All right. Thanks for everyone for joining us here today. For those that don't know me, my name is Scott Berg. I lead the enterprise software and SaaS research efforts here at Needham. Today with us, we have Smartsheet. Company's been here for, I don't know, this is probably your fifth event, plus or minus. We've been involved with the company for a long time. We have the company's founder and CEO, Mark Mader. Thanks for joining us today, Mark. Appreciate it. Sure. We're gonna have some fun here with this one today. Why don't you start off with a brief overview of Smartsheet for the maybe one person in the room that's not familiar with what you do? Okay. We are a SaaS company in the collaboration space. Rather than espousing on sort of all the features and functions, we basically help companies in most industries in the world manage programs and processes scale. When you think about Costco opening a warehouse, the program and the methods that go to opening that warehouse are powered by Smartsheet. When you think about McLaren racing on race day, capturing all their imagery and managing the process of capturing content, making sense of it, being able to send it out to sponsors, they do that on Smartsheet through our content management platform. Programs, processes, projects done in Smartsheet. What's different about it? Well, it. When we built the product, initially, we wanted to serve an audience which was decidedly less technical. You don't need to know how to script. You don't need to know what an API is. You can just use the product. The tricky part in how we've grown is how do you build something that's simple and interpretable by normal business folks, but also put yourself in a position where you can scale up to the most demanding companies in the world, in tech, in manufacturing, in health, and in government. That coexistence of simplicity and enterprise strength is super elusive. That's part of what helped us go public, it's almost five years ago now, right? I think it was. Which is amazing. We've grown to about a $750 million business, improving on the profitability side. The next charter for the business is how do you grow a new multi-billion dollar organization with really healthy profit dynamics as well? Super important question off script. Yeah. How do I get a pair of Smartsheet socks? You ask super nicely, Scott. We can hook you up. Fantastic. You know someone? I do. That's perfect. I do. All right. Good. Let's talk about the industry a little bit. Probably the most common question I get on the industry, even still today, is about your market opportunity overall. Mm-hmm. The size of the space, because I think the typical investor seems to believe that the number of seats available is not very large. How do you think about the TAM, both in terms of today and what the maybe the next 10 years looks like? I haven't woken up since going public worried about TAM. Like, it never quickens my pulse, that question. There are a lot of people out there who, while they have access to technology, still struggle mightily. We're about to publish a report. We just surveyed 8 thousand people across four continents. 91% of them say we're really struggling in the area of making sense of the projects that we're being asked to do. We start allocating our resources appropriately and reporting out to the people who are asking us to do this work, 90%. How can that be? A decade after all the stuff went to the cloud, the magical mobile devices, how is it that people are still struggling? The interesting thing about the position we find ourselves in right now, there's actually more pressure on teams to deliver programs and projects and processes with fewer resources. The temperature's actually getting turned up on people right now. When I look at the people who, I actually don't get that question very often in terms of we think it's a small market. I think the way the philosophy we had in monetizing our service early was that we appreciated that there's some people at a business who care deeply about solving this and then other people who are asked just to participate. If I'm being asked to fire up a new product line for Smartsheet, and that's my sole purpose, I care deeply about it. I have a program, I have it defined, then I might ask you for a piece of feedback. You're like, "Okay, Mark, you asked me this question. I'm like a super lightweight participant." The thing we got right early was we figured out a way to charge for our service that doesn't impose a tax on you to participate. I pay for a license, you get to participate for free. When I think about who is involved in collaborative work, the answer is most humans will be involved. The more interesting question is: how can you get people to pay you for that involvement? Hmm. I think that's where I think innovation on packaging and pricing and not taxing someone too heavily to the point where they don't wanna take an action is where you don't wanna go too far on that one. We were heavily criticized when we started. They're like, "How could you allow people to work on your product for free?" It's like, trust me, you get people exposed, they may not be an owner of the project they're being asked to participate on, but at some point, they will likely have a need. When you look at our largest customers, we have three customers, over 125,000 people on the platform, the vast majority of those users are not paying us today. The number one lead source we have for conversion to paid is that population. It's just an interesting twist on how we've approached the business versus some other players in the market. We're the only ones in the market who do that. I'm gonna stop answering that question. If you're not getting those, I'm just gonna refuse to answer what the size of the TAM is. Right. It's great. As you look at the industry the last three or four years, the work from anywhere environment has certainly changed, kinda, as you're alluding to, how we all work for a variety of reasons or made it more complex trying to squeeze more out in different environments. How has that impacted this, the collaborative work management space and Smartsheet specifically, and I don't know whether it's use cases or even- Sure. general market awareness? I think the, I think the narrative people wanted to speak to was COVID pulled all this demand in and everyone started needing all these SaaS products. Like, I don't really subscribe to that. I think people needed to converse. Video, huge beneficiary. Conversations, threaded conversations, like a Teams and a Slack, fantastic. Huge need. I think beyond that, maybe you could make an argument for signature. I'm gonna say that's even one step removed. I think those are the ones who are the principal beneficiaries. I think what's happened since then is that you have a lot of companies. I'll speak to tech here. There are some other industries as well, where there's been a greater dispersion of the workforce. I think there's a heavier reliance on actually memorializing what we're working on. If we're working on a program to renovate a hotel or set up a warehouse or onboard a client in a certain way, I think people have realized that if work only exists in a threaded conversation, it's super hard to traverse. Like if I were to say, "Hey Scott, give me a heads-up on, or give me a readout on how we onboard our last 20 customers," if you said, "Go check the Slack channel," I'd tell you to pack sand. It's like, I am not going to check the Slack channel. What is my reference point? Reference points can come in the form of dashboards. They can come in the form of lists and sheets that outline the status of things. These are all things that people have been using for eons, things like Excel and Google Sheets. The convergence of a spreadsheet-like thing, which most of humanity knows about, converging with automation, reportability, dashboarding, that's sort of where people are now feeling the pressure to graduate. The old way of having done things in just an Excel-based list. I'm not talking about like calc, like income statements. I'm talking about lists of work. Mm-hmm. A lot of our demand is coming from people who are graduating from those constructs. I think the distributed work and the need for people to have these reference points has been a big driver for this category. Let's move to product 'cause it's my favorite area. One item that's come up several times in some of the work I've done recently is a small module you call Data Shuttle. Mm-hmm. It seems like your partners are really talking about that. Every mid to large-sized customer or even small customers are using it. When you announced the product, I thought, well, this is a nice little module to move data in and data out. Today it seems like it's probably the number one or number two capability your- Yep. customers are buying today. I guess, what makes this capability so compelling? We generate revenue two ways. We either sell you a seat or we sell you a capability, and a capability is something that's not dependent on the number of seats you have. It's like, do you need to perform this function? One of these capabilities that we charge for is called Data Shuttle. I remember one meeting I had with a very large furniture manufacturer out of Michigan years ago, and the CIO had arguably one of the world's most sophisticated SAP environments. I don't know if that's something to be proud of, but it was really complex. Good luck repping that out. I remember him asking about, "Mark, how do we get our business teams to interact with SAP because we have to pull some information out of it?" I started talking about this two-way sync, and I can see him, like, squint a little bit as I said that. He's like, "They're writing information back to SAP?" I'm like, "Yeah, you can." He's like, "There's no chance in hell they're doing that." His point was, we have a bunch of corporate systems that are heavily guarded, and the last thing we want is a business unit user messing with our data. We're happy to send them stuff. I remember that being one of those formative meetings. We were talking to a really large customer, and you think in the years leading up to that, you're like, "Hey, here's what integration means and here's what people value." A lot of IT is like, "No way in hell we're letting those users into our world." What they are willing to do and what they get a lot of requests for is, "Let's ship them stuff. Hey, can you give me this data set? Can you give me this data set from SAP? Can you give me this data set from Workday?" What we did is we built something called Data Shuttle that allows IT to very easily and consistently take any data repository they have, package of information, send it to a user of Smartsheet and have them ingest it, and get continuous feeds of that data and have it automatically merge into Smartsheet. You might say, "Well, what's so special about that?" Trust me, large cos are shipping data all over the place all the time. Optionally, that business user can also send it back to IT if IT does wanna post that back to their system. What was so fascinating to me about this need was, in the purest sense, someone might say, "Well, that's not as dynamic or as real-time." It's like, yeah, but listen to what the customer wants. Mm-hmm. The customer actually sees risk in real-time posting back. It's one of those. That's one Scott had you asked me right before we launched it, would it be that big a winner? I would've said, "Nah, it's nice to have." It's like central to a lot of our capability selling. Yeah. I think it's crazy the feedback that we've had on- Yeah. in a variety of different areas recently. That's great, obviously. I think it also speaks to people love things that they deeply understand and that work. Hmm. It's like so often with tech, it's like we paint these amazingly complex pictures, and we expect the audience to, like, get it and have confidence to move. It's like figure out something they really need, do it really simply, and have them feel success. That's why people talk about it. On the new product end at your customer conference in September, which, I attended, you introduced a couple new products like Data Table and Capacity View in particular. Of these, I guess, new announcements that you referenced there, what's seen the most customer interest, and how should we think about just general innovation going forward? Is this really gonna be a module/capabilities type of playbook over the next, I don't know, 3 to 5 years, or is there other things you can do with the platform that you're looking at? I think the how I see capabilities today, there's a little bit of haves and have-nots going on, where if you wanna buy a capability from us, you speak to a human being, you pitch the value of it, and then you decide to buy or not. I see a future where we expose our capabilities to more people on a trial basis, where you have more self-directed exploration, value assignment, and then a chance to sell it to somebody. I think we're gonna get it in the hands of more people to just better understand and use. Mm. I would say on the where interest lies, on some of the announcements we had, I would say on the resourcing, the Resource View, especially today, where people feel like they have to get more yield from the teams they have. Anything in the camp of resource visibility, how are people assigned, lands well today. Resource View versus DataTable, which I'll speak about in the first second. Resource View is much more pronounced in terms of people's interest. A lot of systems out there right now, when you think about resourcing and assignment, it's fine to be able to say if you were to say, "How many of our designers are on these types of projects?" That's a really easy question to answer based on how people are allocated. The tougher question that people actually assign more value to is, "I wanna do these things next year. I don't have names assigned to it yet. I just need to get a sense for how much capacity I have as an organization before I do any assignment." It's a forward-looking statement as opposed to a lot of the systems today that are rear view mirror. Like a rear view mirror doesn't do anything for you in terms of planning. The Resource View and helping people do forward-looking planning and waiting is something that our customers are looking to step up into. It's a progression, right? It's like a lot of times people start in sort of a, "Hey, we're graduating from tracking our work in this way to let's see how people are assigned." Then the next question is, how do we get forward visibility and how does that incorporate into our planning? As a provider, we're trying to be smart about how we support someone along that journey, right? You may not be asking that question in your first week. You'll probably be asking it in your second year. We're trying to figure out from a selling and a services standpoint, how we fit in. Okay. You and I have had a chance to meet a couple times over the last year in Seattle. My question track, if you wanna call it that, has been really focused on enterprise functionality. Mm-hmm. It's been like my key thesis and the theme the last couple of years in the space. I think we're seeing it come to fruition. I guess in your product innovation stack right now, are most of the capabilities that you've got really kind of purpose-built to drive that enterprise kinda wall-to-wall type of adaptation, or is there maybe something more subtle to it than just that viewpoint? Yeah. I would tweak the word enterprise a bit. I would say enterprise grade. Okay. If we're going out to buy a vehicle and we're not like fleet purchasers, we still wanna get. Like, we're not spending $10 million, we're spending like $40,000 on something. I still want enterprise grade. Mm. Like, give me the best. Give me the most durable, give me the safest, give me the most scalable, even though I may not need it yet. We're seeing more buyers today, especially on the security dimension, saying, "I want all the goodness and the controls that the mega corp has asked you for and that you built it for, but it's still pertinent to me. Like, I don't need to operate less securely because I'm a midsize business." Enterprise grade is important. There are certain things like DataTable, where I would say fewer of our midsize customers say, "Hey, I have a need to, like, import 7 million records out of my SAP product master and match that against..." Like, they don't ask that question. There are a couple of things which I would say are purely enterprise relevant. Mm. More of our offerings are enterprise grade that are absolutely relevant to the midsize. I think it's an important distinction. Okay. definitely seeing that, requirement out there at least. Customers wanna do, you know, they wanna use the platform a lot more today... Yep. which is great. Your net revenue retention rates have been really strong. Mm-hmm. How do we think about the mix of the net revenue retention rates with regards to, I don't know, three different categories? There's seat expansions with your existing customers just blatantly going to a new team... Mm. versus capabilities. I kinda want to more focus on the capabilities module, just trying to understand what that uplift looks like from that angle. Yeah. Seat expansion is still the lead pin here. It's the majority of all incremental revenue we bring into the business. A couple of years ago, a few years ago now, we introduced capabilities, and that's made really solid progress. It's gone from 0% to 25%-29% of our subscription ARR, so in a number of years. Someone asked the question earlier, they said, "So do you expect that mix to change?" I said, "I hope it stays exactly where it is." They go, "How's that?" I said, "Well, I want our capabilities to add a ton of value to our customers, have them buy a ton more. At the same time, I want our seats to move in a really low friction way. What we're seeing with capabilities is if you do something more substantive with our platform and you automate a big program or you start to bring in content, lo and behold, when you buy one of those things, you buy more seats. I do think there's a bit of a tether between the two. I do think because capabilities, these extra capabilities are only purchased by 7% of our customer base today, I do think they have a huge advantage to get more percentage points above 29% of our ARR. Over time, I would expect seats to continue to be quite robust to the expansion. Last question on the product side for me at least is when you look at the capabilities you've added the last couple of years, are they helping drive churn down? 'Cause your churn's at the lowest rate that the customer company has seen it. What is it? I think 4% right now. Yeah. Yeah, absolutely. It's... The cost to change, I think a lot of times people think about the risk of attrition, and they look at how much does someone spend on your seats or your total subscription dollars. It's like, in some cases, with our largest customers, that's like a total rounding error. The, the impact, though, to your change management, like if you were to rip out a program that is renovating a billion-dollar capital campaign you have going, capital program you have going, it's hugely disruptive. What we're seeing is the more you can get into the flow of someone's program or their content generation or how they allocate resources, the harder it is for them to extract you. That's where gross churn has just steadily come down. I don't know where it was when we went public, but it's probably come down 1.5 percentage points to under 4% now. That's exciting. It's exciting. Again, the future of the business, I don't think your path to greatness is getting churned down to 2%. The path to greatness is how do you continue to expand at your large customers around the world or your customers around the world, again, it's hard to get to multi-billion in revenue by shaving off another half point of gross churn. Sure. Let's talk about go-to-market a little bit. Your third quarter report, very good report. I guess if I force rank it against my coverage universe, it would certainly be in the top 2 or top 3. Good results there. Could you dive a little bit deeper into the sales organization and how it's evolved over the last couple of years? Yeah. I know you had a, hiccup's not the right word, but you had some, slowing ramp times a year ago. Your go-to-market motion is more kinda direct today than what it's ever been historically. What does that kinda pathway look like for you all? From the very beginning, we had the opportunity for someone to trial our product and to buy it online. As we have, in the 5 years since we've been public, with some of our offerings being in this capability realm, which is a bit of a consultative sell, the reps have played an ever-growing part in our bookings. What we've done, over the years, we've done various testing around where we allocate people, whether we put them on our enterprise accounts or our emerging accounts. When we look at what's the state of the Smartsheet sales team, I would say the focus for next year and the year out is about how do you manage your cost to book effectively, whether you're selling a 200 person company or you're selling the Amazons of the world. We're very segment oriented in terms of where we allocate that capital. I would say what has happened in the last three years is we've really diversified how much we're doing with those largest customers. It's not a rep calling in saying, Hey, do you need to buy more seats? It's a rep work, working with a team which we call our journey team, which goes in, actually does discovery with these companies. They work with us for a day or two, talking about their big programs, talking about huge capital being spent in their business, then our job is to figure out how to map our value prop to the things they're doing. It's like a super involved sales process. Now, you say that sounds like a high cost of sale. Those are also multimillion-dollar accounts for us, growing at a very high rate year-over-year. What our pursuit is at that top end, like that didn't exist three years ago, Scott. In our territory, our most tightly bound territory, our rep has a single account. All the way down the curve, someone might have 200 accounts in the territory. That distribution and that ratio is much more concentrated at the high end than it used to be. Okay. one of your financial targets is you're gonna be free cash flow positive this quarter. Mm-hmm. How should investors think about your ability to generate free cash flow relative to still continuing to invest in the business? Do you think you will compromise your ability to grow at a fast growth rate, 'cause you're still growing fast? Yeah. Even with that, you know, line in the sand drawn this quarter? I think we've been able to demonstrate progress on the free cash and while investing. We've acquired a few companies. We've invested in our go-to-market pretty heavily in terms of diversifying how we, how we engage and drive value for clients. The great thing about having a little bit of scale now with over 3,000 people is you get to marshal your resource every year, every quarter. Within sales, hundreds of reps, you get to allocate across territories slightly differently. It's not always grounded in, do you need to hire the next engineer? Do you need to hire the next salesperson? I would say the opportunity for us to still invest in these pursuits while showing improvement, I think we've demonstrated that the last year. Hmm. I would expect that on the year forward as well. By the way, we will take audience Q&A in about 7 minutes or so. If there's questions, feel free to hold them till then. I have 2 or 3 more myself. How's the competitive landscape changed between today and versus your IPO? Is it the same, I don't know, half dozen to a dozen vendors, versus obviously Excel in that category? Have you seen any noticeable shift, especially as you've changed the product portfolio? I think the we are a category that I think for some time has been viewed as a grouping of like players. Almost as similar as, you know, Lyft is to Uber, as a Teams is to Slack, like they do the identical things. I think now there's, I think, starting to emerge a greater appreciation for what people are known for, and the players have different strengths. The landscape hasn't changed that materially since we went public. A couple private companies took advantage of the funding cycle when capital was cheap, and they definitely brought capital under their balance sheet. We still, even four years removed from IPO, the median opportunity we deal with is not competing on price, is not doing an RFP. It's people graduating from how they've been doing things to a better way of doing things. That's been a little bit surprising, Scott. Okay. you know, when you think about where most of our ARR comes from, most of our ARR comes from expanding at existing accounts. If it's expanding the existing accounts, why would you have a huge competitive theme there, right? It's continuing to serve people who bought from you. Because so many of our new business transactions are tiny in size, like $2 grand a year, that's like our average ASP on a new deal, by the time someone makes a decision to buy you, they're not doing a formal bake off for $2 grand. They're probably. They might have done some rationalization before they come to you, but it's just not a lot of energy spent there. I think what's happened, though, is in the three years, we have more clarity, especially as companies have gone public, like Asana and monday.com, you have a clear sense for where they are investing in and what they think the path to greatness is. I would say monday.com is a little bit more of a, I would call it like a monopoly board. We're gonna do a whole bunch of things within collaboration. Could be CRM, could be docs, could be whiteboards. I think it's a really broad surface area. We've elected to say we're gonna have a series of offerings that build on each other. That's the climb. We talk about land, expand, and climb. That would be, we're gonna help people do programs, processes, and projects. We're gonna help them scale that. A lot of our capabilities are based on that. It's a very different approach. Mm-hmm. While they're both work management, very different approaches to solving it. Yeah, I think it'll be a really interesting next year when you look at how people are rationalizing investment. You know, we obviously know what we're doing. It'll be fascinating to see what others do in terms of continuing to spend on PPC. On our distribution, PPC and the dollars we give to Google and LinkedIn and all of the referral sites, it's like third out of four in terms of rank and how important it is to the growth of our business. The number 1 growth is that ecosystem of people who use our product, which has the highest convert rate out of any lead source. As the cost of capital changes, will that change the dynamic? I think the number one, the number one influence on someone's success will be the choices they made in terms of what they put in their offering. Mm. Fast-forward 3 to 5 years, we'll see who ends up being the biggest. We have a healthy lead right now, I think right now with the focus on tying to value and really being able to demonstrate a return on the dollar spend, I think some of the things we have in the portfolio lend themselves really nicely. It's where it keeps coming back to the capabilities and the client thesis. Yeah. That's why I've been a big believer of it. Yeah. Look forward to seeing it. It's a huge, huge part of it. probably 2 or 3 financial Yeah. questions specifically. First one, I don't have my crystal ball today. I don't know what's gonna happen in the macro this year or next year. I wish I did. How do we think about free cash flow progression for the company? I believe you have a target of 10% free cash flow margins in your FY24, roughly calendar or FY25, calendar 2024. Is that still achievable, you know, kind of almost no matter what the financial markets or the, you know, overall market looks like? I think we view that as a low watermark. Okay. That's that is something we feel very strongly about. I think for You know, I've been running this business for 17 years now, and I think we're at that crossover point where people have been excited about the growth, they've been excited about the customers we've served, they're like, "Now show us you can make money." It's actually a really The teams I was pleasantly surprised by how much our operators of the business are excited about crossing over into that point of, you know, control your own destiny. One of the ways you do that is by generating profits. A free cash, 10% in FY25, we see that as a at least. I guess what are the push and pulls there? Is it general, you know, growth appetite, you know, given that type of timeframe? Or is there something on the product side that, hey, we went through a big investment cycle the last four or five years, and you just see that normalizing? I don't know if you have any structure on how to think about that. Well, I think we're starting to feel the benefits of scale. Mm-hmm. Even though so much of our focus last year was on our expansion reps and building out our team, it was our best year in terms of ARR from new. In a year that had macro issues, that had a lot of territory, you know, territory allocation, I think, challenges in the year, and we spoke about those in our earnings call in Q2, it was still our best year on new. I think the ability to converge strength in new with an increasing portfolio that matters to people and a ramping rep base, which is significant in size, that should lead to better profits. You know, when you reach a certain scale on engineering also, you get to make choices again within your existing team. You're not beholden to this, "I need to spend on another 100 engineers to get something done." That's. It's for those of us who've been in the business for a long time, it wasn't too long ago when we got to make 1 choice a year, like, and we hope we're right. Yeah. Now we have, you just have more things in the fire. All right. Last one for me is actually on the third quarter results. You had a benefit to operating margins. That was about 300 basis points roughly. Came from an accounting change of company changed its amortization on sales commissions from 3 years to 4 years. Mm-hmm. I'm not really surprised by that given what, your retention rates and everything else are like. Right. I guess why do that mid-year versus just starting it out at the beginning of the, you know, the new fiscal year coming up? Yeah. It doesn't change cash at all. Yeah. It's something we obviously monitor. As we continue to see gross churn drop, it was time to change it. Like, it needed to change. It did not reflect reality at the four-year mark. We made that move. I would say it was, if it continues to improve gross churn, then we'll have to continue to reevaluate it and maybe extend it. To give you a sense, there's some companies, I think at the most aggressive, some people capitalize that or some people run that expense over eight, nine years. Mm-hmm. We are now up to 4 from 3, I believe. That's correct. It's I mean, there's a lot of headroom there still to expand if the customer metrics demonstrate it. I'm gonna keep asking you the financial questions. Who needs this Pete guy anyways? Great. Yeah. Pete's our CFO, who came on board a couple years ago. One thing I'll just say about Pete. He came over, he was with VMware during the big scale from $600 million to $6 billion. One of the things that we've been real beneficiaries of is someone who comes in with just a really clear mindset on models and how to operate a business at scale. One of the things that he's done a really nice job of, like, within a quarter of him showing up, he said, "Hey, you know what? I think we need to look at our team and where we're operating from." I credit Pete 90% of the reason we're operating in nearshore today is because of Pete. I think of him being a good steward of shareholder dollars, I think he's a really great CFO for this next phase of growth. Looking forward to that. Yeah. All right. With that, we have about nine minutes. Happy to take some questions from the audience, if there are any. Wow, shy group today. Well, with that, I'm happy to give everyone a few minutes back, so they're fighting the elevators. Thanks everyone today. Appreciate the time. Thanks, y'all.