've seen play out, and it's something that we look to avoid.

So I think the -- for our largest customers, we do have a few where it is wall to wall per se. But again, we're very prudent in when we actually lock in from the economic standpoint.

Your next question comes from the line of Jake Roberge with William Blair.

Congrats on a solid quarter. Just wanted to double-click on the strength you're seeing with the new customers, I mean, 4x growth. That was awesome to hear. But have you seen any changes to where you're landing within these customers? I know it sounds like the Pro SKU is helping you land more virally up and down market, but have you seen anything with Brandfolder, some of these other new products, driving you deeper into marketing departments?

I think the Brandfolder move is one where it's more of an engaged selling motion as opposed to self-discovered. So I would say in our more mature nodes where we have landed, I think the Brandfolder discussion is absolutely taking off quite nicely.

I think the -- what we're seeing in our thousands of lands in these nodes is what I would call traditional straight up the middle CWM. And it really gives us the opportunity to then expand from that.

In terms of whether we've seen a change in diversity, we already started in such a diverse spot industry functional group that I would say the areas where we have -- where you see greater resonance is once we've landed where we can really go deep project and portfolio, the Brandfolder work and marketing. We have offerings now that lend themselves really well to that project centricity, the marketing centricity and operation centricity. And that's where a lot of our engagement activity is post land.

Great. And then just a follow-up question on NRR, just -- since you're still seeing pretty solid metrics in that. But just curious how much of that can be attributed to user expansion that you're seeing within customers versus the customer climb on the platform to more enhanced offerings like data shuttle or even work apps just given the prioritization for low code and no code that's really going on in the market right now.

So the dollar-based net retention rate, Jake, we see comes from like 2 basic think of motions. One is the expand motion as people are picking up more seats and there's a natural virality to that motion.

The second part of it is as they get expanded, what you can do with the product is vastly differentiated than anybody else in the space. And what you find is the capabilities piece of it really picks up strength, if you will. We're seeing both those levers sort of drive it, but it's predominantly an expansion motion still that drives the DD&R calculation.

Your final question comes from the line of Josh Baer with Morgan Stanley.

Wanted to ask one on the net new customer additions over 5,000. It looks like they were down year-over-year. Can you remind us, does that reflect the focus on larger customers, sales changes? And how should we think about that dynamic?

Yes. So the dynamic that's underway there is the part I called out in the Q4 earnings script, where we were making a lot of changes in the way we think of the field model, splitting territories, adding sort of what I call promoting people into jobs, having an in-person sales kickoff event globally. Those are the things that drove sort of the change in year-over-year growth that we saw in that segment. There's nothing fundamentally different that's happening over there in the demand vectors.

Got it. And then we talked about the improved free cash flow guidance in relation to operating income. But I was just wondering with the stronger hiring and lower attrition, not sure if that's coming from headcount. So I was hoping you could just double-click on the improvement there. Are there areas that you're increasing focus as far as investments are pulling back?

Yes. The majority of our cost savings are tied to sort of moderating our head count growth in the back half of the year. We don't believe this will have a material impact on our growth because if you think of the nature of the front-loaded nature of the hiring we've completed, it sets us up really well to drive our billings and revenue goals.

And while rationalizing costs, we've looked at all areas of the business with sort of a focused effort looking at things, which are supporting roles, driving cost savings associated with hiring in specific geographies. And if you take the intent of this, it's really looking at both people and programs, most of which are sort of support and ancillary spend, not directly tied to building pipeline or expanding or driving expansion. So that's been a little bit of texture on how we've come at it.

There are no further questions at this time. I will now turn the call back over to Mr. Aaron Turner for closing remarks.

Great. Thank you, Brent, and thank you all for joining us today. We'll speak with you again next quarter.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.