Smartsheet Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: John DiFucci - Guggenheim Securities - Analyst : Thank you. Thanks for taking my question. So, Mark and Pete, you put up better-than-expected numbers than you guided up, which normally for software at that degree, that makes you standout this quarter. So congrats on that. But when we tried to tease out the new business signed in the quarter, the new ARR, it looks like the growth was about the same as last quarter relative to an easier comp, which again, this is better than most of our coverage universe. But how are you thinking about, how should we think about the different parts of the market that you primarily sell into for the rest of this year? So Pete, you talked a little bit about large enterprise. You didn't mention much about -- said a little things about this small business that you've talked about, a little more of that in the past and maybe even public sector, if you could throw that in there, that would be great.

Question: John DiFucci - Guggenheim Securities - Analyst : Okay. Okay. And I know you've talked about -- this would be my second question, I guess. You've talked in the past that -- let me ask it this way, I'm sorry. Does the new pricing model -- which sounds really interesting, does that allow or is there sort of a skew in there that allows users to sort of access whatever you sell? Or is it still like a la carte given some of the different offerings you have?

Question: John DiFucci - Guggenheim Securities - Analyst : It sounds really interesting, but we'll see how that goes. But it sounds great. Thank you very much, John.

Question: John DiFucci - Guggenheim Securities - Analyst : Okay. Okay. Okay, great. Thank you, Mark.

Question: Josh Baer - Morgan Stanley - Analyst : Great. Congrats on the quarter and thanks for the question. I wanted to stick on the new pricing and packaging and just wondering what gives you confidence that the slightly lower price or lower pricing, higher user count equation results in accretive nature. Any signals from as far as customer behavior or key assumptions that's aligned to that optimistic commentary? And then I have a follow up.

Question: Josh Baer - Morgan Stanley - Analyst : Very clear. And then I just wanted to ask if you expect any changes to gross margins from these changes to pricing impact?

Question: Josh Baer - Morgan Stanley - Analyst : Okay. Great. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 8:30PM, SMAR.N - Q1 2025 Smartsheet Inc Earnings Call

Question: Terry Tillman - Truist Securities - Analyst : Yes. Thanks for taking my questions. Hi, Mark, Pete, and Aaron. Maybe the first question for you, Mark, I've actually asked this repeatedly over the years as the business has grown and scaled. If we take a step back, there was a magic quarter that came out that seemed like an important milestone. You're talking about KPMG, which seems like a GSI partner potentially going forward. Are you starting to see -- and I don't want to put words in your mouth, so tell me if I'm just absolutely wrong on this. Are you starting to see bigger enterprises where they have been using different work management tools start to take a step back in whether it's an RFP or some sort of strategic vendor consolidation play, maybe because of the macro, the more strategic CIO or just C level purchasing or expansion? And then I had a follow up.

Question: Terry Tillman - Truist Securities - Analyst : Thanks for that, Mark. And I guess, Pete, just last quarter, you kind of split the NRR dynamics across enterprise and SMB. I think you had 120% for enterprise and then basically 0% expansion or 100% NRR for SMB. Could you give an update on how that played out in 1Q between the two businesses? And is there any updated thoughts on how they individually would play out the rest of the year? Thank you.

Question: Terry Tillman - Truist Securities - Analyst : Okay. Thank you.

Question: Rishi Jaluria - RBC Capital Markets - Analyst : Wonderful. Thanks so much for taking my question. I wanted to start going back to the changes in pricing and packaging. Totally appreciate the potential upside from here. I guess historically, when we've seen companies make changes to pricing and packaging, there can sometimes be disruption in the near term. Can you maybe walk us through what is your plan to minimize or mitigate any potential disruption from that? And then I've got a quick follow-up.

Question: Rishi Jaluria - RBC Capital Markets - Analyst : Got it. Thank you. That's really helpful. And then, Pete, for you, I recognize we're shifting to ARR as a metric instead of billings. Maybe can you just help us bridge the delta between billings and ARR this quarter? It was a pretty big range. Maybe help us understand what went on in the quarter to explain that delta and just how to think about the delta between the two going forward. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 8:30PM, SMAR.N - Q1 2025 Smartsheet Inc Earnings Call

Question: Rishi Jaluria - RBC Capital Markets - Analyst : That's helpful. Thank you.

Question: Alex Zukin - Wolfe Research - Analyst : Hey guys, thanks for taking my question. And I'll kind of go down to some of the same themes that we've been -- that the prior questions were on. I guess if we think about the linearity of bookings in the quarter, can you maybe just talk about how it looked and felt and if that was the same or different, just given all the kind of macro noise we hear? And then was the headwind more from elevated SMB churn or lack of seed expansion? And again, how do we model those net new ARR trends as we go through the year? Kind of is it similar to last year or is it even more seasonal? And then I got a quick follow-up.

Question: Alex Zukin - Wolfe Research - Analyst : And what about net new ARR, sorry? Just a clarification.

Question: Alex Zukin - Wolfe Research - Analyst : Okay, and then just maybe my follow up for Mark. I think if we look at some older disclosures historically, I think like 80% of the users have been unpaid. So as we look at the contribution going forward, what does success look like over the next year, two years, and changing that kind of user free versus paid mix? And given the modest impact on this year, how should we think about the NRR dynamics over time as we kind of go through this model transition?

Question: Alex Zukin - Wolfe Research - Analyst : Got it. Thank you.

Question: George Iwanyc - Oppenheimer - Analyst : Thank you for taking my question. Mark, maybe starting with the EMEA Engage Conference, can you give us an update on what you're hearing from customers there and kind of the overall pipeline internationally? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 8:30PM, SMAR.N - Q1 2025 Smartsheet Inc Earnings Call

Question: George Iwanyc - Oppenheimer - Analyst : Great. And then maybe staying on the AI thing, but with the packaging. As enterprises start to adopt this, how are you including and introducing those AI capabilities with the new packaging?

Question: George Iwanyc - Oppenheimer - Analyst : Thank you.

Question: Michael Berg - Wells Fargo - Analyst : Hey, thanks for taking my question. Congrats on the quarter. I want to ask about the sequential improvement in a slightly different manner than after earlier in the call. Any notable changes in the broader macro or buying behaviors, willingness to open up budgets? Any particular reasons that stand out as to why your solution platform has been procured to what appears to be a healthier rate relative to some other names across software? And then I got a quick follow up. Thank you.

Question: Michael Berg - Wells Fargo - Analyst : Got it. And then a quick follow up on margins. Obviously, you had some very nice margin performance and improvement in the guidance for the year. Outside of top on that performance, anything you can think of that's driving the incremental progress there? Or is it just the enterprise? Are your economics flowing through the model over time? Thanks.

Question: Brent Thill - Jefferies - Analyst : Mark, a good April and a good Europe are not consistent with most of the industry. I'm just curious, what do you think really resonated in Q1? Is it the category was it your execution? Did something trigger on the product line? What do you think kind of helped you glide through this headwind that others are really getting bogged down by?

Question: Brent Thill - Jefferies - Analyst : Okay. Pete, are we going to have to wait till June 24 or do we get any sneak peek here in terms of what this is going to look like?

Question: Brent Thill - Jefferies - Analyst : Okay. Very clear. Thank you.

Question: George Kurosawa - Citi - Analyst : Hi, this is George Kurosawa for Steve. Mark, a few times you've alluded here to the impact that Max has had on the go-to-market org, which I think is really impressive given how new he is to the organization. Maybe you should double-click on what you've seen him bring to the table and what you've got him focused on for the rest of the year.

Question: George Kurosawa - Citi - Analyst : That's great to hear. And then a quick follow up on capital allocation. I think the buyback plan makes a lot of sense given how strong the free cashflow generation has been. But the $150 million, it's a pretty significant number. Most of the annual free cashflow guide kind of getting plowed back into buybacks. Maybe if you could just talk about how you guys kind of triangulated in on sizing that and why not kind of push a little bit more into reinvesting in the growth.

Question: George Kurosawa - Citi - Analyst : Perfect. Thanks for taking the questions.

Question: Pinjalim Bora - JPMorgan - Analyst : Great. Hey, everyone. Congrats on the quarter. Nice to see the good results. Just a number of clarifications on the pricing and packaging. Are you completely moving away from the free collaborators, is what I understand from what I've heard so far? Anyway to understand kind of the base of early customers that you are basing the price elasticity comments you made earlier in the call? And within the existing customers or the early customers, I should say, that have moved to this model, what are you seeing from a conversion point of view for those collaborators?

Question: Pinjalim Bora - JPMorgan - Analyst : No, I was just -- I'm trying to understand if a customer -- your existing customer or early customer who has moved to this plan had free collaborators who were also editing, those are moving to paid now is my understanding. So I'm trying to think if you had -- that customer had 10, did all of those 10 -- are you seeing all of those 10 kind of move into paid with this new model? Or is it 5% of that, 30% of that? That's what I was trying to get at in terms of conversion.

Question: Pinjalim Bora - JPMorgan - Analyst : Understood. Thank you.

Question: DJ Hynes - Canaccord Genuity - Analyst : Hey, guys. So, Mark, you're going to be taking a lot of folks that were previously collaborators and you're going to give them full access to create and contribute on the platform. How do you at the same time educate what were passive users in the past on what's possible? How to use the platform as a creator, get them engaged, help them figure out how to create value? I mean that seems like a really important part of driving incremental long-term value from the new pricing model. So I'd love any color on how you're thinking about that.

Question: DJ Hynes - Canaccord Genuity - Analyst : Yes. Okay. Makes sense. And then, Pete, a follow-up for you. So we have pretty limited history with the relationship between ARR growth and net revenue retention. But over the last four quarters, which we do have, ARR growth has outpaced NRR by about 5 to 6 points pretty consistently. How would you expect that ratio to trend and look over the course of this year?

Question: DJ Hynes - Canaccord Genuity - Analyst : Right. So you think it should be pretty consistent in that five to six point range?

Question: DJ Hynes - Canaccord Genuity - Analyst : Okay. Thank you.

Question: Kyle Diehl - KeyBanc Capital Markets - Analyst : Hey. Thanks. This is Kyle Diehl on for Jackson Ader. Just maybe two quick ones for us. Can you give us some color on where we stand in terms of sales capacity for this year and if there are any headcount plans that you guys have for the remainder of the year, particularly given it looks like we're ahead of our initial profitability targets here? And then, Pete, I think you had mentioned that capabilities were 35% of subscription revenue this quarter, so that seems to continue to tick up. In terms of the standalone purchases that are being made, where are the outperformers and where are you guys seeing success? Thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 8:30PM, SMAR.N - Q1 2025 Smartsheet Inc Earnings Call

Question: Taylor McGinnis - UBS - Analyst : Yeah, hi. Thanks so much for taking my question and apologies for the background noise. Just one from me, which is when we look at the revenue and ARR guidance, can you perhaps quantify or tell us how much of the uptick was driven by this pricing and packaging change? And understanding that the macro is still tough out there, you don't have any software companies raising in light of the environment. But just curious, was there anything in the quarter that maybe downtick? Or was a little bit softer that's making you more cautious through the year or is that just mostly conservatism? Thanks so much.

Question: Taylor McGinnis - UBS - Analyst : Great. Thanks so much.