# Smartsheet Inc. NYSE:SMAR

## Earnings Call

_Thursday, September 7, 2023 9:30 PM GMT_

### CALL PARTICIPANTS 2

 PRESENTATION 3

 QUESTION AND ANSWER 7

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## Call Participants

....................................................................................................................................................................

**EXECUTIVES**

**Aaron Turner**
_VP of Investor Relations &_
_Treasurer_

**Mark P. Mader**
_President, CEO & Director_

**Pete Godbole**
_CFO & Treasurer_


**Pinjalim Bora**
_JPMorgan Chase & Co, Research_
_Division_

**Robert Edward Simmons**
_D.A. Davidson & Co., Research_
_Division_

**Scott Randolph Berg**
_Needham & Company, LLC,_
_Research Division_

**Tamjid Md Moinuddin**
**Chowdhury**
_Guggenheim Securities, LLC,_
_Research Division_

**Terrell Frederick Tillman**
_Truist Securities, Inc., Research_
_Division_

**Unknown Analyst**


**ANALYSTS**

**Brent John Thill**
_Jefferies LLC, Research Division_

**Ethan Bruck**
_Wolfe Research, LLC_

**Jackson Ader**

**Jacob Roberge**
_William Blair & Company L.L.C.,_
_Research Division_

**Jason Vincent Celino**
_KeyBanc Capital Markets Inc.,_
_Research Division_

**Joshua Phillip Baer**
_Morgan Stanley, Research Division_

**Keith Frances Bachman**
_BMO Capital Markets Equity_
_Research_

**Michael H. Berg**
_Wells Fargo Securities, LLC,_
_Research Division_

**Pete Newton**
_Barclays Bank PLC, Research_
_Division_


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## Presentation
....................................................................................................................................................................

**Operator**

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would
like to welcome everyone to the Smartsheet Second Quarter Fiscal 2024 Conference Call. [Operator
Instructions] Thank you.

Aaron Turner, Head of Investor Relations. You may begin your conference.

**Aaron Turner**
_VP of Investor Relations & Treasurer_

Thank you, Emma. Good afternoon, and welcome, everyone, to Smartsheet's Second Quarter of Fiscal
Year 204 Earnings Call. We will be discussing the results announced in our press release issued after the
market closed today. With me today are Smartsheet's CEO, Mark Mader; and our CFO, Pete Godbole.
Today's call is being webcast and will also be available for replay on our Investor Relations website at
investors.smartsheet.com. There is a slide presentation that accompanies Pete's prepared remarks, which
can be viewed in the Events section of our Investor Relations website.

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

All forward-looking statements made during this call are based on information available to us as of today.
We do not assume any obligation to update these statements as a result new information or future events,
except as required by law. In addition to the U.S. GAAP financials, we will discuss certain non-GAAP
financial measures. A reconciliation to the most directly comparable U.S. GAAP measures is available in
the presentation that accompanies this call, which can also be found on our Investor Relations website.

And with that, let me turn the call over to Mark.

**Mark P. Mader**
_President, CEO & Director_

Thank you, Aaron, and good afternoon, everyone. Welcome to our second quarter earnings call for
fiscal year 2024. While Pete will provide additional details, I'd like to highlight a few areas of our Q2
performance and share continued progress in our leadership of the enterprise work management market.

Smartsheet revenue for the quarter exceeded our guidance and grew by 26% year-over-year to $235.6
million, and billings grew 18% year-over-year to $243.1 million. In Q2, we generated non-GAAP operating
margins of 8%, and free cash flow was $45.5 million. We ended the quarter with annual recurring revenue
of $933 million and more than 13.4 million Smartsheet users. 75 customers expanded their Smartsheet
investment by more than $100,000 in Q2 and 232 companies expanded by over $50,000. Additionally,
we closed 3 transactions over $1 million and now have 51 customers with ARR over $1 million. Enterprise
expansions for the quarter included Airbus U.S., Hewlett Packard Enterprise, Iron Mountain and Pacific
Life Insurance Company, among others. And we saw new customer wins at organizations such as Breville,
Equity Group Holdings and New York University.

We now have over 9,400 enterprise customers, which we define as organizations with over 2,000
employees. These customers make up over 50% of our ARR and are posting NRRs well above our overall
rate. Our execution within the enterprise continues to be recognized by industry analysts and peer
review sites. On the heels of being named the leader in Forrester's Collaborative Work Management Tools
Wave, IDC published a report in July recognizing Smartsheet as a vendor who shaped the year in 2022.


-----

Additionally, Smartsheet received the distinction of being a customer's choice in the 2023 Gartner Peer
Insights Voice of the Customer in the collaborative work management market segment in Q2. Smart
received the highest rating and the highest percentage of customers willing to recommend the platform
at 98%. Our portfolio of capabilities continues to be a core differentiating factor in our success in the
enterprise. Our customers leverage our capabilities to attach the Smartsheet platform to mission-critical
projects, programs and processes. In Q2, capabilities were present in each of our top 10 expansions.
Smartsheet Advance, which is a bundle of our capabilities, had a strong quarter as well. We closed 216
Advance deals in Q2, an increase of 50% versus Q2 of last year.

To expand on this, here are some additional details of our 3 largest deals this quarter. A Big 4 consulting
firm signed a 7-figure deal with us to streamline client engagement, simplify internal and client status
reporting and automate a variety of processes across the organization. With Smartsheet Advance enabling
the firm's business transformation, this customer estimates they've already saved $7.5 million across 590
projects completed as of May of this year. Importantly, Data Shuttle is allowing them to pull information
from disparate data sources to quickly create reports without needing to develop costly direct integrations
with proprietary systems. They'll also use Smartsheet to more effectively bid on engagements with clients
and more efficiently plan, track and manage resources and budgets. This firm's increasing client-facing use
of Smartsheet will also showcase our platform to their portfolio of blue-chip clients during engagements.

We also signed a 7-figure expansion with a large global retailer where Smartsheet is being used to
drive business transformation across multiple divisions. In its fulfillment centers, Smartsheet is helping
leadership manage strategic planning and operations. And as they grow their brick-and-mortar locations,
they're using Control Center to help manage new construction and store remodels. Smartsheet Advance
also plays an important role in the company's retail marketing organization, where it supports their budget
management, marketing and creative operations. Also in Q2, we closed a 7-figure Brandfolder deal with
a Fortune 15 company. This customer will use Brandfolder to consolidate its tech stack while enabling
marketing teams to eliminate manual processes and streamline the storage and management of digital
inventory and video content. Brandfolder will help power their websites and mobile apps to reduce version
control issues and help the team deliver a better online experience for customers and more efficiently
generate millions in online revenue.

As the leader in enterprise work management, our customers are running mission-critical programs and
processes at significant scale on Smartsheet. Whether that's tracking the sourcing of millions of parts for a
manufacturer or running programs with tens of thousands of projects, the Smartsheet platform continues
to be the choice of customers needing to operate at enterprise scale. Scale will continue to be one of our
biggest differentiators. Our platform's ability to scale allows our customers to leverage Smartsheet to
build sophisticated solutions that run the kind of complex workloads that enable organizations to achieve
their goals. Over the past 12 months, we've gone from supporting hundreds to thousands of concurrent
projects with every Control Center blueprint. Very soon, customers will be able to run tens of thousands of
concurrent projects per blueprint.

Another element of scale is our commonly used and powerful computational feature, cross-sheet cell
linking. It enables our customers to aggregate data across thousands of active and completed projects
to build reports and dashboards to communicate program or portfolio health and progress. We increased
the cell link's limit from 30,000 to 0.5 million per sheet. And we're aiming to achieve another 10x increase
in scale next year to get to 5 million cell links per sheet, so customers can manage more interconnected
projects.

Additionally, in Q2, platform improvements resulted in formula computations running 10x faster. In sum,
these enhancements enable our customers to now manage significantly larger programs and portfolios,
quickly aggregate and compute data at scale and visualize information in real time to achieve great
efficiency across their global operations. And recently, we also made it easier for our customers to find
and derive value from 2 of our most used premium capabilities: Data Shuttle and Dynamic View. Through
self-discovery, our customers can now easily get hands-on experience with these powerful and popular
capabilities without needing to engage with a salesperson.


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Data Shuttle automates data movement between other systems of record and Smartsheet so customers
can quickly visualize and act on this data in their projects, programs and processes. Dynamic View power
secure and confidential workflows across vendors or internal processes by enabling personalized views
of the data in sheets and reports. By creating curated views, teams simplify error-prone manual work
typically done over e-mail and messaging. We commenced the rollout for self-discovery across both Data
Shuttle and Dynamic View for our business and enterprise customers at the end of Q2. By the end of
September, we will complete the rollout.

Following the July announcement of Smartsheet's integrated generative AI capabilities, 3 features are
currently being used by customers in private beta. Our plan is to make these and others more broadly
available after our ENGAGE customer conference in September. AI assistant and AI solution builder will
be available to all customers to get started more quickly and to deliver value faster. These features
enable our customers to continue moving their projects and processes forward without leaving their
workflows, leveraging our AI features to create a solution by describing their needs. With respect to
monetization, AI formula builder, AI content generation and AI insights will only be available to paid users
on enterprise plans. We expect these powerful features to incentivize plant upgrades and expansions. In
some instances, we expect customers to also purchase higher usage tiers based on need. Brandfolder
image captioning, people tagging and basic image editing will also be available in multiple usage tiers as
part of Brandfolder's pricing plans. Over time, these features should become a meaningful catalyst for free
to paid license conversion and enterprise plan upgrades.

Heading into the second half of FY '24, we remain well positioned for efficient growth, powered by the
creativity and energy of thousands of Smartsheet team members and partners worldwide. Our team's
dedication and hard work serves to enhance the Smartsheet platform and drives our success with
customers. In less than 2 weeks at our sold-out ENGAGE customer conference, we will unveil how we are
changing the way organizations operate and innovate faster at even greater scale. We are rapidly evolving
our entire platform to extend our leadership position from the expansion of features, to governance, to
scale and to gen AI. And across all these areas, we're looking forward to enrolling our customers in the
future of Smartsheet.

Now let me turn the call over to Pete. Pete?

**Pete Godbole**
_CFO & Treasurer_

Thank you, Mark. As Mark mentioned, we outperformed all aspects of our guidance in Q2, demonstrating
the durable top line growth and free cash flow inherent in our business model. ARR grew 27% to $933
million, and we are well on our way to surpassing $1 billion in ARR by the end of the fiscal year. In Q2,
we saw some signs of macro stabilization, particularly with our enterprise customers and with Smartsheet
Advance. However, we are still seeing elements of budgetary caution across our customer base, which is
impacting our higher velocity transactions and sales cycle durations.

I will now go through our financial results for the second quarter. Unless otherwise stated, all references
to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in
the earnings release and presentation that was posted before the call. Second quarter revenue came in
at $235.6 million, up 26% year-over-year. Subscription revenue was $221.5 million, representing yearover-year growth of 28%. Services revenue was $14.1 million, representing year-over-year growth of 7%.
Revenue from capabilities made up 32% of subscription revenue.

Turning to billings. Second quarter billings came in at $243.1 million, representing year-over-year growth
of 18%. Approximately 94% of our subscription billings were annual, with about 4% monthly. Quarterly
and semiannual represented approximately 2% of the total.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 30% year-overyear to 3,552 and the number of customers with ARR over $100,000, grew 36% year-over-year to 1,665.
These customer segments now represent 64% and 50%, respectively, of total ARR. The percentage of our
ARR coming from customers with ARR over $5,000 is now at 90%.


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Next, our domain average ACV grew 17% year-over-year to $8,863. We ended the quarter with a dollarbased net retention rate, inclusive of all our customers, of 121%. The full churn rate was 4%. We expect
to exit FY '24 with a dollar-based net retention rate, inclusive of all our customers, of around 116% to
117%.

Now turning back to the financials. Our total gross margin was 83%. Our Q2 subscription gross margin
was 87%. We expect our gross margin for FY '24 to remain at or above 82%. Overall operating income
in the quarter was $19.2 million or 8% of revenue. Free cash flow in the quarter was $45.5 million. This
brings our first half free cash flow to nearly $77 million. For modeling purposes, in Q3, we have 3 large
cash outflows that are unique to the quarter. These include expenses related to our ENGAGE customer
conference, one extra payroll run in the quarter, and a semiannual contractual payment related to a cloud
provider. Given these outflows, we expect our Q3 free cash flow to be around $5 million.

Now let me move on to guidance. For the third quarter of FY '24, we expect revenue to be in the range
of $240 million to $242 million and non-GAAP operating income to be in the range of $8 million to $10
million. We expect non-GAAP net income per share to be $0.08 to $0.09 based on diluted weighted
average shares outstanding of 139 million. For the full fiscal year '24, we now expect revenue of $950
million to $953 million, representing growth of 24%. We expect services to be 6% of total revenue. We
expect non-GAAP operating income to be in the range of $62 million to $67 million, representing an
operating margin of 7%, and non-GAAP net income per share to be $0.53 to $0.57 for the year based on
139 million diluted weighted average shares outstanding.

We are reiterating our FY '24 billings growth of 20% and raising our free cash flow guidance for FY '24 to
$120 million. Also for modeling purposes, we expect our Q3 billings to be 24% of our full year billings. To
conclude, Q2 was highlighted by outperformance across all aspects of our guidance. Enterprises across the
world continue to leverage Smartsheet to power their most sophisticated workflows. And we look forward
to showing the next evolution of our market-leading platform at our ENGAGE customer conference in 2
weeks.
Now let me turn the call over to the operator. Operator?


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## Question and Answer
....................................................................................................................................................................

**Operator**

[Operator Instructions] Your first question today comes from the line of Terry Tillman with Truist.

**Terrell Frederick Tillman**
_Truist Securities, Inc., Research Division_

Nice to see the billings and profit and cash flow upside in 2Q. We've heard about a report and even folks
asking us about one of your enterprise customers, Cisco, potentially migrating away from Smartsheet.
I know they've been a long-standing customer. I don't know if you can talk about this, but is there any
truth to that? And just generally, what's the health of some of your larger longer-standing enterprise
customers? And then I had a follow-up.

**Mark P. Mader**
_President, CEO & Director_

Terry, thanks for the question. Yes, we're aware of that report and it is not accurate. We -- in Q2, Cisco
signed a multiyear, multimillion dollar extension with us. With respect to the health of the large customers,
we had a really nice milestone reached in going north of 50 customers contributing over $1 million of ARR.
We hit a new high watermark on our over $0.5 million accounts, almost getting to 150 or 149 today. So I
really like the stable of customers we have that are growing that are about to become our next 7-figure
customers plus. So again, really pleased with the progress we're making there. And I think the remarks
I had around the improvements we have in our scale and the sophistication of solutions, I think it plays
directly [indiscernible] support those types of customers.

**Terrell Frederick Tillman**
_Truist Securities, Inc., Research Division_

And I guess just a follow-up question is, you all have added a lot of sales capacity really going back from
last year. And as we look through the rest of this year, how are you feeling about where you are, kind of
scorecard in terms of the productivity ramp of these new sales reps? Do you see that inflecting more in
3Q or 4Q? Or is this kind of more of a multi-quarter thing where still there's more benefits and fruit of the
labor into next year around the ramping sales force?

**Pete Godbole**
_CFO & Treasurer_

So Terry, this is Pete. When we look at the sales force productivity, obviously, that suffered because of the
macro. We've seen that play out. And primarily because of the high-velocity transactional business that
has impacted that. So we see continued progress in our enterprise sales productivity, which grew quarteron-quarter. We're expecting that to continue into the future and maintain.

**Operator**

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

**Joshua Phillip Baer**
_Morgan Stanley, Research Division_

I wanted to ask one on the billings outlook for the rest of the year, 20% for the year, 24% in Q3, that's
like 17% growth, I believe. And then that leaves 24% year-over-year growth for Q4. Anything that you
could talk through sort of those dynamics of the step down in billings in Q3 and then the reacceleration in
Q4, whether it's the stub, billings dynamic, comps or anything onetime, just kind of thinking about that
trajectory.

**Pete Godbole**
_CFO & Treasurer_


-----

Josh, it comes down to something very simple. It comes down to the comps that we're looking at. If you
look at Q4 of last year, if you looked at the year-on-year growth, it was the slowest growing quarter of
the year. We grew at 28% year-on-year. That was down from 36% in Q3. So it's just the comps that look
to create the impression of acceleration. But when you look at the 2-year stack, like you just go back to
2022, which is a fairly normal year, and you look at what we've achieved in the first half and you take the
billings guidance we've provided and you create an implied view, you'll see that, that implies the decel
actually in the second half compared to what we've delivered in the first half.

**Joshua Phillip Baer**
_Morgan Stanley, Research Division_

Okay. That's really helpful. And then wanted to just ask on the AI features that are being tested in private
beta now. What's the feedback? Any sense for how many customers are using these features? And then
also, what's the interest level from the broader customer base on -- around AI?

**Mark P. Mader**
_President, CEO & Director_

Yes. I think there's real hunger for getting educated on how to apply AI to systems that they already
understand. I think the best way to land a new concept with someone is to inject it into something they've
already used, as opposed to trying to land them on a brand-new concept in sort of in a [ femoral ] way.
So the interest rate is very high. We've controlled the release of this. We kicked off, what, 4, 6 weeks
ago. And we really look at planning on opening the top on this at ENGAGE. We want to really create a nice
curated experience for all of our customers and do that in a very methodical yet expanded way. So I do
expect over Q3 for that number to expand to many thousands of customers who are using this.

The things we've heard so far are validating, people are saying that they are seeing a dramatic reduction
in cost to doing things like building visualizations with dashboard widgets, which is our AI Insights
product.

And we've started to now also show some of our customers what we're doing on those other premium AI
features around formula building and content generation. The thing I love about these areas is that they
have extraordinarily high foot traffic in our products today. Nearly half of our inquiries on our community
and our support dimensions are in the context of computation and logic they're trying to build into these
workflows, and that's exactly what this addresses.

So I think the relevance of this applied AI that we're introducing is extraordinarily high. I think one of the
reasons why ENGAGE sold out a month before showtime is because people are really interested in some
of these things. So we'll have a lot more to report out on this at the end of Q3 once we get thousands of
customers through the chute on this. I'm expecting quite favorable things.

**Operator**

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

**Jacob Roberge**
_William Blair & Company L.L.C., Research Division_

Can you just talk a little bit more about the retention expansion dynamics this year and what's happening
at renewal time just given the macro? It seems like gross retention is pretty steady. But when customers
are expanding, where are they expanding most? Is that more on the advanced capabilities front or new
products like Brandfolder and Outfit starting to layer in more meaningfully. Just given you called out that
7-figure deal on Brandfolder, it would be great to get that commentary.

**Pete Godbole**
_CFO & Treasurer_

Yes. I think, Jake, what we're seeing is we're seeing expansion sort of coming across both in our seats as
well as in our capabilities, a little more of a slant towards capabilities because in solutions selling, people
need a lot of the capabilities tied to the seat. So you're seeing a little bit more of that. And in general,


-----

the dynamic we've had is our expansion rate is the one that fluctuates. Our gross churn has remained
fairly steady at 4%. And this expansion is the piece that comes with the sort of macroeconomic forces that
come into play. Now we're balancing that with some of these self-discovery of features that we're rolling
out in the back half of the year, which I'm pretty excited about.

**Jacob Roberge**
_William Blair & Company L.L.C., Research Division_

Okay. Great. And then helpful commentary on just AI monetization, how that's going to track with
enterprise skew upsells and free to paid conversions. Will you start monetizing that right after ENGAGE?
So could we see some incremental benefits in Q4 and maybe Q1 of next year? And then, Pete, is there
anything we should keep in mind on the expense side of the house as it relates to AI?

**Mark P. Mader**
_President, CEO & Director_

Yes. Jake, we have not yet set the time or the date for the GA of those features. It's all about enabling
customers right now. What we will -- what we are giving our customers clarity on is at what plan level that
will be available for them post GA. So we have not baked that into our second half numbers at this time.
But again, working very hard to make sure it's positioned well for this upcoming year.

**Pete Godbole**
_CFO & Treasurer_

And to the second part of your question in terms of what have we baked into the plan, there's no dollars of
revenue baked in for AI in the back half that I guided to. But what I would tell you is we've assumed some
costs hitting us as customers in beta and other forms start to try out the product. It's very small.

**Operator**

Your next question comes from the line of John DiFucci with Guggenheim Securities.

**Tamjid Md Moinuddin Chowdhury**
_Guggenheim Securities, LLC, Research Division_

This is Tamjid Chowdhury on for John DiFucci. My first question, again, like on the billings growth, it's good
to see that you maintained the guidance there. Can you maybe talk about like what kind of visibility you
have into the second half of the year? If you can maybe talk about renewals, expansion renewals, that
would be super helpful.

**Pete Godbole**
_CFO & Treasurer_

Yes. So when you start to think about some of the indicators we've used to give us that confidence, start
with how we closed Q2. We closed Q2 I thought fairly well with improved execution from our field team.
That was part 1 of it. But what we also saw on top of that was the pipeline entering Q3 was healthy. And
when you couple both those elements with the fact that our close rate on pipeline we entered the quarter
with is strong and maintaining strength. That's what gave us the confidence in the back half guide on
billings.

**Tamjid Md Moinuddin Chowdhury**
_Guggenheim Securities, LLC, Research Division_

Awesome. Super helpful. And then, Mark, you mentioned about self-discovery starting off with Data
Shuttle and Dynamic View. What prompted that? And sort of like what are you trying to achieve from it?
And any kind of early feedback, that would be super interesting.

**Mark P. Mader**
_President, CEO & Director_


-----

Yes, I think it's all about putting customers in a position to be able to act quickly. One of the wonderful
comments from a customer who saw Data Shuttle through self-discovery called out her customer success
manager, and she said, "Thank you so much for releasing this new feature." The feature has been there
a long time, but now it's fully visible to that person, and she was able to start benefiting from it. So the
purpose is how do you reduce friction and make your median customer available of all of your strengths
that you can bring to bear. And if you gate that behind a discussion with the sales rep, it slows you down.
So what you'll see at ENGAGE in addition to these 2 features that we've put in self-discovery now is a real
push to unify our experiences and to make those available to as many people as possible.

And when we think about serving all the companies we have, the customers we have in the U.S., we're
very U.S.-centric today. So when you're solving and serving Asia Pacific, Japan, EMEA, the more you can
put in front of somebody where it's not dependent on human interaction, the better. So that is the whole
thrust behind the self-discovery piece. And again, we're -- it's in front of thousands of companies now.
It will be in front of tens of thousands of companies by end of September. And I would expect that to
start driving lead growth. And again, as Pete and I plan for second half, we have not baked this into our
numbers yet. So neither gen AI nor self-discovery have been factored at this time.

**Operator**

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

**Pinjalim Bora**
_JPMorgan Chase & Co, Research Division_

Congrats on the quarter. Pete, I want to go back to the billings guide a bit. Obviously, you had a good ARR
quarter. Seems like billings was healthy. You beat your guide, but you kind of kept the full year. I mean
we appreciate it, I guess, given the macro and conservatism in that front. But is that it? Is that just a
prudent conservatism that we should read into the guide? Or was there any kind of pull forward in the first
half versus the second half? Like -- or is there any risk that you see in the second half for some of the
renewals that you have coming?

**Pete Godbole**
_CFO & Treasurer_

So Pinjalim, what I would tell you is there's no pull forward in the business that we reported for Q2. What
I would tell you is at the start of the year when Mark and I set out the guide for billings, we looked at the
macro view of it. There's a lot of things that happened within quarter. We got some feedback on that in
Q1. We've got a different set of feedback in Q2. But looking at the puts and takes in a composite, we feel
good about maintaining the guide at a 20% billings growth.

**Pinjalim Bora**
_JPMorgan Chase & Co, Research Division_

Okay. Got it. And Mark, obviously, you have a lot of AI features coming out, and you'll hear more about it.
But I wanted to ask you about this large base of free collaborators that you have. I'm wondering as you
roll out these AI features and start monetizing them, do you see kind of a big opportunity to accelerate
that free to paid conversion as you have kind of a second trigger point now with AI?

**Mark P. Mader**
_President, CEO & Director_

I do. I think the more value you present to somebody, the more opportunity you have for them to convert
to a paid customer. For many, many years, this notion of a paid license in Smartsheet was predicated on
someone's right to create an asset, a sheet, a dashboard, a report, et cetera. We're now over the next
-- in the coming quarters, introducing capabilities that are incremental to what you've been able to do
that will be reserved for paid license users. So we're giving people more opportunity to have a reason to
subscribe. And when I think about how these Smartsheet deployments are instantiated, you have people
who create assets who share them with others, and then you have many analysts who work with that
data.


-----

And I think the gen AI work is quite interesting because it really enables those people who are
manipulating today, trying to get insights from the data, giving them a mechanism to do their work faster
and more cheaply. And I think when you have that dynamic, I would say the ability to argue for a license
is quite compelling. I mean in the grand scheme of the total cost of an employee, the gen AI license cost
or the license is quite trivial. So I really love the fact that we're moving away from this notion of only
creators need licenses to if you really want to be effective in the most high-impact way, you should also
get a license. And I think that will bode really well. We have a huge population measured in millions of
people who are actively engaged, who do not pay us today, and we're giving them reasons to subscribe.

**Operator**

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

**Ethan Bruck**
_Wolfe Research, LLC_

This is Ethan Bruck on for Alex Zukin. Congrats on the quarter. I just -- I appreciate the color around the
ARR exit rate. I'm just curious if this is also how you think about where ARR trends potentially troughing,
if it's kind of bottoming as you called out some stabilization you saw in enterprise in the quarter.

**Pete Godbole**
_CFO & Treasurer_

Ethan, I think when you think of what our future outlook on NDRR is, it really comes down to sort of what
is our future projection on growth. That's something that we have to play out essentially this year. We
have to see the impact of the actions Mark talked about in terms of AI, self-discovery, and that's really
going to determine in a lot of ways where the NDRR goes. So it's a little premature to sort of call that at
this point.

**Ethan Bruck**
_Wolfe Research, LLC_

Okay. I got it. That's helpful. And just kind of a follow-up there. The monetization strategy and the timing
around the gen AI features was very clear. I was just curious, when do you expect that to start becoming
an impact on net retention as customers kind of stay more on the platform and just also as well on growth
retention, which is still holding very strong.

**Pete Godbole**
_CFO & Treasurer_

So Ethan, when you think of the net retention impact of AI features, I think it comes down to people
actually getting their hands on those features, using those features in context of the work. So I think when
you get more real data on what customers are doing with it, it informs the exact things you're asking
about, which is what do I think about net dollar retention rate? Do I expand? Which people expand? What
use cases they expand to? All of that comes about as kind of, I call it, the second order impact of them
trying the product.

**Operator**

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

**Brent John Thill**
_Jefferies LLC, Research Division_

Mark, I'm just curious if you could characterize the selling environment. I know Q1, it was a little slow out
of the gate. It seems like that snapped back in Q2. And I mean how much of this is just snap back from
things that slipped from Q1 to Q2 versus a better environment, if you will?

**Mark P. Mader**
_President, CEO & Director_


-----

I think the environment plays -- absolutely plays a role. But I would also say, as you go through the year,
the account plans that you put in motion and started to define in the Q1 and Q2 should start to produce
more fully in the second half. So I think the convenient answer is to always say, well, the macro does this,
the macro does that. I think if you run your playbook well, you should see those things that you've set up
in the first half start to contribute in the second. So I would say we're benefiting from right now, and we're
starting to benefit in Q2 from some of that planning we had done early in the year. You start solutions
selling, framing, framing the value of these things. I would expect that to continue in Q3 and Q4.

**Brent John Thill**
_Jefferies LLC, Research Division_

And then just a quick follow-on to that. This whole theme of consolidation. There are a lot of point
solutions out there. You have COVID effectively bought one of everything. Are you now seeing any tailwind
to we've got to get in this consolidation move and move everything over to Smartsheet from the 5 other
tools we cobbled together during the pandemic?

**Mark P. Mader**
_President, CEO & Director_

I would say consolidation, Brent, is more common if an environment has multiple substantial subscription
agreements in place. Very often, I would say, our largest transactions are someone basically anchoring
on us for sort of their strategy for the next X years. In the context of there being a small deployment of
some other provider, that's really not the payoff. The payoff is hey, how can we save $32,000 by powering
something down? It's all about how do we drive yield from a very big Smartsheet investment. There
have been a few cases over the years where there's been a few hundred thousand dollar deployment of
company X and us, where we've won, where it is a displacement. But I would say companies are more
focused on making the decision on the platform they want to bet on and then containing the existing
usage of another tool as opposed to eradicating it. The yield on eradication is just not that high. And I
think a lot of people don't want to sort of unseat a division or a small team just because the payoff isn't
that great. So I would say still hyper focused from our largest clients on making platform choices for
future growth. And consolidation, we haven't really seen tick up that much in terms of the theme that's
driving these big deals.

**Brent John Thill**
_Jefferies LLC, Research Division_

Just a quick follow-up for Pete. Any downsizing in the largest deployment customers that are out there?
There's been some noise in the channel. I just wanted to clarify that. We've been getting many questions.
Simple yes or no is fine.

**Pete Godbole**
_CFO & Treasurer_

No.

**Operator**

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

**Scott Randolph Berg**
_Needham & Company, LLC, Research Division_

Nice quarter. Two questions for me. Pete, I wanted to start with your comment on macro stability. I think
you said there was "some" macro stability. Can you help us unpack that a little bit in terms of what you
meant there, in particular?

**Pete Godbole**
_CFO & Treasurer_


-----

Yes. I referenced the macro stability in the context of the enterprise customers. As I said, some of this is
our selling efforts getting sort of more refined in approach. And the second is, as you build out plans with
customers, just the enterprise play, these things develop as customers put together plans at the start of
the year and grow those through the end. So we saw that manifest itself in higher sales productivity and
attainment of the enterprise team. So that's what we saw play out.

**Scott Randolph Berg**
_Needham & Company, LLC, Research Division_

Got it. Helpful. And then, Mark, you talked about a lot of several new modules that are coming out,
whether they're AI-based or other items here this fall and into next year. But how should we think about
what might be the next advance or the next Data Shuttle or Control Center, something that will have a
meaningful cross-sell opportunity that we can talk about maybe 12 to 24 months?

**Mark P. Mader**
_President, CEO & Director_

I think a few things we've had in the portfolio, Scott, that have not been fully presented to all of our
customers will be presented to them in the coming years. So when I think about the value we delivered
to certain customers with our Advance resource management, our Brandfolder experiences, you should
expect those to come mainline in the coming year. So what I mean by that is the average user who are
actually with Smartsheet will have a pathway to seeing what those platforms can provide and start to
engage with those. And I think the largest -- one of the largest revenue opportunities for us is in getting
these capabilities into more hands of our -- into the hands of more customers. Today, we are mid-single
digits penetrated on our capabilities. It already produces -- contributes north of 30% of our revenue. So I
think one of the fastest paths in our next $1 billion of ARR is to really proliferate this value into the base.
So I think we're always tempted by the next newest thing. Gen AI is a great example of the next newest
thing that we acted on, and I think it's going to bring a ton of value. But as you're doing that, don't forget
about what's in the portfolio and how you maximize that. And I think that will be actually as big a chapter
in our history as gen AI will be.

**Operator**

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

**Keith Frances Bachman**
_BMO Capital Markets Equity Research_

The cash flow performance looks particularly solid this quarter. So congratulations on that. I wanted to
go back to the dollar-based net retention, though. You mentioned for a prior question, you didn't want to
call the bottom. But what are the contributing factors taken it down from, say, 121% to, I think you said
116%,117%? I'm just surprised because a lot of the comments have been stabilization. Product portfolio
is actually improving, may not contribute near term. But what are the contributing factors from there? And
at least how do you want us to think about the puts and takes associated with where that may stabilize?
Because it sounds like the portfolio is getting much richer, but I don't want to get too far ahead of yourself.
But maybe any puts and takes we should think about and what are the contributing factors taking it down
to 116%, 117%.

**Pete Godbole**
_CFO & Treasurer_

Keith, so when I look at your question and I break it down, I would go back and say you're going to find
that there's 3 elements of it. There's gross churn, which isn't changing a lot; there's reductions, which are,
I call it, picking up modestly, not a lot, but just sort of moving up with the pace of the economy were in,
it all comes down to net expansions and how that's moving. So our view on net expansion is, as you look
at the progression of the quarters and the play through, we're going to continue to see net expansions be
pressured. Especially, I mentioned elements like transactional business that's growing, that transactional
business hasn't recovered. It's still facing the pressures of the macro headwinds we've seen. So that's
what's contributing to this.


-----

**Keith Frances Bachman**
_BMO Capital Markets Equity Research_

Okay. And anything you want us to keep in mind as we look out over the horizon? Again, it just seems,
simplistically, your portfolio is getting better.

**Pete Godbole**
_CFO & Treasurer_

It is getting better. Keith, the only thing I'd say is the laws of physics apply to anything you put out
there. When you think of all the things Mark mentioned, we're super excited about those. Thousands of
customers who've never ever purchased the capability get to experience it. But the time it takes for them
to try the capability, experience it, go through their process of how it applies to their work, all of that
takes time. So I don't see that as contributing. We haven't built that into the contributions into the back
half of the year. That's the wait-and-see after they've tried it.

**Keith Frances Bachman**
_BMO Capital Markets Equity Research_

Okay. Well, let me transition to Mark for my second question, though. Particularly interested in the free
to paid scenario. And is there any dimensions you could give us about what that ratio looks like? In other
words, what is your installed base in total and how much of that is paid? And how should we be thinking
about -- you mentioned gen AI. I agree it could be a contributing factor to maybe changing that rate to
get greater conversions. But anything you want to call out and if you could give us some more specifics on
what does that installed base look like today.

**Mark P. Mader**
_President, CEO & Director_

Yes. I think what I'd be comfortable sharing is that the majority of the people who engage on the platform
today are free collaborators. So those people have been invited to paid instances of Smartsheet and
they are contributing. Many of them contribute, actually changing data, not just viewers, but actually
participating in workflows. We see that population as the most, I guess, the deepest vein we could
probably tap in getting them to flip to paid.

We don't give a hard ratio. I think it is useful to see that it is the majority of people engaged in
Smartsheet today. So we've run this play for, what, 18 years now, where we've had the paid creator
who -- or the paid licensee who can create and everyone else is basically free participants. I think the
reason we're able to make this move now is because the portfolio has just gotten to the point where so
much value is available. And we've made a decision on certain things that deliver a ton of value. It just
doesn't make sense to have that just freely distributed to everyone. So -- but this is really the first time
we're doing it. And I think there's -- we will remain, I'd say, leading in category in terms of what those
participants can do.

But we're also -- we also very much believe that we should get paid value for the -- paid for the value
we've delivered. And I would say in the next 2 quarters, we're going to learn a lot about the reaction.
Your question around when shouldn't you start benefiting from that? I think we will benefit from that.
But again, it comes down to timing, right? We give a guide for NDRR for end of the year. We also shared
that we aren't going to be flipping GA likely in the second half of the year. So it really is an FY '25 type
opportunity. And we'll articulate that as we head into next year.

**Operator**

Your next question comes from the line of Michael Berg with Wells Fargo.

**Michael H. Berg**
_Wells Fargo Securities, LLC, Research Division_

Just one quick one, philosophically on guidance. You had a very strong quarter across the board, but
didn't raise billings guidance at all and only raised by the beat for the rest of the metrics. Maybe just help


-----

us understand, are you incorporating incremental conservatism just given what you're seeing in more
stabilization of macro? Just would love to hear your thoughts on if there's any change in the guidance
philosophy.

**Pete Godbole**
_CFO & Treasurer_

So Michael, no change in the guidance philosophy. Obviously, given the macroeconomic forces we've
seen, we've just embedded that conservatism into our thinking. Now you mentioned that we haven't
raised the guide. If you think of the 2 ends of that guide, we actually raised our guide on op income quite
significantly, if you notice. We beat by about $11 million this quarter, and our raise at the midpoint is
about $17 million. So we're taking that approach as we think -- thought about beating the raise as we sort
of progress through each quarter.

**Operator**

Your next question comes from the line of Jackson Ader with MoffettNathanson.

**Jackson Ader**

First question is for you, Pete, on the improvement in the enterprise or on the macro environment. Should
you -- or should we, I guess, expect that if that improvement were to continue, would that show up in a
rebound maybe of net customer additions? Or would it show up more in maybe the enterprise segment
NRR?

**Pete Godbole**
_CFO & Treasurer_

Jackson, I think that would show up more dominantly in the enterprise NDRR that we would see internally.

**Jackson Ader**

And then as far -- just to follow up, as far as what we could see in the public metrics, and I guess I'm
really getting after the -- should we expect net additions in any of these kind of customer strata, whether
it's $5,000, $50,000, $100,000 in spend to reverse and start to see some year-over-year growth in the
net additions in a particular quarter?

**Pete Godbole**
_CFO & Treasurer_

We are seeing net additions. If you think of our largest customer sizes, cohorts, $100,000, we saw 30%
growth there. I think as you start to go through the build of the future quarters, I think you're going
to see that progress continue because customers are going to rely more on us and come up with more
projects that they give us. Mark mentioned the customers which are even larger. I think he mentioned
customers who pay us more than $0.5 million. That population is going to grow as we go through the year.
That's the way you'll see it. We don't report on all those metrics all the time. But as we get more data,
we'll be sure to sort of think of sharing that.

**Operator**

Your next question comes from the line of Jason Celino with KeyBanc.

**Jason Vincent Celino**
_KeyBanc Capital Markets Inc., Research Division_

Maybe first on the high velocity side, I think you said you are still seeing some pressure there. Maybe to
ask us more plainly, in the quarter compared to last quarter, did you see it get marginally better or worse?
Or is it pretty much the same as last time?

**Pete Godbole**
_CFO & Treasurer_


-----

Just as about the same.

**Jason Vincent Celino**
_KeyBanc Capital Markets Inc., Research Division_

Okay. And then last quarter, you also talked about increasing marketing efforts to offset some of the
weakness you're seeing on this side -- velocity side. I'm curious how the effectiveness of these marketing
efforts are going.

**Pete Godbole**
_CFO & Treasurer_

So Jason, we didn't describe that last quarter as a -- to support the weakness. We just talked about things
we're doing incrementally. So let me give you a quick status on how we've done. We're pretty pleased with
the quality of the leads that have come out of the program. But given that this was focused on our largest
enterprise customers and the fact that the timing is fairly recent, if you look at the conversion dynamics
for these enterprise customers, we'd expect to see a small benefit this year, but a larger benefit as we go
into FY '25. So that's the way this is likely to play out.

**Operator**

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

**Robert Edward Simmons**
_D.A. Davidson & Co., Research Division_

So it sounds like enterprise maybe got a little bit better, while the [ oil ] and Advance business was still
kind of weak. Could you also give us some color by geography and by vertical?

**Pete Godbole**
_CFO & Treasurer_

Robert, so if you think about our top, what I call it, 4 verticals in bookings this quarter, they were, I think,
manufacturing, health care, finance and retail. And I think that's just the size of the verticals. But if you
look at the ones that got all which were strong year-on-year, I'd probably say it's consumer goods and
education. You'll see those in live entertainment kind of sign of the times. And probably the ones that
weren't strong relative year-on-year growth, you're looking at media and production and technology.

**Robert Edward Simmons**
_D.A. Davidson & Co., Research Division_

Got it. Got it. That makes sense, or helpful, rather. And then so you raised your income guide by more
than you raised the revenue guide for the year. I guess are there specific areas that you're cutting back on
or just kind of like trimming your sales a little bit? And which areas are you kind of pouring more money
into?

**Pete Godbole**
_CFO & Treasurer_

So Robert, if you think about delta between sort of how we've increased our margin versus the actual
revenue outperformance, I'd say some of the margin improvement comes from the fact that we're
just flowing revenue beat straight into margin. But on top of that, what we're also doing is we're being
extremely thoughtful on operating efficiency. It's when we hire, whether we replace a role or not, where
we hire and looking at every nonrevenue sort of investment and scrutinizing it. Kind of the -- I was
laughing to telling Mark the other day. I think that's just the role of a CFO and the finance org and what
they do. So this is what I call no fault cost reduction that plays out into margins. That's what you're seeing
play through.

**Operator**

Your next question comes from the line of Steve Enders with Citi.


-----

**Unknown Analyst**

This is [ George ] on for Steve. Just wanted to follow up, Brandfolder. Last quarter, I think you called out
some demand headwinds, but in your prepared remarks called out a pretty significant win. So just an
update on the demand environment there.

**Pete Godbole**
_CFO & Treasurer_

So [ George ], if you think of the -- we called marketing solutions and Brandfolder is the major part
of it. Our quarter-on-quarter, if you looked at it, that performance improved. And we did call out a big
deal, which was the largest in Brandfolder history, that we booked in Q2 as well. Brandfolder is a part
of the market budget which is experiencing obviously the impacts of the macro environment, but we're
learning to sort of go after that business by listening to customers and trying to fit how we've described
the benefits in an ROI way. So we're seeing that pay off a little bit for us. And we're being very smart
about even how we think of pricing and packaging. More of that to come when we go into the ENGAGE
conference.

**Unknown Analyst**

Great. And then a quick follow-up. You called out some stabilization in the macro. Anything notable on the
linearity through the quarter?

**Pete Godbole**
_CFO & Treasurer_

There's nothing unusual. We see our first month be the smallest and our last month is the biggest. There
was nothing unusual about the linearity, if you will.

**Operator**

Your next question comes from the line of Ryan MacWilliams with Barclays.

**Pete Newton**
_Barclays Bank PLC, Research Division_

This is Pete Newton on for Ryan MacWilliams. I'm pleased to see that the sequential customer adds
improved across all sizes, the $5,000, $50,000. What would you say drove that step-up? And then how
would you characterize those conversations with customers that you're moving from one of those positions
to the higher one?

**Mark P. Mader**
_President, CEO & Director_

I think customers are looking for a conversation that goes beyond, do you need more seats? And when I
think of what our teams are able to present to them now, it's really a portfolio of solutions. Do you want
to talk about how you set yourself up for strategic transformation? Do you want to talk about how to
drive efficiency into your marketing realm? Do you want to talk about how to execute modern project
management and now starting to inject the gen AI pieces? So you have multiple themes that are hitting.
And the way we monetize both through the licensing of seats and through these capabilities, we have
more opportunities to deliver value and get paid for that. So I think the -- we're starting to -- we're
continuing to see the benefits.

I spoke to the progress on the Advance sales. it was great to see that people are seeing value across that
entire portfolio and saying, "Hey, I'm going to step into that bundle and get the benefits from all." So I
think the greater -- the degree to which we can continue to see success on the capabilities, combined
with seats, I think will manifest itself in this $50,000, $100,000, $500,000 levels stepping up. Yes, I think
that's probably the key driver that I would point to.

**Pete Newton**
_Barclays Bank PLC, Research Division_


-----

Perfect. That's very helpful. And then if you could comment on average deal size closed throughout the
quarter, was there any differences later in the quarter versus earlier? Or any comments there?

**Pete Godbole**
_CFO & Treasurer_

The average deal size -- I want to make sure I understand your question. Is it the deal size that played
out as we went through the quarter? Or was it the deal size in comparison to some other period?

**Pete Newton**
_Barclays Bank PLC, Research Division_

As you trended through the quarter, just trying to get a glimpse at how that linearity looked.

**Pete Godbole**
_CFO & Treasurer_

Yes. The deal size, typically, as you would think, the larger deals booked more towards the end of the
quarter. So the deal size did grow, but it grew sort of consistent with our seasonal expectations.

**Operator**

This concludes our Q&A session for today. I turn the call back to Aaron Turner.

**Aaron Turner**
_VP of Investor Relations & Treasurer_

All right. Great. Thank you for joining us this quarter, and we'll speak to you again soon.

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


-----

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