Thank you for standing by and welcome to the Smartsheet First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Aaron Turner, Investor Relations. Thank you, please go ahead..

Great. Thank you, Jesse. Good afternoon and welcome everyone to Smartsheet's first quarter of fiscal year 2021 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me today are Smartsheet's CEO, Mark Mader; and our CFO, Jennifer Ceran.

Our Chief Product Officer, Gene Farrell will be also be available during the Q&A. Today's call is being webcast and will also be available for replay on our Investor Relations Web site 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 Web site. During this call we will make forward-looking statements within the meaning of the Federal Securities Laws.

We have based these forward-looking statements largely on our current expectations and projections about future events, financial trends and our expectations around the impact of COVID-19 on our business.

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

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

All forward-looking statements made during this call are based on information available to us as of today and we do not assume any obligation to update these statements as a result of new information or future events except as required by law. In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures.

A reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our Investor Relations Web site. With that, let me turn the call over to Mark..

Thank you, Aaron. And thank you everyone for joining us on our first quarter earnings call. The last couple of months have underscored just how interconnected we are, our communities, employees, customers and partners.

In that spirit, I'm pleased to see how our team despite significant disruptions to our collective personal and professional lives has worked to support one another. Our team's commitment to each other and to our customers has never been stronger despite or perhaps because of these extraordinary circumstances.

I'm grateful for the teams work and dedication. For the first quarter, we generated revenue of $85.5 million and non-GAAP operating loss of $13.6 million above the guidance we set in March while our billings came in below our guidance at $89.9 million as a result of extension of accommodations to customers impacted by COVID.

Since the onset of the pandemic, we've seen how the speed with which the Smartsheet platform can be deployed and the agility it enables has aided in our customers response to COVID.

For example, a global healthcare customer recently expanded their use of Smartsheet in order to coordinate the scale distribution of antibody tests to thousands of analyzers at hundreds of lab sites across the U.S.

The speed with which the Smartsheet Park solution could move from concept to production became a clear differentiator and demonstrated our ability to rapidly orchestrate high value enterprise scale workloads.

In March, we made available a set of templates that enable the creation [of aid] [ph] the offering his deployed nearly 14,000 times as an information hub and Resource Center for employees and as a way that organizations can assess risks and collect data on health changes [Technical Difficulty].

And we are also supporting the government's ongoing response to COVID. As announced during our last call, U.S. government agencies responding to the crisis can use our FedRAMP authorized environment free of charge and without obligations. To-date nearly 100 federal, state and local agencies have availed themselves of this offer.

While on the topic of Smartsheet Gov, I mentioned that we made significant progress toward achieving Department of Defense impact level 4, IL-4 authorization. Doing so will enable the aerospace and DoD sectors to securely and efficiently deploy Smartsheet Gov platform to modernize their workflows and processes.

We believe we're in a solid position to expand the use of Smartsheet in these sectors and expect to achieve IL-4 authorization in the near future. We saw many organizations on the front lines of COVID significantly increased their use of Smartsheet during the first quarter.

For example, the Department of Health and Mental Hygiene for one particularly hard hit American city saw their number of active users increased by 700 a 12-fold increase. The medical air transport company which has been a Smartsheet customer since 2015 saw active users increase by more than 1500 a 10-fold increase.

And a payment processing company for vehicle fleets increased their usage by nearly 1800 active users an 8-fold increase. Overall, total users were over 6.75 million at the end of Q1 up from 6.3 million at the end of Q4.

These and many other enterprises now recognize that Smartsheet has become an increasingly mission critical platform for empowering and enabling a dynamic workforce. The workforce capable of working from anywhere, adapting to rapidly changing conditions and staying deeply connected to their individual work and the mission of their team.

Helping customers adapt to an abrupt shift in their business operations was a hallmark of our first quarter. To that end, our product team developed and deployed 30 templates that's specifically designed to help our customers manage through the crisis, such as CDC preparedness, PPE inventory tracking and remote employee onboarding to name just a few.

They were deployed over 37,000 times in Q1. More recently, as customers begin planning for a safe and responsible return to the workplace, we are releasing assets to help organizations manage risk and employee awareness.

We also launched a number of meaningful updates to our product this quarter, including larger, faster sheets, a new form builder with conditional logic, a Smartsheet extension for Adobe Creative Cloud and an accelerator for CCPA, California Consumer Privacy regulation that augments our GDPR accelerator, latest privacy regulations.

Preliminary analysis of May's pipeline development and sales performance suggests a stabilization of the disruption caused by COVID. That early data reinforces our commitment to investing such that Smartsheet is best positioned for continued growth and category leadership.

At a time when collaborative work management solutions are increasingly recognized as an effective mechanism for delivering digital transformation and high value workflows we are allocating our capital to expand product development and innovation, deepen our selling capacity and position us as a company that succeeds over the long-term.

As enterprises recognize the importance and of adapting to a new work from home reality, we were able to quickly respond and be in market with a campaign highlighting Smartsheet's ability to empower dynamic and agile workforces, workforces capable of being productive from anywhere.

As these companies emerge from the initial phase of the COVID disruption and seek to build organizational resilience and agility. We will promote the value and importance of using Smartsheet to help businesses everywhere navigate a changed world. Jenny will walk through the details of our Q1 financial results.

I feel we had a good first quarter given the market conditions. It has been a challenging time for many businesses, but the churn impact was most pronounced among our SMB customers. In addition, the net expansion rate, which includes gross expansions and productions declined, but remained a healthy 140%.

That said, the broad and diverse set of industries that make up Smartsheet's ARR serve to diminish the impact as other segments, such as life science, healthcare and finance and technology performed well. Despite an evolving sales environment, trial activity remains strong and we saw many large organizations continuing to lean in.

15 customers expanded their ARR by more than 100,000 versus 13 in Q1 a year ago, 51 companies expanded their ARR by over 50,000 in Q1 versus 34 in the same quarter a year ago. And at the end of Q1, we had six customers with ARR of more than $1 million. Even before COVID, the world of work was already in the midst of rapid evolution.

It had become more distributed than ever and the secular shift to digital workflows had begun in earnest. The disruption has proven to be a tipping point because it brought a new and unforeseen variable, the pivot to widespread remote work into the mix. The business leaders and customers we are serving are looking over the horizon.

They understand that thriving now and in the future goes well beyond connecting people through communication tools. That success and high performance will not come simply from out-communicating.

They know that to ensure their business is prepared to meet the changing needs of their customers to empower their teams to succeed they need instead to out-execute, out-process, out-automate and out-interpret the important signals their business receives every day.

And as enterprises across the globe seek to enhance their ability to respond no matter the circumstance, the value of Smartsheet's work execution platform will become increasingly relevant and increasingly clear. The conviction we have for the value of our offerings and opportunity to transform businesses remains strong.

Though COVID presented itself mid-stride, we are not hesitating but taking steps forward. We continue to focus on international expansion, our government initiatives, increase sales and service capacity, brand marketing and product innovation. COVID is more than an accelerant causing the inevitable to happen sooner.

Market needs and expectations are vectoring in a new dimension. It's not work from the office or work from home, it's a hybrid. It's not collaboration through video or collaboration through work execution. It's a balance of the two. And it's not IT driven digital transformation or business unit led change, it's the two working together.

I believe that there's a strong return on balancing optimism with realism. It's why we're working as best we can to enroll people in what's possible, empower them to achieve and partner in navigating a new landscape. With that let me turn the call over to Jenny to provide additional detail on our financial results.

Jenny?.

Thank you, Mark, and good afternoon everyone. We delivered better than expected revenue, operating loss and net income for the first quarter. Free cash flow came in within our guidance range while billings came in below as we experienced some headwinds from customers impacted by COVID in the back half of the quarter.

Revenue was $85.5 million up 52% year-over-year and billings were $89.9 million, up 30% versus last year. Many large industries and organizations and particularly those on the front lines of COVID exhibited strong demand for our product.

The annual recurring revenue or ARR coming from our Fortune 500 customers grew 48% year-over-year in Q1 and 79% of the Fortune 500 are now our key customers. Contrasting enterprise strength we saw COVID related softness in our SMB segment, which represented approximately 28% of our ARR at the end of the quarter.

And from customers and certain impacted industry segments, notably travel and hospitality and retail. W care deeply about the well being of our customers and as such supported those most impacted with extended terms or adjustments to quarterly and semi-annual billings. This support had a negative impact to our billings growth rate in the quarter.

Our operating loss came in better than expected at negative $13.6 million and free cash flow was negative $28.2 million. During the quarter, our cost structure benefited from savings generated from our work from home environment, as well as lower than planned marketing investments.

Extending payment terms to some customers offset some of the cost savings we achieved, resulting in free cash flow that was in range. Despite the [Technical Difficulty], we believe our long-term market opportunity remains significant.

The ability to deliver real-time workflows and digital solutions to an even more distributed workforce is more important than ever today. Given this belief, we continue to invest in our most important go-to-market initiatives and product plans.

We will host our engaged customer conference as a virtual event on October 1 and look forward to bringing together a much larger global community for an online day of learning and new product announcements.

We make these decisions from a position of financial strength as we remain well capitalized with this $544 million of cash on the balance sheet and no debt at the end of the quarter. Next I will provide more color on our first quarter financial results.

Unless otherwise stated all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentations that was posted before the call.

As we mentioned, first quarter revenue came in at $85.5 million of 52% year-over-year, subscription revenue was $77.2 million representing year-over-year growth of 53% and services revenue was $8.3 million representing year-over-year growth of 42%.

The strengthen in our subscription revenue growth rate was helped by customer demand across many industries including Life Sciences, Healthcare, Technology, Manufacturing and Finance. Our services revenue growth rate accelerated versus the fourth quarter as we delivered on a large services backlog.

As we are already set up to work in a fully digital environment, our team was able to deliver on customer training and professional services remotely. Turning to billings, first quarter billings came in at $89.9 million.

As mentioned, we saw an impact from COVID on larger customers and impacted industries and on the SMB segment, which we defined as organizations with fewer than 200 employees. In addition, when requested and where appropriate, we offered COVID billing accommodations to help with customers' cash flow constraints.

These accommodations and other related actions due to COVID reduced our billings by approximately $2 million. For the quarter approximately 89% of our subscription billings were annual with 8% monthly. Quarterly, semi-annual and multi-year billings represented over 2% of the total.

Turning to reported metrics, we now have 9576 customers paying us $5,000 or more per year, 1040, paying more than $50,000 or more per year, and 391 now paying us $100,000 or more per year. These segments grew 41%, 101% and 107% versus a year ago respectively, and now represent 77%, 40% and 26% of total ARR.

Our domain average ACV grew 45% year-over-year to $3,866 as we continue to see expansion for more licenses and additional products to plan and track work, build workflows and create dashboards for visibility and reporting. Our net dollar retention rate declined three percentage points from the prior quarter to 132%.

The decline was driven by lower net expansion rates, while the churn rate improved by a 10th of 1% compared to the end of the prior quarter and rounded up to 8%. Due to the ongoing impact from COVID, we expect our net dollar retention rates to trend down during the second quarter to the high 120s. Turning to gross margin.

Our total gross margin declined one percentage point to 81%, driven by incremental costs related to our migration to the public cloud. We are ahead of schedule to complete this transition during the fiscal year and expect our gross margin to trend towards our long-term target of [Technical Difficulty]. Turning to operating expenses.

Sales and marketing expense as a percentage of revenue was 58%, one percentage point better than both the prior and year ago quarters. Research and development as a percentage of revenue was 24%, six percentage points better than the prior quarter and eight percentage points better than the year.

And general and administrative costs as a percentage of revenue was 14%, one and two percentage points better than the prior and year ago quarters respectively. The scale and operating costs during the quarter was driven predominantly by lower than planned personnel, travel and marketing expenses.

Operating loss in the quarter was negative $13.6 million and free cash flow was negative $28.2 million. Operating loss was better than expected due to reduced spend in several areas mentioned above. Our personnel expenses represented 67% of our total expenses.

We have slowed the pace of hiring, but intend to continue to add headcount where needed to support our planned investments. Now let me move on to guidance. While we remain bullish on our path to $1 billion in revenue, we expect that COVID will continue to impact the demand environment, especially in certain segments in the near term.

So against this backdrop, we are adjusting our full year top-line revenue guidance assuming that COVID will continue to be a headwind for the remainder of the year.

As Mark mentioned earlier, we will continue investing against our key initiatives, notably our migration to the public cloud, new enterprise capabilities and functionality in our platform and product, our brand and engage conference and systems to scale our operations.

For the second fiscal quarter, we expect revenue to be in the range of $86 million and $87 million, billings to be in the range of $91 million and $93 million, operating loss to be in the range of negative $21 million and negative $19 million and non-GAAP net loss per share to be between $0.18 and $0.16 based on weighted average shares outstanding of 119.5 million.

Our free cash flow is expected to be in the range of negative $11 million and negative $9 million.

For the full fiscal year, we expect our revenue to be in the range of $360 million to $370 million, [Technical Difficulty] million and negative $55 million and non-GAAP net loss per share between $0.54 and $0.45 for the year based on approximately 119.5 million weighted average shares outstanding.

Due to our limited visibility into the back half of the year, [Technical Difficulty] full year billings and free cash flow guidance, however we are providing [Technical Difficulty] given the size of the market opportunity and our decision to invest [Technical Difficulty] we expect our free cash flow burn for fiscal year 21 to exceed the low end of our previously issued guidance of negative $11 million.

I will now turn it over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Your first question comes from Arjun Bhatia with William Blair. Your line is open..

Mark, you mentioned this in your prepared remarks briefly, but I was hoping you could just elaborate a little bit on some of the stabilization trends that you saw in May. And if you could specifically maybe talk about how some of the pipeline dynamics have evolved over the past handful of weeks, that'd be great..

Yes. I think throughout May, we saw a good improvement in terms of opportunity development, to a point where we're exiting the month with the most significant we've had -- pipeline we've had leaving any month in the history of the company. And this isn't just at the enterprise layer. This is really across the stack.

Quarter-on-quarter every single one of our customer segments in terms of company size, increased in ARR and both our commercial reps and strategic pipeline and now we need to go and execute on..

And then, a quick follow up. I know essentially since the IPO, there's been kind of this focus on moving to enterprise and investing in both the product and kind of the go-to-market function.

How do you think that the current environment impacts that? And when we look into the other side of this, should we think of Smartsheet as accelerating on the enterprise track that it's been on? Or do you think it's going to be relatively steady and the trend that it's -- that you've been performing so far?.

Well, I'm very grateful that we made that decision a couple years ago, because as we talked to customers who are looking to make purchases at scale aren't happening much. Your ability to connect to real business value and articulate how process can change, now customer experience changes that matters today.

And the transactions we've closed some of which were material in the core significant size were hooked to those types of business processes and business impacts. So I'm quite pleased with that continued move.

The customer signal we've heard in the prior -- couple of years around our focus in developing elite experiences for marketers, for example, these are all getting us conversations that a couple years ago we weren't getting. So I'm very pleased that we're deepening the offering. I'm pleased that we can speak at a different elevation within companies..

Your next question comes from David Hynes with Canaccord. Your line is open..

Mark just trying to think through kind of where you've seen some of the impacts, are there certain use cases that used to drive more growth that you haven't seen as much momentum in or is it really just SMB and certain verticals that have been challenged?.

I think the -- it's really some of the decisions that we go through as a business, we're inspecting every investment decision north of 25,000, within our own [business as] [ph] well.

So the transactions that are flowing freely are the ones that are clearly business --clearly articulated, have a business exact sponsor, again, we're talking about the transactions that size, business is still happening on the micro transactions, right? But if anything has sort of a five digit number and north that is having a different closed process than it has had in the past.

So we've adjusted our mechanisms. We've adjusted how we work with our sales reps and how we check down as we go through that pipeline with them. So what we saw in the SMB side, we saw a little bit more pronounced, the full churn on the SMB side.

And at the larger companies, it really wasn't a change in full churn or overall loss rate actually improved on the quarter. But we did see the delay or the deferral of some decisions.

I think we're seeing companies try to figure out when is reopening going to happen? What's the shape of the recovery? And a lot of people are still asking those questions much like we are as a provider..

And I might want to just add a little bit to what just Mark said, from an industry perspective, there were a number of industries whose dollar net retention rate increased in size.

So if you think about health care, telecommunications, finance, education, we actually saw acceleration in the dollar net retention rate, where we saw deceleration more pronounced, we're in the sectors that truly are being heavily impacted by COVID.

So the retail industry as well as travel and hospitality both declined and that influenced the overall outcome of our business results..

And then Jenny, just, I want to make sure I heard you right on the billing shortfall in the quarter. So it was 2 million attributable to flexible payment terms, gross attrition was unchanged and any further delta that would have been driven by lower up sell.

Is that the right way to frame it?.

That is exactly it. Yes..

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

Couple from my end. Just think about the withdrawal of guidance for the rest of the year and you noted limited visibility. Help us kind of rank, where that you have the least visibility.

Is it on potential for further churn? Is it continuing and when I say guidance, billings guides, right, is it continuous -- continuing changes to billing payment terms, or is it just straight up uncertainty around new logo acquisition?.

I think a lot of the guidance is influenced, Stan, by what we're looking at the schedule for things coming back online. And as we look at the hiring decisions, we're making in the first half, we have very good visibility into what's happening this month and the next month.

In terms of the second half, the decision to increase quota carrying reps is going to be partially a function of what we see on the macroeconomic side, what we see within our state of Washington, New York, Boston, Sydney, London, these are all things that are to be on or to be still unfolding.

So it is more about our ability to react to those motions than it is any other major determinant..

Maybe just on the Q2 billings guidance. Help me reconcile essentially your expectation for net revenue retention to be somewhere in the high 120s. And the midpoint of billings, let's call it 16%. Is the Delta there a function of continuing payment term changes, then just get direction and help me close that gap..

Yes. So we're continuing to get requests from customers for either extended payment terms or request for quarterly billing. I will say that in May the percentage was down, which I think is a good sign. What's really driving the billings guidance right now is the April results, it was a significant change from what we had seen in March.

Businesses are still closed, small businesses, certain industries, people still aren't flying for the most part. So it's just reflective of the pain that we're seeing in certain customers and their ability to purchase right now..

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

I guess Mark, I know the sample size is probably small, but do you see anything differently in the sales trends internationally than domestically here in the United States?.

So if you look at the revenue growth rates internationally, we saw acceleration in Q1 in EMEA, very healthy, and in the U.S. We saw a slight one percentage point, deceleration in Asia. And then the other markets, the Americas markets went down a little bit more. That's sort of the trend that we saw.

In general, if you look at the dollar net retention rate, Mark talked about the three percentage point decline, that was really a global phenomenon. So whether you were looking at the U.S. or international, customers who spend more than $5,000, customers who have spend less than 5000. I think this pandemic is really affecting everyone to some degree..

Got it helpful. And then from a follow-up question perspective. We've obviously seen a lot of different technology tools benefit from a work from home strategy and I think most of us on this call will believe that Smartsheet fits in that bucket, obviously, in the use cases.

But as you've had conversations with customers during the last two months in this period, are you seeing the decisions become more strategic get more higher level kind of manage their [CIO] [ph] individuals be a part of these conversations? Or is it still more of a department level sale in general?.

I think it's a function of the size of the transaction. And as you move into six figures and north that's typically the key driver on who's participating. In terms of the tools and technologies used, I think we all reacted to being at work-from-home.

So the first stop was, can we communicate with one another? And I think what we will see is that as we talked previously around the different phases of what people will be deploying, I do anticipate that people have now "Mastered" the ability to communicate and they will be looking for subsequent technologies to benefit them..

Your next question comes from Brent Thill with Jefferies. Your line is open..

Jenny, last call you mentioned you wanted to hire more quota reps this year, then the last, is that still on track and Mark comment about the record pipeline?.

It is. Yes, we hired 50 reps in Q1. So that was very good. We are going to hire a few more in Q2. And then, as Mark mentioned, we're going to step back and see where the landscape is, how things are opening back up. But yes, we've hired reps this year and we'll continue to do so based on the demand that we see..

And Mark just to circle back to the May comment you made, I think a number of tech companies that we all work with has been saying things are getting better day by day, week by week and you can see it across many of the industries we all track.

I guess when you look in May, would you consider this to be kind of a normal month from what you've seen historically, and this is really just a more of an April issue, everyone's just trying to figure out how you would frame the differences that you saw this past month or the month before?.

I think there was a very concerted effort on our sales organization also to accelerate out of April, like people got on their horses and went and engaged customers. The good news was customers were picking up the phone conversations were being had.

And the quality of the pipeline being generated, I would say is going under deeper inspections than in prior quarters. The key is for all the companies who are speaking about pipeline development. Now it's your job to convert that pipeline, right? So I think we're very pleased to see the team's activities in May.

And now we need to do the same this month and then convert on the business that's in front of us..

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

Hey, guys, thanks for taking my question. And hope you're staying safe. I guess maybe first Jenny, I'm trying to figure out what exactly are the payment term adjustments that you're making that are impacting billings and it's primarily for the SMB cohort.

It sounds like, I'm trying to reconcile the no change in dollar churn with the payment flexibility. Are you basically not seeing them change their ACV commitment to you, but just shifting that maybe from a TCV perspective? Or is there something -- there's some other nuance? And then I've got a quick follow up, Mark..

Yes. So we're seeing some requests for extended payment terms. So if you think about an airline, they're not generating any revenue right now, they still want to use us. They don't want to downgrade. Even in some cases, they want to upgrade for something they need us for. So we're seeing requests for typical terms or 30 days.

And in those instances where folks just don't have money right now to pay us because their businesses are shut down, we've extended 90 in some cases, 120 day term. And there were about 150 customers, where that was relevant.

And then, we have some others that just say, I'm still generating revenue, but not as much could I pay quarterly versus pay annually. And so we've been extending some of those offers as well..

Okay. So I guess what is happening to the SMB cohort, if the churn is not changing and really, again, the ACV is not changing.

What is changing for within the SMB cohort, what is the impact you've actually seen?.

The full churn out on the SMB cohort did go up in the quarter. So the reaction to reaction to SMBs in the COVID environment was that we saw more full churn than we had prior. So there was an increase.

As a company in aggregate as a company, our overall loss rate improved slightly, okay? So we have a segment statement within the SMB segment, loss went up full loss window, that's full churn..

Got it. Okay.

And so that's dollar -- that's encompassing dollar and logo and I guess, are you seeing Mark a change because -- is there a change in engagement, I guess is what you're seeing in the SMB customers as well like engagements going up, but temporarily monetization is going down and that could revert over the next few quarters if the situation does improve..

Yes. I mean, unfortunately, when someone attrite, the engagement goes to zero, right? As a population, we saw engagement increasing within our larger company segments, and stay level and in some segments decline based on industry, we saw that occur.

So, overall when we release for instance, COVID hits, templates issued, spike in trials, like people coming to the site, people engaging, some of that results in the pipeline we've created.

But in terms of the activity level within the SMB segment specifically, I would say we saw more pronounced engagement level within our larger time than we did our SMBs..

I'll give you one example because I have to prove every single one of these accommodations. An event marketing firm, small business, they do weddings. My daughter was getting married in September, it's been pushed out a year now. She's requested a COVID accommodation because she literally has no business right now. She loves Smartsheet.

She needs us for all of the management of her programs that she does, but she just has no business right now. So she needs to get her business restarted. And then I expect to see her fully engaged in our product again..

Okay. And sorry, just one more, I'll just sneak in.

I guess, Mark when you're seeing these customers attrite, is this destruction or is it going to a different vendor?.

In a lot of these cases, the vast majority of these are vendor citations. I mean, we look at this data critically. And the COVID mentions we saw more pronounced uptick due to business challenges, inability to operate continue operations. That was the largest uptick we saw in business disruption. Yes..

Your next question comes from Keith Bachman with Bank of Montreal. Your line is open..

I want to follow on the thread a little bit, the past couple questions and just -- I'm stuck on the billings guidance when you're effectively moving from a situation in April where around numbers your billings were 30%. And moving to a situation where you're guiding to 15 to 16, so roughly cut in half.

And I'm trying to piece together what you said about May. You didn't say that there was a material increase, but it certainly sounds like stabilization. So I'm just trying to thread together why billings, it's understandable why I would move lower because April imagine was probably the bottom, but you've talked about stabilization in May.

I'm trying to thread why that billings number would get cut in half versus moving lower than 30%. You've explained some of the billings terms but that certainly doesn't seem to cover anywhere close to that magnitude of a change.

So is there any other -- anything else you could point to in terms of the billings number? And then, I have got a follow up question..

Yes. So what we saw in May was a slight improvement to April. And we did see demand for our product in terms of our pipeline increased nicely, people do want to buy. So that's all good. But what we didn't see is, we're not back to pre-COVID selling levels yet.

And so, I believe that as we begin to open up, it's going to be a very good thing because I know that there are people who want to buy the product, but until that actually happens, we're just assuming June and July is similar to what we see in May and if it's better, we'll be..

Okay. Maybe just taking it up a level then as you indicated that the free cash flow guidance is rescinded. Understand you gave some parameters around it, but just talk a little bit more about your longer term targets and I think most investors had assumed that you would turn free cash flow positive, as we've looked out over the course of next year.

But does everything get pushed out or how should we be thinking about the free cash flow objectives that you have, as you look to get through the COVID situation?.

I think as Jenny remarked, as we look at our -- passed to [a billion] [ph] within our three to five year frame, I think what COVID has done, it pushes a little deeper into that three to five year frame. But I mean, we remain -- have high conviction on our ability to generate operating margin at that level. We are fully invested in this.

As we come up with our models for the second half, there are a wide variety of scenarios, right? And until you see evidence in terms of things happening within our locales and within businesses coming online, those models are, again, which one do you want us to choose, right? So this is what we're planning.

So what we want to do is, we want to be in a position to maintain optionality where we can respond, we can invest further whether it be on a marketing dimension, a sales rep dimension, what have you to be able to go after that.

But in terms of the impact to our to our long-term business prospects, solving for the decade, not the second half of the year, right? So we are really trying to stay very true to that. And I think we are still in a position where we feel we can hit within that three to five year window. It's a continuation of our past comments..

Yes. I would just like to add that I really feel that this situation with our billings number this quarter, which impacts collections for the short-term, is really a COVID related issue.

When we gave guidance in mid-March, we did not see any impact of this coming, right? We didn't even know that we were all going to be sequestered to our homes and that we were going to be continued to be sequestered to our homes until this changed. So our business until March 25 was performing fine performing really well.

What was saw late March and into April was really this, excuse me, I don't mean to say that. But, other businesses going, we're not airbnb, no one is going to stay at home, no one is flying, no restaurants are happening. That kind of stuff is what really impacted our business.

So when we get through this, I feel pretty confident that we're going to see a lot better performance..

Now the good news is, you look at the leading indicators, look at trials, look at number of organizations trialing this on a monthly basis, look at the pipeline across all segments, if I was seeing softness on that front that would have me more concerned. And so we're going to be there to serve the customer.

We're going to continue to improve the product. I do believe that the market will recover and we need to be best positioned to own that market when it does..

Your next question comes from the line of Walter Pritchard with Citi. Your line is open..

I'm wondering -- two questions, first, just on the private companies in the space, and there's been a pretty aggressive, I think push up from the low-end.

I'm wondering, you're seeing that sort of moderate as you've moved into this environment? And I've a follow up?.

Yes. Well, I'll take that one. We really haven't seen a change in the trend that we've seen in the -- as we've reported on the past. We continue to see the vast majority of our transactions are replacing the status quo.

We have had a couple of situations where we've had large customers that have consolidated to Smartsheet and actually pushed out a number of smaller providers that had small footholds in those brands. And those are pretty large brands. Both of those happened in this quarter. But yes, we're not seeing really any encroachment.

We still feel like we're super early days and it's very much a land grab..

Got it.

And then, Jenny, just I think everybody kind of dancing around this question of the affected industries, could you maybe highlight for us I understand SMB is an overlap, but what percentage of your revenue is from these industries like retail, hospitality, event planning and so forth, just to help us sort of understand the magnitude of what their impact is?.

Yes. So we reported that last quarter, it was roughly 4%. But SMBs is kind of in other industries as well. It's not just retail and travel and hospitality. Go ahead..

I was just going to add one thing to that.

I think one of the things that's important understand is, across industries and companies size, the disruption caused by COVID has caused almost every company to take a step back in the uncertainty they see in the market and really be thoughtful about how they spend because nobody knows with certainty what the recovery curve looks like.

And so I would say that we saw companies across the board, delaying decisions and taking longer and contemplation. And one of the advantages of our business model is, we have a relatively short for a lot of our transactions sale cycle.

But when companies start to slow down, that shows up a little bit more quickly in the numbers and I think that's what we're seeing this quarter.

But the pipeline build, the trial build, all those things give us a ton of confidence that as certainly emerges in the recovery path, we expect to see a lot of those -- that hesitation to unlock and we expect the trends to improve..

Our next question comes from Rishi Jaluria with D.A. Davidson. Your line is open..

I hope everyone's staying safe out there. I wanted to start by asking a little bit of a philosophical question. So in the prepared remarks, Jenny I believe, you'd mentioned that you're slowing down the pace of hiring a little bit still obviously continuing to hire in areas that matter right now.

Maybe help me understand why not be more aggressive in hiring, given the huge opportunity you have ahead, given the big TAM that you're going after. I think what Marc Benioff said one of the regrets he has from 08/09 was not -- was taking his foot off the accelerator.

So maybe want to understand how you're thinking about that and the investment philosophy in this environment. And then I got a follow up..

Yes. I think in aggregate, we look at very few things now. You're right.

So when I think about investing in engineering and innovation and the pipeline, we have to deliver on our product roadmap to unlock enterprise and mid-market growth, like hammer down, like we are hiring people, we are innovating, we had an incredibly productive spring, we're having an incredibly productive spring.

I think one needs to be pretty darn thoughtful when you think about adding quota carrying reps, especially people who have compensation online, right? Make sure that the team members you have the 60 or so people we've just added with quota carrying are well served, that they have good territories that those territories are producing that we are very mindful of that.

So we are aware of pipeline conversion, new territory development, government, all those pieces go into it. On the marketing dimension, if we decide to push a brand spend, a portion of brand spend into a quarter when a market reopens as opposed to when a market is closing, that seems like a prudent investment.

So these are all puts and takes they were making. But I think back to the Benioff comment, absolutely do not stop innovating because this category is alive and well. You need to be there with the best product and we're continuing to do that..

And then Mark, you said something really interesting in prepared remarks that you think we're going to be in kind of hybrid work environment. And I completely agree with you on that. You also mentioned that maybe some of the delays and deals are from people waiting for office reopening.

I guess from a market perspective, is there kind of a sweet spot where Smartsheet's most valuable in a hybrid work world versus a purely remote one, or a purely in the office kind of physical presence or environment? Thanks..

Yes. I think when we think about the transition, it's -- I think the reopening and sort of the deal flow and the deferral is less about whether someone's in the office or not, and more about their confidence in the economic situation of their business. So I just wanted to clarify that. The notion of hybrid on all those dimensions I mentioned.

I think people often like to think there's one thing that's going to make it all work, well, it's never quite that simple in life, right? Remember back in the day, 10 years ago, when it's like, it's all about my mobile phone and my mobile mail and my mobile calendar say, well, it's a little bit more than that.

And that's when our category merged like eight years later, right? So when you think about this work from home, work from the office, I think it's not quite as clear cut like people will be going back to the office, will it be different? Absolutely.

And I think people are going to need to be bridging between remote technologies and office technologies connecting people across companies. So I just wanted to clarify, though, that it's less about the work from home or not and more about the economic condition of customers.

Gene do you have any?.

I'll add just one thing to that and that is that I think we saw evidence of -- in a number of sectors, particularly technology where you have folks working from home and seeing tremendous value in moving more workloads on the Smartsheet side.

Actually increases in usage in those segments where I think the companies had better certainty on their business prospects. So I think that reinforces Mark's point that a lot of it depended on how confident the company is and where their environment is.

The other thing I would add is, I think that that this pandemic actually created a great opportunity for us, it was realized across a number of customers where they really appreciated the agility and speed at which we can help them configure or reconfigure business workflow and business process to meet an emerging demand or a changing business need.

And we had customers that were leveraging Smartsheet to reconfigure supply chain. We referenced some of the COVID use cases around testing and coordination on both managing government activities as well as companies switching to remote work. So being able to adapt quickly and offering that dynamic platform, I think is a real differentiator for us.

And I think we actually gained a lot of mindshare through this process..

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

The first question just relates to, we've been talking to a lot of your customers been really helpful for our research. And I would say, we can confirm they're using your software more than they had in the past cross whatever the KPI you'd look at from an activity standpoint.

When we talk to them, though, and what I'm curious about in terms of kind of thinking about sales playbooks, some of these capability based solutions, whether it's the accelerators dynamic view or control center, sometimes they don't know about them, or, or maybe we just didn't ask the question right.

But it seems like you could turn dials with some of these businesses that are using it aggressively and are actually resilient. What are you doing to maybe go in there and when you're seeing those aggressive activity levels, maybe they didn't know about dynamic even what that could do.

So what are you doing right now because of what's going on is an opportunity around the heavy users that do have some budget and will buy those add-ons. How's that going? And then, I had a follow-up..

I agree with your observation Terry and I would say that we are running plays both on product marketing and sales motion side to better educate and identify how customers identify opportunities and understand how they can leverage capabilities.

I would also tell you that we have a very significant investment in flight right now on the product development side to improve discoverability and make it much easier for the average user to understand what's available to them and more easily enable that capability.

So I think I think it's really a huge opportunity for us, but it's a balanced approach between go to market and actually product improvement..

And I guess the question Jenny, I think I had asked about this last quarter because, kind of the way you all would quantify capability based revenue generation it could change going forward and part of it could be this new premier SKU. I see it now on the website. So it's a separate kind of product packaging.

How is that trending? Because I could see where, again, for businesses that are more steadier, it's a lot easier to just buy a bunch of stuff, including connectors in one packaging as opposed to the ala carte. So how's it playing out with the premier SKU? Thank you..

Yes. We've had increasingly strong demand for the enterprise premier SKU. A lot of strength in Q4, we sold less of it in Q1, but that's very typical because people are buying into it as their year end start or end and then absorbs it in the first quarter..

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

Hey. This is Pinjalim sitting for Mark.

Mark or Gene, as you have added automated workflows capabilities about a year ago, based on what you've seen maybe in this last year, do you think Smartsheet could become the workflow execution hub within an organization over time? And are you seeing any kind of a relationship between, say retention and those customers using the workflow capabilities?.

Yes. Well, so I would to your first question, do I think we can become the workflow hub? Absolutely. And I think we have seen almost a doubling in the number of automated workflows triggered over a 30-day period and it's in the millions now. We don't disclose all the specific numbers, but we're seeing really, really nice growth there.

And that continues to accelerate month over month. And as you mentioned, automations we started two years ago, with automations with very simple single step automation. We now support multi step much more complex automation.

And we have some new capabilities coming later in the year that will allow us to even move further up the capability stack, if you will to serve both our power users as well as IT and citizen developers to orchestrate and manage workflows. And but importantly, the place that we will play there is really managing workflow that crosses systems.

And the demand signal we hear strongly from customers is, there's a lot of work that they manage in Smartsheet, that they want to be able to drive based on either intake from other large systems of record like ERP or CRM, or be able to report back to those systems on the results of a workflow that's run in Smartsheet. So we are super bullish on that.

And I think that the cost, value, speed and agility of deployment are going to be real differentiators for us in that space..

And Jenny, just on the guidance on billings, obviously, you talked about the net expansion or net retention rate being 120s.

What are your assumptions? Or what did you see in Q1 and what are your assumptions on net logo ARR, is that -- did it took a big hit in Q1 and what are you thinking for the rest of the year?.

When you say net logo ARR, if you look at -- overall logos increased for the quarter and if you look at dollar ARR as Mark mentioned earlier, ARR increased as well across every industry..

Your next question comes from George Iwanyc with Oppenheimer. Your line is open..

Could you possibly give us a bit more color on what you're seeing in the government vertical and with any FedRAMP benefits?.

Yes. So the pipeline is continuing to go as we said last quarter. We're looking for really the big breakthrough deal that unlocks it. I think the work that we're doing on the DoD side on the [IO-4] [ph], will provide a couple of new unlock opportunities for us. And again, we will report out as soon as we have one of those.

The team in terms of its -- the team we have in place in DC, I feel very good about. I think from an operation standpoint and offering standpoint, a big piece around Control Center, which is really one of our anchor capabilities, is on the call. And that really allows us to go into some very, very compelling use cases for those government prospects.

The number of transactions we're doing continues to go with multiple agencies, north of a million dollars ARR now out of that Fed Gov platform. So we've definitely planted seeds and we're expecting a good outcome this year..

Just following up, with all the near-term COVID related disruptions you're seeing, is there anything, especially with your larger customers, that you're seeing in the conversations that suggests you might be maybe a second way beneficiary from all the changes that have to happen..

I don't think your customers are articulating it quite that explicitly. I think we remain centered on the transformation of their workloads into modern mechanisms. And they're not delineating between we're doing this first and that second, that's really our perspective on people's notions.

So again, just reinforcing the importance of us to connecting to things that really matter. The question earlier around, is there correlation between important workloads and being more sticky or having more success, I think, absolutely.

And one of the reasons why as Gene said, we're investing in this cross system integration capabilities so that CIOs can look at their systems say holy smokes, I've invested all this money in my ERP system. How can I extract more yield from it? And we're starting to come up with these notions not just to do automation within Smartsheet.

But how do you actually get unexpected yield from those other systems? That is a theme that is resonating really well. And we're now on the cusp of being able to respond to that..

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

Mark, I would love to get some color on what you're seeing in terms of awareness trends, and specifically, recognition of collaborative work management as a category and Smartsheet as a brand.

You're doing your investments here, what are you seeing in those trends both secular and I'm curious in the last three months, and just to add to that, and how is that translating to lead gen as well. What are those trends? Thanks very much. .

Yes. I was really pleased to see with Anna, our CMO having been on now for a little over a year. We've continued to check point studies in terms of aided and unaided recall within our category we are leading in terms of on both fronts, aided and unaided. And that is up very nicely over the course of the year.

So I'm really pleased to see that on some of our larger transactions, we saw sponsors who had not been users themselves with Smartsheet make statements around, oh, yes, that's a brand. Yep, we're familiar with it. We've heard about it. So even if they can't perfectly articulate what it does, having softened that beachhead, really important.

So we're really pleased with those results. In terms of the ongoing investments, as Terry asked -- mentioned a couple minutes ago, the importance now is to say, how do you articulate and bring the full value of Smartsheet to bear? It's not just are you aware of our name? But what can it do for me? So we're entering that next phase now.

And I think we've set some really good foundation to build on though..

I would just add to that over this quarter we've spent some time with some software industry analysts and they have reported out a market increase in inquiries around collaborative work management. And I think at least a signal we're getting from neutral third parties is that there's an expanding awareness and appetite.

And interestingly enough, you saw us introduce a number of capabilities targeted at marketing departments, the number one category, or source of those inquiries within the companies or function is marketing..

And our last question comes from Brett Knoblauch with Berenberg Capital Markets. Your line is open..

Can you just talk about how capabilities made accelerators perform in the quarter and how that performance mileage are different from the core business? And then just a follow-up on, maybe the timing of these payment combinations you give them to customers? Was this mainly in, a particular week or in April? And have you seen that meaningfully kind of decelerate in terms of number of customers asking for payment combination?.

Yes. I'll start with your second question. So when we didn't start seeing any of these until the third week in March. And the third week in March, we started to see them and they were most pronounced in April.

And like I mentioned earlier, we had about 150 customers that asked for and were given extended terms of the 90 days -- 90 to 120 days, I mean about 33 customers that asked for quarterly billing terms..

And on the capability side, we saw activity across our connectors to systems of record. We saw dynamic view data uploader. We really had all products firing in Q1 that was sequentially on the heels of an unbelievably strong Q4. And so we haven't seen a disinterest in any one of those categories.

And I would expect the capabilities and sort of the building on a foundation someone has to again, reignite as things open up a bit. I think right now, people are really looking at core licenses, making sure the bases are covered.

They're interested in learning about those capabilities, but I think some of the deferral decisions are on some of those ancillary products..

With that, I will turn the call back to the presenters for any closing remarks..

Great. Well, thank you for joining us and we'll speak to you again next quarter..

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