Smartsheet Inc

NYSE:SMAR

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet First Quarter Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

It is now my pleasure to turn today's call over to Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead.

[Aaron Turner, Head of Investor Relations]

Thank you, Brent. Good afternoon, and welcome everyone to Smartsheet's first quarter of fiscal year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are Smartsheet's CEO, Mark Mader, and our CFO, Pete Godbole.

Today's call is being webcast and will also be available for replay on our Investor Relations website at investors.smartsheet.com. There 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 and we do not assume any obligation to update these statements as a result of new information or future events except as required by law.

In addition to the US GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable US GAAP measures is available on 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.

[Mark Mader, Chief Executive Officer]

Thank you, Aaron, and good afternoon, everyone. Welcome to our first quarter earnings call for fiscal year 2023. Today, I'd like to focus on three key areas, a solid Q1 with healthy growth in both revenue and billings, our strengthening leadership position in collaborative work management, project and portfolio management and digital asset management markets, and how we are investing to deliver shareholder value in the years ahead.

While Pete will provide additional details, I do want to highlight a few standout areas of our Q1 performance. Smartsheet revenue for the quarter grew 44% year-over-year to $168.3 million and billings grew 36% year-over-year to $180.1 million. We continue to see success on each of the land, expand, and climb aspects of our go-to-market motion. On the land dimension, our previously discussed investments in simplifying packaging and the onboarding process are paying off.

Q1 was a record quarter for new customer bookings and the highest net logo growth we've experienced since our IPO. On both land and expand dimensions, the net new plans added in Q1 increased by more than 4 times versus Q1 of last year. And on the climb dimension, we saw 57 domains expand their Smartsheet investment by $100,000 or more in Q1, up 97% year-over-year, including an expansion of over $1 million.

Additionally, we saw our churn rate in Q1 improved to a record low 4% and we finished the quarter with more than 10.5 million Smartsheet users. We now have 33 customers with ARR over $1 million and three customers that have over 125,000 Smartsheet users. Smartsheet continues to provide the best-in-class value in the category as our collaborator model allows Smartsheet to achieve broad reach in a way that is both frictionless for the user and cost advantageous for the customer.

As customers realize the value generated from their Smartsheet deployments many up level their usage to include high value, data-intensive workloads. This is evident in our market leading dollar based net retention rates, which were 133% across our entire customer base and 149% for our customers with ARR over $500,000. Our investment strategy is predicated on proven ROI with a focus on both near and long-term free cash flow generation. People are core to this investment strategy and people want to work at Smartsheet.

In Q1, we exceeded our hiring objectives in both R&D and sales positioning us well for continued execution in FY ’23. We're looking at a tremendous long-term market opportunity and we will continue to strategically and thoughtfully invest. With that said we're mindful of the current macroeconomic environment and have taken steps to ensure we maintain a high rate of top line growth and reach free cash flow breakeven this fiscal year.

As we discussed in previous calls Smartsheet has a proven ability to expand across and climb up the value chain with and organizations. But also very important, we continue to land new customers at an accelerating rate. In the first quarter, we saw significant wins across a number of industries with companies looking to up-level work management, including Assured Partners. This Smartsheet advanced deal with one of the nation's fastest growing insurance brokers will help the company deploy a best-in-class project and portfolio management solution for their IT project management office, their retail PMO and their security team.

We also saw new wins at companies such as the premium resort and residents brand Amman, the Online Bank Money Line, Santander, Second Home Ownership Innovator Pacaso, Volcon E-Power Sports and the Department of the Interior. Looking at expand deals we closed a mid six figure expansion deal at a large European talent acquisition and management solution provider. The leadership team overseeing the company's deployment efforts needed to transform the company's global delivery process; struggling to standardize on our approach across 12 regions and with little real-time visibility across their projects, overruns were cutting into service margins. Smartsheet will dramatically improve their ability to manage and planned projects and capacity.

With their move up to Smartsheet advanced gold and resource management, they are building a solution that will integrate with our existing enterprise business applications to enhance collaboration, engagement and visibility across the company. And with the help of control center, they will have a standardized and integrated approach to managing complex client engagements in a consistent manager that will double up into regional and portfolio dashboards. This allows Executive stakeholders to the resourcing plans and resource availability and get a real time preview of the impact of those changes throughout the project lifecycle.

In the U.S., we closed on a seven figure expansion at a major U.S. healthcare and insurance provider. This customer scaled up to 10s of thousands of connected users on our advanced platinum offering for a highly regulated customer like this Smartsheets Platinum features were key to deepening that relationship. This customer also partnered with us on building our custom Smartsheet solutions that replace some existing tools in their tech stack. This group has generated over $10 million in savings by building solutions in Smartsheet according to their internal company survey.

We also closed Q1 expansion deals with Mass Mutual, Alaska Air, Marriott and Nielsen among many others. Whether we're talking about one of the country's biggest healthcare companies or one of the world's largest insurers, I'm encouraged by the executive level bind we're seeing throughout these organizations, which speaks to our client motion. In April, I was in Sydney at a customer roundtable and at a certain point and executive responsible for digital transformation at a multi-billion dollar gaming company explained to the CFO of a food distributor precisely how he should set up analyst team to maximize value with control center. This exemplifies Smartsheets ability to drive engagement and deliver real value up to the C-level in enterprises.

Our competitive strength remain Smartsheet's ability to scale alongside our customers' existing business systems. Our enterprise-grade CWM and PPM capabilities allow us to integrate equally well with both current and legacy systems of record, as well as collaboration tools like Slack, Teams and Webex, data visualization solutions like Tableau and Power BI, visual collaboration tools such as Miro and Figma, and productivity solutions like Microsoft 365 and Google Workspace.

And while Smartsheet's powerful collaborative work management capabilities continue to be a strong growth driver with Brandfolder or integrated digital asset management platform, we've added yet another important growth engine. In March of this year, we launched a deep integration of our Brandfolder digital asset management platform with Smartsheet. By combining the best in modern work management with best-in-class digital asset management, the integrated Smartsheet platform aligns marketing and creative work, streamlining asset discovery and delivery, and optimizing value through unified team and asset performance analytics.

Let me tell you about our value from one of our customers, McLaren Racing, and what they're realizing from this Brandfolder integration. McLaren adopted Smartsheet with Brandfolder at the start of the 2022 Formula 1 racing season, to streamline have a store, manage, and distribute race day content. With thousands of photos and videos taken at every race, McLaren's team was spending countless hours manually organizing and distributing assets to their partners. Now, photographers and videographers upload assets directly to Brandfolder and machine learning models automatically identify, which logos are in each asset and sort them into collections, saving McLaren's team hours of work each week. Partners then access their respective collections to use McLaren approved assets for their own marketing efforts, while McLaren contract the usage of more than 100 terabytes of assets.

For years, digital asset management systems were used almost exclusively in advertising and media production. And while those industries still make up the lion's share of the customer base, almost any organization that creates and stores digital assets of any kind, photos, videos, PDFs, architectural drawings or 3D models, is a potential customer. Brandfolder is already simplifying digital asset management at tech companies like Zoom and Auth0, a division of Okta, financial services firms like LPL Financial, consumer goods companies like The Cookware Company, and healthcare organizations like CareOregon and Envision Healthcare. In the future, I believe we'll see digital asset management systems used in functions far beyond creative in every industry, architecture, construction, manufacturing, legal services, health care, really anywhere digital assets need to be tagged, stored, searched, and accessed efficiently.

We continue to make Smartsheet not only more powerful, but easier to get people up and running quickly with our product-led growth focus. This quarter, we introduced an onboarding experience to let new and existing users get their project management system setup and shared with their team in just a few clicks. This new experience guides users in quickly building and sharing projects, a simple interface watch users to creating project and automatically creates reports in a dashboard, organizing them within team workspace. This experience will be applied to support 100s of work management use cases in the quarters to come.

On the international front, our expansion is continuing, with 100 team members now onboard in our Sydney location, staffing underway in Japan, and EU bookings growing steadily. One of our EU customers is the European arm of a global medical technology company focused on medical diagnostics, medical imaging system, and surgical devices. They needed a solution to help improve consistency in collaboration on their major R&D initiatives. The evaluation team chose Smartsheet and the solution would help improve their visibility and make collaboration much easier compared to their legacy PPM system.

Moving into Q2 with solid momentum, I remain very optimistic about fiscal year 2023 and beyond. We have a strong category leading position and high confidence in thoughtfully investing to capture the enormous market opportunity in front of us. Our focus remains, leading in for our customers while making investments that deliver a high rate of growth and free cash flow performance that enables us to control our destiny.

I look forward to talking with you later in Q&A, but for now, I'm going to turn it over to Pete. Pete?

[Pete Godbole, Chief Financial Officer]

Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q1 was a solid start to fiscal year '23. Our results exceeded expectations with strong revenue growth, healthy gross margins, and industry-leading unit economics.

To set the stage before we get into the numbers, we are focused on capturing our massive market opportunity with a view on our path to profitability. The investments we are choosing to make are ones that exhibit strong proven ROIs, that will drive not only durable top line growth for years to come, but also deliver free cash flow generation in the medium to long-term.

While we have not seen any macro impacts in our demand environment, we are electing to incorporate an element of macro-related prudence into our Q2 and fiscal year revenue and billings guidance to account for potential headwinds. I will provide more details at the end of my prepared remarks.

As a reminder, we highlighted on our Q4 earnings call how we took steps in the first quarter to build out our field model to capture this market opportunity. These steps include territory realignment to onboard our largest sales class in our history, promoting productive quota-carrying reps into manager positions, and hosting an in person worldwide sales kickoff event to enable this team. We believe these changes position us very well for continued growth for this year and beyond. But as expected, we had an short-term impact on some of our metrics in Q1.

I will now go through our financial results for the first 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. First quarter revenue came in at $168.3 million, up 44% year-over-year. Subscription revenue was $155.3 million, representing year-over-year growth of 44%. Services revenue was $13 million, representing year-over-year growth of 44%.

Turning to billings, first quarter billings came in at $180.1 million, representing year-over-year growth of 36%. Approximately, 91% of our subscription billings were annual with 5% monthly. Quarterly and semi-annual represented approximately 4% of the total. Multi-year billings represented less than 1% of total billings.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 50% year-over-year to 2,516, and the number of customers with ARR over $100,000 grew 68% year-over-year to 1,108. These customer segments now represent 57% and 42%, respectively of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 87%.

Next, our domain average ACV grew 32% year-over-year to $7,210. As a reminder, we saw significant growth of our new customer acquisitions in Q1. New customers typically begin their Smartsheet journey at small dollar values than our overall average ACV. These initial [lens] (ph) put a small amount of 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 133%. The full churn rate dropped further and now rounds down to a record low of 4%. For the remainder of the year, we continue to expect our dollar-based net retention rate to be above 130%.

Now, turning back to the financials, our total gross margin was 81%. Our Q1 subscription gross margin was 87%. We continue to expect our gross margin for FY '23 to remain above 80%. Overall, operating loss in the quarter was negative $23.1 million or 14% of revenue. As previously mentioned, we had a very strong quarter of hiring in Q1, which was above our expectations.

Additionally, we experienced lower-than-expected employee attrition rates in the quarter. The combination of stronger hiring and lower attrition rates resulted in our operating loss to fall within our previous guidance range, despite our revenue outperformance. Free cash flow in the quarter was negative $9.1 million.

Now, let me move on to guidance. Although we have not seen any discernible macro-related impacts in our business thus far, we are embedding an element of macro-related prudence into our Q2 and full-year revenue and billings guidance. If ultimately, we don't experience a macroeconomic impact on our demand environment, this would be a source of upside to our current revenue and billings guidance. Additionally, we have identified areas of cost savings this year, which is reflected in our improved operating loss and free cash flow guidance.

For the second quarter of fiscal year '23, we expect revenue to be in the range of $180 million to $181 million, non-GAAP operating loss to be in the range of $27 million to $25 million, and non-GAAP net loss per share to be between $0.21 and $0.19 based on weighted average shares outstanding of 129 million. The Q2 operating loss guide is impacted by the full weight of hiring we made in Q1, but we expect to see operating leverage in the second half of the year.

For the full fiscal year 2023, we are raising our revenue guidance to be in the range of $756 million to $761 million, representing growth of 37% to 38%. We expect services to be 7% of the total revenue for the remainder of the year as partners play an increasing role in our services delivery. Billings are expected to be in the range of $910 million to $925 million, representing growth of 38% to 40%. We are improving our non-GAAP operating loss to be in the range of $86 million to $76 million and net loss per share to be between $0.67 and $0.59 for the year on approximately 129 million weighted average shares outstanding. We are also improving our free cash flow guidance for the year to breakeven.

To conclude, Q1 was another solid quarter for Smartsheet. We remain committed to working towards driving growth with margin improvement and are actively driving efficiencies across the company, while continuing to fund our key growth initiatives. We have a huge market opportunity in front of us a world-class team, CWM category leadership powered by a business model that can generate growth and free cash flow in various market conditions.

Now let me turn it back to the operator for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Brent Thill with Jefferies. Your line is open.

[Brent Thill, Jefferies]

Good afternoon, Mark. I'm curious if you can expand on the economy and what you're seeing? And ultimately, if things get worse before they get better, how do you think about the steps that you can take to mitigate any of the concerns about the macro?

[Mark Mader, Chief Executive Officer]

I think as we look at our leading indicators, things like pipeline -- progression of pipeline in quarter, I think we have an ability to adjust throttle and moderate spend. As Pete remarked, currently, we continue to plow ahead very well. I think the workout that we got in 2020 and 2021 with COVID, actually, I think, prepared a lot of businesses quite well, where we had a chance to operate in an environment where there was uncertainty and it really put a lot of emphasis on how we present value around the solution. So I think a lot of the things we learned and enabled our sales teams with in 2020 actually fit right into the slot that we're seeing today.

The good news is, we still see a lot of money changing hands in this category and we're moving forward. I think partnering with Pete, and he'll make some comments later around our investment strategy, we have a lot of levers to pull, but right now, we're definitely leaning forward.

[Brent Thill, Jefferies]

And you mentioned on the new client additions were really strong. Can you share any color what you're seeing there?

[Mark Mader, Chief Executive Officer]

Yes, one of the things I spoke to in our earnings call -- in the last really two earnings calls was our focus. We've had such focus over the last few years around our enterprise offering and strength and capabilities moving up the value chain, and we've really started to pair that now with getting much more assertive at the leading edge. So how do you land in more nodes at more businesses, and it's not just winning new logos, it's also landing in more nodes at existing clients. So some of the things we've changed with our Pro plan packaging, I think has really made our land much more accelerated.

And interestingly, when I look at the various segments of employee size, fewer than 50 employees, 50 to 200, 200 to 2,000, over 2,000 to 10,000, each of those segments is benefiting from this packaging. But it's beyond Pro plan packaging, it's also the experience we're serving up to people coming in. And one of the things I mentioned in our Analyst Day at the beginning of the year was if I could have one thing, I would want to have every new person who sees Smartsheet to have perfect understanding of what's possible with Smartsheet. So I think packaging is one and how we present our value is another. And I think we're starting to really see that perform.

[Brent Thill, Jefferies]

Thanks, Mark.

[Mark Mader, Chief Executive Officer]

Yes.

[Operator]

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

[Terry Tillman, Truist Securities]

Yes. Thanks for taking my questions as well. I just had two questions, the first question is for Pete in terms of -- you did actually talk about some short-term potential impact in some of the KPIs. I mean, you beat my billings number and the KPI sounded relatively strong, and it sounded like new logo activity, I think, Mark, you had said, it was record, at least bookings value. So could you maybe double click a little bit into that comment. Was there -- was some of the stuff you're doing at the beginning of the year on, kind of, sales kick-off and things like that, that may have just impacted some of the enterprise business. I'd just love a little bit more on that, and then I had a follow-up question for Mark.

[Pete Godbole, Chief Financial Officer]

So Terry, we mentioned few things that we did at the start of the year. We onboarded our largest class in sales and that involves splitting territories, it involved promotions for people in the field, it involved an actual sales kickoff event to get the whole field aligned. So we saw that as a huge long-term accelerant, but obviously had a short-term impact for us. Some of the impacts we saw -- we still had really great customer ACV changes for the number of customers in those categories, but it was just relatively muted to our historic -- our recent trends, if you will.

[Terry Tillman, Truist Securities]

Okay. Okay, fair enough. And I guess, Mark, I'd love seeing the $1 million-plus customers, I mean, I remember when it was single-digits, and now, I think you said 33. I'm curious, how much is digital asset management within that large customer mix? And have you thought about maybe putting some gas on the fire in terms of with what you have with Brandfolder and the integrations, maybe you have like dedicated sales teams and you just really go after the digital asset management space aggressively? Thank you.

[Mark Mader, Chief Executive Officer]

Yes. Yes, Terry, gas is definitely in the tank. We have added sales reps to our Brandfolder division, the way in which we are teaming between people who know digital asset management really, really well and people who know work management really, really well. Those are starting to really play out. And I would say it's when you look at the bookings impact, Brandfolder is still relatively small, compared to mainline CWM, but the resonance with customers is really interesting, when I speak with executives and I hear them responding to the use cases they can understand, it's very visual, it's very compelling, it’s an easy value prop to convey, we're seeing some really good uptake. I -- it is our fastest growing part of the business today, albeit not as significant yet, as it will be in the future, but it's really starting to play well.

So I believe that it will be part of almost all of our sales discussions within a year from now. And right now we're getting hundreds of sales reps fluent and how it works. I think the good news is that use cases we've already developed are easy and quite enjoyable to talk about. So I think it's going to be actually quite natural for the sales team to pick it up.

[Terry Tillman, Truist Securities]

It’s great to hear. Thank you.

[Mark Mader, Chief Executive Officer]

Yes.

[Operator]

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

[Michael Turrin, Wells Fargo Securities]

Hey, there. Thanks, good afternoon, I appreciate you taking the questions. Q1 billings grew 36% above target. You actually did a slight increase to the low-end of the full-year billings guide to now 38% to 40% as well, even with some of the commentary around just added prudence with macro assumptions. So maybe you can just help us step through those macro assumptions? How that still translates into just -- continued confidence and higher billings growth throughout the course of the year? And anything you can add around the shape of billings also useful from our perspective? Thank you.

[Pete Godbole, Chief Financial Officer]

So Michael, this is Pete. You know, we are really very bullish about our business and we haven't seen any macro elements impacting our demand environment, we would choosing to incorporate an element of macro related prudence in Q2 and our full-year guide to account for potential headwinds, if you look at the macro economy in the factors that are in there. We're just realizing that we may not have seen it in RMAT, we might not have seen it in our demand environment. We want to make sure that we are being prudent as we give you the guide.

The second part of it as it relates to the demand environment itself, when we have went through the COVID hit that took place last year we saw a change in our losses and reductions. We had record numbers related to the churn level, so we haven't seen it there either. So we're feeling really bullish about the business, but we've sort of taken a prudent approach to guidance.

[Michael Turrin, Wells Fargo Securities]

Okay, that's helpful. You've mentioned a couple of times came in ahead of hiring targets, it looks like stock comp also increased in fiscal Q1. Is there anything one-time specific to be aware of around Q1 or anything you could say just around how best to manage stock comp going forward, given the current employment and market backdrop everyone is facing?

[Pete Godbole, Chief Financial Officer]

Yes. So we've, you know, looked at stock comp fairly closely. Our stock comp is a function, it's of the hiring we've done in previous years. As you look at these, sort of, our core is at layer on top of them, we're seeing that play itself out in stock-based compensation. And then the other element, we are recognizing is a lot of the grants we made pre-IPO are now starting to wind off and we're going to replace them with grants, which are at a much higher value, which is sort of the two drivers in our stock comp expense.

[Michael Turrin, Wells Fargo Securities]

Helpful. Thank you, Pete.

[Pete Godbole, Chief Financial Officer]

Of course.

[Operator]

Your next question is from the line of Keith Bachman with BMO. Your line is open.

[Keith Bachman, BMO]

Hi, thank you have a lot of background noise, someone asked my questions concurrently and I apologize for the noise. First, I want to come back to the previous question, previous quarter you beat billings by about 10% this quarter you beat billings by about [indiscernible]. You indicate the macro is not a factor is that -- is the kind of a skinny beat, so to speak this quarter exact because of the sales. We [indiscernible] that your 4Q or was there something else in the quarter?

And then my second question is just around glide path. And what I mean by that you've provided us with the op guidance for this year, free cash flow positive, or excuse me -- in a neutral, but how should investors think about the next year, is there a steady progression toward your previously stated longer term targets? Or is there more of a back-end weighted so to speak to realize those longer-term target? And that's it from me. Thank you.

[Pete Godbole, Chief Financial Officer]

So Keith, I’ll take your questions in order. So your first question was about, sort of, what we're seeing in the billings side of it. The billings guidance that we provided to you was factoring basically the changes we were making to drive our field models and that included sort of the number of territories we were creating, the number of promotions we made, the actual -- having a sales kick off global event for several days. That was what we had baked into our guidance and that's exactly how the quarter played out. There was no macro elements or demand factors that affected this -- the way we landed in for billings in Q1.

The second part of your question was on how we think of the free cash flow in the op margin guide in the long-term. We are committed to driving free cash flow and op margin improvements in a steady and measured way as we go through the years, and we are tied to our longer term model and guidance we've provided and this guidance we've set up really, sort of, demonstrates that. Our belief is our model does generate free cash flow at scale and we're, sort of, in our guidance showing you, sort of, the underlying elements that support that frame.

[Keith Bachman, BMO]

Okay. But the steady were -- I mean the keyword is steady progression towards those goals. Okay, thank you very much.

[Pete Godbole, Chief Financial Officer]

No problem.

[Operator]

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

[Scott Berg, Needham]

Hi, everyone, thanks for taking my questions. I guess a couple here, let’s start off with the one that I don't think anyone's directly asked at least at the moment. Pete you just talked about no macro impact in Q1, are you seeing anything so far yet in Q2 to help give some of the guidance that's a little bit more conservative as you mentioned?

[Pete Godbole, Chief Financial Officer]

You know, Scott, we haven't seen anything that would be -- that’s different relative to the any macro impacts in our demand environment. You know, in fact, seeing our people we've hired in ramping nicely building pipeline. So we're seeing a level of, what I call trend that's positive relative to sell where we expected to play out.

[Scott Berg, Needham]

Got it, helpful. And then from a follow up Mark, you talked about the 33 customers that are more than $1 million now that you have a couple of dozen of those almost three dozen. Are you seeing any commonalities around those expansions to that level or higher? I assume it's not -- it's no longer just straight seat expansion as you're seeing to the other capabilities, but you know if there is any real commonalities in playbooks that you can point too and replicate? Thank you.

[Mark Mader, Chief Executive Officer]

Yes, Scott, I think you hit it on the head. It is really a combination of people growing through both seat expansion and engagement inside and outside of their company combined with capabilities. And the capabilities is across a couple of dimensions, one is premium experiences, whether it's control center or data exchange with the legacy platforms, things like Brandfolder. And then on the management and governance side. I think the neat thing that we're seeing is, we're not only seeing the count $33 million play out. We're also seeing the stable of $0.5 million customers climb nicely, so we're almost at 100 customers at the $0.5 million mark today. So it's not like we're adding to the million and depleting the coffers at the $0.5 million threshold.

And one thing also to note was, we had our fastest ever progression passed from $0.5 million to $1 million under five months. So I would say the degree to which we're helping our clients understand the roadmap and why they should be stepping up investment that is playing out quite nicely. But this ability to speak to both the capabilities that they can really attach to really important drivers in their business, as well as seat expansion that is the common thread across these customers.

[Scott Berg, Needham]

Great, very helpful. Thanks for taking my questions.

[Mark Mader, Chief Executive Officer]

Thanks, Scott.

[Operator]

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

[George Iwanyc, Oppenheimer]

Thank you for taking my question. Mark, just following up on the strong new customer activity you're seeing. Is there any changes in the competitive environment? How many of the opportunities have been Greenfield? How much are head to head competition?

[Mark Mader, Chief Executive Officer]

Yes, on those lands, those are typically not grounded in RFP. Those are high velocity really self-driven experiences for the most part. So I can't really speak to what's going through the buyer's mind at that point. What I will say is we posted really impressive growth amidst a pretty active category and we are really encouraged to see that. So I fully expect that while most of our new and expansion opportunities are people coming from graduating from sort of non-competitive environments, I do think that people have choice in the market and it was really important for us to see such progress at the leading edge, while also showing really good strength at the enterprise level.

[George Iwanyc, Oppenheimer]

Yes. And then maybe from a pricing perspective, when you're having your discussions with enterprises and -- on these larger deals. How do you feel about the pricing environment? How do you feel about the value-based selling?

[Mark Mader, Chief Executive Officer]

We feel great about. I think part of succeeding at scale is mapping to something that companies care deeply about. So I think going in on purely quality measures talking about better connection with people driving purpose, those are vitally important to what people use software. But absent a connection to an outcome that is tied to a $1 amount, I think it becomes increasingly difficult for people to really warrant very large expenditures and software. So it's fundamental to our selling approach All of our -- and it's not just the largest of enterprise pursuits, I would say the upper mid market as well is starting to have these discussions and one thing to have these discussions.

[George Iwanyc, Oppenheimer]

Thank you.

[Operator]

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

[Alex Zukin, Wolfe Research]

Hey guys, thanks for taking the question. So just maybe for you, you mentioned that you guys are being prudent with respect to your guidance, both for the second quarter and for the year. I wonder if you could dig into exactly what that means? Are you assuming lower close rates? Are you assuming a couple of deals slip out of Q2 into the second half? Are you assuming that some of the productivity from this ramped -- ramping sales organization doesn't come through or that retention goes down? I'd be curious just, what assumptions you're baking in, even though you're not seeing anything?

And then Mark, maybe for you, I mean, given the valuation environments in the private side, are there any areas that are starting to look more interesting or attainable from a buy versus build perspective given the reset and valuations?

[Mark Mader, Chief Executive Officer]

Okay. Well let Pete start and I'm happy to answer that question.

[Pete Godbole, Chief Financial Officer]

So, Alex, when we think about a little bit of texture on sort of how we think of these factors, we don't expect that there will be any issues with our ramping, we've seen the ramp of our reps worked really well, they have integrated well into the sales force. We see our deal volumes progress appropriately. What we imagine in the event of a macroeconomic impact would be these cycles lengthening which we haven't seen yet, but we're sort of giving a guide based on, sort of, that element of it. So that's kind of the backdrop of how we are thinking about it.

[Mark Mader, Chief Executive Officer]

I think on the M&A side, Alex, I think there is probably a little bit of an offset between what's happening in the public market and what private companies believe their valuation to be. I can tell you that those appropriately aligned yet, but when I look at our team and how we're organized around the market map development, the priorities we have to both expand at the enterprise offer new solutions and then also derive high engagement in our product. I think there is some really interesting opportunities that will be coming out in the next 12 months to 18 months, but it is predicated on the privates, sort of, recognizing that there has been a shift. And I think there’s still room to have further shifting their -- that curve.

[Alex Zukin, Wolfe Research]

Got it. Thank you, guys.

[Mark Mader, Chief Executive Officer]

Thanks, Alex.

[Operator]

Your next question is from the line of Robert Simmons with DA Davidson. Your line is open.

[Robert Simmons, DA Davidson]

Hey, thanks for taking the questions. So you revised both numbers upwards for the year, but I was wondering what drove the improved free cash flow expressions notably more the improved operating income expectations?

[Pete Godbole, Chief Financial Officer]

So the -- to your question, Robert, the majority of our cost savings were tied to sort of think of it is headcount growth moderation in the back half. And while that improves right away, sort of, the spend element of cash, when you think of op margin you're tied to things which are more than an accrual basis, the way revenue is recognized in subscription model. So you don't get the full impact of that on the op margin line. So that's the reason why we've sort of given you the guide on free cash flow and op margin the way that is.

[Robert Simmons, DA Davidson]

Got it. That makes sense. And then last quarter you talked about some displacements. Was there anything notable to report there this quarter?

[Mark Mader, Chief Executive Officer]

Yes. I think one of the things as we're investing in our project and portfolio management capabilities, we're starting to have opportunity -- to see opportunities to display, some of the legacy players in that category, where people are looking at PPM and CWM as a composite and that's been a welcome development at some of our larger clients.

[Robert Simmons, DA Davidson]

Got it. Great, thanks.

[Mark Mader, Chief Executive Officer]

Yes.

[Operator]

Your next question is from the line of Pinjalim Bora with JPMorgan. Your line is open.

[Pinjalim Bora, JPMorgan]

Great. Thank you. Pete, I wanted to ask you on the guidance. Understanding that you have put a macro buffer in the billings guidance anyway to understand the magnitude of that buffer, is it, how do you kind of thinking of two points of growth or more? I mean, any way to help investors understand that?

[Pete Godbole, Chief Financial Officer]

So you know, we haven't quantified the level of what it call impact that would have, because you can come up with various scenarios of how much impact you would have relative to what scenario you choose. But if you would flip the question and say what would we have done without sort of that macro backdrop? We would have converted the outperformance in the quarter into the lift in guide. So that's what we would have done. So that's the best I can share with you is the thinking.

[Pinjalim Bora, JPMorgan]

Got it, understood. And one for Mark, Mark, could you talk about maybe the wall to wall deployments or what are you hearing from customers into two different ways, like one are you hearing customers talk more about wanting to go wall to wall with Smartsheet? And two, how do you assess Smartsheets ability at this point to drive organic wall to wall expansions from a product and process standpoint?

[Mark Mader, Chief Executive Officer]

Yes, it's interesting, you know, we are having been in enterprise software for 20-plus years. It's typically the vendor that pushes wall the wall as opposed to the customer clamoring for wall to wall. And it's a dynamic, it’s been around a long time and our philosophy for -- really since we've shown tremendous growth in the enterprise has been to earn the enterprise business, so the way we have been modeled from the start is we allow us to get tremendous reach with our collaborator model. The degree to which we monetize those through an advanced offering or through license consumption that varies depending on the scenario. So I would say the ability for us to touch the vast majority of people in a company that is something that precedes the licensing event. So we speak about 125,000 plus users engaged at over at more than three companies that is the model playing out.

I think, one needs to really deliver maximum value for the client and to retain a healthy customer long-term. I think balancing when you monetize it with when they receive value is actually a paramount importance. I think what some companies get into their challenge of is they sell a wall to wall adoption doesn't meet expectations two to three years later, there's a ratchet down and that's when you see a pretty precipitous fall in the dollar retention. That is something, if you damn out seeing play and it's something that we look to avoid. So I think the -- for our largest customers, we do have a few were where it is wall to wall per se, but again we're very prudent and when we actually lock-in from the economic standpoint.

[Pinjalim Bora, JPMorgan]

Understood. Thank you.

[Mark Mader, Chief Executive Officer]

Thanks.

[Operator]

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

[Jake Roberge, William Blair]

Hey, everyone congrats on the solid quarter. Just wanted to double-click on the strength you're seeing with the new customers. I mean, 4 times growth that was awesome to hear. But have you seen any changes to where you're landing within these customers. I know it sounds like the pro use helping you land more by early up and down market. But if you've seen anything with Brandfolder some of these other new products driving new deeper into marketing departments?

[Mark Mader, Chief Executive Officer]

I think the Brandfolder move is one where it's more of an engaged selling motion as opposed to self discovered. So I would say in our more mature nodes, where we have landed. I think the Brandfolder discussions absolutely taking off quite nicely. I think that -- what we're seeing in our 1,000s of lands in these nodes, it's what I would call traditional straight up the middle CWM. And it really gives us the opportunity then expand from that. In terms of whether we've seen a change in diversity, we already started in such a diverse spot industry functional group that I would say the areas where we have -- where you see greater residents is once we've landed where we can really go deep project and portfolio, the Brandfolder work and marketing, we have offerings now that lend themselves really well to that project centricity, the marketing centricity and operation centricity and that's where a lot of our engagement activity is post land.

[Jake Roberge, William Blair]

Great. And then just a follow-up question on NRR just since you're still seeing pretty, pretty solid metrics in that. But just curious how much of that can be attributed to user expansion that you're seeing with end customers versus the customer climb on the platform to more enhance offerings like data shuttle or even work apps, just given the prioritization for low code and no code, that's really going on in the market right now?

[Pete Godbole, Chief Financial Officer]

So the dollar based net retention rate Jake, we see comes from the two basic I think of motions. One is the expand motion as people are picking up more seats and there is a natural virality to that motion. The second part of it is as they get expanded what you can do with the product is vastly differentiated than anybody else in this space. And what you find is the capabilities piece of it really picks up strength, if you will. We're seeing both of those leverage sort of drive it, but it's predominantly a -- expansion motion still that drives the DBNR calculation.

[Jake Roberge, William Blair]

Great, thanks for taking my questions.

[Mark Mader, Chief Executive Officer]

Thank you.

[Operator]

Your final question comes from the line of Josh Baer with Morgan Stanley. Your line is open.

[Josh Baer, Morgan Stanley]

Great, thanks for the question. Wanted to ask one on the net new customer additions over 5,000, it looks like they were down year-over-year. Can you remind us, does that reflect the focus on larger customers, sales changes and how should we think about that dynamic?

[Pete Godbole, Chief Financial Officer]

Yes. So you know the dynamic that's underway, there is the part I called out in the Q4 earnings script, where we were making a lot of changes in the way we think of the field model, splitting territories, adding sort of what I call promoted -- promoting people into jobs, having an in-person sales kickoff event globally. Those are the things that drove sort of the change in year-over-year growth that we saw in that segment. There is nothing fundamentally different that's happening over there in the demand vectors.

[Josh Baer, Morgan Stanley]

Got it. And then we talked about the improved free cash flow guidance in relation to operating income. But I was just wondering with the stronger hiring and lower attrition, not sure if that's coming from headcount. So I was hoping you could just double click on the improvement there? Are there areas that you're increasing focus as far as investments are pulling back? Thank you.

[Pete Godbole, Chief Financial Officer]

Yes. The majority of our cost savings are tied to, sort of, moderating our headcount growth in the back half of the year. We don't believe this will have a material impact in our growth, because if you think of the nature of the front-loaded nature of the hiring we've completed it sets us up really well to drive our billings and revenue goals. And while rationalizing costs we've looked at all areas of the business with sort of a focused effort looking at things, which are supporting roles, driving cost savings associated with hiring in specific geographies.

And if you take the intent of this it's really looking at both people and programs, most of which are sort of support and ancillary spend not directly tied to building pipeline or expanding or driving expansion, so that's been a little bit of texture on how we've come at it.

[Josh Baer, Morgan Stanley]

Great, appreciate it. Thank you.

[Operator]

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

[Aaron Turner, Head of Investor Relations]

Great. Thank you, Brent and thank you all for joining us today. We'll speak with you again next quarter.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.