Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet second quarter fiscal 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions]. I will now turn the conference over to Aaron Turner, Head of Investor Relations..

Thank you Chris. Good afternoon and welcome everyone to Smartsheet's second quarter of fiscal year 2020 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, 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 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 and financial trends.

These forward-looking statements are subject to a number of risks and other factors, including, but not limited to, those described in our SEC filings available on our Investor Relations website and on the SEC website at www.sec.gov.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ materially and adversely.

All forward-looking statements made during this call are based on information available to us as of today 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 also be found on our Investor Relations website. With that, let me turn the call over to Mark..

Thanks Aaron. good afternoon everyone and thank you for joining us for today's call. We delivered another strong quarter by executing our strategy of providing high-value solutions for enterprises, expanding Smartsheet's presence in new and existing customers and driving international growth.

Our platform designed to accelerate individual and enterprise achievement enable teams and businesses of all sizes to move faster, address significant challenges and drive innovation.

We posted revenue of $64.6 million in Q2, representing year-over-year growth of 53% and our annualized average contract value or ACV per domain-based customer grew 48% year-over-year to $2,972. The total number of all Smartsheet users across paid and collaborators is now over 5.4 million.

Expansion within our base during the quarter included 46 companies increasing their annual recurring revenue or ARR by more than $50,000 and 13 customers increasing their ARR by more than $100,000.

Notable expansions occurred at customers such as Olympus Corporation, a global leader in electronics and optics, U-Haul, the moving equipment and storage rental company and VCCP, a global creative and marketing firm serving some of the world's largest brands.

Many of those expansions were driven by record 750 unique customers that bought one or more capability-based products in Q2 with July seeing record bookings for our accelerator offerings. In conversations with customers this quarter, I was repeatedly reminded of Smartsheet's mission critical role in their businesses.

From tracking clinical trials intended to eradicate global diseases to managing the remodeling and reopening of hundreds of restaurants globally, I heard how Smartsheet is driving high value automation and workflow consistency in areas such as project management, research and development, healthcare and media.

For example, Syngenta, a Swiss-based biotech company wanted to connect workers at research labs, testing farms and product manufacturing facilities in more than 90 countries to ensure rapid and accurate decision-making and reporting across the organization.

With Smartsheet, research and field teams now use mobile devices and tablets to share information and images quickly, allowing for real-time decisions about the next stages of their agricultural experiments, more frequent reporting of observed safety issues and increased transparency of information from the field to corporate leaders.

Providence Medical Group, a healthcare organization with 60 clinics throughout Oregon and Southern Washington leverages Smartsheet to intake document and track clinic managers' attestations of compliance with constantly evolving medical practices mandated patient care requirements.

Smartsheet cross-platform accessibility enables caregivers to input and access information from any device in any clinic location. And Crain Communications, a multi-industry publishing conglomerate, sought to implement a centralized work execution platform across its 24 brands including Ad Age, Autoweek and regional business publications.

By provisioning Smartsheet and implementing our control center and dynamic view products, Crain is able to build scalable, automated workflows that reduce time-to-market and duplicative work and increase visibility for both internal stakeholders and third-party vendors.

Fueling these team and organizational achievement and Smartsheet wins is a strong pipeline of product innovation. We are making significant investments focused on delivering a platform and the infrastructure required to support that platform that anyone can use to move faster, meet challenges and achieve more.

For example, the latest enhancements to our automated workflows enable users to automate multiple actions and scenarios in a single workflow. This includes the ability to automate approvals with multiple stakeholders or to create a recurring workflow using a time-based schedule.

By enabling users to automate more sophisticated work processes, Smartsheet helps organizations save time and maintain data consistency. In mid-August, we announced that Smartsheet Gov had received full FedRAMP authorization.

Now that we are authorized in the FedRAMP marketplace, we look forward to the chance to expand the use of Smartsheet among federal employees as they seek to modernize workflows and processes, drive the effectiveness and pace of intra and interagency collaboration and to deliver better experiences for citizens.

We look forward to unveiling additional product offerings at our third annual ENGAGE global customer conference, September 30 through October 3. With registrations on track to outpace last year's total of 2,500, ENGAGE'19 is set to be even bigger and better and we look forward to seeing many of you there.

Before I turn it over to Jenny, I want to share a few thoughts on our national advertising campaign that we kicked off this morning with a full-page ad in the print edition of The Wall Street Journal.

As you see the ads in the coming months across many different channels, you will note that we are heavily focused on a message of achievement for both individuals and for companies of all sizes. It's time that the world hears about all that Smartsheet has to offer and I look forward to us telling that story more broadly.

To close, I am pleased with our performance thus far in fiscal year 2020 and remain ever mindful of the degree to which we are an important part of our customers' businesses. Thank you to the Smartsheet team for your support, of our customers and of one another.

Thanks also to our customers, partners and shareholders for your confidence in our service and in the future of our business.

Jenny?.

Thank you Mark and welcome everyone. As Mark mentioned, our second quarter revenue came in at $64.6 million, up 53% versus a year ago. Billings came in at $79.5 million, up 52% versus a year ago. Our dollar-based net retention rate was 134% and our average ACV per domain-based customer grew 48% year-over-year.

We also added approximately 1,900 net new logos, a little over a third of which we obtained via the 10,000ft acquisition to end the quarter with over 82,000 domain-based customers.

Second quarter non-GAAP operating loss was $10.8 million as we continued to make investments in our platform and go-to-market capabilities and non-GAAP net loss per share was $0.08.

Operating cash flow was negative $2.7 million and free cash flow was negative $7.3 million and we ended the quarter with cash and short-term investments of $561 million which includes $380 million from our equity raise in June. Let me dive more into the revenue for the quarter.

Of our $64.6 million in total revenue, subscription revenue was $58.3 million, a 56% increase versus a year ago. Services revenue came in at $6.3 million, up 29% versus a year ago and represented 10% of total revenue.

The services revenue growth rate was tempered by the lapping of a large consulting engagement in Q2 of last year and by our ongoing sales of accelerators, which attach with a lower services component. Let me move on to metrics. We continue to see strong growth in our larger customers, 7,673 customers now pay us $5,000 or more per year.

635 now pay us $50,000 or more per year. And 226 now pay us $100,000 or more per year. These customer segments grew year-over-year by 55%, 113% and 128% respectively and now represent approximately 70%, 31% and 20% of total ACV.

As mentioned earlier, our average ACV per domain-based customer increased to $2,972 for the quarter and our dollar-based net retention rate was 134%, consistent with the prior quarter and three percentage points above the same quarter a year ago.

Next, I will 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 second quarter, overall gross margin was 82%. Subscription gross margin was 88%, flat with the prior and year ago quarter. As we make incremental investments in our infrastructure and migrate more of our services to the public cloud, we expect our overall gross margin to come down towards our long-term target overall margin of 785 to 80%.

Professional services margin was 31%, which was in line with prior quarter. Turning to operating expenses. General and administrative cost in the second quarter were $9.5 million, representing 15% of total revenue, one percentage point below the prior quarter and two points below the year ago quarter, as we begin to show scale.

Research and development was $18.9 million, or 29% of total revenue, a decrease of three percentage points from the prior quarter and two percentage points from the year ago quarter as we realized some scale and saw increased capitalization of internal use software.

We continue to invest in our product capabilities and added a record number of new developers to the team this quarter. Finally, sales and marketing expense was $35.7 million or 55% of revenue versus 59% of revenue in the prior quarter and 54% in the year ago quarter.

We expect our sales and marketing as a percentage of total revenue to increase in the back half of this year as we hold our third annual ENGAGE conference in October, launch a brand advertising campaign and add more reps to support our global expansion plan. Turning to operating loss and free cash flow.

Operating loss was $10.8 million, representing a negative operating margin of 17%. Approximately 70% of our total expenses were headcount related and we ended the quarter with over 1,350 employees.

Free cash flow was negative $7.3 million which includes CapEx spend, capitalized internal use software and principal payments on leases totaling 7% of revenue. Now turning to billings. Our second quarter billings were $79.5 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 third quarter and the full year fiscal year 2020. For the third quarter, we expect total revenue of $69 million to $70 million, representing year-over-year growth of 47% to 49%.

We expect non-GAAP operating loss to come in between $23 million and $22 million and non-GAAP net loss per share to be between $0.19 and $0.18 based on weighted average shares outstanding of 116.5 million. We also expect our free cash flow in Q3 to be up to negative $4 million.

Both our operating loss and free cash flow reflect expenses related to our ENGAGE conference, brand advertising and market expansion plans. For the full fiscal year, we expect total revenue to be in the range of $265 million to $268 million, representing growth of 49% to 51%.

We expect non-GAAP operating loss to be between $70 million and $66 million and non-GAAP net loss per share of between $0.58 and $0.54 for the year based on approximately 112.5 million weighted average shares outstanding.

We expect billings to be in the range of $320 million to $324 million for the full fiscal year, representing growth of 48% to 50% versus last year. And for modeling purposes, please assume historical trends for quarterly billings for the remaining quarter.

Regarding free cash flow, our success expanding Smartsheet's presence into new markets such as the U.K. has given us the confidence to invest faster in our international expansion and accelerate our migration to the public cloud.

Accordingly, we are increasing our full year free cash flow guidance by negative $5 million to a total of negative $25 million for the year. With that, we will now turn it back to the operator to take your questions..

[Operator Instructions]. And your first question is from Bhavan Suri with William Blair. Your line is open..

Hi guys. Thanks for taking my question and nice job that our retention rate was just amazing. I guess I wanted to touch, maybe first for Mark here. You look at these accelerators and those capability-based solutions, they are contributing nicely to the results.

I guess help us understand how customers decide to adopt these? And then are you seeing new customers land with these solutions or is something that's adopted by more advanced Smartsheet users that have been customers for some time? And then I have got a quick follow-up..

Hi Bhavan. I think the accelerators are really serving a nice role in helping people understand how to deploy Smartsheet to solve something that matters within their business. So when you look at the seven accelerators we have, these are common issues that we see, challenge that we see across business.

And rather than choosing a platform which requires configuration to achieve an outcome, they can choose something which is more turnkey where they can say, we want to take an M&A accelerator or we want to do a joint selling accelerator and it's a great way to onboard.

Now as I have said on prior calls, whether they choose to deploy the accelerator or go with a non-accelerator-based approach, that education and that grounding has served us very well to get people on side. When we look at whether it's influencing new and expansion business, we have sold accelerators into both.

Given the distribution of our sales reps being overweighted to expansion, clearly that group has an advantage because we have many more quota-carrying reps there, but we are starting to see signal where the new business reps are feeling comfortable in presenting those..

Great. That's really helpful. And then a quick follow-up for Jenny.

Jenny, given sort of the mix of the business globally, I would love to understand if you saw any currency impact this quarter and if you could quantify what that was in the numbers and what you might have modeled into guidance given sort of we have seen some pretty big currency moves globally? Thank you..

Yes. Hi Bhavan. So currency is still relatively small for us compared to some other companies. We bill roughly 7% of our subscription billings are in non-U.S. dollars.

And if you look at the impact however in Q2 because there have been a relatively big move, we did see a headwind of roughly $300,000 on our billings because we invoiced at the current spot rate and that's basically what goes into our billings number.

On the revenue side, it was minimal impact just because of how we allocate revenue throughout the year and it's based on an historical rate.

One of the things we did notice though on dollar net retention rate, we did see a little bit of a headwind there and it wasn't anything, it wasn't a significant impact but several basis points based on the fact that the math is creating a headwind there..

Got it. Helpful. Thank you guys. Nice job. Thanks for taking my questions..

Your next question comes from John DiFucci with Jefferies. Your line is open..

Thank you. I am sorry. I was having some telephone technology issues there, so hopefully you didn't hit these issues, these questions. I guess the follow-up on both Bhavan's questions, first on the international business. I think last quarter, Jenny, you said you had 11 salespeople in the U.K.

Can you give us, I don't know, any other data on international and how that's doing, either as far as your presence there or even, I did get cut off a couple of times, but if you have given the revenue that's come from international, that would great too?.

Right. Well, so we started the year with 15 folks in the U.K. and we now have 30 and nearly half of them are quota-carrying reps. And we are planning to invest more in the U.K. this year because for the first half of the year in terms of our internal targets, the U.K. team has exceeded those expectations.

So we feel really good about their performance to-date and investing more in that business..

Okay. Great. Okay. And did you say anything about what kind of contribution realizing you had international business prior to even putting people in the U.K.

But did you give that information about how much business came internationally this quarter?.

So 21% of our revenue this quarter was from international..

Okay. Great. And I guess just on the accelerators and maybe, Gene, if you can talk to this or Mark. This sounds really interesting, right. And it sounds like it's actually spurring business even if the accelerators [have been bought] [ph]. So should we continue to see, you are at seven now, I think Mark said.

Should we continue to see other areas and is there anything, any other accelerators you can talk about that are on the come? I am not sure if you want pre-announce them but maybe talk about some areas that might be interesting?.

Yes. Well, hi John. Thanks for the question. Yes, as you stated, we have seven today. We continue to develop new accelerators based on where we see customer's signal and my team would shoot me if I gave away the upcoming announcements that we are likely planning to make at the ENGAGE conference at the end of the month.

But I would tell you that we continue to look at areas where we think we can bring customers more out-of-the-box solutions to solve meaningful problems for their business and I think that we will have more to talk about after the ENGAGE conference..

Okay. We can wait a month and look forward to it. And nice job here. It's great to see a company actually continue at the same kind of momentum that you have been out now for just over a year. So thanks..

Your next question is from Stan Zlotsky with Morgan Stanley. Your line is open..

Hi guys. Thank you so much for taking my question and again, a nice job in the quarter. So from my end, look, it certainly sounds like accelerators are doing very well.

How are you thinking about accelerators and what kind of contribution that could have to your financials as we go into the back half the year? And in as much as accelerators having amazing adoption, how do you think about what that does to your pro services growth as we go back half of this year and potentially into next year? And then I have a quick follow-up..

Yes. Okay. Hi Stan, this is Jenny. Well, with respect to the second part of your question in terms of our pro services growth, we guided 9% to 11% in Q1. We were at 10% in Q2. And I would continue with that guidance. There is no change. Pro services is still really important to us. It's just priced differently than it was a year ago.

Then with respect to the first question around accelerators and their contribution, we are seeing our capability-based products increase as a percentage of total subscription revenue. So last quarter it was 9%, this quarter it was 10%. And as we create new solution in this area, I would expect that we could see that trend continue..

Got it. Thank you. And just a quick follow-up.

What was the inorganic contribution in the quarter from the acquisition of 10,000ft?.

Yes. So we are not breaking out 10,000ft as it's really not material to the overall results.

But what I can remind you of is, last quarter we said that we expect 10,000ft to generate $2 million of revenue and $4 million in billings for the full year, so over three quarters And I would tell you that they are performing well and they kind of met our expectations for the quarter..

Okay. Perfect. Thank you so much..

Your next question is from Richard Davis with Canaccord. Your line is open..

Hi. Thanks. Mark, you are kind of a student of the evolution of markets and things like that.

And I am wondering, I know we are right at the foothills in this space, but have you seen any evidence inside some of your companies where they may have had multiple vendors beyond using Excel and you guys have bounced those vendors out? Or is just still far away as in like years before that's really an issue? I am just trying to think about how this market is evolving and stuff because as you know, there's other companies in different swim lanes and I am just kind of thinking about these in Venn diagrams.

Thanks..

Hi Richard. What I am hearing from, I had really interesting conversations with a CEO week before last and he was on a mission to help his large-scale mega-cap company go from 13 providers in one category down to three. So the charter wasn't to jettison or bounce out 12 of the 13, but to try and get efficiencies by being a little bit more choiceful.

So I would say, what did surprise me to learn that one of our largest customers had over 4,000 apps that they had deployed, that did surprise me. That's a lot of apps. And I do think people's intent is to really put energy behind the ones that are working best for them.

I think in terms of the flight to sort of find a single that works for everything in every category, that's not what we are seeing today. So I think user preferences and desires and needs are being incorporated into buy decisions and renewal decisions. There is a very healthy balance right now between the business units and IT.

But I do think that over time, people's intent is to not have sprawl. But again, I don't think the pendulum is going to swing back to having a single provider within each category for these large companies..

Got it. Thank you very much..

Your next question is from Terry Tillman with SunTrust. Your line is open..

Hi Mark, Jenny and Aaron. I am sorry for a horrible cold here. But I guess the first question just relates to, it sounds like sales and marketing investments are ramping in the second half, maybe even more than we expected. I think part of it is like advertising. I know you have a new CMO.

But maybe you could pinpoint some of the other areas where there is incremental investment? And then how do we, when we are talking to investors, what are some of the proof points or ROI you would see next year which I am assuming that's when you see benefits whether it's just net new customers or $100,000 per year customers.

Just a little bit more about the investments and then how we watch the metrics around that? And I had a follow-up..

Great. Thanks Jerry. I will take the first half of that and then Jenny will take the second. In terms of the investments that are incremental, we knew when we brought Anna into our team that we were going to be deploying campaign dollars in the second half this year. What we have been pleased to see is how our team, our composite in the U.K.

has come together and clarity around quota-carrying reps, customer success, support, how that whole group gelling. We now want to pull our Asia-Pac investment forward and we feel like we are organizationally ready to do that. Heading into the year, we really anticipated that not hitting in FY 2020.

So I think one of the things that's slightly different about how we are going to approach that than what we did in the U.K., I would say we approached the U.K. in a more phased manner. First, we said we are going to have a sales leader, then some quota-carrying reps and over the course of quite a few months we built that composite.

We now have confidence in what that structure looks like and we are going to be more assertive in getting that group in place quickly.

Jenny?.

Yes. And with respect to sales and marketing kind of in the back half, if you kind of look at what happened last year between Q2 and Q3, you saw a jump up in sales and marketing and that was driven heavily by our ENGAGE conference. It's several million dollars of incremental investment there.

Now on top of that, we saw expansion into these international markets. We have got brand advertising. So I think the increase in sales and marketing as a percentage of revenue into Q3 will be more pronounced than what you saw a year ago.

And in terms of return on our investment, we continue to monitor LTV to cap, payback, magic number and we look at these every quarter. And right now, we still feel really good about it and we still feel like there is room to make incremental investments..

Okay. And I technically view that as just one question event though it's two parts.

Can I ask a second question to follow-up?.

Yes. Sure Terry..

Right. I don't know why I asked if I could you a question. So anyways, Jenny, you have a perspective on billing. You also had a couple of years now of this great ENGAGE conference.

What I am curious about is, what are you baking into in terms of potential sales activity? I know part of it is education, networking, et cetera and just kind of unleash all the new innovation.

But as you have done this a couple of years in a row, like how much are you banking on actually getting a lot of new sales activity coming out of it? Thank you..

Well, it's definitely a lead generation opportunity. We get to engage with customers. There is business that's done. And so we factor our best estimates of what that might look like for Q3 and Q4. Without going into too much detail of what it is, we do feel like there is a good return from ENGAGE..

Your next question comes from Ittai Kidron with Oppenheimer. Your line is open..

Hi guys. Good quarter. I guess a couple for me. First, Mark, I guess I am trying to kind of look at a pattern of your results over the past few quarters and can't help seeing that the magnitude of the beat over the top range of your guidance is shrinking. It's shrinking from one quarter to another.

And under the assumption that the methodology by which you give guidance does not change, what is changing in the business? Or perhaps maybe you could talk about what you were not happy with during the quarter?.

Yes. I think so over the course of 13 years, if you were to wake me up at two in the morning, I would say I want most things sooner than we get them, right, on almost all dimensions. So this will be a nice long answer for you. So we did two acquisitions in the first half of the year.

The way in which those teams members have folded into our community has been really strong. I would have loved to have on the product integration side had those day one. So you do the acquisition, the next day you come in the office and the parts are fully integrated.

And we are excited about showing our customer base at ENGAGE some of the progress on that front. But that is something where as we go to market, we want to have a hand-in-glove unified offering across all those dimensions. So that is one that we are pushing on very hard and only until you embark on that work do you really understand what's entailed.

And we believe the details matter. So the difference between shipping something out to market quickly and putting jazz hands around and telling your customers to buy something that's not ready, that's not how we run our business.

So that's one very specific thing which as we look at additional acquisitions over time we are going to apply those learnings and further refine our model. FedRAMP is another one. We had given multiple progress reports in the past quarterly reports. I would have loved that to have been a 90-day process.

We were one of the fastest companies ever through that process in just about a year. That seems like an eternity to me. And now we have earned the right to engage on RFP processes with federal agencies. I will probably again be disappointed with the length of time it takes to execute those. But again, these are opportunities, right.

So those are two concrete things which I would say represent new opportunities that simply need some time to bake. And unfortunately, I don't get to control all the variables there. But I am very excited about both of those fronts..

Excellent. And then as a follow, Jenny, you have talked about how you expect the gross margin to kind of drift down over time.

What is it that really we need to see from a revenue standpoint or some sort of scale standpoint that will actually make you get there because you some to be doing far better than your long-term target for a long time and you are holding it quite steady?.

Yes. I think that it relates predominantly to the timing of our migration to the cloud and as we mentioned on the call that we are accelerating that migration. Originally, we were thinking 18 months and now we are thinking more like six months.

So to the extent that that happens faster, you should expect our subscription gross margin to tick down percentage..

Just to clarify that, are you already in that process? Or you will start it in six months? I am bit confused..

We have already started it but we were taking a much slower process and now we have decided we are going to accelerate that and so we will start seeing more cloud-based expenses versus the deprecation we have on equipment. So there could be some overlap which will bring it down a bit..

Got it. Okay. Thank you very much. Good luck guys..

Your next question is from Scott Berg with Needham. Your line is open..

Hi everyone. Congrats on a good quarter. Mark, I wanted to expand on the FedRAMP opportunity to start, I guess. Can you remind us how much of your business comes from federal in general right now? My guess is really, really small.

But how should we view this opportunity in terms of what your longer-term opportunity looks like here?.

Yes. I think what I have heard, Scott, over the years from people who have sold into the agencies is that there is no formulaic playbook that works for all companies equally. So I am, in many respects, an experiential learner and we are starting on this process now. We do have, I would say, a very, very small percentage of our revenue today.

Low, low, low single digits comes from this world today. The degree to which people make decisions on somewhat of a tactical temporary authorization to operate approach is different than a full-on agency RFP process. We have not gone through that process yet to closure.

So as we understand that, we will have a greater sense for the magnitude of the opportunity. What we do know is that agencies have real needs. What we do know is that it's a very small number of vendors who are authorized to sell to them. So I like that dynamic.

But until we start posting wins and we start seeing agencies successfully utilizing our product, there is really no evidence to draw from..

Got it. Helpful. And then a quick follow-up for Jenny on free cash flow. I get the additional investments this year given the success. How about your view on 2021? I believe you have discussed roughly cash flow neutral for the year in fiscal 2021.

Are you still holding that expectation? True or does that maybe change?.

Well, to your point, we are very mindful of our path to profitability but at the same time we are looking at growth opportunities that are pretty significant and investments that we may want to make related to those. So we are finishing off this year. We still have got another five months to do.

We are kicking off our planning process kind of as we speak right now and I will give everyone an update when we guide for the next year in a couple of quarters..

Got it. Thanks again. Congrats on a good quarter..

Your next question is from Mark Murphy with JPMorgan. Your line is open..

Hi guys. This is Pinjalim on behalf of Mark. Thanks for taking our questions and congrats on the quarter.

Going back to the capability-based offerings, could you talk about the uptick of control center and dynamic view? How those are doing? And then those two along with accelerators, where do you see the most opportunity among those three? And the third part of that lovely question is, what is the average ASP that you are realizing from these products today?.

You packed a lot in there. So control center, dynamic view and data uploader are three premium products in addition to accelerator that kind of make up the bundle of what most of the demand is. I would actually tell you that all of those are quite healthy. Data uploader has probably been the one that's the fastest growing for us.

And while we don't breakout ASP for our premium based offerings, I would tell you it varies pretty widely across that portfolio based on the size of the solution we are building for the customer..

Okay.

And then is it fair to say that control center may be being the oldest is the largest among all of those?.

Yes. Control center has been around and it's the largest, it represents the largest revenue of that group..

Understood. Okay. And Jenny, the dollar-based net retention obviously has been holding up pretty steadily. That's great to see.

Is there any improvement in gross retention or churn to be called out there?.

Yes. So last quarter I mentioned that our loss rate was above 9%, but rounded down to 9%. This quarter it's below 9%, but it rounds up to 9% still. So we have a 40 basis point improvement in total loss rate for the quarter..

Excellent. Thank you so much..

Your next question is from Alex Zukin with RBC. Your line is open..

Hi guys. Thanks for taking my question and congrats on a solid report. I guess maybe just first on the dollar-based net expansion metric, another great posting at 134%.

What's the right way to think about that for the back half of this year? Is this kind of the right balance? Do you see it ticking up? Or is it at the right range at this point?.

Yes. Hi Alex. It looks nice to be working with you again. On the net retention rate, we are modeling high-20s by the end of the fiscal year. So high-120 percentages. We don't typically bring it up, that would be very aggressive and very odd. But we are very happy with the number..

Perfect. And then maybe for Mark. It seems like you have got a lot of growth opportunities ahead of you and you are investing ahead of that growth.

So maybe can you stack rank by maybe your enthusiasm level or where you see the lowest hanging fruit between the U.K., APAC and federal? And where do you feel like you are still under investing from that perspective?.

Yes. One thing I would like to remind our employees is low hanging fruit still needs to be picked. And when it's fallen on the ground, it's typically rotted. So each of these things takes effort.

And I think the thing that we are organizationally focused on right now, there are such a plethora of things to pursue, but the things you pursue, how do you do those really, really well? So the U.K., we learned some lessons in terms of what we are going to be applying to our next region. We will be deploying people differently to the next region.

The team did a heroic effort in the U.K. holding it together as we phase people in and out. And it's, again, we are going to apply that. So I think it is, in terms of excitement, I get excited about things that we learn and apply more effectively next time around. I talked about that in the context of acquisitions.

I talked that about in the context of new territory presence. And federal is no different, right.

So as we go to deploying our sales professionals who are dedicated to that space as we learn how to best respond to inquiries, how to respond to authentic inquiries versus inquiries where they are just sort of kicking the tires, we will learn from that as well. The things that I am most excited about, at the core of it, we are a software company.

We build stuff. We build stuff that people should love and I am fired up for ENGAGE. I am fired up that we are going to be bringing stuff to market that is differentiated.

So, I mean, it's one thing to talk about, are you better than someone else? Do you maybe look a little different than someone else? Do they like the sound of your offering better? No. If you have stuff that is not possible elsewhere, that is a very concrete thing to talk about with people in a sales call. I love those things.

So as we think about our roadmap, it's not just improving certain things, getting into new markets. It's brings stuff to market for which there is a need that other people don't have. I love that union. So that's my number one. Hopefully you come to ENGAGE and you can learn about some of it..

Thank you guys. Appreciate it..

Your next question is from Steve Koenig with Wedbush Securities. Your line is open..

Hi Smartsheet. Thanks for taking my question. So one quick one and one follow-up. Your subscription revenue hardly decelerated at all, very impressive results. You did mention you had the hard pro-serve comp and we don't really care about pro-serve revenue. It's an enabler. It's not a strategic driver of the business.

But it does get mixed in when people look at headline results.

So I am curious on how should people kind of think about or model out pro-serve? Are you looking at that to decelerate in the future at a greater pace? It's just not as important to you all? What does that revenue enable for you?.

Yes. So my expectation or our expectation, rather, is that services revenue will continue to be a very important part of our business. And we are guiding the year to 9% to 11%. So it won't necessarily decelerate more.

I think if you just, within your modeling, take somewhere between 9% to 11% of your total revenue, that will be consistent with what we are looking at internally with our business..

I think one thing to add that. When we think about professional services, it's one part configuration and deployment assistance, another part is training and enablement. And that part of services is alive and well. We are adding capacity to all aspects of professional services.

And I don't think, we don't foresee a slowdown on that type of investment at all from our customers..

Got it. Thanks, I appreciate that. And apologies if I am duplicating a question, I did get on the call late. But the one follow-up I would have would be your domain-based customer acquisition activity was very good even on an organic basis.

Maybe could you comment a little bit on what drove that and how we should think about that going forward?.

Well, I mean, it's the same motions that we have been doing every quarter. We just saw a few more domains this quarter join on sign up for Smartsheet. And we are going to continue to invest in awareness of our product and hope that we will continue to see growth on that front..

Terrific. Great. Well, thanks and congrats on a good quarter..

Our last question is from Ryan MacWilliams with Stephens Inc. Your line is open..

Hi guys. Thanks for squeezing me in.

On your data point that 750 unique customers bought one or more capability products in the quarter, how should we think about this maybe on a year-over-year basis or compared to prior quarter?.

Well, certainly, it's more. I don't have the exact data point from a year ago. But you think about accelerators have been around for about a year now. Dynamic view has been around for about a year now. Prior to that, we had Smartsheet control center and just a few other things. So it's definitely up..

Yes. I think as we look at the penetration of capabilities-based products into our customer base, that now exceeds 80,000. Of course, we need to be reminded that a very small percentage of our customers have bought them to-date.

So as we think about how we package them, how we bundle them, how we price them, what we develop next, we think it's still, again, very early innings on this front. But we were pleased to see that we have evidence now of some customers buying multiple capabilities from us.

So we apply those learnings and hopefully we again see that pattern as being an important complement to the standard license..

And Ryan, this is Aaron. The only thing I would add is for data points, in Q4, we referenced 700 unique customers buying capabilities one or more in the quarter. And this quarter we are reporting 750. So if you are looking for concrete data points, those are the ones I would point to..

Perfect. And then previously mentioned that 90% of your product roadmap comes from customer feedback. What things are customers asking for? Maybe you are seeing any particular interest from a particular industry? And have there been any recent enhancements from an AI standpoint on the platform..

Yes. So I would say, so we still base 90% of our roadmap on customer feedback and we have a number of different mechanisms we use to drive that and that's critically important. I would say that we don't see there a lot of very specific use cases that kind of create any kind of a central tendency.

We see really broad use of Smartsheet across a number of different functions and industries.

What we do find though is customers are looking for things that make the platform do more work for them, whether that's things like automation, which we have invested in pretty aggressively, things that make it easier to get real time insights into what's happening in work or the status of the work within their organizations.

So dashboards are growing very rapidly and are kind of a key area of value. And then you will see some things that we are going to be announcing in ENGAGE, some capabilities that we think are differentiated and really addressing some customer needs that we have been hearing for a while. And so I would say, I think it's fairly broad based.

And then I forgot the last part of your question.

What was the last?.

Just any updates on --.

Yes. I am sorry. Thank you. I was reminded, AI. Yes, I would say that we believe that AI and ML are going to be important underpinnings to where many or almost most end-user applications are going to be over the next 10 years.

And so we are continuing to invest in building our AI capabilities and you will start to see some of our user capabilities powered by AI, things like how we prioritize notifications for users, how we suggest ways for users to configure their work that will just make it easier.

In many cases, we will do, we will actually perform those configurations for them. And so I would say, we are still super early. That technology is still really emerging. And but we are very committed to ensuring that we are leveraging those technologies to make our platform better for customers..

Perfect. Thanks for the detail and thanks so much for taking my question. Thanks a lot..

This does conclude the Q&A period. I will now turn it back to Aaron Turner for any closing remarks..

Okay. Well, thank you all for joining us today. We look forward to speaking with you again next quarter and hopefully seeing many of you at ENGAGE..

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