Good afternoon, my name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Aaron Turner, Head of Investor Relations, you may begin your conference. Thank you, Emma. Good afternoon, and welcome everyone to Smartsheet second 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 CEO, Mark Mader, and our CFO, Pete Godbole. Today's call is being webcast and will also be available for replay on our investor relations website at investors.smartsheet.com. There is a slide presentation that accompanies Pete's prepared remarks, which can be viewed in the events section of our investor relations website. During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends. These forward-looking statements are subject to a number of risks and other factors, including, but not limited to, those described in our SEC filings available on our investor relations website and on the SEC website at www.sec.gov. Although we believe 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. We do not assume any obligation to update these statements as a result of new information or future events, except as required by law. In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our investor relations website. With that, let me turn the call over to Mark. Thank you, Aaron, and welcome everyone to our second quarter earnings call for fiscal year 2023. Q2 was another strong quarter for Smartsheet. Revenue in the quarter grew 42% to $186.7 million, and billings grew 44% to $205.6 million as enterprises across the globe continue to deploy Smartsheet at scale to solve their mission-critical workflows. In Q2, 62 customers expanded their Smartsheet investment by over $100,000 and 201 expanded by over $50,000. We also added three more customers to the million-dollar ARR tier and now have 36 customers over this ARR threshold. We ended Q2 with ARR surpassing $736 million and now have over 11.1 million Smartsheet users. Q2 was another great quarter for our new business motion, with new business bookings setting another quarterly record. We saw new wins at companies such as payment processor REPAY, United Health Services, Bloomberg Industry Group, IMAX, Midwest Vision Partners, the broadcast management platform Operative, LOGIC Consulting, and Affinity Health Partners. However, we are not immune to the changing macroeconomic condition. In the month of July, we started to see macro impacts on our business, including longer sales cycles, some deal compression, and additional approval up layers. These impacts resulted in lower expansion rates. Additionally, our previous guidance assumed a ramp time for sales reps we hired at the beginning of the year to be consistent with what we'd experienced in the past. However, this ramp time has been slower than we anticipated. We're investing in new enablement tools and training to improve productivity. Given these factors, we're taking a thoughtful approach to guidance and are electing to lower our full-year billings and revenue guidance with the assumption that the current macro environment persists. While Pete will provide more details about how the changing macroeconomy is impacting our financials for the remainder of the year, I want to update you on the status of our key growth drivers, namely our portfolio of capabilities products, our success in the enterprise, and Brandfolder. Our portfolio of Smartsheet premium add-ons that we refer to as capabilities continues to drive deep attachment within our customer base and further differentiate Smartsheet from the rest of the CWM category. Whether these capabilities are bundled in an advanced package or purchased individually, they power our customers' most important workflows. From Data Shuttle, which lets users act on data across multiple systems, to Control Center that lets users build and operate a system of work across hundreds to thousands of projects or workflows, to our Brandfolder digital asset management platform, our portfolio of capabilities lets customers connect to a range of workloads unmatched in the collaborative work management space. These differentiated offerings give our customers the keys to unlock massive value within their organizations. An example of this is Infoblox, the leader in next-generation DNS management and security that has increased its Smartsheet usage by close to 4x since 2019. As more teams and departments at Infoblox adopted Smartsheet, they began to see opportunities to create more integrated, centralized workflows using premium capabilities. Over time, they deployed Data Shuttle to set up a sync between their CRM and Smartsheet, plus advanced reporting capabilities that help summarize their data and enable faster and more informed decision-making. In Q2, Infoblox upgraded to Advance to access the full value of Smartsheet's premium capabilities, and they plan to implement a scalable, automated, and secure OKR solution using Control Center and Dynamic View. We're seeing more large customers deploy Advance to access multiple capabilities such as Data Shuttle, Control Center, Data Mesh, and Bridge for complex workflows that need to integrate with other systems in their organization. For example, the technology and consulting provider NV5 implemented Control Center to automate the creation of their primary customer engagement templates to save time and achieve consistency while still allowing for changes over time. They are also using WorkApps and Dynamic View to create custom views for field teams that only show them the information that is relevant for their role, helping ensure data security at scale. Revenue from capabilities continues to grow rapidly and now accounts for 28% of our subscription revenue, compared with 22% in Q2 of last year. Advance, which packages various capabilities, was included in 300 deals in the first half of this fiscal year, including those with biopharmaceutical company Sobi, Crown Roofing & Waterproofing, and Elligo Health Research. The growth potential for capabilities remains very strong. Through Q2, only around 7,000 of our more than 100,000 customers had deployed at least one capability. Those customers are realizing significant ROI on their Smartsheet deployments and are expanding at a rapid pace. This value realization naturally gets the attention of senior executives who are increasingly involved in the decision-making process. This value-based enterprise go-to-market motion has demonstrated an increase in executive leaders selecting Smartsheet as their CWM platform of choice. I'd like to highlight a few Fortune 100 companies where that's happening. In Q2, a Fortune 100 entertainment company expanded its Smartsheet investment by over $700,000, taking their total ARR to over $3 million. With this expansion, they migrated to the next tier of connected users for their Advance Gold deployment. This company has doubled the number of paid licensed users over the past year, adding roughly 3,000 enterprise-licensed users, and has now tens of thousands of connected users. That number is expected to increase further as Smartsheet is now the central component in the company's effort to consolidate the work management solutions it uses. An executive in their IT department suggested that other CWM platform used in the organization will be retired in favor of Smartsheet. A Fortune 50 pharmaceutical company more than doubled its ARR to almost $1 million as its teams rely on Smartsheet to help them manage the spin-off of one of its divisions and will continue to use Smartsheet in the resulting two companies. Most important, the company's expected ROI of its Smartsheet deployment is $3 million in just year 1. We also won an RFP at a Fortune 50 food and beverage company to become their global standard for collaborative work management. While this company is a low six-figure customer today, this RFP win sets the table for rapid growth over the next few years. RFPs are still rare for our business, but this shows that in a rational head-to-head comparison, Smartsheet won, thanks to our years of investing in our platform to delivering extensibility, scalability, and security that businesses demand. One more example I'd like to share from Q2 is a Fortune 10 technology company that expanded by over $1.7 million in Q2, accelerating our growth within this organization to a total of $7.6 million in ARR. Last year, we became a globally approved CWM platform for the company. This approval has helped fuel significant adoption of Smartsheet across several dozen large departments. Previously, I've emphasized the importance of our Brandfolder digital asset management platform as key to cementing our leadership in the CWM space. Naturally, we've spent a lot of time understanding how to optimize workflow management for marketers. One of our insights is that marketers need to distribute content across more channels at higher velocity while ensuring brand consistency. Marketing teams are being asked to do more and more with fewer resources. To meet customers' expanded content distribution needs, we've acquired the leading brand management templating and creative automation platform Outfit. Outfit will turbocharge Brandfolder's content distribution capabilities, making us a leader in the content automation and management space. We're looking forward to introducing Outfit and the many other exciting new Smartsheet features and capabilities to thousands of users at our ENGAGE 2022 customer conference, taking place September 19 through 22 in person for the first time since 2019. In closing, the new economic reality organizations are facing has impacted a portion of our business, yet we remain confident in our ability to deliver long-term, durable growth and profitability. This confidence is due to our position in the market, our differentiated suite of capabilities, and our market-leading presence in the largest companies in the world. We're carefully managing our resources to drive improved margins, and we remain on track to achieve break-even free cash flow by end of this fiscal year. Now I'll turn it over to Pete. Pete? Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q2 was a strong quarter that reflected durable growth, a product set that powers how work gets done in the largest enterprises around the world, and a resulting business model that shows sustained progress to profitable growth. We saw this in 40+% revenue and billings growth, dollar-based net retention rate greater than 130%, and gross churn that is at a record low of less than 4%. In July, we began to see macro-related headwinds in the form of elongating sales cycles, procurement policy changes, deal compression, and lower pipeline close rates. This trend has continued into August. We have incorporated those macro headwinds into our updated full-year guidance, and I will provide additional details towards the end of my prepared remarks. Regarding the composition of our customer base, approximately 50% of our ARR now comes from enterprises with over 2,000 employees, with only 25% coming from SMBs. Our ARR also remains very diversified, with only 13% coming from our largest vertical. As Mark mentioned, we recently acquired Outfit to enhance our Brandfolder offering. We expect the revenue and billings contribution from Outfit to be around $1 million each for the rest of the fiscal year. I will now go through our financial results for the second quarter. Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentation that was posted before the call. Second quarter revenue came in at $186.7 million, up 42% year-over-year. Subscription revenue was $173.5 million, representing year-over-year growth of 43%. Services revenue was $13.2 million, representing year-over-year growth of 24%. Turning to billings. Second quarter billings came in at $205.6 million, representing year-over-year growth of 44%. Approximately 91% of our subscription billings were annual, with 4% monthly. Quarterly and semiannual represented approximately 4% of the total. Multi-year billings represented approximately 1% of total billings. Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 48% year-over-year to 2,738, and the number of customers with ARR over $100,000 grew 63% year-over-year to 1,220. These customer segments now represent 58% and 44% respectively of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 88%. Next, our domain average ACV grew 28% year-over-year to $7,557. As a reminder, we continue to experience healthy growth of new customers. New customers typically begin their Smartsheet journey at smaller dollar values than our overall average ACV. These initial lands put some pressure on our domain average ACV growth rate in the near term, but provide a healthy base for expansion in the future. We ended the quarter with a dollar-based net retention rate of 131%. The full churn rate dropped further and is now below 4%. Given the current macro environment, we see a scenario that would cause our overall dollar-based net retention rate to be in the mid- to high-120s by the end of the year. Now turning back to the financials. Our total gross margin was 82%. Our Q2 subscription gross margin was 87%. We continue to expect our gross margin for FY23 to remain above 80%. Overall operating loss in the quarter was -$16.1 million or -9% of revenue, which represents a 5 percentage point sequential margin improvement. The margin improvement was a result of cost saving initiatives we discussed last quarter, which included moderation of our hiring plan and cost rationalization. Additionally, we let a significant portion of our revenue outperformance drop to the bottom line, demonstrating the operating leverage inherent in our business model. Free cash flow for the quarter was +$7.1 million, bringing our free cash flow total in the first half to -$2 million. Looking ahead in Q3, we have three large cash outflows that are unique to the quarter, related to our ENGAGE customer conference, one extra payroll run in the quarter, and a semiannual contractual payment related to a cloud provider. Given these outflows, we expect our Q3 free cash flow to be - $20 million. Now let me move on to guidance. As we mentioned previously, towards the end of July, we saw macro-related headwinds begin to emerge. These headwinds continued in August and have impacted our sales productivity and ramp time for our newer sales reps. Given these trends and our preference for prudence, we are taking a thoughtful approach to our full-year guidance and electing to guide under the assumption that the macro pressures continue through the end of the year. For the third quarter of FY23, we expect revenue to be in the range of $193 million-$194 million and non-GAAP operating loss to be in the range of $21 million-$19 million. As a reminder, in Q3 we will host our first in-person customer conference in three years, which we believe will result in incremental expenses of around $5 million on our sales and marketing line. We expect non-GAAP net loss per share to be between $0.16 and $0.15 based on weighted average shares outstanding of 130.5 million. For the full fiscal year 2023, billings are expected to be in the range of $870 million -$880 million, representing growth of 32%-33%. We expect our revenue to be $750 million -$755 million, representing growth of 36%-37%. We expect services to be 7% of total revenue. We are improving our non-GAAP operating loss to be in the range of $75 million-$65 million and non-GAAP net loss per share to be between $0.56 and $0.49 for the year based on approximately 125 million weighted average shares outstanding. This improvement in our profitability is due to cost reductions and efficiencies identified in non-revenue generating areas of our business, combined with a more measured investment posture we articulated earlier this year, and a careful evaluation of our expenses and policies. We are maintaining our free cash flow guidance for the year of breakeven. To conclude, Smartsheet is a system of work able to scale for the largest, most demanding businesses in the world. With ARR approaching three-quarters of a billion dollars and revenue growth in the high 30s%, I believe our value proposition positions us to deliver long-term durable growth with improving margins and outsized cash flows. Now let me turn it back to the operator for questions. Operator? Thank you. As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. We do ask today that you limit yourself to one question and one follow-up. Your first question today comes from the line of John DiFucci with Guggenheim Partners. Your line is now open. Thank you. I have a question for Mark and then a follow-up for Pete. Mark, your commentary about the strength of the quarter, that sort of agrees with our calculations anyway for new business in the period. I realize there were some things that you're seeing in the macro environment, and it makes sense to me to be, as you and Pete both said, more prudent regarding your outlook. Just a clarification on the ramp time for new reps. Is the time required growing simply because of the macro backdrop or has the job gotten more difficult as you build out your platform? I mean, I think about Smartsheet years ago when I first became acquainted with you, and Smartsheet, the application's just, it's a much more sophisticated. It's still easy to use, but it's a more sophisticated and complex application. I'm just wondering if that job has just gotten a lot more sophisticated, the requirements for the sales job. I think the requirements have, John, but I've also seen the support mechanisms we have around enablement and the tooling dramatically improve from the early days. I think with that larger surface area of the offering and more value we can deliver, I think we have put good support structures in place for that. I would point to macro as being the largest impact. When you look at bringing in many new sales reps at the beginning of the year where they're being assigned existing accounts, most of our bookings motion is expansion. You know, those new reps are going to talk to existing customers. I think that relationship between the new rep who's trying to articulate value to an experienced customer. I think during these times, there's a more pronounced effect that comes from it. you know, we're supporting our reps. We're investing in new tooling, and, you know, I think it's gonna result in capacity that we get to carry next year as well. I think there will be a payoff. Okay, good. It's good to hear you're not gonna give them an out to say it's a harder job. That's great. Pete, listen, this looks like to us anyway a really strong quarter and a big uptick from last quarter, at least from the way we look at it. I again get the prudent guidance here, but I'm just wondering, when you gave the guidance, are you assuming the macro backdrop just sort of stays as it is, or that it continues to soften through the rest of the year? Our assumption, John, is that the backdrop, the economic backdrop stays fairly consistent and slightly weakens as we go through the year. Okay, great. That makes a lot of sense to me. Okay, thanks a lot, guys. Thanks, John. Your next question comes from the line of Terry Tillman with Truist Securities. Your line is now open. Great. Thanks so much for taking the question. This is Robert Dion for Terry. My first question relates to macro positioning. I'm curious, how does the playbook change, if at all, for continuing to drive new logo strength amid a tougher macro environment? And what are some of the assumptions for new logo adds implied in the current guide? And then I have one follow-up. Thank you. Our assumption, you know, as you looked at, your question was on looking at sort of where we are seeing the macro changes in our environment. I think we've seen it across the board. We've seen it in all segments of our business. What I would say is that it's not in any particular vertical. It's spread across all elements of it. That's what we've assumed in our forward-looking guide. We've extended what we saw in July and August all the way through the year. On the new logos, we continue to see with quite a low entry point in terms of dollars, you know, that both the volume and the velocity has remained. As I speak to peers and other SaaS businesses, it's what many of us are seeing. We're seeing on the, you know, more a critical eye coming to the larger expansion opportunities where maybe there are additional layers of approval coming into play. On the, you know, sub-$2,000 new business logo, those are still flowing quite well. Okay, great. Thank you. As a follow-up, nice to see some impressive benefit stats on Brandfolder out of Forrester last week. How has Brandfolder's ROI proposition been resonating with customers, both for those who have adopted the solution and for folks who haven't? How might that evolve with the addition of Outfit? Thank you. Well, the addition of Outfit is an interesting one because it's a response to what we're hearing from some of our larger enterprise opportunities, where they have larger teams who have larger production needs, and that need for content automation really ties into the enterprise opportunity. I think it's a very favorable impact to Brandfolder's ROI statement. But even at mid-sized companies, I think there's still a lot of learning in the market right now about graduating from simply having your digital assets available to you to be able to tag them, distribute them, measure the usage of them. When people take the time to read that ROI statement, hear from a rep, we're seeing very, very positive response. You know, we're still in that early phase of getting Brandfolder, you know, ramped on all of our reps. That co-selling motion between our Brandfolder team and our mainline reps, that's something which we would expect to continue to strengthen throughout the year. That's great. Thanks so much. Yeah. Your next question comes from the line of Michael Turrin with Wells Fargo. Your line is now open. Hey, great. Thanks. I appreciate you taking the questions. First is just kind of a higher level question. It ties into some of what you're saying, and it's consistent with what we're hearing more broadly across software, just signs of elongation, more scrutiny and sales cycles and deal decisions. I'm just wondering if you're finding tangible stats around ROI or efficiency gains or just how well equipped your sales team is to raise their hand and position as these conversations just kind of just continue to layer on across software. I think the especially when we're introducing our premium capabilities, those capabilities, either Advance, which is the package of them or the one-off capabilities, I think those lend themselves most strongly to an ROI statement. When people can move from qualitative to quantitative measures, the confidence goes way up in the sales cycle. I think what we're looking to do is how do you get more of those capabilities exposed to more people earlier? Part of what we're doing on the engineering side over the next year is figuring out how we can get more of that portfolio exposed to people on a self-directed basis as opposed to a human-assisted sales basis. I think it'll be very interesting to see next year how that more self-directed digital motion can open up more of the portfolio. When you talk about things like Control Center and Data Shuttle and content automation lifecycle, it is grounded in doing more things, letting the system do more things in an automated way that can tie out directly to a human being or set of human beings not needing to be as involved. That's where people feel very confident in the formula. My aspiration is how do we get more of those capabilities driven into the median buyer as opposed to 7,000 of our more than 100,000 customers. That's super helpful. I think you've already gotten some questions just around the metrics on Q4 look strong. You're talking about low churn and the expansion rates holding in relatively well. In terms of what you're guiding for, just is it fair to assume that more of those impacts show up on the net new side of your business? We know there's generally a Q4 heavier billings dynamic, so just anything you can add around visibility you have into the existing base there, given some of the uncertainty you're seeing. Yeah, Michael, it's if you look at the change in our billings guidance, which is the key part of the conversation. It is all in the existing expansion business, and it's really net expansion side of it where this is playing out. If you sort of break it down into a few categories, you'd say, you know, of the total change, 1% of it probably comes from, you know, FX. 1% of it is, you know, almost tied into Europe and the economic weakness we're seeing in Europe. Of the balance of the numbers is probably 2% of it tied to just taking this large class of sales reps and getting them to the median level of productivity for our experienced reps. Then the rest of it is in the macro changes and out there. Hopefully, that gives you the color you're looking for. Appreciate you quantifying it like that. Very helpful. Thanks. Your next question comes from the line of Brent Thill with Jefferies. Your line is now open. Pete, just on the margin, how are you thinking about the environment we're in and the expenses that you're carrying going forward? Are you still holding your plan for quarter reps and investments that you had planned in early in the year, or are you tapping the air brakes a bit there as well to tighten up that approach? Brent, I think what we're focused on is driving operational efficiencies in what I call the non-revenue generating roles that we've got. We've moderated our hiring plan, focusing on ancillary and support roles that aren't core to revenue generating sort of activities, if you will. We've also taken the approach of what I call hiring in different locations and really focusing on things which every expense dollar is important and taking the approach of we'll review every dollar and find efficiencies there. As it relates to the sales rep and the quota class, we feel really good about the capacity we're carrying in, and it's gonna set us up really well, not just for this year, but the way we think of FY24 and how that appears. Now, we'll make changes to our sales capacity based on sort of management adjustments of, you know, as we onboard reps, but that's the plan. Okay. Just a quick follow-up. When you guys talk about some of the pressure you're seeing, is it more seat-based? Are you seeing more in seats or this upsell to higher value inside the install base? What are you seeing there? I think we're seeing it in two forms. I would describe it in terms of customers who are earlier in the journey are seeing more of it, so that could be a seed-based expansion or their ability to buy capabilities in packages. You're seeing some of that, but I think you're not seeing it as much in customers who are way down the journey with us and have seen the full value, and they're, you know, I would say, expanding at rates which were consistent with what we planned. Thanks. Your next question comes from the line of George Iwanyc with Oppenheimer. Your line is now open. Thank you for taking my question. Maybe following up on, you know, the sales investment priorities that you just talked about, Pete, can you give us some perspective on the R&D priorities and how you're looking at the near-term investment that you're prioritizing now? Yeah. You know, we've thought of R&D as we hired a large class of our R&D, you know, kind of capacity we needed early in the year, and we continued to build that through Q2 in sort of very targeted areas we knew we needed to grow in. That's been the playbook. We're gonna be looking at opportunistic hiring in R&D as we go through the year, but we're certainly not sort of indexed to the same level of hiring we had in the first half. Okay. Maybe Mark, following up on that, can you give us a sense, you know, like you talked about the self-service investment, are there other areas, you know, either from an M&A perspective or a roadmap that you're really focused on? Yeah. As we head into ENGAGE, we're gonna be announcing a number of things, in, you know, late September. They really go across the entire portfolio from enterprise control and governance capabilities to scale capabilities in our Control Center line, to experiential things that impact every new collaborator and every new person who signs up for our service. I think one of the things, one of the benefits we get from operating at scale is that we don't have to make choices at the expense of one of those important areas. I really feel good about the investment balance we've achieved, and we have not had to eliminate focus from any one of those important things. Thank you. Your next question comes from the line of Rishi Jaluria with RBC. Your line is now open. Oh, wonderful. Thanks so much for taking my questions. Maybe first I wanted to start just doubling down a little bit on Brandfolder and Outfit. You know, it does feel like you're maybe, and please tell me if I'm wrong on this interpretation. It does feel like you are kind of doubling down on the marketing use case. I know this is a horizontal platform, and there's virtually unlimited use cases, but can you maybe talk a little bit about the feedback that you'd been getting from customers and prospects that led to kind of this motion to go deeper on the marketing side, and then I have a follow-up. Yeah. I think when you could identify a pattern of requests, especially within the enterprise class buyer, it's a huge gift when you see a pattern emerge in terms of what multiple people want. This notion of being able to store and classify and distribute content, everyone gets that. I would say the importance of not just being able to create a template, which is, "Here's my digital asset, I need to overlay some content on it," but saying, "I need to do that at scale because I'm running a campaign with 300 different assets that needs to be created." If you don't have that, you're basically telling someone, "Build it manually. Do three hundred assets." What content automation does for you, it says, "Define your frame, have your content, which will live in a Smartsheet, and then merge that, and you can eliminate a lot of manual load within your design team." Like, that is a really easily understood concept. What we're seeing within Brandfolder is that the resonance of digital assets is starting to expand beyond marketers. When you have people within health, within construction, within tech, all keying off on that, I think it's still early, but we are definitely seeing signs of relevance outside of the marketing function. I think the content you know, as we talk about quantifying value, the absence of this content automation, I think forces you into sort of a manual discussion, which is really counter to our thesis. I think it's a really nice complement to what our brand promise has been. All right. Wonderful. That's really helpful. Look, I appreciate all the commentary around expense control, obviously the prudent thing to do in this environment. Maybe one that I'd like to drill down a little bit more on is the stock comp, right? It definitely continues to get elevated, right? SBC is now about 25% of revenue. You're tracking close to 4% annual dilution. I know it's obviously a messy way to analyze it, but maybe taking a step back, can you talk a little bit about your philosophy around stock comp and any kind of longer-term or medium-term plans you may have to kind of get stock comp down over time? Thank you. Rishi, this is Pete. You know, your question on stock comp, let's talk about the texture of how stock comp is created. You're generally carrying a cohort of multi-years of grants, which all layer into sort of annual compensation levels that become a part of the stock grant calculation. We're extremely mindful in controlling and managing this expense, and it starts with how we think of stock and how we think about leveraging it. We haven't taken the approach of, you know, what I call re-greening our entire population. We've taken a very thoughtful approach of saying, you know, we're gonna focus on, selective number of hires coming into the business, granting them stock on what we consider as a reasonable basis, and really managing that, the total stock grants first, and then driving that into compensation expense and ensuring that we have outcomes that are acceptable to us. That's been a part of a deliberate effort Mark, myself, and the management team have gone through. All right. That's really helpful. Thank you, Pete. Thank you, Mark. Thank you. Your next question comes from the line of Scott Berg with Needham. Your line is now open. Hi, everyone. Thanks for taking my questions. I guess I wanted to pivot just a little bit and talk about Outfit a little bit more. Obviously, small purchase price here. You know, you're not obviously buying customers here, you're getting product on this. As you know, help us understand a little bit more the fit with Brandfolder and from a, you know, pricing product perspective, is this something that can really drive, you know, ARPU in a significant way over time as you develop the product as you want? Or is this more of a, maybe a smaller add-on that, you know, just helps create maybe some, you know, modest differentiation from the rest of the competitor set? I think first, Scott, it would, I really see it as an opportunity to improve our win rates with Brandfolder. I think that's the primary benefit. There is evidence within their customer portfolio that larger organizations assign significant value to this. Now, this is an emerging set of evidence, but we see at scale some of their customers being multiples of size of the average revenue that a Brandfolder customer would have standalone. We will integrate it. We do see it as an add-on for which we will charge, as opposed to having it be a freebie. The degree to which that will manifest itself in a meaningful adjustment to our revenue, early days. I absolutely see this as a buy-up opportunity for customers because there's such value associated with it. Got it. Helpful. Following up on Pete's comment earlier about sales rep hiring this year and, you know, most of the, I guess not necessarily cost reductions, but delayed hiring is in non kind of sales or revenue generating positions here going forward, and the rest of the half is. You know, should we take that kind of the same way around, you know, the rest of the sales kinda ecosystem within the company outside of just the quota-bearing sales reps? Yeah, I think, you know, we've taken the approach of the quota-carrying field carriers. There's many of them in those roles. We're generally leaving that capacity sort of as the capacity we wanna deal with and help us for 2024. There's support roles in sales, which are a part of like our moderated hiring plan, you know, in terms of infrastructure roles that support sales systems. Those I consider more in the box of what I call the rest of the folks who support the sales organization. Got it. Very helpful. Thanks again. Your next question comes from the line of Jacob Roberge with William Blair. Your line is now open. Hey, guys. Thanks for taking my questions. Was just wondering if you could talk more about the demand that you're seeing in some of those newer products like WorkApps or Data Shuttle and Brandfolder? Have any of these been more or less prioritized given the uncertain macro environment and some of the headwinds that you'd experienced over the last month? Yeah, I would say the ones that are really resonating are the ones where there's such a clear economic return on the decision. So Data Shuttle is a great example. Do you wanna be manually managing ingress, egress of data into your system, or do you wanna put it on rails and hit the go button? I mean, it's a super simple value prop. So that one is probably the highest velocity, simplest to describe. I would say on the Control Center one, where it's analogous to Data Shuttle in the sense that do you want to have a program and replicate it manually and do all of the portfolio management hand to mouth, or do you wanna put it on rails in Control Center and have it do it for you? Those are concepts which are landing really well. I would say on the Brandfolder side, the degree to which a company has big distribution needs, the degree to which it has content automation needs, the degree to which it has a templating need, that drives the degree to which there's a strong ROI case for Brandfolder. If it's simply a, I'd like to store my assets in a more digital, more beautiful digital way, that's not really carrying the day fully. We're really mindful of understanding what that need is from the customer before we make that ROI promise. Again, back to those, the Data Shuttles, the Control Centers, and the Brandfolders, the ability for us to get our reps in a position where they can present that value is really landing well with folks right now. One of the second part of your question was what's changing in the demand environment? You know, we've seen people really appreciate the impact of our premium apps called capabilities that really help us. We are happy. You know, we wanna sell people the package because it's easier for them to consume, and it helps them long term. You know, we're open in this environment, and we're seeing customers elect in cases to buy them à la carte because that's the way they wanna consume them. We have the flexibility in our model to do both, and we're gonna take the total addressable market in the way customers wanna sort of use it. Great. Thanks. That's really helpful. Could I just double-click on some of the sales headwinds that you're experiencing? Is it really just a macro and training issue, or are there any territorial or quota restructurings that you plan to complete over the kind of balance of the year? I think, you know, the headwinds we described were three-part. You know, there was an elongated set of sales cycles we were seeing. We were talking about seeing some deal compression, and then there was an additional level of approval layers that were being introduced into the process. Those are the, what I call, macro elements that we were seeing across everything we were sort of experiencing in our entire base, if you will. The second part of your question was, what was additional, is we had taken sort of a very large class, introduced that into the field, and what we found is that there was more ramp time needed to get these folks to be productive. They're productive today, but they could be more productive relative to our experienced reps. That's the effort we're driving with single-minded focus to get to. Sounds great. Thanks for taking my questions. Your next question comes from the line of Keith Bachman with BMO. Your line is now open. Yes. Thank you. I have a couple really focused on margins, and I wanna kind of build on the previous question on SBC. If I look at the your operating loss is improving pursuant to your new guidance. Yet, even if I kinda look at Q4, it's still, you know, guessing a little bit here, but, you know, - 5% kind of operating margins. The broader question I wanna start with is, as we reflect on our models here, how do we get to improve profitability? What's the key attribute? Because your average ACV is still pretty small relative to your client base, $7,500. And so your sales and marketing is certainly high relative to most software companies. The question is: How do you improve your reach and grow your ACV, but at the same time, I think satisfy investors that in fact you can improve your margins? Not only improve, but start to generate non-GAAP operating and profit dollars. If you just, you know, is it simply scale? How do you solve that sales and marketing riddle and really reach the operating profitability? Keith, your question has two components to it, and I'll speak to both. I think the first thing we're seeing in our business is our largest customers are driving the greatest profitability for us. As we get bigger, just the natural migration of the model to a larger percentage of our business coming from these larger customers, there's an inherent lift in profitability. The second part of that is when you think of, like, introducing newer products like Brandfolder, what we do is we leverage our mainstream sales force in what we call our co-prime model, where we're not adding pro rata sales and marketing dollars, but we're leveraging an existing base to farm demand and using that as a uplift to our margin profile. Think of those as two, as the two drivers which we think of as drivers as examples in the sales and marketing efficiency camp. Then there's things which we achieve at scale. The larger we get, the more we get to use location, geographic hiring, efficiency and automation, which we get to build in. We've taken a single-minded focus in doing that effectively and efficiently. Between those elements, we have a story we've built out for this year, but we don't expect it to stop here. We expect it to continue into future years as well. Okay. Okay. Yeah, I think investors like to understand, you know, what the roadmap looks like, but I assume we'll find out your guidance in a few quarters on 2020, 2023, or FY 2024, excuse me. You led into my second question, is really how do you think about M&A? And if you know, are there parameters that you think about in terms of willingness to do deals that might positively or candidly negatively impact your operating margin trajectory? Or there's any boundaries that you would not do a deal in terms of the margin impact? If you could just talk a little bit more about the philosophy on M&A as it relates to you know, the impact on margins. Keith, our signal that we've used in the past has historically always been where customers and enterprise buyers are telling us that there's a demand and there's a clear established signal. Why that's important is because you're establishing that into where you can eke out a return in terms of top-line sales dollars and growth. We are looking at adjacencies which fit that profile. That's the first thing we've done. Even with the most recent acquisition of Outfit, it really helps our Brandfolder, you know, sales perspective in future fiscal years, and that's what we've indexed on. You asked me about the boundary conditions. We're being extremely thoughtful about returns that acquisitions give us, and that's been the metric we've been using. What's the dilution impact it has? What's the accretion I expect on the top line, and how am I trading against those? Right. Okay. All right. Well, congratulations to your result. Given the backdrop, it seemed pretty solid. Congratulations. That's it for me. Many thanks. Thanks, Keith. Your next question comes from the line of Pinjalim Bora with JP Morgan. Your line is now open. Great. Hey, thank you for taking the questions. I wanted to go back to the elongated sales cycles comment. Could you give us maybe more texture around if it was more enterprise slash small or mid-market business driven? Was there any difference between the various geos? Was the elongation largely around larger sized deals versus smaller? You know, when we looked at it, there was a general elongation of sales cycle, but I think it was more pronounced in the enterprise because you think of the sophisticated buyer that looks at every deal and the mechanisms they have to react to things before they're fully entrenched in their business. We saw that. That's kind of what we would represent as being elongating sales cycles by segment or tier. I see. Understood. Okay. The other question, I guess, when I'm looking at the billings guidance, I did this math pretty quickly, but seems like the second half slows about 10 points versus the first half, and seems like the slowdown was more pronounced during 2020, when you had to take the billings guidance off the table, at that time. Maybe compare the two environments. What you're hearing from customers are seeing in the deals now versus what was in that April-July timeframe last in 2020. I think what we're seeing is the conditions that we saw in 2020 were quite new to people, right? There was a set of variables that many people hadn't faced before. I would say while there is some lack of certainty on how the conditions are improving or worsening, we're dealing with a slightly more recognized set of variables than we did in 2020. What's changed for us internally, what's different than 2020 is we had a different set of inputs we were dealing with. This year, we brought on the largest class in company history in the first half. We didn't do that in 2020. How we're reacting is fundamentally to a different set of conditions. In terms of what the buyers are going through, where the commonality does sit, is they're asking for what's the value, what has changed a little bit this go around is not only what's the value, what's the return, but I would say there's more focus now on how quickly can you get that return to me. I would say the time horizon around the return on the investment is probably more pronounced than it was in 2020. Understood. Thank you. Your next question comes from the line of Steve Enders with Citi. Your line is now open. Hi. Great, thanks for taking the question. I just want to ask a little bit more on some of the go-to-market aspects of the business. I think you mentioned that you thought there was more you could do on the sales enablement side to try and turn things around. How are you kinda feeling about the levers that you could potentially pull and some of the different marketing strategies to put in place to try and drive some better penetration expansion rates and accounts? I think one of the things that's a really welcome change is in past years, our ENGAGE conference has been a big driver in terms of customer education, understanding the possibilities, and also spending time with our most valuable teams in person to develop account plans. It's the first time we're doing it in three years. Registration for an in-person event is going well. That'll be an event where we have thousands of people in Seattle. So we have some of our largest teams, our largest customers already signed up, where you have teams of people showing up representing those companies. So that's a really positive variable. I would say other things that we're doing is improving our product marketing in how we cross-sell and cross-introduce the portfolio that we know is single-digit penetrated today. A big product marketing push in the second half is around developing new materials, not just for enablement, but also to educate customers at the right time on what they could be doing with Smartsheet. I think part of that is through, you know, we brought on a new CMO at the end of last year. Andrew and his team are hitting stride. They're developing new things. They're hiring new product marketing team members, and I expect that to start benefiting us in the second half. We have some changing variables that should be positive as we exit this year and head into next. Okay. That's helpful. I guess kind of beyond, you know, the marketing area and what you're doing with Brandfolder there, I guess, how do you think about other verticals or other core use cases you could, you know, go after and really kinda simplify the solutions that kinda more tailor it for some specific areas? We're doing work right now on identifying commonality around use cases within our largest customers. We just presented to our board this last week the approach we're taking on how to have a more recommendation-based set of use cases that we can introduce to our sales team, so there's commonality in the core value prop. Not so much just like PPM and marketing, but like more specific granular functional use cases in certain industries where we've been very successful. That is something which is very much in flight right now. I think in terms of how our customers are responding to use cases, I would say we continue to see requests for more sophisticated capabilities. I'll give you an example. For years, we've sold the ability to manage projects at scale. When we talk about applying resource to them, which we do very well, we have given people the ability to track resource allocation across their work. Great. The largest companies in the world are also saying, "Help me understand the forecasting of that. Don't tell me how I'm assigned, but what type of capacity do I have looking forward across the skill sets I have?" There's a whole set of capabilities in project and portfolio management and the management and utilization of resources that is being developed today, which is gonna be coming out in the coming quarters. We're extending the depth of some of these capabilities as opposed to saying, "What are other simple things we can do in adjacent spaces?" I think the differentiation in our category, the winner long term will not simply be a very broad-based set of capabilities that are simple, but have very, very discrete differentiating enterprise capabilities that are deeply understood and in demand. As we build our portfolio, it's not about just broadening it, but deepening. So far, we've seen those capabilities work really well. Yeah. Perfect. Thanks for taking the question. Yep. Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is now open. Great. Thanks for the question. I think with billings linearity, I'd assume weighted toward the end of the quarter, just wondering why the macro impacts that surfaced in July didn't have a more significant impact versus the 44% billings growth and billings outperformance in the quarter. You know, the impact that we saw in July was partway through July, so you saw some impact of it. Frankly, without that impact, we'd had an even bigger quarter in how the quarter would have played out in billings. That's the trend we saw. I think we saw that trend play out or extend itself out as we went into August as well, and which became the basis of our guide. Okay, that makes sense. Would you say May and June were sort of in line with your expectations? What, like, kind of thinking month by month, were those actually extra strong? No, I think month by month, they were fairly consistent with what we would have expected and what we'd historically seen. There was nothing unusual about May or June. Okay, great. Thank you. Of course. Your next question comes from the line of Andrew DeGasperi with Berenberg. Your line is now open. Thanks for taking my question. I guess, I mean, first, just as a follow-up on the employee side, I mean, has employee retention been an issue since this, the realignment, particularly on the quarter carrying side? Or have you not seen any changes? We have not seen a meaningful change in attrition rates. Great. Secondly, just on the, given the change in market conditions, I just wondered if you've seen an improved competitive environment, particularly from the smaller CWM players. Or has it, has that been unchanged as well? It's we don't, you know, there's not a lot of head-to-head. As I said, when we have those, like those rare but notable RFPs, we're talking single digits in a quarter, right? It's difficult to say what the others are experiencing. Again, most of our deals are not contested. Most of our business is grounded in expansion, where they're really committed to Smartsheet already. It's difficult to say what they're saying. I think what we're benefiting from is where a lot of our demand comes from the usage of our product, where we're not overly reliant on the new marketing mechanism, like advertising mechanisms. We are seeing, you know, through our analysis that there's been a little bit of a rise in cost of people having to battle it out for the next new dollar, and that's something that we fortunately don't have to participate in as heavily. Understood. Thank you. Your last question today comes from the line of Robert Simmons with D.A. Davidson. Your line is now open. Hey. Thanks for taking our questions. First, to clarify one thing on the headwinds that you're experiencing, are you seeing increased plan downgrades or user contraction at clients? Or is it really just on the kind of like expansion side of things? Robert, we're seeing it entirely on the net expansion side. Our churn remains at a record low level, and I shared that our churn rate is now below 4%. It's all on the net expansion side that we're seeing these headwinds. Got it. Great. Have you built in any revenue benefits this year from holding ENGAGE in person or would that be upside to numbers? You know, we've built in some level of what I call, you know, what we would expect a modest amount of an improvement in our close rate based on what we are experiencing with ENGAGE in September, but we haven't built in a big upside. Got it. That makes sense. Thank you very much. You're welcome, Rob. This concludes today's Q&A. I now turn the call back over to Aaron Turner. Great. Thank you so much, and thank you all for joining us today. We'll speak with you again next quarter. This concludes today's conference call. Thank you for attending. You may now disconnect.