Smartsheet Inc (SMAR) 2021 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Smartsheet's Third Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

  • I would now like to hand the conference over to your speaker today, Aaron Turner, Head of Investor Relations. Thank you. Please go ahead, sir.

  • Aaron Turner - Senior Director of IR

  • Great. Thank you, Christine. Good afternoon, and welcome, everyone, to Smartsheet Third Quarter Fiscal Year 2021 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; CFO, Jennifer Ceran; and our incoming CFO, Pete Godbole. Our Chief Product Officer, Gene Farrell, will also be available during the Q&A.

  • Today's call is being webcast and will also be available for replay on our Investor Relations website at investors.smartsheet.com. There is a slide presentation that accompanies Jennifer'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, financial trends and our expectations around the impact of COVID-19 on our business. 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, and 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 to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our Investor Relations website.

  • With that, let me turn the call over to Mark.

  • Mark P. Mader - President, CEO & Director

  • Thank you, Aaron. And thanks to everyone for joining us on our third quarter earnings call. We're pleased with our Q3 results of $98.9 million in revenue and $112.4 million in billings. Highlights from the quarter include continued strength with large deals, a new high-water mark for our government business, the completion of our acquisition of Brandfolder, a successful Engage conference, and a total Smartsheet community that now exceeds 7.6 million users.

  • I'd like to thank Smartsheet's employees and partners for their continued hard work and commitment to our customers' success. These Q3 results are a reflection of the resiliency and quality of the Smartsheet community and the increasing relevance of our core value proposition.

  • As enterprises across the globe seek to digitally transform how work is delivered and innovation is achieved, the value of Smartsheet platform is becoming increasingly clear. In Q3, our domain average annualized contract value, or ACV, grew 42% year-over-year to $4,665, an expansion within the base included 294 companies increasing their ARR by more than $25,000, up from 235 in Q2; 106 increasing their ARR by more than $50,000, up from 79 in Q2; and 36 increasing their ARR by more than $100,000, up from 19 in Q2. Preliminary analysis of our Q4 pipeline suggests a continuation of customers choosing Smartsheet at scale.

  • At a time when collaborative work management, or CWM, solutions are increasingly recognized as an effective means by which to rapidly deliver digital transformation and high-value workflows, we are investing to expand product development and innovation, deepen our selling capacity across the globe and firmly position Smartsheet as the market leader. Up to now, most digital transformation efforts have been IT-led top-down initiatives. While valuable, their scope has been limited to a relatively small number of high-volume, high-cost workloads whose benefits are realized after long implementation time frames. We are seeing the appetite within enterprises extend beyond these megaprojects to address a larger portfolio of opportunities best solved with easier to configure and faster to deploy platforms like Smartsheet. By empowering the people and business units at the edge of their organizations with a platform that brings together 3 foundational elements of work, collaboration, content and workflow, enterprises are able to improve the speed and agility with which they deliver digital-first workflows, things such as improving project approval flows, providing visibility into program status, and enhancing the development and distribution of digital content.

  • This shift was reinforced by Forrester's recent evaluation of the enterprise CWM market published on November 18, which underscored the increasing importance of CWM and named Smartsheet as a leader that excels in providing dynamic work management for the enterprise.

  • One example of how Smartsheet delivers value is Sage Software. The Sage Group is a 12,000-employee British multinational software company with 2 million customers across 22 countries. With strong demand for their business payment solutions, Sage sought, in their words, to harmonize our ecosystem of connected data through seamless automation. To do so, they now leverage Smartsheet's control center and bridge offerings to create trigger-based workflows from various systems, including Microsoft SharePoint. Doing so provides Sage with real-time status updates and visibility into their most critical projects and processes. Sage, like many other enterprises, recognizes the foundational importance of Smartsheet as a collaborative work execution layer to maximize the effectiveness of their existing technology stack and to underpin their global project delivery and resource management initiatives.

  • We shared other customer success stories at our annual Engage global customer conference held virtually on October 1. With nearly 60,000 registrants from 57 countries and over 250,000 streams of content, we highlighted a range of new products and use cases, including high-fidelity dashboards with a more modern look that are easier to build and update, enhancements to our enterprise scale, manageability and performance, including policy management, plan management and admin insights; Work Apps, Smartsheet no-code platform that will enable users to build intuitive, desktop and mobile applications; Bridge, designed to allow enterprises to automate business processes with workflows that trigger actions and share data across platforms from a user-friendly interface; and our reimagined design of Smartsheet in 2021 to help our customers achieve more with a more delightful, beautiful user experience. These and other recent product enhancements drove some notable engagement metrics in the quarter. We saw roughly 40 million form submissions, 128% year-over-year increase. Almost 650,000 dashboards were created, and dashboard views were up 64% year-over-year. A 48% year-over-year increase in workflows built, and 4,600 customers utilized our digital proofing capabilities.

  • At Engage, we also introduced our integration with Brandfolder, the leading digital asset management platform we acquired in mid-September. This integration, and those to follow, will allow Smartsheet's customers to more effectively organize, control, distribute and measure digital content. Early customer response to the synergies that will be made possible by the integration of Brandfolder's content management and analytics capabilities and Smartsheet's workflow platform has been very positive. Along with the resource management capabilities, we offer via 10,000ft, Brandfolder deepens Smartsheet's ability to deliver solutions that benefit marketers and content creators. We look forward to continuing to enroll all Smartsheet and Brandfolder customers in the value that their respective solutions provide.

  • Content-centric work is becoming increasingly cross-functional, driving among other things, sales motions, marketing campaigns and many other day-to-day business interactions. To be most effective, this work should not be confined in silos, but in many cases, technology itself is the cause of these silos. And as marketing and content become more central to overall organizational strategies, connecting them with other functions throughout the enterprise is paramount. For example, McGraw Hill, a global learning sciences company is, at heart, an engine of content creation and distribution. They wanted to make their processes for creating and tracking educational media assets more efficient and accountable by leveraging technology to bring those assets into a single place. And Smartsheet enables them to automate and simplify the process of creating and sharing media assets for its educational products, cutting time and effort out of assigning and revising assets and processing vendor payments, improving efficiency by 50%.

  • I love how McGraw Hill's design leader put it. She said, Smartsheet frees up our designers to spend their time being creative, brainstorming and concepting big ideas instead of working on photo metadata and tracking it for hours of their day. Smartsheet lets us focus on the fun stuff.

  • Beyond our commercial business, we're also making progress in the government segment. With over $1 million in federal bookings in Q3, our largest quarter thus far, we remain bullish on the long-term opportunity in this market. I'm also pleased to report that we've achieved Department of Defense Impact Level 4, IL-4, provisional authorization enabling the aerospace and DoD sectors to deploy the Smartsheet Gov platform. Achieving this authorization demonstrates our continued commitment to furthering the federal government's use of cloud technology to mitigate risk, enable the federal workforce, and drive digital transformation.

  • As an example of the early traction we're seeing in the federal market, the GSA significantly expanded its use of Smartsheet Gov in Q3, making them our second largest federal customer. From supporting the procurement of billions of dollars of worth of supplies each month to managing the world's largest collection of real estate assets, Smartsheet is core to how the GSA fulfills their broader important mission and helps other federal agencies achieve theirs.

  • As we look ahead, I believe now is the time for leaders to take steps to ensure their organizations are positioned to fully capitalize on a digital-first operating model. To empower their business teams, not solely their IT teams to serve as agents of change, and quickly and durably applying technology to improve processes and deliver insights. As remote work becomes not just a short-term adaptation but a long-term strategy, businesses cannot continue to rely primarily on synchronous work, work undertaken and managed through communications and real-time messaging apps. There are limits to people's ability to be productive and accountable when tools require them to be continuously present.

  • Leaders are recognizing they need to shift more workloads to asynchronous work, work that is documented, automated, tracked with dashboards and where priorities are clearly defined. They understand that by empowering their teams with no-code solutions that facilitate asynchronous work, cycle times will be improved, a deeper sense of ownership will be created, and prioritization and accountability will be insured. Smartsheet is ideally suited to help enterprises work more asynchronously to derive the benefits from doing so.

  • With that, I'm about to hand this call over to Jenny Ceran for the last time. As we previously announced, Jenny is retiring from Smartsheet. She has played a valuable role at our company, helping us transition from a high-growth private company to a public one. Her leadership has served us well and continued as we worked together to identify and transition to her successor. I believe the transition plan she's helped us build will ensure a productive handover to our incoming CFO, Pete Godbole.

  • I'm pleased to have Pete join the team, and I look forward to working closely with him to drive our next phase of growth. Pete is an enterprise software industry veteran. He comes to Smartsheet having most recently served as CFO of Hearsay Systems and previously as CFO of VMware's end-user computing global business unit. His experience helping companies scale into new products, geographies and business models makes him a terrific addition to our senior executive team. I'd like to ask Pete to say a few words.

  • Pete Godbole

  • Thank you, Mark. I'm pleased to be here, and I'm excited to begin. This business has been in really good hands, and I'm energized by the chance to help Smartsheet reach new heights of success.

  • The year 2020 has seen a transition to remote working, leading to permanent changes in collaboration and automation. Past the pandemic, it is clear that the future of work is going to be a confluence of collaboration, workflow and content. Smartsheet's value proposition is the essence of doing that effectively and efficiently. The TAM and sheer scale that this opportunity creates is incredible.

  • I'm excited to play a role in accelerating the outreach of Smartsheet's value proposition to this large and growing market. As much as the opportunity itself, from my earliest conversations, I've been incredibly impressed with this team. I felt culturally aligned from the start. I find them a passion for solving customer problems, accountability and authenticity that drives performance and a hunger to lead a disruptive and evolving market. Truly, I'm honored to be a part of this winning team. Much more to come, but for now, I'm grateful for the opportunities ahead and look forward to working closely with all of you on the call.

  • Mark P. Mader - President, CEO & Director

  • Thanks, Pete. And with that, let me turn the call over to Jenny to provide additional details on our financial results. Jenny?

  • Jennifer E. Ceran - CFO & Treasurer

  • Thank you, Mark. Welcome, Pete, and welcome, everyone.

  • Overall we were pleased with the results for the quarter, which reflected strength from mid-market and enterprise customers and stabilization in the SMB sector. Revenue came in at $98.9 million, up 38% year-over-year. And billings were $112.4 million, up 35% versus last year. Our dollar-based net retention rate was 125%, and our domain average ACV increased 42% versus last year. Non-GAAP operating loss and free cash outflow came in at $15 million and $8.8 million, respectively.

  • We completed the acquisition of Brandfolder in the quarter, using approximately $124 million net of cash acquired. And continued to remain well capitalized with $420 million on the balance sheet and no debt at the end of the quarter.

  • Next, I'll provide more color on the third quarter financial results. 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.

  • As already mentioned, third quarter revenue came in at $98.9 million. Subscription revenue was $90.9 million, representing year-over-year growth of 41% and services revenue was $8 million, representing year-over-year growth of 12%. The Brandfolder contribution to total revenue in the third quarter was $1.7 million, exceeding our original expectations.

  • Turning to billings. Third quarter billings came in at $112.4 million, above our guidance range as we saw strength among our mid-market and enterprise customers and a larger number of big deals. In billings, Brandfolder contributed $3.2 million from the normal course of business and $4.7 million from acquired deferred revenue. We were also pleased to see a number of customers who had contracted in the first half of the year, expand again as their business has stabilized and improved. Additionally, our remaining performance obligations, or RPO, which includes deferred revenue and backlog, increased 47% year-over-year as our sales team closed a larger number of higher-value, multiyear deals, and Brandfolder also contributed a higher number of multiyear deals. Approximately 89% of our subscription billings were annual this quarter, with 7% monthly. Quarterly, semiannual and multiyear billings represented about 4% of the total.

  • Moving on to reported metrics. We now have 11,172 customers paying us $5,000 or more per year; 1,331 paying $50,000 or more per year; and 504 now paying us $100,000 or more per year. These customer segments now represent 80%, 44% and 29% of total ARR. The Brandfolder acquisition contributed 685 customers to the greater than $5,000 cohort, 63 customers to the greater than $50,000 cohort, and 16 customers to the greater than $100,000 cohort.

  • Our domain average ACV grew 42% year-over-year to $4,665. Excluding Brandfolder, our domain average ACV was $4,506.

  • We ended the quarter with a dollar-based net retention rate of 125%. Please note, our dollar-based net retention rate will exclude the impact of Brandfolder until we lap the acquisition in the third quarter of fiscal year '22.

  • The full churn rate improved and rounded down to 7%. We expect our dollar-based net retention rate in the fourth quarter to be in the low to mid-120s as the rate represents a 1-year look back, which continues to reflect the early headwinds of COVID.

  • Turning to gross margin. Our total gross margin was 79%, 3 percentage points lower than the second quarter. This quarter, we completed the migration of our platform to the public cloud. The decline in margin versus the prior quarter was driven primarily by the wind-down costs we incurred for our legacy data centers. The impact of these costs reduced our overall gross margin by approximately 2 percentage points. We expect to recoup the 2 percentage points in the fourth quarter, with the exit of our data centers now complete.

  • Moving to operating expenses. Sales and marketing expense as a percentage of revenue was 52%, approximately 14 percentage points lower than the year-ago quarter and 1 percentage point higher than the prior quarter. The improvement compared to the year-ago quarter was driven primarily by lower marketing investments, including our virtual Engage conference and to lower travel expenses, while the increase compared to last quarter was driven primarily by increased marketing investments and our virtual Engage conference. As we plan to hire more reps and invest in ongoing marketing, we expect our sales and marketing spend as a percentage of revenue to increase in the fourth quarter.

  • Research and development as a percentage of revenue was 26%, 4 percentage points lower than a year ago and 2 percentage points higher than the prior quarter. As Mark highlighted earlier, we continue to make investments in our products while driving long-term engineering efficiencies.

  • General and administrative expense as a percentage of revenue was 15% as we continue to invest in and make progress on our SOX remediation efforts.

  • Overall, operating loss in the quarter was $15 million, and free cash flow was negative $8.8 million. Our personnel expenses represented 71% of our total expenses. The significant improvement in operating loss relative to our guidance was driven by our revenue beat and the timing of marketing investments and other spend.

  • Let me move on to guidance. For the fourth fiscal quarter, we expect revenue to be in the range of $102 million to $103 million. Billings to be in the range of $131 million to $134 million. Operating loss to be in the range of $18 million to $16 million. And non-GAAP net loss per share to be between $0.15 and $0.13 based on weighted average shares outstanding of 121.5 million. Our free cash flow is expected to be positive and in the range of $6 million to $8 million. We expect Brandfolder to contribute about $2.5 million to Q4 revenue and $4 million to Q4 billings.

  • For the full fiscal year, we expect our revenue to be in the range of $378 million and $379 million. Billings to be in the range of $431 million to $434 million. Operating loss to be in the range of $54 million to $52 million. And non-GAAP net loss per share to be between $0.44 and $0.42 for the year based on approximately 120 million weighted average shares outstanding. We expect free cash flow to be between negative $36 million and negative $34 million for the full fiscal year.

  • Before I turn it over to the operator for questions, I'd like to welcome again Pete Godbole as the next Smartsheet CFO, and to thank Mark and the entire Smartsheet team for a wonderful and exciting 4 years building this business together. I've had the opportunity to get to know Pete in the interview process and as we begin the transition. He shares my passion for this business and will be a fantastic addition to the team. Thanks also to all of you, our investors and sell-side analysts, for the time you've spent getting to know our business and our opportunity. I'm truly grateful.

  • With that, I will now turn it over to the operator for questions. Operator?

  • Operator

  • (Operator Instructions) Your first question comes from the line of David Hynes from Canaccord.

  • David E. Hynes - Analyst

  • Congrats on the strong results. Mark, I want to ask if you've seen any change kind of in the percent of use cases that lean more towards workflow automation versus maybe project management or collaboration. And I realize that most of your deployments have kind of flavors of both, but I'm wondering if COVID has in any way kind of accelerated interest in automation.

  • Mark P. Mader - President, CEO & Director

  • I think it is now more central and common to have it as part of the conversation. In terms of it being the tip of the spear for the conversations, I would still say that program or project theme is alive and well. I would say though, it's less now us introducing the concept as really people being more fluent in it and recognizing that the business units can actually participate in this. But I would say in terms of sort of tip of the spear, new opportunities originating on specifically that dimension, we haven't really seen a fundamental change yet.

  • David E. Hynes - Analyst

  • Yes, yes, okay. And then, Jenny, just a quick follow-up on the numbers. I wasn't sure if I caught the comment, but do you think we've seen the nadir in net dollar retention in this quarter?

  • Jennifer E. Ceran - CFO & Treasurer

  • So we expect the net dollar retention rate, as I mentioned on the call, to be in the low 120s to mid- for Q4. So you have to understand that our dollar retention rate is a 4-quarter look back. So we still have COVID headwinds, but we do see an opportunity for stabilization beyond that.

  • David E. Hynes - Analyst

  • Yes, yes, okay. Congrats to you, Jenny. Thanks for all your help. And Pete, welcome.

  • Pete Godbole

  • Thank you. Thank you very much.

  • Jennifer E. Ceran - CFO & Treasurer

  • Thank you.

  • Operator

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

  • Terrell Frederick Tillman - Research Analyst

  • I want to make sure I get all this in. Mark and Gene, hi. Jenny, congratulations, and I'm going to miss you. And Pete, welcome.

  • I guess first question though, Jenny, is just I want to make sure I got this right. Were you saying that for the stub period of Brandfolder, its $8.7 million in billings contribution with the quarter and then the guidance? Or was I off on that?

  • Jennifer E. Ceran - CFO & Treasurer

  • You were off on that. So $1.7 million was revenue. So that's what we showed on top line revenue. $7.9 million when you include both the core business, billings of $3.2 million. And I think $4.7 million on the deferred revenue, that's what we contributed to the billings number. So $7.9 million on billings, $1.7 million on revenue.

  • Terrell Frederick Tillman - Research Analyst

  • Okay. Got it. And I guess Mark, maybe just a big quick picture question here in terms of you all helping really kind of craft this market and really be a category leader. And what you've been working on the branding side, the discoverability of features, you have the new UI and just overall C-level exposure. Where I'm going with this is I heard about large deals. You guys becoming like the system of record for collaborative work management. Maybe an update on that. How many million-dollar deals do you have now? And how much attention are you all now garnering from C-level executives? Why don't we just use Smartsheet for that?

  • Mark P. Mader - President, CEO & Director

  • Thanks, Terry. I would say the -- just to answer the question on the million-dollar customers, we did see an increase of 2 in the quarter. I think the thing that I'm more encouraged by in terms of the accounts though, is the growing stable of accounts north of $0.5 million. And while we don't report out on that as a metric, we report it on a 100,000 and 50,000 threshold. That stable of north of 500 is growing nicely.

  • And I do think the conversations as we talk with more enterprise-relevant themes around automation, integration with systems, deriving yield from their existing stack, people are wanting to have the conversation. The Work Apps conversation, Gene and I were just talking yesterday around how CIOs are talking now around what their strategies are for no-code app building. Well, that conversation wasn't happening 2 years ago. So I think the things we're doing are inviting that conversation. We're much more, I think, well suited to have those conversations now.

  • Operator

  • Your next question comes from the line of Stan Zlotsky from Morgan Stanley.

  • Melissa Louise Dunn - Research Associate

  • This is Melissa Dunn on for Stan. The first thing I have is around the commentary on your federal business. So it sounds like you had a high-water mark there and that you've been doing a lot of work around your presence there. How did this segment track versus your expectations in the quarter? And any color you can give on your expectations for how big of the percentage of federal can be going forward? Or how meaningful this can be going forward would be super helpful.

  • Mark P. Mader - President, CEO & Director

  • Yes. In terms of what we're looking for is we're looking for quarter-to-quarter improvement. And when I look at the productivity of our reps in that area, and I look at what our customers who are experimenting with Smartsheet are doing, we're seeing nice adoption there. I would say still as a low single digits million part of our business, we're not making huge remarks yet in terms of its contribution and influence on our overall performance next year. But over the 3- to 4-year frame that we've set in terms of our $1 billion in business, we think it's going to be a material contributor. So we look at this on a 3-year horizon as being a really nice component. When we talk about guidance in Q4, we may have some more remarks on it, but at this time, none.

  • Melissa Louise Dunn - Research Associate

  • Okay. That's really helpful. And then just a quick follow-up. So operating margins are coming in really well. Doesn't -- I don't necessarily see the same improvement on the free cash flow guidance. Is there anything to keep in mind there on why those things might be trending a little bit differently?

  • Jennifer E. Ceran - CFO & Treasurer

  • Yes. It really has to do with how revenue gets recognized relative to your collections and then on payments and how you accrue those over time. We did mention our Q4 free cash flow will be positive, and so catching up from what we saw in Q3.

  • Operator

  • Your next question comes from the line of Ittai Kidron from Oppenheimer.

  • Ittai Kidron - MD

  • Jenny, thank you so much for your service. It's been great working with you. And Pete, good luck in your new role. You've got some big shoes to fill, but I'm sure you'll do just great.

  • A couple of questions for me. First, on Brandfolder, clearly a very good start. Jenny, if I remember correctly, you've talked about originally $2 million revenue contribution for the year. It looks like you did that almost in one quarter.

  • So help me think about how much of the contribution there was Brandfolder by sales momentum kind of carrying forward versus you've already started to see Smartsheet itself being able to monetize that very effectively?

  • Eugene M. Farrell - Chief Product Officer

  • I'll take this one. This is Gene.

  • That contribution is 100% Brandfolder on its own. We have really just started to put in place some of the lead sharing and kind of co-selling where it makes sense, motions. But we really believe Brandfolder can be a significant stand-alone element of our business.

  • Ittai Kidron - MD

  • Got it. And then I know you haven't talked about next year's outlook. Is there a general framework you'd like us to keep in mind as far as growth or expansion rates? And Mark, maybe you could talk about clearly productivity is heading in the right way. And I've been following your job listings, and they've increased quite substantially over the last 2, 3 months. How do I think about the linearity of hiring through the year?

  • Mark P. Mader - President, CEO & Director

  • I think we -- as we looked at the COVID headwind that happened in the first half, we were committed to keeping our investments on point. So that was both on a people dimension and a program dimension. And I think we're actually well suited to enter next year with a group of quota-carrying reps and other team members who can produce more. And we expect to produce more next year than they did this year. So we don't have this huge need to do this massive hiring right now to support our current plans for next year. So I think we're actually well positioned on that front.

  • I think as we looked at what our objective is in growing the business and this notion of being a rule of 40-aware company with a bias towards growth, right, we look at both aspects. We look at investment, we look at top line growth. And I would say our posture is very much to still be growth-minded.

  • Ittai Kidron - MD

  • Excellent. Great, guys. Good luck. And Jenny again, thanks.

  • Jennifer E. Ceran - CFO & Treasurer

  • Thanks, Ittai.

  • Operator

  • Your next question comes from the line of Arjun Bhatia from William Blair.

  • Arjun Rohit Bhatia - Analyst

  • Jenny, I'll echo my congrats to you. It's been great working with you over the past few years. And Pete, look forward to working with you over the next few.

  • Maybe first one for Mark. It seems that you're on pace to add in excess of 2 million total users to your platform this year. When we look at that free collaborator base, can you just maybe give us a sense for how that impacts your long-term growth prospects? And if we dig in maybe a level deeper, how should we think about the time that it typically takes those free users to convert to paid, whether it's a matter of quarters or years, just how should we think -- we be thinking about that?

  • Mark P. Mader - President, CEO & Director

  • I think next year is going to be really the commencement of something that's quite new for us. And that is providing our customers with additional mechanisms for engaging these users. In the past, we've had a very simple model, which is paid creators and free collaborators. And with the announcement of Work Apps at our Engage conference, we're allowing people to build these much more tailored experiences, which are no longer free, but they come at a very low cost. So you really allow enterprises to create these elite solution experiences, but we get the benefit of actually getting paid for some of the value we deliver.

  • So we're just starting off on it. We have over 1,000 companies previewing Work Apps today. So I would say the impact from Engage was successful in that dimension, which was great to see. And as we head into next year, we look at formally releasing that product.

  • Arjun Rohit Bhatia - Analyst

  • Got it. And then maybe one thing, if I can touch on the -- you created some great solutions for the marketing department. And now you're layering in Brandfolder. How should we be thinking about the go-to-market motion? Is that still very much that same self-serve, land and expand? Or does Brandfolder and some of the organic work that you've done there allow you to do direct outreach to CMOs and maybe try to sell that -- sell those marketing solutions a little bit more top down?

  • Mark P. Mader - President, CEO & Director

  • I think it's going to be much more balanced going forward. We've actually seen a really nice uptick in some leads coming into the business that are not grounded in a self-directed trial. So we've done a bunch of testing over the last year. And we've actually seen some interesting results of what is delivered when you allow somebody -- when you invite someone into a conversation as opposed to a trial. And it gives you a chance to articulate the value, some of the mechanisms, which maybe are hard to learn on a self-directed basis. So I do think the solution set does lend itself well to that top-down solution orientation. And that doesn't mean we're abandoning the self-directed, right? We're making investments there, too. But I think by having both, you really get to address 2 types of preferences. And I think we've learned in the past year that both exist.

  • Arjun Rohit Bhatia - Analyst

  • Perfect. Thank you very much, and congrats on the quarter.

  • Mark P. Mader - President, CEO & Director

  • Thank you.

  • Operator

  • Your next question comes from the line of Ryan MacWilliams from Stephens Inc.

  • Ryan Patrick MacWilliams - Research Analyst

  • So strong additions from customers contributing over 50,000 in ARR in the quarter. As larger enterprises start going through their budgeting process, have you ever -- have you noticed any differences to how these larger customers are approaching their expansion plans for Smartsheet compared to last year?

  • Mark P. Mader - President, CEO & Director

  • I think one of the topics that we continue to be welcoming is the notion of how can we drive more yield from our investments. So as they look at the offerings we have, whether it be on the content dimension, the automation dimension, the collaboration dimension, they're also looking at where they can maybe reduce some of their spend in other application areas.

  • And there are really 2 areas of investment. One is, what are my subscription dollar outflows? And the second is, what is my cost to deploy a solution? Both of them are budget impacting. So I think our continued focus on velocity and the exterior of the solutions, I think, lends really well to savings on that front versus competing solutions.

  • Ryan Patrick MacWilliams - Research Analyst

  • Great. And then just on the composition of these new customers who are added to these cohorts. How should we think about how customers who were previously dipped below these guide posts added to growth here? Just trying to see how maybe they came back and see growth or their expansion.

  • Jennifer E. Ceran - CFO & Treasurer

  • I didn't quite understand your question. Could you repeat it?

  • Ryan Patrick MacWilliams - Research Analyst

  • Sure. Just the customers that maybe previously contributed greater than 50,000 ARR and then dipped below that in the previous quarters, how do they contribute to the new growth that you saw within those customer segments for this quarter?

  • Mark P. Mader - President, CEO & Director

  • Yes, it was immaterial, immaterial. These were -- I think what we were pleased to see, there was some anecdotal evidence of customers who were heavily impacted who again have gotten their sea legs under them. But in terms of meaningful impact in the numbers, it's -- they're not.

  • Operator

  • Your next question comes from the line of Scott Berg from Needham & Company.

  • Scott Randolph Berg - Senior Analyst

  • Congrats on a good quarter. And Jenny, I would certainly echo my -- echo the words of good luck. And Peter, look forward to working with you as well.

  • I guess on -- within the quarter, Mark, you had a large competitor of yours actually get acquired, which was the first real acquisition in the space, at least of a sizable vendor. What do you think that means to the collaborative work management space in terms of helping validate what you all are trying to accomplish today?

  • Mark P. Mader - President, CEO & Director

  • Yes, I think it does. I think when you see a large cap really take note and look to expand their diverse portfolio, I think it's notable. I think it's also worth highlighting that they're fairly different solutions. And we just got done talking a little bit about a self-directed versus for a consultative sale. The acquisition of that asset, it is purely a consultative sale in this sense there is no land-and-expand motion. It is truly a sort of services driven deployment.

  • But I do think it is obviously in a related category. So I think it shows that there is demand within enterprises for these types of solutions. As we've articulated, we think that the marketing organizations are fundamental to being a cohesive provider to any enterprise. And yes, we look forward to continuing to work with Adobe and serving our tens of thousands of customers.

  • Scott Randolph Berg - Senior Analyst

  • Got it. Helpful. And then from a follow-up perspective, Gene, I can't leave you out of the call, at least. When you look back in a year or 2, out of all the pieces of innovation that just came out at Engage, which I thought was a great pace, what's the one item do you think that will be most impactful on the Smartsheet business here in the near term?

  • Eugene M. Farrell - Chief Product Officer

  • Well, that's a...

  • Mark P. Mader - President, CEO & Director

  • So how do you choose?

  • Eugene M. Farrell - Chief Product Officer

  • Yes, that's a tough one. I've actually had this one before. It is a little bit like picking your kids. But I would tell you, Scott, the one that I think really has the most opportunity to transform is Work Apps. I think that -- and we're already seeing this because it just -- it gives us that frame to bring together all of the capabilities of Smartsheet and the other assets we've acquired, whether it be Brandfolder or 10,000ft, and bring that together in a really cohesive experience that it just creates a completely different way to deliver our capabilities to end users.

  • And the customer feedback has been exceptionally positive. Now saying that, it's still very early days, right? We're still in a preview, and we still got a lot of work to do getting into GA and seeding it in the market. But I think it really has probably the most potential to really be transformative for our business.

  • Scott Randolph Berg - Senior Analyst

  • Very helpful. Thanks for choosing amongst your favorite kids. Congrats on a great quarter.

  • Operator

  • Your next question comes from the line of Keith Bachman from Bank of Montreal.

  • Keith Frances Bachman - MD & Senior Research Analyst

  • I was going to ask 2 questions concurrently since they are related. The first is, Jenny, I know you mentioned your expectations for net retention rate in Q4. But I was just hoping to get a little broader context to that question and extend it out through FY '22. Where do you think that shakes out on the net retention rate? In other words, your

  • (technical difficulty)

  • Aaron Turner - Senior Director of IR

  • Keith, you still there?

  • Keith Frances Bachman - MD & Senior Research Analyst

  • Yes. Can you hear me?

  • Jennifer E. Ceran - CFO & Treasurer

  • You dropped for a minute. You said where does it shake out in FY '22?

  • Keith Frances Bachman - MD & Senior Research Analyst

  • Yes. Is that the low in Q4? Or does it stay steady at that rate?

  • And assuming you can still hear me, I wanted to ask the second part of my question. And that is upon -- is there still an economic climate that's a headwind for Smartsheet? And what I mean by that is as you think about FY '22 and assuming that COVID recedes and whatnot, do you feel like there's still a current economic impact on your revenues? And I'm just -- I'm asking the question in the context of any kind of guideposts that you could give us around how we should be thinking about top line growth in '22? In other words, could there be a little bit of COVID relief on your top line that's exhibited during the course of '22? And hopefully you heard both those questions.

  • Jennifer E. Ceran - CFO & Treasurer

  • Yes, I did. So we're currently in our planning process for next year, and I won't be here. Pete will be here, and I want to make sure that Pete delivers the guidance for next year because he's going to be held accountable for it.

  • But with respect to the net retention rate, we do see just based on the metrics, the larger deals that we're doing, the fact that customers who did contract some customers in Q1 and Q2 come back in Q3. I do see a scenario where it does stabilize and potentially could go up next year, but we're not guiding to next year right now. We're just guiding to Q4.

  • Operator

  • Your next question comes from the line of Brent Thill from Jefferies.

  • Joseph Anthony Gallo - Equity Associate

  • This is Joe on for Brent. Congrats on the strong and improving results.

  • I just wanted to ask a follow-up to Ryan's earlier question. Are you starting to see enterprise license agreements or a formalized contractual agreement process making it easier for customers to scale up quickly? Or is it still too early for that?

  • Eugene M. Farrell - Chief Product Officer

  • Yes. I think we put mechanisms in place as early as 3 or 4 years ago, which allowed us to really simplify the way in which Smartsheet can expand within an organization. Very often, that's predicated on being approved and enabled by core IT. So the business unit identifies it, presents it to IT, we go through security review and then we get enabled within their -- with their provisioning environment.

  • I would say the degree to which those are becoming more frequent, we do believe that will be a trend for us as we go higher into these ARR contribution layers.

  • The other piece is on the multiyear side where people are making not just a decision to approve and enable, but also lock in for a multiyear commitment. And while it's early there, we are seeing signs of that type of commitment from the largest customers.

  • Joseph Anthony Gallo - Equity Associate

  • Great to hear. And then I guess just to keep Gene in the flow of the conversation, given your product portfolio typically follows customer requests, anything surprise you out of Engage, or any common requests or verticals stick out?

  • Eugene M. Farrell - Chief Product Officer

  • Well, I don't know that I would say that I was really surprised. I said -- I would actually say I was really more satisfied with the positive response we got from the announcements that we made. Some of the core elements of product and portfolio management that we announced, like baselines, was really well received, really big uptake on things like column formulas, of all things. And then I would tell you that the early response we're getting to the marketing offerings has been really encouraging. And we've seen a number of large deals and a fair number of competitive displacements because customers are looking for solutions that can break marketing out of what, in some cases, has been a silo within the organization, to have something that can be a platform that can support marketing and all of the other parts of the business. So I would say that's been really gratifying.

  • On some of the other big announcements like Work Apps, it's still super early. So we're going to kind of hold on those until we get more signal.

  • Operator

  • Your next question comes from the line of Walter Pritchard from Citi.

  • Walter Herbert Pritchard - MD & U.S. Software Analyst

  • A product question on my end just around no code, low code. How fast do you see an incremental demand evolve around that driver? And sort of when you're in those conversations, what other sort of platforms do you see customers looking at beyond yours? Understanding everybody sort of intersects in this area in a tangential way.

  • Mark P. Mader - President, CEO & Director

  • Yes. Walter, I would say that, yes, like -- as I mentioned before, it's still early days. We're still in preview. But I would tell you that we've had an increasing number of conversations with -- in those sets of platforms, it's really IT that is driving the discussion. And we've had an increasing number of conversations with IT where there's deep recognition that they're not going to be able to continue to do business the way they have the last 10 years. They really are hungry to empower their users to be able to build and deploy and manage solutions with some appropriate guardrails on their own.

  • And so I would say, still relatively small numbers, but we're seeing increasing signal and greater clarity on what they're looking for. And that's part of what gives me a lot of optimism around the solution we've built in Work Apps. Because one of the things that they're very clear about is the solution they deploy needs to empower their average knowledge worker, not just a business analyst or a more technically savvy member of their staff. And when I look at the competitive landscape, I believe that what we've built is really well positioned to serve that broad base of knowledge workers. And I don't know that I can say the same about many of the other platforms in that space.

  • Walter Herbert Pritchard - MD & U.S. Software Analyst

  • Great. And then just a quick one for Jenny. People have asked on the net retention rate bottoming. Just on churn and so forth, I mean, you turned the corner a bit this quarter. Do you expect it in Q4 with some of the larger customers there and so forth contracting with you, that you'll continue to see that trend here or better? Or you think there's risk that, walks that backs the other way in Q4?

  • Jennifer E. Ceran - CFO & Treasurer

  • I don't see any reason why the trend wouldn't continue. It may not go below 7%, though, in terms of rounding down, but there's no reason why the trend wouldn't continue.

  • Operator

  • Your next question comes from the line of Rishi Jaluria from D.A. Davidson.

  • Rishi Nitya Jaluria - Senior VP & Senior Research Analyst

  • Jenny, it's been a pleasure working with you. And all the best.

  • Two questions. First, I wanted to ask a little bit more about the billings number this quarter, and more importantly the guidance for next quarter. If we do the math at the midpoint of guidance, you're talking about an acceleration in billings again next quarter on an organic basis in both cases, excluding Brandfolder. Just wanted to get a sense, what's giving you the confidence to, given the current environment that we're seeing in the pipeline, to guide to an acceleration in organic billings next quarter? And then I've got a follow-up.

  • Jennifer E. Ceran - CFO & Treasurer

  • Sure. So this quarter, we saw really nice strength in enterprise. And Mark and I both talked about the number of larger deals that we're seeing. When we look at the pipeline, we have a big pipeline of larger deals. And so all of those things, I think gave us decent confidence in the guide that we had for fourth quarter.

  • Rishi Nitya Jaluria - Senior VP & Senior Research Analyst

  • Got it. That's helpful, Jenny.

  • And then just on Brandfolder -- and by the way, really appreciate all the disclosures and transparency. It's very, very helpful for us. But as we think about the ACV of Brandfolder, I was almost surprised to see it's actually higher than the core Smartsheet ACV. Wondering if you could give us a sense for why is that. Is it a function of just it's a high -- more expensive pricing-wise? Do they have larger deployments at their customers? What's leading to that?

  • Mark P. Mader - President, CEO & Director

  • Yes. I'd say -- I'll take that one. I would say the way to think about Brandfolder is it's a different proposition because it's not really a user-based solution. It is -- think of it more like a capability-based solution that we deploy and you have tiers of capability within Brandfolder. And there are additional add-ons and premium offerings on top of that core platform capability. So we do believe there's opportunity to expand within an existing base, but fundamentally it's just a different type of sale.

  • Also, that being said, it does land at a higher price point than typical Smartsheet.

  • Operator

  • Your next question comes from the line of Mark Murphy from JPMorgan.

  • Pinjalim Bora - Analyst

  • This is Pinjalim on behalf of Mark. Congrats on the quarter. And Jenny, great working with you. I'm sad to see you go. And Pete, welcome.

  • Mark, just one question on Work Apps. You had talked about Bridge last time, and Work Apps seems something new. Help us understand maybe with an example, what can customers build on Work Apps today? What -- and what is the vision maybe 3 to 4 years from now? And do you expect Work Apps and Bridge maybe to help alleviate the churn on an aggregate basis even more?

  • Mark P. Mader - President, CEO & Director

  • Yes. I think with -- let me start with Work Apps. One of the things that is essential in collaborative work management solutions is the ability for the participant to understand what they are supposed to do. So in our current approach, if you share someone a dashboard, a sheet, a report and a form and you say, just follow these instructions and here's your little -- here's your guidebook on how to do it, you're actually placing burden on the person you're asking to participate. And let's not forget, these are collaborative situations either within your company or across company.

  • What Work Apps allow you to do is to create a very intentional presentation of these capabilities. So you log into an application. And to you, it presents a dashboard and a form for intake and a report all in one place. So it's unified. It's a collection of things you want that person to see. There's no distraction from other things within that environment.

  • One of the real benefits though is when you invite someone to an application like that, not everyone should have the same level of access. It's a very important enterprise capability. You might want the program director to see all the assets. You might want to have a contributor to see 30% of the assets. You may want to have the CFO see 90% of the assets. So the ability to simply create that bundle, that composite solution and share that in a secure manner, it is a very, very important thing.

  • So think about it as being able to unify the artifacts that we've spent the last decade building in a really cohesive secure manner. And again, this is not slinging code to pull it off. This is allowing someone in a very straightforward interface to identify what they want to present and enroll people. So it is a very big impact to that reach out to that user base.

  • I think Bridge is a very different value proposition. Bridge is one which is enabling people to orchestrate different interactions between Smartsheet and external systems. It is not principally tailored at being consumed by users or collaborators. It's about enabling people who understand systems [orchestration] to do more with their Smartsheet platform.

  • The neat thing about Bridge is it allows us to participate in workflows that are not simply core to our application. And over the past, we've done things like integrating to Atlassian, JIRA and the Salesforce for sales and service cloud and to ServiceNow. This opens that portfolio of touch points.

  • The other real benefit with Bridge and Work Apps is you allow third parties to do more on our platform. So when we think about partner enablement and being at roughly 450-plus partners worldwide now, we think the opportunity to allow partner to advise customers on solutions is a huge win for our company over the next 3-year frame. So as Gene and I and [Pierre] on engineering talk about this, it's not just empowering our customers, it's empowering the partner community.

  • Pinjalim Bora - Analyst

  • Super helpful to understand that. And Jenny, just one housekeeping. Did you give the mix for the capability-based offering as a percentage of subscription revenue?

  • Jennifer E. Ceran - CFO & Treasurer

  • I can give it to you. So it's 83% is seat licenses, and then 17% is capabilities.

  • Operator

  • Your next question comes from the line of Michael Turrin from Wells Fargo.

  • Unidentified Company Representative

  • This is [Alan] on for Michael Turrin. Just one high level one for me. I wanted to follow up on Engage, but from an international standpoint. Hosting that in EMEA and APAC, I was wondering if you could talk about the opportunity there going forward, along with any other regions you'd want to call out or -- that are -- that you're most excited about.

  • Mark P. Mader - President, CEO & Director

  • Yes, I think we saw good engagement from those conferences from those regions. We remain very focused on the U.K. and Continental Europe next year. And in the Asia Pac region headquartered out of Sydney, starting to identify other regional markets that we want to pursue. But I think this next year will be really reinforcing our go to market in those 2 geos. And that partly comes in the form of marketing and sales capacity, partly in the form of how we deliver our solution. Now that we have moved to AWS for our delivery model, it really gives us optionality for going in market from a solution deployment standpoint. So I would say that will probably be one of the bigger moves for us next year as it relates to international.

  • Operator

  • Your next question comes from the line of Brett Knoblauch from Berenberg Capital Markets.

  • Brett Anthony Knoblauch - Analyst

  • First, I just want to say good luck and best wishes to you, Jenny. And congrats to Pete. I Look forward to working with you.

  • I was just wondering if you could provide an update to total user count, and maybe how many user came from Brandfolder? I know you said it's maybe not like a user-based model.

  • And then just as a follow-up, 47% RPO growth was very strong. Could you break that out organically?

  • Jennifer E. Ceran - CFO & Treasurer

  • So you want to answer the Brandfolder question?

  • Eugene M. Farrell - Chief Product Officer

  • The user count that we gave out is not inclusive of Brandfolder users. So that would be organic Smartsheet.

  • Brett Anthony Knoblauch - Analyst

  • And then just on RPO growth?

  • Jennifer E. Ceran - CFO & Treasurer

  • So well -- so on RPO growth, I don't have the breakout between short term and long term. What I can tell you is of the RPO, which is 207 million, 92% of that will be recognized in the next 12 months. And that is down from 96% in the prior quarter.

  • Brett Anthony Knoblauch - Analyst

  • I was asking organic growth from an RPO standpoint. How much came from Brandfolder?

  • Jennifer E. Ceran - CFO & Treasurer

  • Yes, so you would take out roughly 7.5 million for Brandfolder.

  • Operator

  • There are no further questions at this time. I'd like to turn the call back over to Mr. Aaron Turner.

  • Aaron Turner - Senior Director of IR

  • Great. Well, thanks for joining us this quarter. Happy holidays, and we'll speak with you again next quarter.

  • Operator

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