Release Date: September 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Smartsheet Inc (SMAR, Financial) reported a strong Q2 with annualized recurring revenue (ARR) reaching $1.093 billion, up 17% year over year.
- The company saw significant enterprise growth, with 75 customers expanding their ARR by more than $100,000 and three transactions exceeding $1 million.
- Smartsheet Inc (SMAR) launched a new pricing and packaging model, which has led to high engagement and the addition of many new customers.
- The company is making good progress on the modernization of its platform and plans to showcase new features at the upcoming ENGAGE Seattle conference.
- Generative AI tools have shown positive early results, with nearly 50% sequential growth in user adoption and significant time savings reported by customers.
Negative Points
- The full churn rate increased slightly to around 4.5%, primarily due to elevated churn rates in smaller customer segments.
- Despite strong performance, Smartsheet Inc (SMAR) maintained its FY25 revenue guidance, indicating a cautious outlook.
- The company expects its dollar-based net retention rate (NRR) to track down, consistent with overall ARR guidance.
- There was a slight decline in services revenue expectations for the full year due to a higher percentage of services being delivered by partners.
- Smartsheet Inc (SMAR) did not provide specific details on the impact of the new pricing model on like-for-like customer spend, indicating uncertainty in the early stages of its implementation.
Q & A Highlights
Q: Have you thought about potentially some of these existing enterprise customers going ahead and starting to leverage the new pricing ahead of time, just given you have a lot of reasons to be talking to them about capabilities and could that drive upside to ARR?
A: We do expect some interest from our existing customers, which could translate into potential dollars for us this fiscal year. As we've rolled it out to a larger majority of our customers, we expect that number to increase, contributing to increased bookings. Additionally, as people discover self-directed capabilities, there will be efficiency in the sales model, improving the motion and efficiency of the sales process.
Q: Can you provide more context on the initial customer behavior around the new pricing model? Any rule of thumb for how much of what you typically expect would just be the free users are now monetized?
A: Last week was our first week where we saw those first of the thousands of customers who are on the new model hit their true-up period. We're pleased to see confirming data: more users, more value being realized, and more ARR. The approach of lower P with a conforming Q is playing out to our expectations. While it's early, the initial data is positive.
Q: Are you still in the market repurchasing shares in the third fiscal quarter?
A: The share repurchase program continues through the year as planned.
Q: Will there be any gross margin impact from providing AI capabilities to all users through December 31, 2024?
A: We don't expect a major impact. Our product and engineering teams have moved a lot of the workload to a more efficient model, allowing us to serve a larger population with minimal cost changes.
Q: Can you provide insights on bookings linearity trends in the quarter and NRR trends for the second half?
A: The implied bookings for the quarter were very similar to the previous quarter. Regarding NRR trends, we expect it to track down consistent with our overall ARR guidance. There has been no meaningful change in competition; we continue to perform well, especially at the high end of the enterprise.
Q: How do you address concerns that customers might resist the new pricing model and potentially threaten to leave?
A: We feel confident in our ability to double our paid user base. When prices change, customers expect value to change too. We're moving to a model conforming to how other software is charged for, and the early metrics from thousands of customers indicate a positive response. The largest global SIs are expanding rapidly under the new model, experiencing significant value.
Q: Is there any increase in churn from segments other than smaller customers?
A: We didn't see anything in particular. The slight increase in churn was specific to our smaller customer segments.
Q: Are you giving customers the ability to renew earlier than 2025 to lock in the prior pricing model one last time?
A: We're not giving customers an option to renew under the old model for long durations. The preference is to convert them to the new model early to experience the value it provides.
Q: Can you reiterate what you're seeing like-for-like customer spend under the new model versus the previous model?
A: We're not giving specifics, but we are seeing higher ARR contributions from customers who have reached the first true-up period. The early indications are positive and confirmatory.
Q: What is the plan for AI capabilities after the free trial period ends in December?
A: We plan to make all our capabilities, including AI, discoverable and available for trial in the future. For now, we decided to activate AI capabilities for the entire population for a limited period.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
