# Smartsheet Inc. NYSE:SMAR

## Earnings Call

_Tuesday, March 14, 2023 8:30 PM GMT_

### CALL PARTICIPANTS 2

 PRESENTATION 3

 QUESTION AND ANSWER 8

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**WWW.SPCAPITALIQ.COM**


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## Call Participants

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**EXECUTIVES**

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

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

**Pete Godbole**
_CFO & Treasurer_

**ANALYSTS**


**Aleksandr J. Zukin**
_Wolfe Research, LLC_

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

**David E. Hynes**
_Canaccord Genuity Corp.,_
_Research Division_

**Jackson Edmund Ader**
_SVB Securities_

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

**John Stephen DiFucci**
_Guggenheim Securities, LLC,_
_Research Division_

**Michael James Turrin**
_Wells Fargo Securities, LLC,_
_Research Division_

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

**Rishi Nitya Jaluria**
_RBC Capital Markets, Research_
_Division_


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

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

**Seoyoung Lee**
_Morgan Stanley, Research Division_

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

**Unknown Analyst**


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## Presentation
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**Operator**

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference
operator today. At this time, I would like to welcome everyone to the Smartsheet Fourth Quarter Fiscal
2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn today's call over to
Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead.

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

Thank you, Brent. Good afternoon, and welcome, everyone, to Smartsheet's Fourth Quarter and Fiscal
Year 2023 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's 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 that the expectations reflected in the forward-looking statements are reasonable, our
actual results may differ materially and adversely. All forward-looking statements made during this call
are based on information available to us as of today, and we do not assume any obligation to update these
statements as a result of new information or future events, except as required by law.

In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures. A
reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that
accompanies this call, which can also be found on our Investor Relations website. With that, let me turn
the call over to Mark.

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

Hello, and welcome to our fourth quarter earnings call for fiscal year '23. Our fourth quarter results caped
off a strong year for Smartsheet, a year in which we extended our leadership position in collaborative work
management, delivered our best year ever for new customer bookings, acquired outfit to strengthen our
marketing and creative management solutions, added 2.2 million users to the Smartsheet platform and
generated positive free cash flow for the year for the first time.

While Pete will provide additional details, I want to call out some of our highlights from the quarter.
Revenue for the quarter was $212 million, up 35% year-over-year. We added $62 million in annual
recurring revenue in Q4, bringing our total ARR to more than $854 million.

In Q4, we saw expansions at Volvo, USA Today and Allscripts, among many others. And we had new
customer wins at companies such as [indiscernible]. Our expansion motion within our customer base
continued with 311 customers expanding by $50,000 or more and 118 expanding by $100,000 or more.

In Q4, we had 2 transactions of more than $1 million and now have a total of 45 customers with ARR over
$1 million. Despite these successes, we've seen the changing macroeconomic environment negatively
impact expansion rates across customer segments. However, even with these less favorable macro
backdrops, our enterprise customers continue to exhibit the fastest growth rates.


-----

Our product investment and go-to-market strategy is focused on winning the enterprise, and we have
seen great success in this segment. We now have over 3,300 large enterprise customers, defined as
organizations with over 10,000 employees. ARR from just this customer segment is now over $260 million
and grew over 40% in FY '23.

We believe this segment alone represents a multibillion-dollar revenue opportunity for Smartsheet.

While we may have seen some companies be more thoughtful with spending in this environment, we
believe that in the long term, enterprises, especially large enterprises, remain the best opportunity to
drive long-term profitable growth. and no one in this category is winning the enterprise like we are.

In FY '23, in response to the changing macroeconomic environment, we took steps to improve our
profitability. These actions resulted in Q4 profitability, non-GAAP operating income and free cash flow
exceeding our guidance. As we look ahead, we expect our scale combined with our increasingly efficient
operating model to generate positive operating margins and over $110 million of free cash flow in FY '24.

Our scale and profitable business model further secure Smartsheet as the leader in collaborative work
management. We are operating at an ARR scale, enterprise adoption rate and profitability level that are
unmatched in category. This leadership position is recognized by top-tier review sites and publications.
We recently earned a top 5 placement on G2's 2023 Best Products for Enterprise List, making us the only
CWM platform to rank anywhere in the top 50. The list recognizes software companies that have best-inclass enterprise customer service, products and experiences. And earlier this month, we were recognized
for our industry-leading enterprise work management and digital asset management solutions on Fast
Company's Most Innovative Companies List in the enterprise category.

At Smartsheet, adoption of our capabilities-based products play a key role in our enterprise success. These
capabilities now make up 31% of our subscription revenue, up 5 points year-over-year. Capabilities drove
many large customer expansions in Q4. For example, a leading enterprise human capital management
provider signed a 3-year enterprise license agreement that will give all 8,000 Smartsheet users at the
company access to our full suite of advanced capabilities.

Through January, on a year-over-year basis, they created 67% more forms, provisioned 132% more
control center projects and created 210% more WorkApps. A key smart use case at this HCM provider is
in professional services org, where they use Smartsheet to manage customer deployments. Smartsheet
has become their global standard for customer deployments in part because our enterprise-grade security
gives them the ability to manage sensitive customer data on our platform while still allowing for efficient
collaboration.

Our secure collaboration model has allowed this company to bring more than 42,000 external collaborators
from different client organizations onto the Smartsheet platform.

Q4 was a strong quarter for Smartsheet Advance. A Fortune 500 global manufacturer had a high 6-figure
annual expansion that included an upgrade to a higher-advanced tier. This upgrade resulted from the viral
adoption of Smartsheet across the organization. This year alone, they created over 5,000 dashboards,
increased their WorkApps used by 430% and provisioned nearly 5,000 projects using control center.

This company will now use Smartsheet to help achieve its $1 billion 3-year operational cost savings
initiative.

Advanced usage through connected users also drove a 7-figure expansion at a Fortune 100 telecom
company, which brought the customer's total ARR to over $3 million. Over 50,000 Smartsheet users
across 11 departments in 8 countries now use Smartsheet. This deal was driven by increased demand and
adoption as more teams look to centralize their work on Smartsheet.

Our platform underpins over 1,000 WorkApps, 4,000 projects managed using control center and over
28,000 dashboards. It is now the starting point for thousands of workflows that span integrated apps such
as Salesforce, Jira and Slack, and serves as a central hub for the company's collaboration with more than
500 external organizations.


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Wins such as these speak to the power of the advanced model where the value of Smartsheet increases as
the use of Smartsheet grows. In January, we published our inaugural Future of Work Management report,
which showed that over 80% of workers at every level across organizations say, project management is
being done by people whose title or job description doesn't include Project Manager. The research also
showed a significant perception gap between leaders and workers with respect to their current project
management tools.

60% of leaders say they've made the necessary investment in tools, but just 36% of workers who
responded feel this way. This gap drives a robust, continuous flow of opportunity for Smartsheet.

Here's a great example of how the best tools can empower people and business transformation. In Q4,
we had an RFP win against 3 CWM competitors, which expanded our footprint at a Fortune 500 global
biopharma company. The seeds of this win were planted when one team member in the purchasing
organization took the initiative to design a Smartsheet-based system to automate the company's complex
and time-consuming paper and e-mail-based purchase order management process.

Smartsheet didn't just modernize PO management, our platform also reached the company's
transformation office, where Smartsheet is now supporting the company's critical initiatives. As the
company's business transformation platform, Smartsheet Control Center and WorkApps are now helping
them manage 5 strategic portfolios of work, each containing dozens of work streams that will guide the
company towards its goal of positively impacting the health of 2.5 billion people in the next 10 years.

On the product front, we closed out another year of customer-focused innovation, having delivered over
400 product enhancements. In Q4, we launched the Smartsheet Desktop Application, content automation
with integration of outfit, capacity view and numerous automation enhancements. We also further
increased platform scalability to power sophisticated workflows and drive thousands of business-critical
work streams for customers of all sizes.

In FY '24, our investment efforts will be focused on helping our biggest customers grow faster with us as
well as driving efficiency and how we sell to and serve our emerging customers.

To enhance customer experience and value, we continue to evaluate and integrate artificial intelligence
into the Smartsheet platform. Our AI innovation began in 2018 following our acquisition of Converse.AI.
More recently, we have enabled petabyte-scale intelligent content management through our proprietary
powered AI engine [indiscernible] Intelligence. Using recognition models, content is analyzed and tagged,
making it easier for people to find creative assets with natural language search. And for over a year,
predictive models have powered navigation recommendations in Smartsheet.

Now our sights are set on the next wave of innovation, degenerative AI. The progress we've made in our
early development is very promising and the impact to accelerating customer onboarding, solving for
advanced business designs and unlocking self-directed discovery can serve as a catalyst for growth in FY
'25 and beyond.

In closing, I'm proud of how our team executed in FY '23, expanding our enterprise leadership position,
while navigating macro headwinds and driving significant efficiencies in the business. We continue to
keep our customers' needs top of mind as we prioritize investments that enable them to drive meaningful
change for their organizations.

Q4 was another showcase of our CWM leadership, our winning enterprise strategy, the power of our
platform and the scalability of our business model. We are excited to continue this momentum in FY '24
and beyond. Before I turn the call over to Pete, I want to acknowledge the transition of Smartsheet's
Board Chair role.

We recently appointed Mike Gregoire as the new Chair of our Board of Directors. He succeeds Geoff
Barker, who has been on our Board since 2012 and has served as Chair since 2017 and will remain on
the Board following this transition. We appreciate and thank Geoff for his leadership. His commitment to
governance and execution during the company's transition from private to public and in the years that
followed, strengthened our ability to deliver value to customers and shareholders.


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Mike has been a valuable member of the Smartsheet Board since late 2019. His expertise in operating
technology companies at scale aligns very well for our next phase of growth. We are pleased to welcome
Mike to the chair position and look forward to working with him more closely. Now let me turn the call over
to Pete. Pete?

**Pete Godbole**
_CFO & Treasurer_

Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q4 was another strong quarter. We
exceeded our guidance across the top and bottom line and posted quarterly operating income for the first
time. We saw particular strength in our largest customers who continue to exhibit expansion rates above
our overall net dollar retention rate, an advance, which contributed a record level of billings and revenue
in the quarter.

Despite strength in these areas, we saw the impacts of a worsening macro environment. Similar to past
quarters, we see these pressures manifest as smaller deal sizes and longer sales cycles, which ultimately
led to lower expansion rates among our customers.

In FY '23, we placed an intense focus on driving operational efficiencies, which has resulted in a faster
path to profitability than previously contemplated. We focused on driving operational efficiencies by
eliminating lower value activities, while maintaining sales capacity. These operating efficiencies have
contributed to our outperformance in our operating income and free cash flow in Q4 and our guidance for
FY '24.

We expect the macro to worsen in FY '24, but the plan we have created positions the company to
capitalize on an improving economy when that eventually occurs. We are continuing to pursue sustained
growth and profitability in a disciplined and thoughtful manner, while focusing on allocating capital to
growth initiatives.

Our strategy of focusing on large accounts for the last several years has been a part of that thinking and
this year, we plan to invest in 4 areas: first, widen our competitive lead on the dimension of enterprise
scale; second, unlock product-led discovery and adoption; third, enhance IT, governance, control and
security; and fourth, elevate our user experience.

I will now go through our financial results for the full year and fourth 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.

For the full fiscal year '23, we ended with total revenue of $766.9 million, up 39% year-over-year. Billings
of $892 million, up 35% year-over-year. Operating loss of $36 million and free cash flow of $9.8 million.

We ended the year with annual recurring revenue of over $854 million, a year-over-year increase of $215
million.

Next, I will provide more color on our fourth quarter financial results. Fourth quarter revenue came in at
$212.3 million, up 35% year-over-year. Subscription revenue was $198.9 million, representing year-overyear growth of 37%. The Services revenue was $13.5 million, representing year-over-year growth of 15%.
Capabilities made up 31% of subscription revenue, up from 26% of revenue in Q4 of last year.

Turning to billings. Fourth quarter billings came in at $286.7 million, representing year-over-year growth
of 28%. Approximately 94% of our subscription billings were annual with 3% monthly. Quarterly and
semiannual represented approximately 3% of the total. Multiyear billings represented less than 0.5% of
total billings.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 36% year-overyear to 3,206 and the number of customers with ARR over $100,000 grew 45% year-over-year to 1,484.
These customer segments now represent 62% and 48%, respectively, of total ARR. The percentage of our
ARR coming from customers with ARR over $5,000 is now 89%.


-----

Next, our domain average ACV grew 20% year-over-year to $8,377. We ended the quarter with a dollarbased net retention rate of 125%. The full churn rate remains below 4%. Consistent with our assumption
of the macro environment in FY '24, we expect our net dollar retention rate to trend lower into the high
teens by the end of the year.

Now turning back to the financials. Our total gross margin was 82%. Our Q4 subscription gross margin
was 86%. We expect our gross margin for FY '24 to remain above 80%.

Overall operating income in the quarter was $7.5 million or 4% of revenue, which represents a 6
percentage point sequential margin improvement. Free cash flow in the quarter was positive $16.4 million.

Now let me move on to guidance. Our guidance reflects the expectations of a worsening macroeconomic
environment. Therefore, we have incorporated more conservatism into our guidance philosophy. If the
macro environment does not decline, this will be a source of upside to our current full year expectations.

In FY '23, we placed a heavy internal focus and operational rigor and moderating our hiring plan to
adapt to the changing macro economy. In FY '24, these initiatives combined with the natural economies
of scale in our business will result in significant improvements in our margin profile and free cash flow
performance.

In FY '24, we are investing in enterprise growth with the ramped sales team and continue to invest in
widening the technology advantage of our platform. As a business approaching $1 billion of ARR, we are
set up to leverage this natural scale via operational initiatives that we started in FY '23.

For the first quarter of FY '24, we expect revenue to be in the range of $213 million to $215 million, and
non-GAAP operating income to be in the range of $8 million to $10 million. We expect non-GAAP EPS to be
$0.08 to $0.09 based on diluted weighted average shares outstanding of 136 million.

For the full fiscal year '24, we expect our revenue guidance to be $943 million to $948 million,
representing growth of 23% to 24%. We expect services to be 6% of total revenue. We expect our
non-GAAP operating income to be in the range of $35 million to $45 million, representing an operating
margin of 4% to 5% and a non-GAAP net income per share to be $0.31 to $0.38 for the year based on
approximately 137.5 million diluted weighted average shares outstanding.

We expect FY '24 billings growth to be 20%, and we expect our free cash flow for FY '24 to be $110
million.

To conclude, Q4 was another strong quarter, highlighted by our continued outperformance, our strength in
the enterprise and emerging profitability. We see FY '24 as a year where our enterprise investments set us
up for durable, long-term growth.
Now let me turn the call over to the operator. Operator?


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## Question and Answer
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**Operator**

[Operator Instructions] Your first question is from the line of John DiFucci with Guggenheim Securities.

**John Stephen DiFucci**
_Guggenheim Securities, LLC, Research Division_

Well, first of all, congrats on elevating Mike Gregoire to the Chairman position. I think he fits really well
with our view at least of how you guys approach the business. He's pretty straightforward. It's also nice to
see you demonstrate the profit power of the software model with both the results this quarter, but also in
your guidance for next year. So it's great to see [indiscernible]. But my question, Pete, you said guidance
reflects a worsening macro. So it sounds it's a little more conservative than usual, which I think is the
right thing to do here.

But last quarter, you gave some specifics around go-to-market metrics. And you talked about positive
comments on pipeline, close rates, sales productivity, [indiscernible]. You also said you'd be close to a fully
ramped sales force, and I think you sort of mentioned that too here. Can you sort of hit some of those, do
you think that are most important? And what you're -- what is implied in guidance in this year? Are they
all -- are you assuming all of those things sort of moderate throughout the year? Or are there some of
them that actually hold steady and some sort of moderate?

**Pete Godbole**
_CFO & Treasurer_

So John, I'll parse that question down to what you asked. So let's start with Q4. We exceeded our
guidance relative to the expectations we have set based on advanced booking and larger transactions that
we did. But as we built through the quarter, we saw a nominal worsening relative to past trends. And what
that meant was a slight degradation in the close rate and an elongation of the sales cycle.

We're seeing a strong pipeline. It's the close rate that we're seeing the slight degradation on. So given
that phenomena, what we've opted to do is be conservative in building a nominally worsening guide for
those in FY '24 as it relates to our top line view.

**John Stephen DiFucci**
_Guggenheim Securities, LLC, Research Division_

Okay. That makes sense. And if I could, just a quick follow-up to that, Pete. It sounds like the NRR is
going to -- though you said it will decline to the high teens by the end of the year. So it sounds like it's
progressively. And I realize that's a trailing 12-month metric. But does that imply that -- should I be
thinking about that as like the year-over-year subscription growth or perhaps the ACV growth would also
decelerate throughout the year too? Or is it not quite that?

**Pete Godbole**
_CFO & Treasurer_

So the net dollar retention rate, John, aligns with our billings guide, if you think of the top line, those are
intertwined. And the same factors that affect the billings guide we just walked through are at play for
the net dollar retention rate. So you're seeing a basic macroeconomic impact. We have a pretty healthy
growth rate but there's a macroeconomic impact that puts a slight pullback from those rates, if you will.

**Operator**

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

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


-----

Mark, on the enterprise, it seemed like that held up better. Can you just give us a little more color on
what you're seeing and kind of back to Pete's comments in the monitoring of demand? Or where are you
factoring in for the enterprise close in the back half? And for Pete, just when you think about the economic
headwinds worsening, did you see that across multiple countries? Was it more pronounced in Europe
versus U.S.? Any color you can get from a geographic perspective would be great.

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

Brent, I think one of the things that I was looking for in the quarter was how the conversion of pipeline
that extended in the previous quarter played out. So one of the things that was really encouraging to see
was in business that did extend last quarter, a lot of that business converted this quarter. And when I look
at our net sequential adds on over $50,000, $100,000, we saw really healthy numbers. We added, I think,
138 over $100,000 customers. We added over 240 over $50,000. So I was really pleased to see that.
So we continue to see strength there. I think the expectations from customers is clarity on what one's
presenting to them and how it connects to value. Are you helping me identify new sources of revenue? Are
you helping me retain my existing ones? Are you helping me drive savings? So some of them spoke to in
my remarks, spoke to that ability to help customers expand or drive savings. And that remains very much
alive and well.

I think the -- going into the year, I feel like we have a sales team, which is probably the most ramped
team we have -- have had heading into a year. So I think that will continue to yield nicely on that part of
our business.

Now as we make investments in our product, I'm also as motivated to continue to drive that product-led
growth piece, which builds all the future growers. So we do talk about enterprise a lot, but I think there's
also some really favorable things coming out this year, which helped lay that foundation for future growth.
Pete?

**Pete Godbole**
_CFO & Treasurer_

Sure. And then to the second part of your question, we did see more macroeconomic, sort of, what I call,
pressure in Europe. That's one part of it. But between the customer base over here, we saw really good
success with our larger enterprise customers. And we probably saw a little more pressure with our SMB
and smaller ARR customers. So that's a little bit of texture where we saw it.

**Operator**

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

**Seoyoung Lee**
_Morgan Stanley, Research Division_

This is Sophie Lee on for Josh Baer. I'm wondering if you saw any benefit of vendor consolidation? And if
you saw any customers consolidating to the Smartsheet platform? If you can also highlight any customer
conversations that changed meaningfully in the past quarter and some of the outcome of that discussion?

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

I think on the consolidation front, Sophie, we're seeing -- it's quite common when we have a multi -$100,000, multimillion dollar opportunity that there is presence of others in the environment. I think
where we benefit is we have very commonly presence within multiple nodes of the business. We remain,
I think, really grateful for those high conversion rates in those situations. I spoke to one of those in the
biopharma space this year, which was a bake-off where we were able to demonstrate the value and they
moved quite quickly. That is going to be a very large account for us over the next 10 years.


-----

So I would say the number of times, there is that formal RFP really high diligence bake-off, those are still
pretty few and far between, but they typically happen on the accounts that really matter. So we definitely
put energy into those when they do come about.

**Operator**

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

**Aleksandr J. Zukin**
_Wolfe Research, LLC_

Good to see a solid quarter, and congrats on kind of the margin guide. Just 2 quick ones for me. First, if
we dig in a little bit to the macro factors that you saw in the quarter versus what you guided to getting
worse. I guess clearly, your churn was strong at some 4% but maybe if you split up what you're seeing
around expansions with existing customers versus net new, where are you seeing that bigger impact from
the macro, any downward pressure on renewals? And then I have a quick follow-up.

**Pete Godbole**
_CFO & Treasurer_

So Alex, I'll take your question in pieces. So first of all, the net dollar retention rates are fairly healthy.
And the pullback that we've seen is on the expansion side of it tied to sort of what's happening in the
macro. And what we've seen is it's been relatively strong with our larger customers and our enterprise
customers, and there's a little more pressure with the SMB and smaller ARR customers. So that's how
we've seen it play out. We haven't seen, as I said, the churn number materially get impacted. So we've
seen fairly strong commitment to the Smartsheet platform.

**Aleksandr J. Zukin**
_Wolfe Research, LLC_

Perfect. And then, I guess, with respect to the margin guidance, maybe talk about through the linearities
through the year, the exit rate that we should be looking at for fiscal '24. And specifically, as you
contemplate kind of this net new growth algorithm -- growth profitability algorithm where your billings
growth is at that kind of 20% level, what is the aspiration around sales efficiency in terms of that magic
number or the ability to kind of generate a balance of both?

**Pete Godbole**
_CFO & Treasurer_

So I'll start by saying that this is a big market, and we think there's plenty of room in the growth in this
market long term. We're bullish in this market, and we are the leaders in the enterprise segment and
across the whole category. So when we think of this business in terms of the longer-term growth, we see
this as a solid growth.

Now there's going to be macroeconomic adjustments as we go through different cycles of macroeconomic
change. So that's one part of it. But the second part of your question is on the profitability and how
we think of that moving forward. We're going to continue to be optimizing essentially the scale we've
attained. So if you think of the scale we've achieved, we don't need to add a lot of resources just given
the scale in terms of where we're at. And we're being more and more efficient because the -- every dollar
we've already gained cost us a lot less to serve compared to the dollar we need to invest to gain. So that's
playing into the economics you're seeing in sales and marketing is going to continue through. So you're
going to see that play itself in the future as well.

**Operator**

Your next question is from the line of Terry Tillman with Truist Securities.

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


-----

I had to look at the press release like 3 times because I kept looking at -- is that $110 million of free cash
flow and surely it was. So great to see that. I have 2 questions. The first one is a multi-parter. And then
the second question, I'll follow up with. But on the first question around product and packaging. I think,
Mark, you said you have 3,300 customers that are considered enterprise. But I'm curious about is the
penetration of Advance now in that segment? And then if we take a step back, if we're looking at 23% to
24% growth in the total revenue, how should we be thinking about the enterprise segment? And then I
have a follow-up around [indiscernible].

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

Terry, the 3,300, again, that ties out to the large enterprise. That's over 10,000 employees. We obviously
have many more companies north of 2,000 employees as well. So in that very large segment, it is still
really early innings for Advance. We have -- while the bookings do tie out to a lot of the larger transactions
we have, it's a minority of that base. So we think it's still -- we're trying to figure out ways in addition to
our people-based processes to get these capabilities presented to people.

As I said on past calls on some of our road shows, we are working on both getting our professional sales
team able to solution advise and do outcome mapping with people, while getting our advanced product
line into a self-discovered state. So what that means is people at those 3,300 customers using our product
in the context of what they're trying to solve, whether it's integration, whether it's providing advanced
access to data, having those things presented to them [indiscernible] having them experience those things
and then do -- really have inbound demand to us saying, hey, we use this thing, we'd like to talk to you
about this capability, which ultimately leads to a discussion of Advance.

So we are still, call it, second inning on the Advance penetration as it relates to these super large
customers. What's neat though is that we have enough data points now that really help us understand
how people are adopting those, what it means for connected users and how that flows through on the
economics.

**Pete Godbole**
_CFO & Treasurer_

And Terry, the second part of your question is that -- was on the 23% to 24% revenue growth and how
that parses out across segment. So our revenue growth is a function of our billings and our net dollar
retention rates, you think of the largest customers, they grow with us the fastest as we -- as Mark shared
on our biggest large enterprise customers, you can see the growth rate is really quick. And the best part
about that is they will grow faster than our median growth rate but what's interesting is that our biggest
customers are the most profitable for us as well. But that's the scale that leads to the $110 million you
see, which you referenced at the start. So we're pretty excited by those economics.

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

Yes. Got it. And I guess just following up on the first part of the question. I mean, Mark, you were kind of
going down the path of product discovery. And I know we've talked about that a bunch in the past. You
go on the website. And if you just look at the sheer number of capabilities, a lot of these folks probably
don't even know all of what is under the hood, but is there a point in time this year where there is a major
kind of milestone where whether it's the technology, the AI or people they could really unleash this where
potentially this could become an upside driver around some of the product discovery initiatives on whether
it's billings or revenue?

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

Yes, Terry, we expect to benefit from this beginning in the second half. So engineering is underway right
now. Some of that self-discovery will be available heading into the second half. And consistent with how
Pete and I have forecasted the business, until a new idea, a new concept, the new innovation yields, we
don't bake it into our guide. So I would see that, Terry, if it performs to be incremental.


-----

**Operator**

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

**Michael James Turrin**
_Wells Fargo Securities, LLC, Research Division_

Great. Appreciate you taking the question and nice job with the close of the year. I think given the
prepared remarks, the focus on enterprise is clear. Could you just speak to how margin complements
that? I would think that could prove more people heavy, but clearly not the case given you're giving 10
percentage points of implied free cash flow margin expansion into next year. So can you just add more on
what enables that from the Smartsheet side and how you're able to balance both an enterprise focus and
the margin expansion in the current environment?

**Pete Godbole**
_CFO & Treasurer_

Sure. So Michael, 2 parts of it. The first one is, when you think of the enterprise customers and you think
of their -- the growth rates they have, that's a really high number. It sort of is better than our average by
a fair bit. And what that does for us is it creates a space where if you're looking at our growth and you're
looking at how much we invest in retaining the dollars we've already got, that's a fairly low number.

So that provides the basis for the margin accretion. We are investing in getting the new dollar, but
the base is growing by such a large number that it provides natural scale impact benefit to sales and
marketing. So that's one part of the equation. And the second part of the question is just a simple part of
-- we hired a lot of people last year given the size at which we are, and we don't need to hire the same
number of people and that lower hiring that we're going to go through this year is margin accretive. Those
are -- think of them as 2 simple facts that really drive the margin story.

**Michael James Turrin**
_Wells Fargo Securities, LLC, Research Division_

That's helpful. And then, I guess, just the other point that you mentioned in the prepared remarks, Pete,
was just also making sure you're able to capture the improvement whenever that were to surface in
the world. So it sounds like you have some natural capacity to grow into, but just how you continue to
thoughtfully add capacity to make sure you're striking the right balance?

**Pete Godbole**
_CFO & Treasurer_

Yes. For us, we are a sales-assisted motion. And now we've [indiscernible] with obviously the selfdiscovery that makes that motion go faster. But if you think about the way we've modeled it, we've
modeled our sales productivity in line with the way we think the macro is going to play. If the macro
changes and it turns on us, you will see a ramp in sales productivity because we've already got a ramped
sales force we brought in this year that's now enabled with the best technique. So we're ready to get
there. So that's the upside we see as the environment changes or as Mark mentioned, as we see the
benefit of some of these things, which we can measure, we can put more energy behind those initiatives
and drive upside to the current plan we have.

**Operator**

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

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

Congrats on the quarter. Mark, good to hear that you're kind of leaning in on generative AI. Maybe help
us understand some of the use cases. But more fundamentally, how do you differentiate with generative
AI when everyone is kind of rushing to implement those large language models? Do you think it becomes
kind of table stakes at some point versus kind of increasing competitive advantage?


-----

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

Yes. I love the question. I think those who sprint towards embedding a standard capability that is not
differentiating can say that they're participating. But I actually don't think it really separates you from
the competition. I think the marriage between what is distinct and unique to your offering paired with
generative AI, that's the magic. So when we think about our assets and digital asset management,
whether it's the generation or images, manipulation of images that is paired with the Brandfolder and
Outfit offerings.

When I think about where we see major value unlocks in our world in terms of Smartsheet [indiscernible],
I think of the thousands of cases we get every single quarter from people saying, trying to figure out how
to design the most advanced formula and logic-based workflows in our app.

We've already done research. We've already generated formulas and logic with the help of generative AI,
which we think will be a major design win for customers. So when you think about -- it's not just driving
down the cost, it is unlocking a whole new set of population that in the current form may be dissuaded
from taking the next step. So I think it's in the context of the work people are tracking and designing
in Smartsheet, the digital asset. And then the third vector is really all of the inflow we get from our
customers into our help center.

People are trying to -- when you look at the percentage of cases that come in, it's not break/fix. It's
typically grounded in how do I -- and how do I unlock with generative AI is significant. So the very
promising remark that I made in my remarks ties up to those 3 vectors that we're pursuing. And you'll
see us continue to engage our community and our customers through Early Adopter Program in the
coming quarters. And I would say I'm quite bullish for the out years in terms of what that means for our
customers.

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

Got it. Understood. And Pete, one question for you on the FCF guide. Obviously, it's extremely strong. But
help me understand kind of the context with respect to stock-based compensation on that. Seems like SBC
is growing about 23%, our understanding is that hiring is probably going to moderate. Help us understand
the FCF guide versus the SBC number. Is there a change in kind of comp structure going into this fiscal
year?

**Pete Godbole**
_CFO & Treasurer_

So the guide we provided obviously shows an improvement in the GAAP margins as well. So you can see a
proportionate improvement in the GAAP margins consistent with the non-GAAP margin improvement, and
it embeds a stock-based compensation element that basically shows it's being -- we're managing it to be
flat year-on-year. And we've taken a sort of special emphasis and initiatives that we can use to reduce the
stock-based compensation.

Obviously, there is a stacking effect that happens in stock compensation of previous historical brands. So
we're very mindful of what we're adding into the pile. And for example, this quarter, we made the change
to convert the bonuses we paid to senior employees, which used to be in stock to convert them to cash.
That's an example of, among many others of how we're managing stock-based compensation.

**Operator**

Your next question is from the line of Rishi Jaluria with RBC Capital Markets.

**Rishi Nitya Jaluria**
_RBC Capital Markets, Research Division_

Wonderful. First, I wanted to maybe hit a little bit on the macro side. And what sort of impact have you
seen from your existing customer base? And what are you kind of contemplating from the seat count


-----

reductions or I guess the layoffs you've been seeing across and what that means on the seat count side? I
know you're very well diversified, but we've seen a lot of layoffs in tech. So maybe you could talk through
what you've seen so far, what you're modeling and any tools that you've kind of had in your arsenal to be
able to counteract that or maybe slightly offset that? And then I've got a quick follow-up.

**Pete Godbole**
_CFO & Treasurer_

Yes. So the -- for us, the major element of what we're seeing is when you think of the expansion, it's
really on the gross expansion side of it. We're not seeing anything more than the normal historical
movement on what we would consider reduction. And to parse that even further, we are seeing sort of
what I call some seat churn, but that's not unusually different from the capability churn we see. So it's
sort of aligned and moving in lockstep together.

Some part of that obviously comes down to what we're doing. So what we're doing is we don't have an
ELA type model. What we have is the earned enterprise, which means we don't sell seats ahead of their
usage. People are using them, they leverage them. It is the same concept we use for connected users.
You're not paying for users you don't need. That really helps keep people on the side of the ledger where
they're staying with what they have. And then the question really becomes one of, what are you adding to
the list? Or how much are you going to add and when are you going to add those?

**Rishi Nitya Jaluria**
_RBC Capital Markets, Research Division_

Got it. That's helpful. And then the other kind of macro-related question, I wanted to better understand.
Pete, when you were talking about the impacts that you're modeling, you've seen lower close rates, you're
assuming that degrades further, which makes a lot of sense. Have you also seen deal compression as
well in terms of you thought a deal would be, call it, $1 million in ARR, and it ends up coming at less than
that, $800,000 or whatever be the case? And what are you modeling in terms of deal compression going
forward? Is that embedded in guidance?

**Pete Godbole**
_CFO & Treasurer_

Yes. So Rishi, we've modeled the trends we've seen. And so what we have modeled is some degradation,
the close rate. We've modeled some elongation in the sales cycles. And the deal compression that happens
typically is people deciding not to buy is not the issue, they're buying either things a la carte and in
smaller pieces. So it's still a healthy expansion rate, which is what I was looking at. Looking at our
expansion rate is healthy. And even the one we've guided to is a healthy expansion rate. It's just a matter
of moderation in the macroeconomic phase that exists.

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

Rishi, I think one thing also that has been helpful is there are some of the transactions this last quarter,
I would class as compliance-based licensing. So we have an agreement with you, you use the product
extensively. You have all these connected users and that discussion happens around, okay, here's the new
level at which you're engaging with the platform. It's not you making a choice over, oh, I think this would
be interesting, I didn't get value. It's a decision you made quarters ago that you're not clicking into and
those discussions are usually much more high velocity because it's really maintaining compliance than it is
making a new business decision.

**Operator**

Your next question is from the line of Jackson Ader with SVB Securities.

**Jackson Edmund Ader**
_SVB Securities_


-----

The first one, just given that these things are happening concurrently, like how confident are you -- there's
been a lot of discussion with [indiscernible] how confident are you that none of the [indiscernible] or close
rates are impacted by some of the expense cuts that you've made over the last kind of 6 to 12 months?

**Pete Godbole**
_CFO & Treasurer_

Jackson, the short answer to your question is, if we've made expense reductions, we've made them
in areas which are ancillary to the core selling or product areas. So we made changes, for example, in
support resources. We made changes in expenses that we spend on, we just reduced the dollar value
of those normal procurement type of things. So we haven't -- we've actually maintained our sales
capacity, and that's one thing we're pretty excited about going into the year. So when you talk about deal
compression or you talk about elongated sales cycles, that's really about what customers are feeling and
experiencing as they're making plans of their own on how to plan their business.

**Unknown Analyst**

Okay. Yes, that makes sense. So they're outside of the scope that you would expect to see. Okay. And
then, Mark, when we're talking about those rare instances where it might be a bigger RFP and Smartsheet
is already installed in a couple of [indiscernible], are there any business units that you feel like have an
outside influence on the ultimate company-wide decision, whether it's finance or IT or sales, marketing,
whatever?

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

I would say [indiscernible] user population as well as those responsible for ensuring a safe and scaled
environment. And I would say there are certain things that are non-negotiables where you have to
conform, whether that's in how it's administered, how you are licensed, how you allow non-licensed
people to interact with the information that is being stored. Those are all things that are, I think, pretty
tried, true and tested in that enterprise environment. I would say that the organization from a functional
standpoint, which I think are getting outsized sort of wait on the scale right now are those who are tying
out to revenue and both growth and retention. So I think the presence of field ops, any organization is
directly tied to customer experience, and financials, I would say, it plays a larger role today.

**Operator**

Your next question is from the line of DJ Hynes with Canaccord.

**David E. Hynes**
_Canaccord Genuity Corp., Research Division_

Mark, can you talk about what you've seen with some of your more marketing-oriented use cases,
Brandfolder, Outfit? It just feels like that's a category of spend that's seeing more scrutiny. So it would be
great to get any observations there.

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

Yes. I think conversations in the marketing and creative management arena that tie out to sort of concrete
financial benefit, like that presentation of value is landing very well. I think things are that are more
qualitative in nature in terms of being more confident about the work you're managing, being a little bit
more clear on the status of something still important, but probably not enough to tip the scales.

So on most of our large marketing-based solution discussions now, we are grounding it in accelerating
the completion of work, the elimination of third-party resource to get that work done and then the
quantification of what that campaign or that asset is actually yielding for your company. And people are
very interested to learn about how to quantify that. And the more weaken our marketers in going to their
CFOs, Pete, no offence, right, in presenting the value, I think that really gives the marketing teams much


-----

more confidence. So it's a newer arena for many marketing organizations, but I think it's -- it actually is
quite promising for the year ahead.

**David E. Hynes**
_Canaccord Genuity Corp., Research Division_

Yes. Okay. That's helpful. And then, Pete, just a follow-up for you. So look, in the context of the big
margin upside next year, and I know this is a question you won't want to answer, but can you help frame
like what kind of sales capacity you're thinking of adding in fiscal '24, maybe relative to what you did in
fiscal 2023? And the reason I ask, like, I think investors are going to want some assurances that we're
continuing to invest and position for growth in fiscal '25 and beyond. So any color there would be helpful
for folks.

**Pete Godbole**
_CFO & Treasurer_

So DJ, I think we're committed to growth. So think of that growth coming from a more efficient model.
So quite simply, if you think of the size of our base that we bring in for renewal, the cost in terms of what
it takes to service that base is much lower than what the cost is for bringing in a new dollar of business.
That economic or that effect is going to stack into how many resources we need. And now we will continue
to hire. We're going to hire this year as well. We'll hire next year, but the classes in size will be smaller
than what we have historically done. So you see an accretion to margin as a part of our longer-term plan
to grow margins.

**Operator**

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

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

Everyone, congrats on the nice results this quarter. I guess, Mark, I want to start with a question on a
totally different kind of, I guess, agenda is the company is pretty close to a $1 billion revenue run rate.
How does Smartsheet look differently at a $2 billion run rate, do you think?

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

I think the enrollment, Scott, of many more customers having a diversified experience in Smartsheet, that
will be very much present at $2 billion. So today, we talk about thousands of companies benefiting from
Advance. I think a couple of years from now, we're going to see tens of thousands of organizations having
a much more complete Smartsheet experience.

So a couple of years ago at Analyst Day, someone said, what's the thing you would most like to have
in your product and you know what, don't give me another thing. I want our customers to have perfect
information on what's possible. Now fortunately, I have done a whole bunch of them in those 2 years, but
I want those assets, those capabilities to land with our median customer. So we are working very hard,
not just to cater to the largest of the large, but how do you get that midsized customer and that upper
mid customer and even an emerging customer to understand the power of the platform. So I believe
you're going to have a much more cross-connected product experience across the various disciplines
within Smartsheet, whether it is on strategic transformation, it's marketing creative management, it's
PPM, it's core work management. You're going to have much more complete usage. And today, you'd see
-- you'll have evidence of hundreds of customers using us at scale, doing very sophisticated things that
will be driving towards the [indiscernible].

And I would say what that will result in is not only more customers, but also a significantly higher average
contribution per customer. So our ASP will climb meaningfully over the next few years as a result of that.

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


-----

Got it. That's very helpful. And then from a brief follow-up perspective, a lot of discussion on the macro,
obviously, not a surprise given what's going on. But how do you all view your opportunity or recent
working with partners? Partners continue to become increasingly more important component of, I think,
some of your sales process, it's not that they necessarily sell directly, but they seem to influence it. Are
you seeing anything different out of partners recently than maybe what you had in the past?

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

I'll start, Scott, by talking to -- a message I sent to -- a video message I did for the kickoff of one of
our global SIs who has one of their global practices building a set of workflows and solutions on the
Smartsheet platform. In this -- for this large global SI, every single M&A transaction and divestiture
within this industry practice is backboned by Smartsheet. Every single project they do is navigated with
Smartsheet. Every time they leave the customer site post that transaction being completed, Smartsheet is
left behind with the customer for it to continue in those operations.

So that is a few years ago, those types of discussions, those types of experiences never existed. It was
much more the midsized SI. We still have hundreds and hundreds of SIs in the middle range who are
contributing, influencing. We do as much co-selling with them as we do them closing deals independent
of us. But I would say the really notable ones, the ones that sort of give me the most confidence in terms
of high impact are those larger players who are developing practices around us. And that is not just one
global SI. We have 3 of those in play right now.

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

Very good. Congrats on nice results this quarter.

**Operator**

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

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

I was wondering, given the way valuations have generally come down and maybe stabilized a little bit
privately, what's your current thought for us on doing further M&A? And kind of how much cash do you
need to keep on your balance sheet? So kind of what's going in your capacity or bandwidth?

**Pete Godbole**
_CFO & Treasurer_

So we have a healthy cash balance. And our approach to M&A has been that we want to look for
adjacencies when they come up, but they have to be accretive relative to our margin model. So we're not
looking for visionary M&A that doesn't have a clear payback or a clear ROI. So that's been our strategy,
and we continue to pursue that aggressively.

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

Got it. And then talking about an existing one. Can you tell us about how it has been performing, a little
more quantitatively perhaps than you did before in terms of like a lot of -- like the actual performance?

**Pete Godbole**
_CFO & Treasurer_

So Outfit has performed to our expectation. It's done a really kind of effective job. The way we went
about Outfit was it really tags along with Brandfolder as a part of templating that you need when you're
doing Brandfolder deals. And we're seeing a good sort of, what I call, synergistic effect and the product
integration we're thinking about between Brandfolder and Outfit makes this even more compelling when
that comes through.


-----

**Operator**

Your next question is from the line of Jacob Roberge with William Blair.

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

Congrats on your results, especially on that profitability guidance. It was awesome to see. I understand
there was a slight degradation in close rates and sales cycles, but you're still seeing some pretty strong
new customer activity with new bookings and the user growth number. I know those customers start
small, but were there any particular segments or industry verticals that stood out on that front?

**Pete Godbole**
_CFO & Treasurer_

I think if you look at the segments that come out for us, which are very strong, in that new user, et cetera,
we've launched essentially a lot of new activities with customers. And what we're seeing is our largest
customers that come in from the largest companies, new nodes within companies coming forward, they
seem to be really resonating with our product. And what they're hearing is capabilities can be launched
earlier. We still do deals with Advance, which surprises sometimes us internally that says it's a new
customer, they start with the brand. That's somebody deciding that they don't want the primitives as they
get started. They just want to start with what gets them the lift in productivity that they need.

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

Okay. Great. And then would love to just touch on what you're seeing in the market from a competitive
perspective. It seems like some of your competitors are calling out some headwinds and undergoing some
fairly large risks, while you're obviously continuing to execute pretty well. Have you started seeing any
competitive benefits in the pipeline as a result of those changes?

**Pete Godbole**
_CFO & Treasurer_

So what we are seeing is -- 2 things happening. First is the market for hiring talent has obviously gotten
better, which is a macro statement about everything we've done. And then the one thing we are finding
is on the marketing side, the competition for [indiscernible], et cetera, is proving to be easier. The cost is
dropping over there. So we're benefiting on those 2 fronts.

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

I think in terms of the teams in our pursuit, the large opportunities that we pursue, where we have
established footprints, those are very rarely highly contested. It's really us demonstrating value and
seeking greater investment from our client. It's pretty rare that one of our large existing customers that's
growing quickly that they're in the process of reconsidering -- considering a platform change. So it's -- we
really haven't seen that manifest or the median sales cycle for us.

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

Great. Congrats again on the great results.

**Operator**

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

**Unknown Analyst**

This is George on for Steve. I guess on the macro, if you could discuss the degree of linearity you saw
through the quarter, it sounds like things may be progressively got worse on the conversion rates and
sales cycles. So just any comments there. And then what you've seen in February and March so far?


-----

**Pete Godbole**
_CFO & Treasurer_

So as we looked at the quarter and how it played out, the build through the quarter had some element of
what I call, degradation that took place between November, moving into December and January, that you
could describe as the elements I described before, that macro degradation was a function of like elongated
sales cycles and what I call some degradation of the close rate that we saw. We saw that play out as we
progressed through the quarter. So that's first part of it.

What have we observed so far in February, I think we've got to a February start, which is consistent with
the first month of the quarter. But essentially, the trend we expected to have continue, which is a part of
our guide. It's built out. We have seen the close rate and what I call sales cycles, not sort of improved,
they stayed sort of marginally a tad bit sort of worse than [indiscernible]. So that's how they played out.

**Unknown Analyst**

Got it. That's helpful. And then one quick follow-up on the margin guidance in your sales and marketing
spend. I just wanted to kind of understand if there are any kind of KPIs that you would see that might lead
you to sort of turn on that investment flow? Or is this kind of all sort of according to plan and regardless
of what you see in the macro side, you're kind of going forward with this ramp sales force that you have
today?

**Pete Godbole**
_CFO & Treasurer_

I think, George, our model is based on sort of reading the signals and seeing what comes out. So I would
describe it to you is if we see a macro opportunity, as long as the ROI and the payback is there, we will
continue to invest, which sort of provides the stability in op margins, but allows us to accelerate revenue
on one side of it. We'll do the same thing with -- for example, things we generate internally, we see
something that has [indiscernible] and it's driving to good ROIs, we'll continue to invest behind it. That's
the approach we're taking.

**Operator**

At this time, I will now turn the call back over to Mr. Aaron Turner.

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

Great. Thanks, everyone, for joining us this quarter, and we'll talk to you again next quarter.

**Operator**
Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now
disconnect.


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