Smartsheet Inc (SMAR) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Smartsheet Third Quarter Fiscal 2020 Earnings Conference call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Aaron Turner, Investor Relations.

Please go ahead.

Great.

Thank you, Emily.

Good afternoon, and welcome, everyone, to Smartsheet's third quarter fiscal year 2020 earnings call.

We will be discussing the results announced in our press release issued after the market closed today.

With me are Smartsheet's CEO, Mark Mader; our CFO, Jennifer Ceran; 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's 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 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 the 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 measure is available in the presentation that accompanies this call, which can be also be found on our Investor Relations website.

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

Thanks, Aaron.

Good afternoon, everyone, and thanks for joining us on today's call.

Smartsheet delivered another strong quarter in Q3, building off the momentum and excitement generated at ENGAGE, our Third Annual Global Customer Conference, we delivered revenues of $71.5 million, representing 53% year-over-year growth.

Billings came in at $83.5 million, representing 52% year-over-year growth.

Our dollar-based net retention rate was 134%, and the number of users on our platform is now over $5.8 million.

Now into the third year and having grown to over 4,000 attendees, ENGAGE has not only become a showcase for Smartsheet product innovation, but a great opportunity to deepen relationships with customers from around the world.

I speak for our entire team when I say how inspiring it was to meet customers from such a diverse set of industries, share their enthusiasm and learn how they're using Smartsheet in their teams and businesses.

Thanks also to all of you on this call who made the trip to be with us in Seattle.

Customers continue to unlock new value and expand with us.

U.S. Bank, Krispy Kreme Doughnuts and Rackspace among them.

Expansion within our base during the quarter included 69 customers that increased their annual recurring revenue by more than $50,000, up from $46,000 last quarter; and 17 that increased their ARR by more than $100,000, up from $13,000 last quarter.

A contributor to that expansion was record sales of our capability-based products, including accelerators, Dynamic View and Data Uploader.

More than 900 unique customers bought one or more capability-based products in Q3.

For example, a Fortune 100 insurance company recently selected Smartsheet's M&A Accelerator to manage a significant and strategic step-up in their M&A activity.

Chosen over 3 purpose-built solutions, Smartsheet now has strong executive sponsorship within the account and is better positioned to deliver more value and broaden our footprint.

1 year after introducing accelerators, we now have 10 in market, having expanded our offerings in Q3 to include solutions for GDPR, marketing-shared services, events and campaign management.

I'm heartened by the performance of, and the pipeline for, these offerings that provide a tailored solution for a known need.

In addition to the accelerators, we also introduced a range of features at ENGAGE that enable organizations to drive greater creativity and effectiveness for marketing and creative content activities.

These content collaboration features are a direct result of our acquisition of Slope earlier this year.

They enable users to review, proof and comment on a variety of file types, manage feedback from internal and external stakeholders and maintain version control, all in the core Smartsheet application.

As we continue to build out and expand this functionality, organizations will eventually be able to manage their entire content production process using a single platform.

In addition, in early November, at Adobe MAX, we announced a new Adobe Creative Cloud integration that will help creative teams eliminate manual work so they can focus on what they do best, creating game-changing content.

Our Smartsheet extension will appear as a panel within Adobe Creative Cloud, enabling customers to manage workflows without having to switch applications or source content from various tools.

Multiple Adobe Creative Cloud applications, including Photoshop, InDesign and Illustrator will be integrated before the end of the year.

Combined with powerful marketing-oriented accelerators and content collaboration capabilities announced at ENGAGE, these Adobe integrations will deepen our ability to help enterprises drive collaborative marketing projects and processes.

As we deliver these and other high-value offerings for customers, it's increasingly important for us to align ourselves with industry-leading consulting and integration partners that have well-developed expertise that complements and expands our core capabilities.

That's why we recently announced the launch of Smartsheet Aligned, a program for our global community of partners and solution providers.

Smartsheet Aligned will drive continued momentum for us as we expand to solve for a widening set of high-value enterprise workflows.

One such example is a partner-led opportunity we recently closed with the world's largest CPG food conglomerate.

Smartsheet and our partner, SoftwareOne, proposed a solution for managing their end-to-end process of designing and installing displays in large grocery retailers.

From initial store selection to ongoing maintenance and improvements, this global company now relies on Smartsheet and SoftwareOne to coordinate the many processes and disparate teams required to deliver impactful brand experiences to their customers.

In mid-August, we announced that Smartsheet Gov achieved FedRAMP authorization.

This designation has stimulated interest in Smartsheet from various federal agencies and departments, among them, the National Oceanic and Atmospheric Administration, NOAA, which became one of our first customers on smartsheet.gov.

Along with our reseller partner, Spatial Front, Smartsheet now supports a wide range of departments within NOAA to launch satellites, communicate with ocean-going research vessels and manage a $500 million-plus portfolio of strategic projects.

We look forward to the opportunity that FedRAMP authorization affords us to help elevate the important work being done by NOAA and a range of other federal agencies.

Before I turn it over to Jenny to provide more financial details on the quarter, I want to share with you my belief that Smartsheet is well positioned for the future.

Our product pipeline is strong.

We're demonstrating the ability to extend and expand across the enterprise, and most importantly, customers are realizing value and are leaning in.

They've responded with genuine enthusiasm to the brand advertising they now see in market and have told us repeatedly how much the strengthening of our brand presence helps them in being effective advocates for Smartsheet within their companies.

It is clear that organizations now understand the need for a better way to empower their people and teams to achieve more by increasing the effectiveness of their work.

The fact that Gartner recently published their first market guide on collaborative work management is a clear sign of that.

To a growing degree, Smartsheet is recognized as the provider that can help enterprises accomplish this important objective.

I'd like to take a moment to acknowledge our employees for their hard work and to thank our customers and partners for their trust in Smartsheet.

Many people, both inside and outside the company, have been with us a long time and have seen us through many stages of growth.

I'm very grateful for their continued support and encouragement.

We have some big goals at Smartsheet and working alongside our customers, partners, employees and investors, I could not be more excited about what we've achieved and what lies ahead.

Now let me turn the call over to our CFO, Jenny Ceran.

Thanks, Mark, and welcome, everyone.

As Mark mentioned, our third quarter revenue came in at $71.5 million, up 53% versus a year ago.

Billings came in at $83.5 million, up 52% versus a year ago.

Our dollar-based net retention rate remained flat at 134%, and our average ACV per domain-based customer grew 48% year-over-year.

And we ended the quarter with 83,139 domain-based customers.

Third quarter non-GAAP operating loss was $20.7 million as we continued to make investments in our platform and go-to-market capabilities, and non-GAAP net loss per share was $0.15.

Operating cash flow was positive $1 million, and free cash flow was negative $2.9 million.

And we ended the quarter with cash and short-term investments of approximately $563 million.

Let me dive more into revenue for the quarter.

Of our $71.5 million in total revenue, subscription revenue was $64.4 million, a 55% increase versus a year ago.

Services revenue came in at $7.2 million, up 34% versus a year ago and represented 10% of total revenue.

The services revenue growth rate accelerated compared to the prior quarter due to increased demand for our training program.

Let me move on to metrics.

We continue to see strong growth in our larger customers.

8,421 customers now pay us $5,000 or more per year, 770 now pay us $50,000 or more per year and 279 now pay us $100,000 or more per year.

These customer segments grew year-over-year by 51%, 114% and 120%, respectively, and now represent approximately 73%, 34% and 22% of total ACV.

Our average ACV per domain-based customer increased to $3,286 for the quarter, and our dollar-based net retention rate was 134%, consistent with the prior quarter and 2 percentage points above the same quarter a year ago.

For the fourth quarter, we expect our dollar-based net retention rate to be in the low 130s.

Next, I'll provide color on the rest of our income statement and a few highlights from our balance sheet.

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.

In the third quarter, overall gross margin was 82%, stable with prior quarter.

Subscription gross margin rounded up to 88%, flat with the prior quarter, but we began to see some incremental costs associated with our continued shift to the public cloud.

As we migrate more of our services to the public cloud, we do expect our overall gross margins to come down towards our long-term target overall gross margins of 78% to 80%.

Professional Services margin was 32%, 1 percentage point better than the prior quarter.

Turning to operating expenses.

General and administrative costs in the third quarter were $11.1 million, representing 16% of total revenue, 1 percentage point above the prior quarter due primarily to investments required to support SOX.

We expect G&A to remain elevated as we complete SOX compliance this year before realizing scale again next year.

Research and development was $21.1 million or 30% of total revenue, 1 percentage point higher than the prior quarter and 2 percentage points higher than the year ago quarter due primarily to hiring more developers.

Finally, sales and marketing expense was $47.1 million or 66% of revenue versus 55% of revenue in the prior quarter and 60% in the year ago quarter.

The increase relative to the prior quarter was due to cost associated with our ENGAGE customer conference and our brand advertising campaign.

We expect sales and marketing to trend lower as a percentage of revenue in the fourth quarter.

Turning to operating loss and free cash flow.

Operating loss was $20.7 million, representing a negative operating margin of 29%.

Approximately 64% of our total expenses were headcount-related, and we ended the quarter with nearly 1,500 employees.

Free cash flow was negative $2.9 million, which includes CapEx spend, capitalized internal-use software and principal payments on leases totaling approximately 6% of revenue.

Now turning to billings.

Our third quarter billings were $83.5 million, up 52% versus a year ago.

Approximately 90% of our subscription billings were annual, with 9% monthly.

Quarterly and multiyear billings represented about 1% of the total.

I will now provide our guidance for the fourth quarter and the full fiscal year 2020.

For the fourth quarter, we expect total revenue of $77 million to $78 million, representing year-over-year growth of 48% to 50%.

We expect non-GAAP operating loss to come in between $21.5 million and $19.5 million, and non-GAAP net loss per share to be between $0.17 and $0.16 based on weighted average shares outstanding of 117.5 million.

For the full fiscal year, we expect total revenue to be in the range of $269.4 million to $270.4 million, representing growth of 52%.

We expect non-GAAP operating loss to be between $67 million and $65 million, and non-GAAP net loss per share between $0.53 and $0.52 for the year based on approximately 112.5 million weighted average shares outstanding.

We expect billings to be in the range of $326 million to $328 million for the full fiscal year, representing growth of 51% versus last year.

Regarding free cash flow, we remain at negative $25 million for the year and plan to spend the full remaining amount of approximately $2 million in the quarter to support our ongoing brand advertising campaigns, international expansions and continued migration to the public cloud.

And with that, we will now turn it back to the operator to take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Stan Zlotsky from Morgan Stanley.

Perfect.

Guys, congratulations on a nice quarter.

First question for me is on investments.

You guys are certainly making the right investments considering the growth trajectory that you're putting up.

What are you seeing specifically in Asia Pacific?

Because it is a big focus area for your sales and marketing investments there.

What do you see as far as the beachhead there for landing your sales and marketing resources?

And how are you thinking about that business and how it can start to potentially inflect in growth as we get into calendar 2020 versus the single-digit growth that we've been seeing out of APAC year to -- in the first half of this year?

And then I have a quick follow-up for Jenny.

Great.

So our team has been over there in quarter, we have done a lot of interviewing.

We have approximately 20 roles already filled so we expect that team to be off and running as we head into next fiscal year.

I think what we're going to see is something quite similar to what we observed in the U.K., where local presence allows you to engage with the thousands of customers we already have in regions in the region in a more meaningful way.

So when you think about composite solutions, which bridge traditional license engagement with capabilities, those types of larger discussions that "matter and connect to things that are enduring and scalable," those are best suited for that type of in-region engagement.

So I was very pleased with the team's performance, our people operations team and our field ops team in getting a really good candidate pool and converting on that.

So we feel like we are slightly ahead of where we were when we made the decision to go into the U.K.

Okay.

Perfect.

And then for Jenny, it was very encouraging to see net revenue retention sustain 134% in the quarter despite the tougher comparisons that you're now starting to lap for the second quarter -- well, for a number of quarters now.

And thank you for giving us guidance for Q4 for net revenue retention.

But specifically in the quarter, right, what drove such a strong net revenue retention result?

Because we do realize that you did have some large renewals signed a year ago that were a headwind of sorts.

That's it for me.

Yes.

I would say our sales team performed really well.

I think ENGAGE helped very much to motivate customers.

They were very enthusiastic about the products that we announced and delivered at ENGAGE.

I think it motivated our sales team.

And so if you look at our net expansion rate, that really stayed roughly the same.

Our loss rate continued to improve a bit.

But overall, we were flat with the prior quarter.

And our next question comes from the line of Terry Tillman from SunTrust.

Can you all hear me okay?

Sure can.

Well, congrats from me as well, a strong quarter.

It's good to see.

Jenny, I don't know if you all talked about this in your prepared remarks, and maybe I just missed it, but on capabilities-based products, just maybe an update as a percentage of revenue and kind of how we should think about that trending?

And then I had a follow-up for Mark.

Yes.

Sure.

So on revenue, our license revenue was 90% of our subscription revenue, capabilities were 10%.

That was flat with Q2.

However, if you looked at our billings, our billings were -- 89% were licenses and 11% were capabilities.

And we have a license plan called Premier that also includes capabilities.

Right now, we put those in the license amount, but if you incorporated that, that number would be even higher for capabilities.

That's good insight.

And maybe, Mark, just -- I think it was in the actual press release and in your prepared remarks, you used the phrase leaning in.

Clearly, you're having strong expansion.

We can see that in the expansion rate that Jenny has just talked about, the net revenue, there is a bunch of metrics that suggest, yes, they are leaning in and they're expanding.

What I'm curious about is, when you're one of these larger, like Global 2000 or Fortune 500 accounts and they're looking to expand, is it kind of a captive audience or do they at least say, hey, maybe we should look at some other collaborative work platforms?

Or is it kind of your business to be had and it's almost like you're creating kind of the center of excellence?

So I ended up asking like 5 questions by thinking that.

But I'm just trying to kind of understand, as it catalyzes into a bigger opportunity, is it competitive?

Or no, it's really your business?

Yes.

I think a big part of it is.

People lean into the things they're familiar with.

And when you develop mastery in something and you bring people with you for -- I mean literally, bring people with you, we had people -- we had some organizations bringing more than 10 people to ENGAGE.

So what changed this year is that we had not only divisions and team representatives but we started to have executives brought to Seattle.

So when you start developing mastery in something and you have confidence and you can articulate to your executive why, the cost of switching is actually fairly high.

So we're very encouraged by that.

In terms of what we're seeing, verbatim with what we said in prior quarters, the majority of the workforce is still graduating from a document-centric, messaging-centric world and they are not moving between collaborative work management platforms, they're really embarking on their initial journey.

That's what we see in the land.

And on the expand side, as we look at being able to unlock value for people with additional capabilities, they're wanting to learn more.

And when they see something they like, they can move and pursue it.

Our next question comes from the line of Richard Davis from Canaccord.

Two quick questions.

One, with regard to the accelerators, how much of it is, like, you guys kind of sitting around the table going all right, this makes sense?

And how much is it kind of influenced by customers?

And I know you have your customer conferences, I was just curious on that.

And then second, Mark, you've been around a while as have I. Are we at the point -- you've got a bunch of companies that are kind of probably, let's just say, running out of oxygen in your space.

Is it getting -- are they trying to confuse the market?

And I mean you're obviously fending them off the disinformation that they would try to stir things up, but maybe there's no answer to that.

But is there -- how are we on that market?

Have we been to the -- are we at the shakeout mode yet or not?

So influence -- the accelerators and how do you keep the -- come up with marketing plan?

Yes.

We'll have Gene make some remarks on accelerators, and I'll take the second half of the question.

Yes.

Richard, I would say that on the accelerator front, it is really driven by customer signal and where we see customer solution -- or customer problems that need solving.

And so we get -- we do have customers that will say, hey, I'm using Smartsheet for these use cases but I've really got this problem over here and managing onboarding with employees that are inquired -- are acquired through an M&A transaction, or I'm really looking for a better way to apply best practices to how I manage my PMO.

And that's really what drives, I would say, probably 90% of the road map around accelerators.

That being said, we have made some conscious choices to invest in areas where we think we have some unique capabilities or we're launching something new.

So our marketing accelerators are a great example, where we saw a need that we -- that was a new space for us to go after, and there were others in that space, where we felt like an accelerator with best practices was going to give us a leg up in competing for that customer business.

And we've been really pleasantly -- or positively encouraged by the customer reaction to the marketing accelerators we launched at ENGAGE.

I would say on what we're seeing in the market, I think being a provider who's been in market now for over a decade and understanding signal for what it takes to move from solving someone's project needs to program needs to process needs at scale, you get an appreciation for what those different employee groups that the customers are seeking, and what someone might have strong desire for in terms of a feature on day 1 may be quite different from what IT at scale is asking of you on day 1,000.

So in terms of one thing that's been helpful is that I think the types of questions that we're getting asked from customers considering that move to scale in our category, they're actually quite fluent with what they're looking for.

So they understand that it's not all about features, it's about governance, it's about insights, and I think being able to speak to both of those has really helped us.

Our next question comes from the line of Bhavan Suri from William Blair.

I'd like to add my congrats, nice job there.

I wanted to touch on something that you sort of said, you're obviously in a really nice expansion of ACVs, $50,000, $100,000 regular basis.

You're seeing executives come to conference.

I guess my question is, are you seeing the sales process change?

Because it changed when we went from sort of domains to more -- without domains to domains, that culling of some of the lower end of that customer base.

As you get a component of the business at C-level, are you -- and maybe even potentially top-down type implementations, are you seeing a change in how you have to sell?

And how are you thinking about the investment to bring maybe a different set of skills back to the company, enterprise focus maybe or enterprise relationship focus, how are you thinking about that and how should we think about it?

Bhavan, I'll take that.

It's Gene.

I think that -- I don't know that we've seen today that we need to change our motion but we are seeing signal from customers.

We just recently held our first customer advisory board where we brought in senior leaders from many of our top brands and talked to them about how we can better align with them and engage them in a more strategic way.

And I think we got some really good signal from that on some things they would like to see us continue to invest and invest more in around things like joint solutioning and building deeper, long-term relationships and giving them more transparency in how they can continue to scale with us.

And so I think we will be continuing to invest in, I wouldn't call it, changing, but enhancing the skill sets of our team and being able to -- as we graduate to larger and larger relationships with those customers, being able to take the next step into being truly strategic partners where they've decided to go all in.

Got it.

Got it.

It's good to hear your voice, Gene.

Another question actually for you, given you're there.

As you think about customers adopt best-of-breed solutions that integrate well, and one of the things that happen obviously with rest APIs and things like that, the ability to integrate as -- and standardization has become much more efficient, I guess when you think about the platform, where would you say you are in the -- in building out those platform capabilities, attracting developers because of the integration capabilities?

Is that an already priority?

Do you think you're like inning 1 or 2 in terms of the integration capabilities and where that's going to go?

And I guess how much of a priority?

Yes.

Great question.

Well, I think as we've been -- I think we've been really consistent.

Our primary target is citizens.

And we -- as opposed to citizen developers or developers or -- whether it's enterprise or for independents, that doesn't mean we don't want to serve the developer audience, and we are investing to improve the performance of our APIs, the coverage of our APIs.

But I think importantly, from a prioritization standpoint, we're really looking at how do we invest to more broadly support enterprise IT because what we are finding, kind of related to your last question, as we're scaling with these customers, IT is getting more engaged and they're wanting to connect us with more systems and build more solutions across their platform and that's where you probably saw a little bit of a shout-out at ENGAGE to the development of Bridge, which is a new platform, we have to make it really easy for customers and developers to be able to connect Smartsheet to other platforms and other systems of record and perform more advanced workflows.

And that's now in private beta.

We're getting a lot of great customer signal.

We anticipate that being GA probably in the first part of next year.

And so you'll continue to see us invest there probably first.

Now that starts us down a path to, over time, probably providing even more support for more advanced use cases with developers and integrating into other platforms.

But today, our priority is really on serving citizens and Bridge.

And then the other thing I would say is it's important to us to be able to integrate with the other partners we have in the ecosystem as well.

So Microsoft with Teams, Slack, Google with Hangouts and Gmail, Facebook, we think it's really important that we be a good partner with the ecosystem because that's really where our customers want us to be able to play.

And our next question comes from the line of Mark Murphy from JPMorgan.

This is Matt Coss on behalf of Mark Murphy.

Are you guys still on track with your fiscal '20 plans for quota-carrying reps, and particularly, on track to have 30 enterprise account reps by the end of this year?

Yes.

This is Jenny.

Yes, we are.

We're on track.

Okay.

And I know currency exposure is pretty small for you guys, but did that in any way impact revenue or billings headwinds or present any revenue or billing headwinds?

There were -- there was about a couple of hundred thousand dollars on both revenue and billings but it was largely immaterial.

But yes, it was a headwind.

Okay.

Finally, I know when you look at the percentage of new logos with more than 50 employees, how is that trending versus prior periods?

And are you getting to a point where maybe the majority of your new logos might have, let's say, more than 60 or more than 70 employees?

Yes.

We're seeing -- when we look at our lead acquisition, we look at segmentation very closely.

We're pleased with how we're tracking on that front in the over 50 segment.

As we talked about on prior calls, we look at various size of companies, and we've often reported out on penetration of Fortune 500 and 100.

With over 80% penetration in the largest companies in the U.S., there's such a huge opportunity to expand still and we see that abroad as well.

What I want to see is I want to see progression in those segments, which represent the largest TAM and that's not just the over 2,000 employee base, there are other segments as well.

So we're doing a variety of things to the best position, whether that's in an assisted way or in a self-directed way.

Our next question comes from the line of Alex Zukin from RBC.

So Mark, maybe first one for you.

As you look at some of the incremental investments that we've kind of touched on, I think in both the script and in the Q&A that you guys have made this year, what's the right way to stack rank kind of the biggest growth catalysts as you look out to next year between maybe federal, expanding the -- continuing expansion of the product suite, the investment internationally?

What's the right way, in your mind, to kind of stack rank those?

I think the ones that are going to have the most substantial impact are the things that touch the largest percentage of our audience.

So when I think of Fed, it's an exciting opportunity, it's a differentiated opportunity.

The relevance to our 83,000-plus brands today is somewhat muted.

When I compare that to the acquisition we did, and if you were at ENGAGE and you saw the reaction to the announcement of our 10,000ft integration, which is relevant to tens of thousands of our customers, I would say stack ranking a 10,000ft above Fed in the near term would be probably a pretty safe bet.

So when I look at those, I often look at relevance to size of market and the potential TAM.

So I would say the 10,000ft is one that we're very excited about.

It really demonstrates a deepening in the capability set that's highly relevant to many.

The Slope acquisition, which is coming online now as well, announced at ENGAGE, highly relevant to not only marketing teams but anybody collaborating on content.

So I would say in the lead group, it's going to be those highly relevant product investments that we've made and through those -- through acquisition.

The international markets, I think it's one of those where we have well over 5,000 accounts in the Asia Pacific region.

We will report out as that team gets set and when we demonstrate engagement.

Perfect.

And then maybe just broadly around M&A.

Is there appetite for larger M&A?

And the current thought process and generally, strategically, how you think about M&A for -- over the next kind of 12 to 18 months?

Yes.

We're not bracketing ourself into any artificial filter.

We're really -- we're very disciplined in the things we look at in terms of being really nice logical fits for our business and also really high value for our customers.

There are some very interesting opportunities out there.

Again, we don't put a quota on ourselves to make bad -- rush to bad decisions.

But I would anticipate, given that what we've seen with 10,000ft and Slope, that we're going to continue to be acquisitive.

Perfect.

And Jenny, maybe just if I could sneak one on dollar-based net expansion.

Kind of -- I guess are you surprised that you've been able to maintain that rate consistently?

And what's the right way for us to think about the progression there?

Is it something that you expect to kind of naturally start to go down over some near-term period or is that something that could be sustained for quite some time?

Well, I think we're certainly pleased that we've been able to maintain that rate because as you get a larger denominator, it gets harder on the numerator part to maintain it.

I would say some of the things that have been tailwinds for us are some of the larger expansion transactions that we're seeing now.

The international part of our business, we're seeing the net expansion rate increase in that area.

And prior to about a year ago, it was lower because we didn't have as much people on the ground kind of supporting the business there.

So we -- I can never say if it's going to continue at 134%, we don't know.

But certainly, we're pleased with where it is now.

And that's all I really have to comment on.

Our next question comes from the line of Ittai Kidron from Oppenheimer.

Good quarter, guys.

A lot of my questions have been asked.

But Mark, I want to dig in a little bit on the brand advertising campaign that you started in October, if I remember correctly.

Help me understand how did that go about relative to your expectations.

Is that something, by the way, that you're kind of dialing back a little bit now and you want to see how it translates into results?

Or how does that evolve over the next 12 months?

Help me think about that.

I think we are not deploying a start-stop model, so we expect continued investment on demand gen and brand.

I would say with Anna having been on now for north of 2 quarters, we're excited about having a really cohesive approach across all aspects of marketing, whether it be product marketing, demand gen spend investment and brand.

We are very clear about what we're trying to measure in terms of our brand investments.

I think customer advocacy, given that expansion is so important and being able to get -- we've had a host of interactions with customers now where executives who really didn't know much about Smartsheet either heard a radio campaign, saw a television commercial, and that's sort of the air cover which our advocates are very grateful for, I guess they've been trying to promote us internally.

A lot of that, at times, is anecdotal evidence.

There are some things around measuring aided and unaided recall on the brand before, mid and post the initial campaign rate weeks into this campaign.

What we've seen so far, though, is indicative of wanting to continue to invest.

Got it.

And then on the FedRAMP, glad to see you're making some real tangible progress here.

How many things, though, from a pipeline standpoint, how is that evolving?

And are there unique partners here that can better help in making penetration here deeper or maybe faster?

Yes.

We use third parties to help us establish and manage those relationships with the government.

It's still early days but since we have -- or since we are now FedRAMP-compliant, we are seeing some good deals, some growth in that area, and we're optimistic about that continuing to help us next year.

Very good.

Jenny, maybe then last one for you.

I'm guessing you're staying consistent with your long-term $1 billion in margin targets.

And also, with regards to your breakeven free cash flow next fiscal year, are there any other elements on next year?

I know you haven't guided yet for the year but any other things or potholes you want us kind of to keep in mind on a year-over-year basis that make either opportunities or complexities in certain periods of the year?

No.

Our next question comes from the line of Brent Thill from Jefferies.

Mark, the accelerators were a big focus on the showroom floor at ENGAGE.

I know just from a, it's still early, but from a revenue impact this year and going into next year, can you just maybe help articulate what you think this is going to do?

If you can quantify it or not.

Then a quick follow-up for Gene.

This is Jenny speaking on behalf of Mark.

For accelerators, so we actually had our best quarter ever, Q3, for accelerators on -- our bookings and billings exceeded $1 million.

So we're very pleased we've got 10 accelerators now, and some of them are new.

We recently signed -- or recently announced some of those, and we're starting to see some sales.

So it is still early days, but we certainly are seeing demand and we're very pleased with that.

I think one thing to add, Jenny, which is -- which was encouraging at ENGAGE is when you see a combination of an accelerator and a distinct sort of value being delivered, combined with new capabilities being released in product and you get those playing off of one another, it really helps customers understand what it is and how to utilize it.

And I would say that's what Gene and team did very well at ENGAGE is framing that.

Great.

And then just on the migration to public cloud, can you just highlight how long that's going to take?

And when do you expect that to largely be completed?

Yes.

I would tell you that one of the things that we focused on immediately after ENGAGE was ramping up migration of services into public cloud.

And so that work is in-flight now.

Our current forecast is to be mostly into having everything in public cloud, services established by the middle of next year.

And -- but the tricky part there is you need to make sure you get everything established and then really burn it in nicely before you shut down your existing data centers.

So we think the transition to be totally out of the data centers right now is likely going to happen by the end of next year.

And it may come in sooner if things go well, but I think right now, we're trying to be conservative in our approach there.

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

This is Hannah on for Rishi.

So I know you talked about Federal as a strong

(technical difficulty)

I was wondering [if you] could talk about success you're seeing in other regulated industries

(technical difficulty)

Yes.

I would say that's the one regulated industry that we serve today.

I would say a couple of years ago, we made some moves to be able to support business associates agreement on the HIPAA side, which has -- gave a lot of confidence to our healthcare industry buyers in the U.S. But really, Fed is the only that really conforms to that strict set of standards that needed to be audited and such.

So there really isn't a good comp for that currently in the business.

Okay.

Great.

And have you seen any changes in buying behavior lately?

Maybe customer willingness to buy upfront annual

(technical difficulty)

Well, the majority of our customers buy annually, 90%, and so we -- that's been very stable.

We report on that every quarter.

Okay.

And then just last question.

On the 4 accelerators you announced at ENGAGE, have you seen any garnering more than others?

Yes.

I would say it's interesting because it's very different, right?

You have GDPR, which is -- has applications across a wide spectrum of companies.

And then we had our 3 marketing accelerators.

I would say there's probably more interest in the 3 marketing only because it's very new and there's a lot of immediate application, where GDPR, I think people are a little bit more in the how does GDPR fit with CCPA, which is another area that we're working on.

And so it's a little bit different type of a sale.

We closed some GDPR deals.

But I would just say, in general, I think the transaction time and velocity on the marketing accelerators is a little bit faster.

Our next question comes from the line of Scott Berg from Needham.

Congrats on the quarter.

I guess I've got 2 relatively quick ones.

First of all, probably for Mark, you mentioned partners in the quarter.

You mentioned a couple of deals, especially with the large CPG company.

But help remind us how influential are partners and your new bookings today and how should we think about them over a period of time, maybe over the next 3 to 5 years?

And then kind of last part of that question is, do the large system integrators, the well-known Deloittes, Accentures of the world, finally start putting these tools into their digital transformation toolboxes at some point?

Yes.

I would say, right now, Scott, we have a couple of hundred partners on the new Aligned platform.

And I would say when I look at the types of deals that we participate in, oftentimes, a partner who has a long engagement history with an account has access to power, is a trusted source and can be very helpful and unlock some doors that maybe are more difficult to unlock in a direct basis.

So I would say the types of deals we've seen do skew more towards a solution orientation than a here's a toolboxing capability, go empower your workforce.

So as our teams get more engaged with the accounts in a solution context, I think those partners can be helpful.

The degree to which we're seeing digital practices get established, where partners are allocating scores of consultants on this, I would say there's more still customer-driven, where a customer will approach the partner if they have an existing relationship and start to enroll them.

But we are not seeing a huge pattern of practice areas being developed.

The approach we have taken that our partner team has done is going into existing practices.

For example, Protiviti, our partner, GDPR, not going to them and saying, create a new practice area but going to an existing practice area for something like governance and compliance and audit and saying, we have a solution that supports your existing team.

So I think what we'll see more of in the coming years is collaborative work management tying into those existing practices with a new set of offerings.

Got it.

Super helpful.

And then from a follow-up perspective, obviously good quarter, the results are fantastic, both on the billings and the revenue side, but the obligatory macro question, especially in Europe and some of your early operations there, are you guys seeing a change in any buying trends at all or is the expectation going into early next year that the momentum you've seen in the last couple of quarters is likely sustainable based on your own execution of course?

We see good pipelines right now, Scott.

The exit from Q3 and into Q4, the team is confident.

Our next question comes from the line of Steve Koenig from Wedbush Securities.

I've got 2 questions for you all, if you don't mind.

So first one, you touched on this a little bit, but maybe could you give us a little bit more color on your progression from having the Aligned partner program to a full-blown kind of application ecosystem, if that's even in the cards.

How -- what does that look like from a product and go-to-market perspective over time?

Yes, sure.

Happy to, Steve.

So I think that the Aligned program is a great, kind of, foundational element for us where we've kind of shifted our partner approach from one that historically was much more of a kind of a reseller model or a new business model as opposed to one where it's really aligning with partners to build solutions for customers, which fits, I think, really nicely with where we're building and investing in the product platform.

I think what you'll see is us continue to develop and introduce new capabilities that will make it easier for customers and third parties, partners to be able to configure solutions, build solutions on our platform, and then ultimately, be able to monetize them when it's a third party, monetize those as a packaged solution.

And there's a number of different elements that go into that from how do you control versioning and how do you enable testing and deployment and just the packaging in general.

And so we have investments across the spectrum to support that and it's certainly something that's part of our long-term vision for the product.

Cool.

Yes.

So then the second question, there's always somebody that's got to ask about a particular competitor by name, and I guess that's going to be me, wearing the hat this time.

So you've partnered with Microsoft, they -- you have a good partnership, you've done some integrations, they have a long history of coopetition with partners.

They've been perfectly happy to compete aggressively with companies they're partnered with.

And recently, they announced new subscription plans for Microsoft Project, which is a pretty venerable older product but now they're putting it on Azure with subscription plans, they are working on integrations with Teams, Power BI, the Office tools, seems like the space ought to be in their sweet spot.

So maybe tell us a little bit about how you stay ahead of that from a product and, again, a go-to-market perspective as well.

Well, I think that -- I think for us, partnering with many of the different players in the kind of office productivity and collaboration space is really core to our DNA.

And we've always been kind of Switzerland in wanting to work and play nicely with whatever customers want to go buy.

I mean just recently, Microsoft recognized us at their customer conference with an award, recognized us as one of the best integrations for Teams.

And we continue to have close relationships with both Microsoft overall but also the Team's team in building integrations and solutions there.

We have Dynamics connector that we actively sell and more of a Microsoft on as well.

So I think that -- we think it's important to stay focused on the customer and how do we create value for what customers are trying to do.

The other thing I would tell you is that Microsoft is a great company that built a great portfolio of solutions, but I think sometimes, when you have such a broad portfolio, it's sometimes not as easy to narrow in and focus on the specifics of what makes things like collaborative work amazing for your end users.

And I think we have -- our entire team is focused on building great solutions for our customers.

And so I think for us, it's just really important for us to continue to innovate, work really great with the other tools in the ecosystem but make sure that we win over that end user.

And Mark talked about helping our advocates inside of our customers with things like the advertising.

Those are all important parts of the play where user preference is ultimately going to win the day in many of these accounts.

Our next question comes from the line of Brett Knoblauch from Berenberg.

Thanks for taking my questions, the first of which is on maybe as you launch more accelerators that solve more problems and develop more of a platform per se, are you seeing maybe a change in the competition you were seeing at all?

And then just a following question on maybe what's driving the ACV growth and maybe the mix?

Is it maybe 70% from customers that's increasing their contract value through expanding licenses or maybe 30% coming from customers with larger initial contracts are coming onboard?

I think I'll take the first half of that question, Jenny.

As I look at solving for very specific needs with accelerators, the amazing thing about SaaS is, you don't have to look too far and you're going to find an offering that solves a specific need that is a purpose-built SaaS offering.

And I think the degree to which a platform that is extensible and flexible and easy to use can solve for that need beautifully.

The customer will look at that and say, wow, I get that capability, pick M&A, for example, we solved really well for -- with our accelerator and look what else I can do with the Smartsheet platform as opposed to the fixed solution, which solves just that one thing.

So what we're hedging on, what we're betting on is that customers will prefer to have optionality, prefer to have configurability, prefer to have extensibility as opposed to be locked into a specific function.

But again, the beautiful thing, people get to exercise choice, right?

We think there will be a multitude of SaaS providers addressing very specific needs.

And I think within large business especially, they will want that optionality.

Yes.

And with respect to the growth in average ACV, I can tell you that our lands are still relatively small because the majority of those come in, in an unassisted motion through the app.

So what's driving our increase in ACV is really the bigger deals that we're seeing, the continued expansion and engagement from customers who've been with us for a while.

They are continuing to see bigger opportunities to use Smartsheet.

Our capabilities are helping a lot because they have higher price points but licenses are still very important and still represents the majority of our billings on a quarterly basis.

Okay.

And then maybe just one more.

You guys launched 10 accelerators over the last year, give or take.

How do you expect the same pace of development over next year, maybe 3 years?

Yes.

I would say that one of the things that we've learned as we've launched more accelerators is that there is a lot of value in what I would call depth versus breadth.

And so I think as we've built solutions with partners and we've built solutions around specific capabilities that we think can be differentiating, I think what you'll see at least over the next year is we'll continue to launch new accelerators but we will probably launch fewer with -- that are deeper versus an accelerator for everything.

Our next question comes from the line of Terry Kiwala from First Analysis.

I know there have been some questions on the federal contracts and installations.

On the sales side with the federal opportunities, any insights into the length of time and -- the length of time that the sales process takes and the average contract value of the opportunities or the RFPs you're bidding on?

And whether you currently are preparing to grow that team?

And then on the cost side, if you have any additional insight as to whether that is a more expensive customer to serve, relatively speaking.

In terms of the team, we are continuing to invest in the team.

As it relates to our overall quota-carrying base, it's a very small number of people.

But it is growing.

I think the sample we're working off is still very small, right?

So it's going to be influenced by NOAA and a few of our other early customers.

So I think we're not ready to make a deep read into that yet.

In terms of the cost to serve, we haven't seen a material difference on that.

From an account management standpoint, a sales proceed standpoint, it looks quite similar today.

And there are no further questions at this time.

I will turn the call back over to Aaron Turner for closing remarks.

Great.

Well, thank you all for joining us today, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.