# Smartsheet Inc. NYSE:SMAR

## Earnings Call

_Thursday, December 1, 2022 9:30 PM GMT_

### CALL PARTICIPANTS 2

 PRESENTATION 3

 QUESTION AND ANSWER 7

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**WWW.SPCAPITALIQ.COM**


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## Call Participants

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

**EXECUTIVES**

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

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

**Pete Godbole**
_CFO & Treasurer_


**Michael Bird**

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

**Richard David Poland**
_RBC Capital Markets, Research_
_Division_

**Robert William Dee**
_Truist Securities, Inc., Research_
_Division_

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

**Unknown Analyst**


**ANALYSTS**

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

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

**Ethan Bruck**

**Fred Lee**

**George Michael Iwanyc**
_Oppenheimer & Co. Inc., Research_
_Division_

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

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

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

**Kyle Diehl**
_MoffettNathanson LLC_


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

**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 Third 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 Third Quarter of 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.

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

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

Thanks, Aaron. Hello, and welcome to our third quarter earnings call for fiscal year 2023. Today, I'd like
to focus on 3 topics: our solid performance in the quarter, how we're improving our operational efficiency
in the current macro environment; and how delivering measurable ROI for customers drives our durable
long-term growth. While Pete will provide additional details, I want to call out some of our strong financials
from the quarter.

Revenue for the quarter was $199.6 million, up 38% year-over-year. We added $56 million in annual
recurring revenue, bringing our total ARR to more than $792 million. We added many new customers in
the quarter, such as recruiting software providers seek out, Monster Energy, the social good empowerment
platform, Bonterra and Arizona Beverages. And we expanded Smartsheet's footprint significantly at Picasa,
AGC Biologics and Seattle Children's Hospital, among others.

Our strong expanded climb motion within our customer base continued with 235 customers expanding
by $50,000 or more and 79 customers expanding by $100,000 or more. We also now have 40 customers
with ARR over $1 million. And we ended the quarter with more than 11.7 million Smartsheet users. Last
quarter, we discussed how our new sales reps were ramping more slowly than sales reps from previous


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years. This quarter, we saw improvements in quota attainment and pipeline generation from our newest
reps. We exited the quarter with a record pipeline, improved after macro-related softening in Q2. We
also made significant improvements to our profitability in Q3. Our Q3 non-GAAP operating loss was
negative $4.3 million significantly better than our guidance and a 7 percentage point sequential margin
improvement from Q2. This improvement is a function of the adjustments we've made to our hiring plan
for the year, a heightened focus on operational rigor and financial policies and inherent economies of scale
in our business model.

We expect these margin benefits to persist, allowing us to improve our non-GAAP operating income and
free cash flow guidance for the year and beyond. The growth we experienced in the quarter came in
large part from Smartsheet's ability to provide measurable ROI for customers as they navigate the macro
backdrop. For example, in Q3, a Fortune 50 healthcare company expanded its Smartsheet investment by
over $0.5 million, bringing their total Smartsheet ARR to nearly $2 million.

Since moving to Advance Gold a year ago, they've seen a 56% increase in license growth as more teams
across the organization leverage advanced capabilities to manage programs and processes at scale. Their
Data Shuttle usage has increased almost 300% over the past year, and they now have 85 workflows
powered by our Bridge integration product. One of the biggest benefits this customer is seeing from
Smartsheet is improved efficiency, leading to a measurable ROI. For example, one team used a workflow
powered by Bridge to automate a complex manual process for managing staff changes and application
requests, decreasing the amount of time spent on it by more than 50%.

We also saw a leading provider of customs brokerage and logistics upgrade to Smartsheet's enterprise
licensing and Advance Gold platform after determining that advance would save them nearly 3,000
hours of labor each year. Those hours saved are delivering more than $300,000 in ROI for the company
while giving it the ability to handle a larger volume of quick win transactions and improve employee
engagement. In another Q3 advanced deal, the leading integrated reporting platform provider, Workiva
moved up to advance, so the professional services group could leverage Control Center and the
Smartsheet Salesforce connector to implement a new project and portfolio management solution.

They chose Smartsheet as their PPM platform because it offers both introductory and professional-grade
tools for project management that can scale to enterprise levels. This solution also gives project managers
insight into project risks and time lines and makes it easy for them to see all assignments in one view,
helping reduce project cost overruns. They estimate that in over 3 years, they will earn a 340% return
on their Smartsheet investment. On the innovation front, we launched several Smartsheet capabilities
and experiences at our September ENGAGE conference. where we welcome thousands of Smartsheet
customers and partners in person for the first time in 3 years.

It was incredibly energizing and gratifying to connect with customers face-to-face and hear their
Smartsheet stories. HP, Webex, AbbVie and many more presented during breakout sessions and shared
how Smartsheet is empowering them to solve tough problems, deliver on promises and drive tangible
results. At Engage, we launched portfolio WorkApps, which combines the power of control center for
managing large portfolios with the end user simplicity of WorkApps. A global food services company
recently chose portfolio WorkApps as the PPM solution for its global transformation initiatives.

The company has a complex global operating model and portfolio WorkApps gives its portfolio managers
the ability to create portfolio views tailored to specific organizational roles that span multiple regions,
countries and segments. By leveraging portfolio WorkApps, the company now has a clear line of sight into
any given initiative across a global matrix environment, allowing leadership to drive a strategic road map
and achieve KPI targets. We're also deepening our investment in the PPM space by launching new resource
management capabilities such as capacity view that gives resource managers increased visibility of their
capacity for planning and deploying talent. We're continually refining our governance and security controls
to meet customers' current and future needs. At ENGAGE, we shared details on data egress, a new layer
of control over how Smartsheet data can be exported outside of an organization. Such robust security
and governance capabilities, which protect confidential information via granular control are a key reason
many companies choose our platform. For example, in Q3, a large mortgage lender chose Smartsheet


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over another CWM solution when the competitor's solution was unable to comply with certain mandatory
requirements.

This customer was impressed with Smartsheet's enterprise-grade security and like how easy it was for
teams across various lines of business to start using the platform. Ultimately, they felt Smartsheet was
the best platform to help them meet their COO's goals for managing the business more securely and
efficiently. We also announced our new desktop application, which was enthusiastically received by people.
As worth of new ML-powered home and reimagined search functions. These investments streamline the
daily Smartsheet experience for all users by enabling them to find and act on their work quickly. On
last quarter's earnings call, I mentioned our acquisition of the Outfit brand management templating and
creative automation platform, which we have integrated with Brandfolder.

The synergy of the Brandfolder Outfit solution is already providing its value for customers in a meaningful
way. In Q3, we landed a $300,000 plus deal with a major appliance manufacturer that will be using
Brandfolder plus outfit as their single source of truth for digital asset management and production. Each
brand within the company will use Brandfolder to track and manage assets, helping reduce assets for all.
Outfit will provide a self-service model for building automated asset templates that they can distribute to
wholesalers and retailers to ensure consistent brand marketing. This Outfit powered content automation
solution will help the company reduce a 14- to 16-week creative and distribution process to 4 weeks,
driving a 400% faster time to market for their marketing campaigns. By providing transparent and
efficient content creation distribution and tracking capabilities. The new system allows the company to
utilize its existing in-house creative team while eliminating significant outside agency-related costs.

As you've heard today, despite the current macro environment, we had a strong quarter and remain well
positioned for continued growth. Just last month, in their Q4 2022 report, Smartsheet was named a leader
in the Forrester Wave for collaborative work management tools. The report recognized that Smartsheet
continues to provide an extremely broad set of use cases among the leaders in this Forrester Wave. And
that Smartsheet strengths are the extensive availability of work types, flexible use case creation and
end user automation capabilities. With people under greater pressure to choose the right CWM solution
for their needs, reports like this are important in helping guide their decision-making. In closing, Q3
was another solid quarter for our company, especially considering the global macro headwinds. With
our performance in the quarter, a continued focus on operational efficiency and the way we're delivering
ROI for customers, I remain confident in our ability to deliver long-term durable growth with improving
profitability.

Now, Let me turn you over to Pete. Pete?

**Pete Godbole**
_CFO & Treasurer_

Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q3 was a strong quarter that
reflected durable growth and improving profitability. We exceeded our guidance on both the top and
bottom line as customers continue to turn to Smartsheet for their diverse set of mission-critical work
management needs, and we benefit from improving economies of scale and an intense focus on
operational efficiency.

We saw particular strength among our enterprise customers as these customers continue to deploy our
capability-based products to streamline their most mission-critical workflows. Capabilities grew to 29% of
subscription revenue in Q3, aided by strong growth in our advanced offering and Brandfolder. I will now go
through our financial results for the third quarter. Unless otherwise stated, all references to our expenses
and operating results on a non-GAAP basis and are reconciled to our GAAP results in the earnings release
and presentation that was posted before the call. Third quarter revenue came in at $199.6 million, up 38%
year-over-year.

Subscription revenue was $186.1 million, representing year-over-year growth of 40%. Services revenue
was $13.5 million representing year-over-year growth of 12%.


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Turning to billings. Third quarter billings came in at $219.6 million, representing year-over-year growth
of 36%, approximately 92% of our subscription billings were annual with 4% monthly. Quarterly and
semiannual represented approximately 3% of the total. Multiyear billings represented less than 1% of total
billings. Moving on to our reported metrics.

The number of customers with ARR over $50,000 grew 43% year-over-year to 2,962 and the number of
customers with ARR over $100,000, grew 55% year-over-year to 1,346. These customer segments now
represent 60% and 46%, 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 25% year-over-year to $7,951.
We ended the quarter with a dollar-based net retention rate of 129%. The full churn rate remains below
4% given the current macro environment, we expect our overall dollar-based net retention rate to be in
the mid-120s by the end of the year.

Now turning back to the financials. Our total gross margin was 81%. Our Q3 subscription gross margin
was 87%. We continue to expect our gross margin for FY '23 to remain above 80%. Overall, operating
loss in the quarter was negative $4.3 million or negative 2% of revenue, which represents a 7 percentage
point sequential margin improvement. The margin improvement was the result of cost-saving initiatives
we discussed in previous quarters, which included moderation of our hiring plan and cost rationalization.

Additionally, we led portion of our revenue outperformance dropped to the bottom line, demonstrating
the operating leverage inherent in our business model. Based on our improved gross retention, we also
moved to our 4-year amortization period for our commission base -- commission expense from a 3-year
amortization period. This accounting change contributed about 3 points of margin improvement in Q3.
Free cash flow in the quarter was negative $4.6 million.

Now let me move on to guidance. Before I go into the details, a few comments on our approach to
guidance. The macro environment dynamic, which impacts near-term visibility. We are, therefore, electing
to remain appropriately prudent as it relates to our top line performance. For the fourth quarter of FY '23,
we expect revenue to be in the range of $205 million to $207 million and non-GAAP operating loss to be
in the range of negative $2 to $0. We expect non-GAAP net loss per share to be negative $0.02 to $0.00
based on weighted average shares outstanding of 131.5 million. For the full fiscal year '23, we are raising
our billings guidance to $878 million to $885 million, representing growth of 33% to 34%. We are also
raising our revenue guidance to $760 million to $762 million, representing growth of 38%. We expect
services to be 7% of total revenue. We are improving our non-GAAP operating loss to be in the range of
$45 million to $43 million and non-GAAP net loss per share to be $0.31 to $0.30 for the year based on
approximately 130 million weighted average shares outstanding.
We are raising our free cash flow guidance for the year to $5 million. To conclude, Q3 was another strong
quarter. We continue to demonstrate our ability to drive durable growth with improving profitability as the
most demanding businesses in the world turn to Smartsheet for their mission-critical and data-intensive
work management needs. Now let me turn it back to the operator for questions. Operator?


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## Question and Answer
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**Operator**

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

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

I wanted to dig in on your comment about improved pipeline conversion given the softening macro
backdrop. You raised billings guidance for the year modestly, which is certainly positive. As we think about
next year, are you assuming that pipeline conversion stays at current levels or improves throughout the
year? And how should we think about pipeline conversion relative to workforce productivity, some of the
investments you've made on the front and the sales force continues to ramp. Sorry for the long question.
That's my bad habit.

**Pete Godbole**
_CFO & Treasurer_

John, this is Pete. I'll take your question in parts. The first part of your question was pipeline conversion
essentially, what I talked about last time was ramping our new reps, we saw our pipeline conversions
related to rep productivity improve from that sense. And what we saw in terms of the physical view
closing and pipeline, October was a strong month for us as it relates to pipeline closing. So those are the
2 elements of dimension on sort of how pipeline conversion looked. One, from a rep standpoint, and the
other from the business deals and how they closed. Can you repeat the second part of your question you
asked about, so I just want to take them in sequence.

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

As we think about next year, should we assume that pipeline conversion stays at the current levels, or
should we assume it gets better or who knows macro backdrop, maybe that changes for the worst, too.
How should we think about it? How do you think about it as it relates to guidance?

**Pete Godbole**
_CFO & Treasurer_

So we haven't come up with guidance for next year. But what I would tell you is 2 things, it's going to be
a function of sort of what the macro is because that's going to decide sort of the number of deals and how
those are progressing. We will go into the year with a sales team that's very ramped, and that's going to
be positive to conversion.

**Operator**

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

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

Congrats on the nice set of numbers here. Mark, one for you. I'm curious how, if at all, you've evolved the
go-to-market messaging in the current environment? I mean, obviously, ROI is important in any sale. You
mentioned it several times in your prepared remarks. I'm wondering if there are certain products or use
cases that get more emphasis in a tougher environment?

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

I think when you break it down in its most simplest terms, we're helping companies drive revenue or
achieve cost savings. And when you can apply a program or process, something is scaled to one of the


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things that they're trying to achieve and using plans speak like that, you typically have an opportunity to
have a conversation. So when we think about things like control center, Data Shuttle moving information
more quickly and efficiently across systems. We think about having fewer hands on things so you can
get shorter cycle times. These are all very hard ROI calculations you can make. So I think the shift, the
continued shift from the soft benefits in terms of employee engagement, which is super important, but
harder to calculate a benefit from. Customers are responding to how we've oriented ourselves into such
discussions. And I think that goes across not only selling seats to somebody, but also introducing our
capabilities, which are really the underpinning for a lot of those calculations.

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

Yes. That's helpful. And then as a follow-up, look, I mean, a strong quarter improving conversion rates,
record pipeline. Does it at all make you kind of rethink the moderation in hiring plans that we've talked
about? And I realize this stuff doesn't whip around in 90-day cycles. But I guess I'm getting kind of the
commitment to longer-term margin expansion based on what you're seeing?

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

I think we had a really robust start to the year. We brought on a healthy number of team members. And
we have not gone through a massive layoff in our company. So we have retained really good strength.
We've invested in ramping those individuals. And as Pete just said, I think going into the end of the
year with a ramp team, a larger ramp team than we had a year ago, that actually gives us quite a bit of
confidence to out and execute. So I think it would be in a different position had we finished the year with a
very [indiscernible] all of that great talent we brought on the beginning of the year. So I feel like we're still
the beneficiaries of some of those earlier in the year moves.

**Operator**

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

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

Mark, you were in the CRO last time we went through the recession. Obviously, you're in a completely
different position. But any learnings parallels that you're seeing in KPIs you're monitoring going into
calendar '23?

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

Yes. I think one of the big lessons, Brent, is just being quick, and the another sole notion survival of the
quickest. I think you have to pair that, though, would be thoughtful. And it's like we're not just solving for
Q3, we're not just solving for Q4. FY '24 is right around the corner. Pete and I are started talking about FY
'25. So it's like these are all important dimensions. And I think one of the learnings is not to get too overrotated on that next 90-day window. And I think Pete has been a good partner to me in helping manage
some of that balance. So I think that's probably the largest takeaway.

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

Yes. I mean, Pete, just as a quick follow-up on the rep productivity. I mean, it's kind of counter to what
we're hearing at other companies. What do you think inverted the quota attainment for you, what changed
there? Was it something that happened in the demand environment? Was it one particular geography?
What -- was there anything you can put your pulse on because that's kind of counter to what we're
hearing in other companies right now?

**Pete Godbole**
_CFO & Treasurer_


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Yes, the rep productivity that I was describing was for our newer reps. We had a series of what I call welltimed and absolutely meticulously defined initiatives of how we would ramp the newer reps into territories
they had never managed accounts, they had never managed. And I think we're seeing the dividends of
that play. So we've seen the productivity of those reps client. Now remember, we had a significant class
that we ramped in. So when you're looking at the weighted average of the impact of that many people
getting ramped up with a systematic set of plays, that's what we're seeing.

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

I think it's also an important, Brent, to recognize that we're making a relative statement. We were not
pleased with where we were last quarter in terms of rep productivity on certain cohorts. We're seeing
improvement there. So heading in the right direction. I think that is a statement though against what we
saw last quarter as opposed to we are exceeding at all levels on all fronts. I think we still have a good
room to go to continue to improve.

**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, I just wanted to understand a little bit. I guess it's a great quarter. It
seems like numbers are great, but we are hearing a lot of consternation from other companies as well,
right? Last quarter was you had faced some difficulties. So I'm trying to understand how does the macro
feel for you? Is it the improvement that you did within some of these messaging plays that helped you this
quarter versus the normal discussions on a macro front. Is that kind of similar to last quarter? Or is it -does it feel a little bit better or worse?

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

I think it feels quite similar. I think the way we're engaging in those conversations are starting to produce
yield for us. But I would say that the tenor within the customer environment is quite similar. I would say
how we're responding to that has proven to be positive. And I think that is a function of reps feeling more
confident, thus being able to present these solutions in ways that resonate with them. But I would say it is
as much getting yourself higher in that priority list for customer consideration as opposed to the amount
of budget customers have starting to swell again. So I think it's really our placement in that stack rank,
that's helping us.

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

Yes. Got it. One follow-up. I wanted to ask you about WorkApps. We have some -- we have had some
conversations with some of your customers who are talking about consolidation, not just around work
management applications, but consolidation of other third-party apps, in-house apps, scheduling app or
something else, right, which are being built on top of WorkApps. Are you seeing that? Is that kind of a
driver for the enterprise plan at this point where people are trying to save money to more with less?

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

Yes. I think any time you have a -- the beautiful thing about the platform as opposed to a point tool is that
it can be utilized in a multitude of ways. And I think any time someone sees a set of technologies that they
can utilize across multiple use cases and drive a higher yield for an amount of spending. That's a good
thing. So I think WorkApps is a contributing for us there. I wouldn't say WorkApps is the tip of the spear.
It's one of a whole multitude of things that we're presenting to clients. I think in the coming years, I think
WorkApps will continue to gain steam, the release we had an ENGAGE by connecting it to control center,
which has been a really successful offering for us. Customers are really happy to see that.


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I think we'll see some benefits of that marriage between touch control center and WorkApps in the
quarters to come.

**Operator**

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

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

Congrats on a strong quarter. I wanted to ask one on macro and sort of in relation to guidance. We can
see the deceleration in the implied Q4 billings guidance and the commentary just around the decline in the
net retention rate. So I was hoping you could talk about some of the macro assumptions that's embedded
in that guidance? And when you talk about prudence, what does that mean if you could add some details
there?

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

Absolutely. So Josh, the growth decel implied in our billings guidance is a function of the strong comp
from Q4 from a year ago. And we've combined that with sort of a prudent outlook given the macro
environment, which includes an expectation of lower customer budget spending sort of compared to prior
periods. And that's what substantiates the macro in your question, which is we're seeing a macro that's
worsening. But the good news is when I gave you guidance a quarter ago, I gave you a composite guide
of Q3 and Q4 and we had projected that Q4 would be softer given a worsening macro that was built in. So
that's the basis of the assumption.

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

Okay. Great. That makes a lot of sense. And then if you could just add any commentary on the linearity of
sort of demand trends month-to-month throughout the quarter and into November. Have you been seeing
things get worse over the last months leading into Q4?

**Pete Godbole**
_CFO & Treasurer_

So the -- October was a strong month for us relative to the, what I call the close rates and the pipeline
close rates we saw. November turned out steady to our expectations. We expected the macro cycle to
be in play, and it produced results that are very consistent with our expectations. So remember, in Q4,
there is a great deal of business to be booked in December and January. So that's what's built into our
assumption as we've guided to the quarter.

**Operator**

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

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

Congrats on good quarter and I guess that 2 questions here. First of all, Pete, you talked about capabilities
where I think it was 29% of revenues in the quarter. As the company continues to move upmarket more,
what does that mix look like at kind of, I don't know, peak levels? And then how should we think about the
ARPU lift that you're gaining from those customers that are adding on some of these capabilities today?

**Pete Godbole**
_CFO & Treasurer_

Still the, I think, a [ meta ] statement of sort of where we see capabilities. And I think when you talk
about a percentage of capabilities of total, it sort of implies that there isn't going to be as much growth
on the user license part of it. We see both as really solid drivers. We see the width of our use case, if you


-----

remember the information Mark provided on the latest reports, we have a wide variety of use cases that
drive what I call our expand motion. Think of capabilities as the client piece of it. We think of that number
as being -- as growing over time because they are fast growing relative to our core license business. And
we gave some guidance during our last Analyst Day on how big they could be but we're stretching the
surface on that part of it.

So I do feel like as customers start to unlock the scale that they need after they've deployed the solution,
you're going to see more and more customers small and large start to use them in the most demanding
way.

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

Got it. That's helpful. And then from a follow-up perspective, maybe this is for Mark. I wanted to see if you
can talk about the competitive environment a little bit. And I asked the question in the framework. You
had a competitor report their results tonight that were not nearly as strong as yours we'll go with that.

Are you seeing anything different out there that might be driving the strength of your business versus
others maybe not continuing as well.

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

It's harder for me to make a relative statement, Scott. I think as I said earlier, I can share what customers
appear to be responding well to in our offering. And I think the capabilities alongside the core licenses,
that is a composite that people are responding to, and it manifests itself not only in growth but also
retention. If you have multiple value points that you can deliver to somebody, I think you have a healthier
relationship. And I think that's helping drive our business.

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

Congrats on the good quarter.

**Operator**

Your next question comes from the line of George Iwanyc with Oppenheimer.

**George Michael Iwanyc**
_Oppenheimer & Co. Inc., Research Division_

Also my congratulations. Mark, maybe could you give us a bit of perspective on the desktop app and what
kind of feedback you're getting from this launch at this point?

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

Yes, George, I think one of the things that's always I find funny over the many years we've been doing
this is somehow software companies get so excited about the next most extremely high-value obscure
feature than someone says, but I really want the easy thing. And I think the desktop app is just such a
beautiful example of that where people want to see it in the tray on their machine. They want to be able
to get quick access to it. They don't want the tabs that represent all their work in Smartsheet co-mingled
with a bunch of other tabs in their Chrome or Safari browsers or Microsoft browser. So these are very
simple things that people respond to.

And I think when someone is living in your app and you can make their life easier, either through better
design, or more quicker access, they're thankful for it. I think some of our team members were surprised
at ENGAGE. And this is something which you just can't substitute with the digital conference. When you
look at the number of people queued up at a booth, wanting to learn about this thing versus many other
things, you really get that topical sense for [ how ] this matters. And the desktop app is one of those. It's
been something we've been working on for some time. Thousands of people, many thousands of people


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are using it today. I think it's still an EAP. It will be released shortly, broadly. So we'll continue to invest
behind that.

**George Michael Iwanyc**
_Oppenheimer & Co. Inc., Research Division_

And with that, maybe could you give some perspective on when people are in the app, are you seeing
them engage with multiple products in a more broad way with the overall platform?

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

When you say more products you mean more elements of our product or integrations with...

**George Michael Iwanyc**
_Oppenheimer & Co. Inc., Research Division_

Yes, more elements of your product.

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

Yes. And I think as we dovetail things like Brandfolder into the experience and our resource management
more into our core experience, by lowering that hurdle height for people to easily traverse, yes, we are
seeing that happen. The one thing that I'm quite looking forward to and I shared this on a prior call, as
we remove -- further remove the friction from people being able to explore our entire portfolio. As Pete
said a second ago, today a lot of those capabilities are really consultative sale. And what Praerit and the
engineering team are working on continue to let people discover, explore, realize the value and then
ultimately buy those in a self-directed manner. So I think in the coming 2 years, you're going to see a
much greater diversity in people using more things in our products because we're lowering that friction.

**Operator**

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

**Ethan Bruck**

This is Ethan Bruck on for Alex Zukin. Congrats on the quarter. I wanted to ask, I appreciate the color for
where NRR will go next quarter. But as you think about looking to next year, is like mid-120 [ brings ] the
right way we should think about I guess where NRR would stabilize, and if you look to next year, it's high
20s growth the right way we should be thinking about it.

**Pete Godbole**
_CFO & Treasurer_

Ethan, we're not talking about next year because that's a part of the whole construct of how we see next
year. It's related to what we see bookings, billings, all those elements. So it's a little premature to talk
about sort of where that number will be. I think longer term, we see great capability for that number to
grow just based on our history and sort of the products we've got in the pipeline. So that's the way I'll
leave it.

**Ethan Bruck**

Great. And then congrats also on showing the great improvement in incremental margins improved
from like negative 20 to negative 3%. I guess is this the kind of the pace and rate we should think
about margin improvement going forward? And I guess how are you thinking about balancing, I guess,
improving this margin, [indiscernible] a little bit more? Can we expect a little bit more on the margin side?
And also, I just want to ask, is the 10% free cash flow margin for calendar '24 still on the table?

**Pete Godbole**
_CFO & Treasurer_


-----

So Ethan, I appreciate the question. We've made significant strides by really focusing on operational
improvements and moderating hiring. So we've seen that play out in the margins you've just seen. What I
would tell you is we're going to continue that effort by trying to go after efficient growth, and that's going
to be something we'll continue for several years as we go through it. That being said, we're not going
through specific callouts of how much margin improvement there is and what rate it clips at. There's a
little bit of work to be done before we get to that point.

**Ethan Bruck**

Congrats, again, on the good quarter.

**Operator**

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

**Richard David Poland**
_RBC Capital Markets, Research Division_

This is Richard Poland on for Rishi Jaluria. I guess just in terms of the macro environment versus what you
saw 90 days ago, is there any way to kind of bifurcate what you're seeing between SMB and enterprise
and just kind of -- are there any pockets of either demand improvement or demand softening that you'd
call out within that?

**Pete Godbole**
_CFO & Treasurer_

So Richard, this is Pete. What we've seen is we've seen, if you would parse the segments of the market
differently. I would say in the U.S. mid-market, we've seen sort of global impacts more broadly so. I would
say we've had strength in the enterprise based on just the number of transactions we've been able to
book with these enterprises. So those would be like the texture on it. I think you're looking for that level. I
think in terms of verticals, we've seen strength in manufacturing, global energy architecture, construction,
if you will, and some of the weaker verticals for us have been technology, probably consumer good, and
media, if you will.

**Richard David Poland**
_RBC Capital Markets, Research Division_

Great. That's very helpful. And then just as I think about SBC, I mean, stock-based compensation came
down nicely in the quarter. Should we expect that to continue to trend down. Just kind of any update on
your thoughts around how you think about stock-based comp?

**Pete Godbole**
_CFO & Treasurer_

Yes. Stock-based comp is really important to us because it's a key element of how we look at the business.
I think you should expect a few things to happen. I'll answer your question right at the outset, do we
expect stock-based compensation in the future to decline as a percent of revenue? Yes, it should decline.
That's the way the results will come out.

Now when you think of stock-based compensation, think of it as a number of people times the how much
you offer them being the driver. We've essentially, going forward, moderated our hiring plan because
we don't need to hire the same pace. We're doing this very differently. So what you're going to see is
a positive impact on the number of people we're bringing in and the impact it has on stock comp. That
being said, stock comp is dictated by the history of what you've done in the past. So when you look at
it, you say large part of it is already set by the prior hires that we've put in place. But -- so those are the
2 effects that play into the total stock comp that gets created, and we're focused on making sure that it
goes down year-over-year as a percent of revenue.

**Operator**

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


-----

**Robert William Dee**
_Truist Securities, Inc., Research Division_

This is Robert Dee on for Terry. Curious to get an update on the newer onboarding experience and some
of the other recent initiatives around helping users start quickly. Have you all started to see greater usage
and penetration with newer customers today versus newer customers from say a year ago, what have
been the specific drivers of that, if so?

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

Yes. We have a number of measures there, Robert. And one of the things that we've seen a nice uptick in
is the percentage of new participants who are successful in creating their first solution, the first thing that
they're starting to try and work with. We saw really nice improvements in that. That was one of the early
success factors that we were trying to solve for. There are a number of other designs and elements that
are being rolled in later this quarter targeted for Q1 and Q2, which I think will also have beneficial results
in terms of conversion rate. But really pleased with what the team has put out there in terms of improving
that experience.

One other really nice benefit from what the team put in, we have greater visibility into what somebody's
intent is and that can come on a few fronts. The more we understand someone's intent, the better we can
serve them, both in terms of consulting, advising templates to them, how we support them. So overall, it
helps us serve better, help someone get navigated and started better. So pleased with the improvements.

**Robert William Dee**
_Truist Securities, Inc., Research Division_

That's great. And just one quick follow-up. Hoping to dive a little deeper on Brandfolder, how attach rates
and penetration for the solution been performing relative to expectations? And what trends are you seeing
in the overall digital asset management market from a demand perspective?

**Pete Godbole**
_CFO & Treasurer_

So Robert, we were pretty pleased with our performance with Brandfolder. We're seeing broad resonance
as people look at the combined Brandfolder Smartsheet solution together. I think what's really helped is,
one, the customers' impact which comes from both those solutions together. And this year, we launched a
model where we basically turned on our core Smartsheet sellers to help in selling Brandfolder, that's paid
pretty good dividends for us as well. As far as the digital market and Brandfolder, I'll let Mark speak to that
a little bit.

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

I think there's still a huge opportunity for us to educate our customers and prospects about what's
available to them and I think, well we have examples that we can point to like this big appliance
manufacturer who's doing pretty impressive stuff in terms of content automation. A lot of times when we
share those stories with people, they're unfamiliar that, that's even possible.

So I think while digital asset management has been around and sort of many -- some customers are
fluent in it, the majority are not, and it's still in an education phase. I think with our -- as we talked about
ramp up reps, we talk often about our newest cohort. I also think about ramping in productivity with our
existing reps on new lines of business like Brandfolder and Outfit. And I think, I would say with the median
rep on our team who's experienced is much better suited today to speak to that value proposition. So
again, I think it's a very different phase in terms of stage, in terms of market understanding, and we're
leaning into it.

**Operator**

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


-----

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

Congrats on the great results. Pete, you've talked a lot about cost rationalization and moderation of your
hiring plan helping on the margin front. Given you beat by over $16 million on the operating margin front,
could you dig a little more into the areas you're finding leverage in the model. And then when we think
about moderation in hiring, do you expect that to continue into next year when comparing it to this year's
hiring plan?

**Pete Godbole**
_CFO & Treasurer_

So the $16 million beat you're referencing is for the quarter, right? So I just want to make sure I answer
your question.

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

Yes, for the quarter.

**Pete Godbole**
_CFO & Treasurer_

Great. So I'd say the 2 elements of that beat are coming from -- I'll lay it out for you, probably half the
beat is coming from the revenue leverage that we've had as we've moderated and controlled costs. So
revenues have grown up. We've moderated our hiring and people-related costs that go with it. that's
produced sort of more than half the effect. About 3 points or 3 percentage points of it have come from
-- we've looked at the customer duration that's associated with a greater gross retention rate, and that's
meant a lower commission expense, that's accounted for about 3% of it. So that gives you some texture.
And the rest of it is just hard core operational cost containment. Looking at every dollar that you're
spending and asking whether it has value in terms of the priorities you've set up. That's the first part of it.

And the second part of your question was on hiring in the future. We don't expect to have a similar sized
hiring class coming on board and hiring expectations in the future will be significantly smaller. So we're
going to see the benefit that we've created this year in a continued manner next year as we think of the
operating leverage.

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

That's really helpful context. And then some of your peers have called out some headwinds from a user
perspective, given slower hiring rates and some layoffs at tech companies. Have you seen any large
customers reduce headcount as a result of those headwinds, or just given your enterprise customer base
and that focus, are you more immune to those issues than some other peers?

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

I think for the last 5 years, our whole mindset about penetrating the enterprise has been what we call the
earned enterprise. So what we don't do is we don't go in and sell what we think at the time is a big air or
a deal and go wall to wall. We say, how can we mobilize, how can we deliver value and then we grow over
time with them because very few of our large customers are full wall to wall where your dollar retention is
reliant on the next person they hire. We're actually somewhat insulated from that. The other piece that's
helpful to us is because some of our ARR is grounded in value components that we call capabilities, it's
actually not tied out to a user license.

And if you want to keep benefiting from that, you will keep subscribing to it. But it is not hinged on that
next hire. And I think that's where our mixed model or hybrid model is turning out to be quite helpful.

**Operator**


-----

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

**Unknown Analyst**

This is George on for Steve. Just want to congrats on great execution in a difficult environment. I wanted
to circle back on the discussion earlier about rep productivity. I think when you were talking last quarter,
you were talking about expected improvement over the forward 3 to 6 month time frame. But I am just
curious, obviously we have seen improvements over these first 3 months. What are you thinking about -how are you viewing improvement potential in Q4? And is there any of that baked into the guidance?

**Pete Godbole**
_CFO & Treasurer_

George, this is Pete. I just wanted to quickly say, we are really pleased with how the field teams have sort
of gone about improving productivity of newer reps who have started. We've seen the benefits of it as
they've become productive. Our expectation is we will continue to see productivity improvements in those
reps because our plans involve multi-quarter changes and how we get them productive. That's baked
into our guidance. So you should think of our guidance as an overlay of improving new rep productivity,
combined with the macro that we have thoughtfully and prudently considered.

**Unknown Analyst**

Got it. That makes sense. And then just 1 quick follow-up on the billings upside came in quite ahead of -Are we still remodeling. I was wondering if you could just dig into kind of what drove that upside and if
there's anything unusual or onetime in nature that we should be aware of?

**Pete Godbole**
_CFO & Treasurer_

George, there was nothing unusual or onetime nature in those numbers. So it's organic bookings which
translates into billings.

**Operator**

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

**Michael Bird**

This is Michael Bird on for Michael Turrin. I wanted to dive into expansion rates again quickly, they have
been pretty nicely in the quarter. And I know the exit rate expectations are still the same. Maybe with a
discussion on potential seat expansion issue, you can walk us through the mix of seats versus capabilities
on driving that expansion rate number and if that's changed meaningfully over the past quarter or 2?

**Pete Godbole**
_CFO & Treasurer_

I'll start with the question. And then from a meta standpoint, Mark will chime in, in terms of how that's
operating. We're not seeing a big difference between the seats and the, what I call, capabilities. Obviously,
capabilities are still growing faster than the sear part of it, that is factored into the expansion rates we
see. We gave you some stats on capabilities. We said that they're 29% of revenue. And if you looked at
them sort of a year ago, they were 24%. So clearly, people are expanding with capabilities. but you're
seeing a healthy mix of people with seats as well in that mix. So that's kind of a meta point of like how
expansion rates are moving.

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

Yes, I think -- I don't think I have much to add to that.

**Operator**

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


-----

**Kyle Diehl**
_MoffettNathanson LLC_

This is Kyle Diehl on for Jackson Ader. Just to dig a little bit deeper onto that expansion kind of the time
line that you guys are seeing. Is the time line for expansion slowing at all? Or do you kind of see that
slowing in the near term future here? Or has that kind of remaining constant as to what you've seen
historically?

**Pete Godbole**
_CFO & Treasurer_

So the -- if you think of expansions and you convert them into its core fundamental, you're talking
about bookings and how quickly they materialize. Obviously, expansions are a key part of bookings and
billings. So you should think of it as being -- we've seen an elongation in sales cycles and we've seen deal
compression. So let's talk about how that actually plays itself out. The way we've seen elongations, people
just stay longer with a number of potential reviews that take place for any purchase, those are happening.
The second part of it is the deal compression. The way that would happen with these capabilities and
expansion is you can either buy a package, which is likely packaged up value in advance or you can still
buy pieces of it, we don't tell customers how they should buy it, but they buy a la carte capabilities that
hit a specific need, those represent if you buy the a la carte capabilities, you're getting a smaller bite
in bookings. Obviously, over time, you're going to get all the bookings, but it means a different size. So
that's how expansions play out.

**Kyle Diehl**
_MoffettNathanson LLC_

Okay. Great. That's helpful. And then I guess just in terms of next year's IT budgets, historically are you
able to attribute a decent or a majority of revenue growth to IT budget expansion? How do you see it
playing out if IT budgets kind of come down next year. Do you see that as having a meaningful impact on
the top line growth?

**Pete Godbole**
_CFO & Treasurer_

So I would say that the budgets for our funding. Remember if you're dealing with -- this isn't one
purchaser and 1 department. There are hundreds and thousands of people in enterprise who are buying
it. See you have as much of people with line of business budgets that are buying it as they are IT folks in
there. So I think it is fairly broad based in terms of budget.

**Operator**

Your next question comes from with line of Fred Lee with Credit Suisse.

**Fred Lee**

Very nice quarter, particularly in this environment. I was wondering if you were seeing any change
in behavior from your competitions, specifically privately held companies that might be slowing their
investment in market expense and then a quick follow-up after that.

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

No. Even given the thousands of transactions we do in the quarter, the median transaction is still really
helping if someone progressed from their status quo, which isn't grounded in a CWM player and getting
into CWM for the first time. So it's difficult for us to speak. It will not be really well grounded for us to
speak to these huge patterns that we see. We have seen -- you do see it manifest itself in some other
ways in terms of you definitely get a sense that those companies are hiring less. I think some of the
people who joined companies, would have now been let go, obviously talk to people in the community, and
I think there's less chatter around people considering going to such companies. I think that's one of the


-----

things that more established companies will benefit from in the coming quarters. In terms of what we're
seeing in market, nothing that we've really heard from customers on that front.

**Fred Lee**

And just a quick follow-up on the net retention metric eventually in the 20s by the end of the year, I was
wondering if you could drill down a little bit on what's contributing to the sequential decline in the metric?

**Pete Godbole**
_CFO & Treasurer_

So Fred, the net dollar retention rate metric is a full year look back. So we look at what happened over
the full year, if you will. So when you think of what comes into the calculation when we report out at the
end of Q4, is you're going to be replacing a very strong quarter with a macro that was very different,
expansion need that was very different without something that's in a different macro phase. So you're
just swapping out one quarter for the other, and that's where you see look back of a full year in expansion
rates dropping to where we've guided.

**Operator**

There are no further questions at this time. I will now turn the call back to Mr. Aaron Turner.

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

Great. Well, thank you for joining us, everyone, and we will speak with 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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