Smartsheet Inc

NYSE:SMAR

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, my name is Shawntel, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet Inc. Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions]. Aaron Turner, Head of Investor Relations, you may begin your conference.

[Aaron Turner, Head of IR]

Thank you, Shawntel, good afternoon and welcome, everyone to Smartsheet’s second quarter fiscal year 2019 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 Jennifer Ceran. Our SVP of Product, Gene Farrell will also be available during the Q&A.

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 Jennifer’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 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 these 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 U.S. GAAP financials, we will discuss certain non-GAAP financial measures; reconciliation to the most directly comparable U.S. GAAP measure 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.

[Mark Mader, President and CEO]

Thanks, Aaron. Good afternoon everyone and thanks for joining us for today’s call. The momentum with which we began the year continued in Q2 with revenue reaching $42.4 million representing year-over-year growth of 59%. Our teams continued to execute with strong focus and commitment to customers success. Through customer expansion combined with a lower attrition rate, our dollar based net retention rate reached 131%. We increased our presence in Fortune 500 companies to 72% and the total number of all Smartsheet users across paid and collaborators is now more than $4.2 million.

Expansion within our base during the quarter included 26 companies increasing their annual recurring revenue by more than $50,000. Notable expansion occurred at customers such as SAP, Dell, Hurley Medical Center and HP.

In numerous customer conversations this quarter, I repeatedly heard how Smartsheet is driving high value automation and workflow consistency in areas such as project management, sales, marketing and finance.

For example, a Fortune 100 retailer and Smartsheet customer for over five years expanded by more than $100,000 in the quarter. This customer upgraded to our enterprise plan and is using advanced features such as alerts, automation and dashboards to drive meaningful workflows across marketing, new store openings, supply chain management and process management.

Now, our top 20 Smartsheet customers their broader usage of the platform across an increasing number of teams is delivering efficiency throughout the organization. As we’ve previously discussed we optimized our sales motion at the beginning of the year to focus efforts around our high potential accounts while enabling other prospects through our digital sales motion. While there is still work to be done in this regard we are pleased by the results we’ve seen thus far.

In June, we evolved our plan offerings to better meet the needs of customers who want to access high value capabilities such as dashboards and automation, by introducing an enterprise premier plan and discontinuing the team plan for new customers, we responded to customers’ needs and simplified our online and assisted sales motions in the process. We believe that access to these high value features will drive stronger and more fruitful relationships overtime.

The expansion of our international sales and support capacity remains on track, since we believe direct time zone appropriate engagement drives both better outcomes for customers and healthy expansion rates, starting in October we will have our first EMEA sales team members on the ground in the U.K. with the plan to grow overtime. We look forward to delivering a deeper, more robust level of engagement for our international customers which currently account for about 25% of our total account value.

Smartsheet’s consistent performance overtime is driven by a strong product portfolio that addresses a wide range of real world challenges for business users. We remain focused on delivering an increasingly valuable platform that empowers everyone to improve the way they work, connect, innovate and execute. That empowerment in turn creates better experiences for employees, organizations and their customers and drives better business outcomes.

In Q2, we continued to deliver on our initiatives to integrate with popular messaging platforms furthering Smartsheet’s position as the neutral fabric between teams regardless over the corporate messaging standard. In addition to our previously announced integrations with Slack and Workplace by Facebook, we launched an integration with Google Hangouts chat in July. Integrating with the leading messaging applications remains an important aspect of our product roadmap and you can expect further developments on this front as we move through the year.

This quarter we also launched a set of prepackaged solutions called, Accelerators for three distinct used cases; IT PMO, Professional services and M&A. By leveraging our insights and best practices, our customers are able to deploy Accelerators rapidly, with confidence and at scale.

For example, a biomedical equipment manufacturer, Beckman Coulter deployed our professional services accelerator in less than three weeks to improve their customer on boarding and equipment deployment process.

With our Accelerator, Beckman Coulter quickly gained visibility and real-time status updates to workloads that were previously managed using a less efficient combination of email and spreadsheets.

Although it's still early days for our accelerator products, interest from both current and prospective customers is encouraging. Given this early signal we plan to roll out additional Accelerators in the coming quarters.

We also added significant enhancements to our mobile capabilities in Q2, including a contextually aware editing experience. This touch optimized experience knowledge workers can be more productive from wherever they are executing work through their mobile device.

We also introduced new mobile only capabilities like barcode scanning, which our customers are deploying for a number of high-value used cases including inventory tracking and supply chain management.

We expect mobile workloads and engagement with Smartsheets platform to continue to increase over time. From desktop to tablet to smartphone, we believe we are well-suited to add value for our customers, regardless of their device choice or work location.

These are just a handful of the product initiatives we’ve been working on, and we are excited to unveil additional offerings at our second annual ENGAGE global customer conference October 1 through 4.

Last year, we hosted our First ENGAGE conference with over 1000 attendees and this year, with registered attendance outpacing last year’s conference, ENGAGE 18 is set to be even bigger and better. We look forward to seeing many of you there.

Before I turn it over to Jenny to provide more financial details on the quarter, I want to share my continued excitement for Smartsheet in the future. I'm very pleased with our performance thus far in Fiscal year 2019 and the progress we are making against our strategic priorities. Thank you to our dedicated Smartsheet team for your continued passion and commitment to our customers and to one another. And thanks also to our customers and shareholders for your confidence in our service and in the future of our business. Jenny?

[Jennifer Ceran, CFO]

Thanks Mark, and welcome everyone. Overall, we delivered $42.4 million in revenue for the quarter, up 59% versus a year ago, driven by strong demand for our platform. Billings came in at $52.2 million, up 55% versus the same quarter a year ago.

Our net dollar retention rate was 131%, an increase of one percentage point versus last quarter and our average annualized contract value or ACV per domain based customer group, 49% year-over-year to $200,000.

Second-quarter non-GAAP operating loss was $8.7 million, as we continued to make investments in our platform and go-to-market capabilities and non-GAAP net loss per share was $0.08.

Free cash flow was negative $4.2 million, driven by continued investments in the business and we ended the quarter with a cash balance of $211 million. Before I provide our outlook for the third quarter and the remainder of the year, let me provide you more details on the second quarter starting with revenue.

Of our $42.4 million in total revenue, subscription revenue was $37.5 million, a 57% increase versus the year ago quarter. Services revenue came in at $4.9 million, up 71% versus a year ago. Services revenue represented 12% of our total revenue and we now expect it to be between 10% and 12% of total revenue for the remainder of this fiscal year.

I will now turn to our quarterly business metrics. Our total domain based customer account at the end of the second quarter was 76,693. These customers continue to represent approximately 96% of our total ACV and IFP customers which represent individuals and very small teams using an ISP based domain represented the other 4%.

We saw very positive growth in our largest customers this quarter with 4,956 customers now paying us $5000 or more per year and 298 customers now paying us $50,000 or more per year. These customer segments grew year-over-year by 76% and 146%, respectively, and now represent approximately 60% and 22% of total ACV.

As of the end of the quarter, our average ACV per domain based customer increased 49% compared to the same period a year ago as customers continued to deploy Smartsheet into more areas across their organizations.

And as I mentioned earlier, our dollar based net retention rate was 131%. We now expect dollar net retention rate to be above 126% for the remainder of this fiscal year. Next, I’ll provide color on the rest of our income statement and a few highlights from our balance sheet. Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results and the earnings release that was posted before the call.

In the second quarter, overall gross margin was 82% versus 80% a year ago and 80% in the prior quarter. Subscription gross margin was 88%, one percentage point more than the prior quarter. The improvement was driven primarily by cost efficiencies and hosting related services.

As we continued to migrate services to the public cloud, support international expansion and serve the government sector industries, we expect our gross margin to more closely reflect our long-term margin of 78% to 80% overtime.

Professional services margin was 30%, up from 29% in Q1, driven by higher utilization of our consulting staff and continued strength in training. As we add headcount to support growth, we expect the professional services margin to be closer to our annual target of 20% in the second half of this fiscal year.

Turning to our operating expenses, general and administrative cost in the second quarter was $7.4 million, representing 17% of total revenue, up from 16% of revenue in the same quarter a year ago and in line with the prior quarter, as we continue to absorb the incremental cost of operating as a public company.

Research and development was $13 million or 31% of total revenue. This compares to 27% of revenue a year ago and 34% of revenue in the prior quarter. We plan to continue to make substantial investments in our product to support the expanding appetite of our enterprise customers for more capabilities.

Finally, sales and marketing expense was $22.9 million or 54% of revenue, versus 62% of revenue a year ago and 60% of revenue in the prior quarter. We expect sales and marketing as a percent of revenue to increase in the third quarter as we incur incremental cost for ENGAGE customer conference and/or marketing initiative.

Overtime, we expect to realize leverage across all of our operating spend categories as we scale the business but our near-term focus continues to be enhancing our product and driving growth and market adoption.

Turning to operating loss and free cash flow, operating loss was $8.7 million representing a negative operating margin of 21%. Approximately 68% of our total expense is headcount related and we added 74 employees across the organization during the quarter. Free cash flow was negative $4.2 million which includes CapEx spend, capitalized internal use software and principal payments on leases totaling 7% of revenue. The increase in CapEx spend relative to the prior quarter is related primarily to the expansion of our Boston office.

Now turning to billings, our second quarter billings were $52.2 million, up 55% versus a year ago. Approximately 88% of our subscription billings were annual and the remainders were monthly with quarterly and multiyear billings representing about 1% of the total.

In the second quarter, we build a large number of enterprise renewals including the renewal for our largest customer. In the third quarter, we have fewer large enterprise renewals. As such we expect our third quarter billings to be lower in absolute dollars than the second quarter, which is consistent with our year ago trend.

I will now provide our guidance for the third quarter and the full fiscal year 2019. This guidance reflects our plan to reinvest the majority of upside back into the business, specifically in our product capabilities and our sales and marketing effort, which includes the increased marketing costs mentioned earlier.

For the third quarter, we expect total revenue of $43.5 million to $44.5 million, representing year-over-year growth of 48% to 51%. We expect non-GAAP operating loss to come in between $17 million and $16 million and non-GAAP net loss per share to be between $0.16 and $0.15 based on the weighted average shares outstanding of $102.8 million.

For the full fiscal year, we expect total revenue to be in the range of $167 million to $169 million, representing growth of 50% to 52%. Non-GAAP operating loss is expected to be between $57 million and $53 million. We expect non-GAAP net loss per share of between $0.56 and $0.52 for the year based on approximately $99.2 million weighted average shares outstanding.

For fiscal year 2019, we expect billings to be in the range of $201 million to $204 million, representing growth of 48% to 50% versus last year. As I mentioned earlier, we expect billings in the third quarter to be lower in absolute dollars, than the second quarter due to the timing of larger enterprise renewals.

We are also updating our free cash flow guidance for the year to be up to negative $24 million, as we continued to make investments in our business and the flexibility in the second half to do more based on strategic priorities. We expect cast burn to be equally distributed between the third and fourth quarter.

To recap, we were very pleased with our second quarter results as demand for our work execution platform remained robust. We continued to develop new products and features such as our accelerators and enhancements to our mobile solution, and as we look forward to the remainder of the year, we plan to continue making investments that help our customers reap even more benefits from our platform.

And with that, we’ll now turn it back to the operator to take your questions. Operator?

[Operator]

[Operator Instructions]. Your first question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

[Stan Zlotsky, Morgan Stanley]

Thank you so much guys and well done in the quarter. Maybe just start on the first one which is you have seen a great momentum within the larger customers, particularly the 5000, especially the greater [ph] 50K ACV customers, which I presume is a function of the – our strategic sales force team that you've been really building out. Maybe just some qualitative comments on how the broader sales, the strategic sales force is – has performed into the first half of the year and how it’s looking for the second half of the year especially with the enterprise that the heavy enterprise scale that we tend to see in the back half of fiscal year, and then a quick follow-up.

[Mark Murphy]

Yes, this is Mark Stan. I would say it’s a combination of two things. One, the people and then the offerings that those people that were able to bring to the market. And I think the company has really made progress from having a horizontal platform or tools that people can use to their advantage to now strategic reps few more to go in with solutions and that is distinctly different than selling licenses that enable people.

So it’s the combination of one and the other. I would say if that strategic sales team is growing and we’re able to be in market with people, you know when I visited some of our larger customers and I see how they respond to our team being in their buildings, helping them and helping counsel on how they can best take advantage, people are responding really well. We exited last year with a pretty small strategic team call it 5% -- 5% of the total quota-carrying rep base. As that team has more than doubled in size now and we're look to trebling that. We're looking to make sure that type of behavior and that that type of response in customers stays in place. But I would say, it’s a balance, balance between having people in market and then changing the offering that we were able to show them.

[Stan Zlotsky, Morgan Stanley]

Perfect. And then actually I think, segues well into on my second question which is the accelerators which I think is a very interesting portion of your product portfolio especially considering the 2000 plus use cases that you already have in the system. So just to the Accelerators that you've already announced, what are some other use cases that you think would be a great opportunity for these Accelerators? And maybe just remind us how are these accelerators price when you walk into a customer? Thank you. That's it from me.

[Gene Farrell, Senior VP of Product]

Thanks, Dan. This is Gene Farrell. Let me start first with kind of how we structured Accelerators and then I'll talk about use cases. So Accelerators are package solutions, so they have a -- typically they're sold with a combination of reoccurring software revenue for the actual solution itself. And then a services package that's usually for some customization and then on-boarding services. So the idea is that this becomes something that customers can get started with really quickly, it doesn't require a heavy consulting engagement to get going.

And we are actually seeing demand across almost every kind of vertical and horizontal use case for higher value solutions. We chose the first three really based on where we saw the most customer demand. And our plan is to announce additional Accelerators over the balance of the year. And our next wave of Accelerators we're going to focus on a specific vertical around sales processes. And I can't get into the specifics of the exact Accelerators we'll be launching, but you'll see more announcements on that in the coming months. And then pricing, sorry, and then the third you ask is around pricing. And today our Accelerators, pricing varies by the type of solution, but all of them are priced in the five figures.

[Stan Zlotsky, Morgan Stanley]

Got it. Thank you so much.

[Operator]

You next question comes from John DiFucci with Jefferies. Your line is open.

[John DiFucci, Jefferies]

Thank you. I have one question, but I think there's three questions in my question, so I'll just ask this one. First of all, the results look really strong. And we calculate that new subscription annual contract value accelerated in the quarter, the year-over-year growth rate increased. Firstly, I guess I know that's not a term that something you're going to talk about in detail, but is that directionally accurate? And second, is that more – it sounds like that's more to do with your expand. Like the land and expand model is more to do with expand, sounds like it's really working really.

And if that's the case capturing new customers can result in meaningful traction over, perhaps a longer period and then we seen from other software businesses. So if you could talk a little bit about how that efforts going on when you're focusing on new customers?

[Jennifer Ceran, CFO]

All right. I'll take the first. This is Jenny. Hi, John.

[John DiFucci, Jefferies]

Hi, Jenny.

[Jennifer Ceran, CFO]

On the subscription growth that you mentioned, the way we calculated the growth rates were about the same. Well, they were the same as Q1. So we're happy with the performance. With respect to – we are doing about three quarters of our bookings. Our expansion one quarter is new. That's where it's trending now. Expansions definitely an important part of the play here given that people land pretty small and then grow over time. Do you want to talk a little about that strategy for new?

[Mark Mader, President and CEO]

Yes. On the new side John, it's really across a couple of dimensions. The first is acquiring larger entities that have high potential to invest and to really generate value with our platform over time, so that's indicative like 26 Fortune 5 that we added this last quarter. And then other investments that are continuing on the digital motion, which really cater to a very deep stack of potential buyers. We think there is still considerable work that we can perform on that front, which is servicing solutions, making it very high velocity sales, low touch. And I would say more of the emphasis this year and the dollars have been deployed against the higher potential and we think there's great opportunity for the rest of this year, next year in terms of optimizing the digital sales motion.

And it's kind of interesting, because the digital sales motion is what the company was – and really commence on and was shaped around, and then we extended into a sales assisted motion and really for rest of this year or maybe next year its going to be balanced across both.

[John DiFucci, Jefferies]

Great. That's helpful. If I could just -- I just thought of follow-up, Mark, when you're talking about that? Can you tell us -- I know it really early, but can you talk a little bit about international traction? I know it just sort of just started to put salespeople in international regions, but are you seeing any uptick there yet? Or is it just too early for that?

[Mark Mader, President and CEO]

Yes. We're starting to see -- what give us confidence about getting team over there is in last quarter we already had dedicated territories covering the region. So those were sales individuals and customer success people reaching over to Europe from Boston. And the customer reaction we found from having dedicated coverage even couple thousand miles away was very positive. So what we're starting to see evidences of -- starting to see evidence of in international is really the belief that the remote territories should be able to produce expansion rates and now, I guess, to what we have here in the U.S. And there's nothing -- people have needs globally, and if you cater to those needs in a comprehensive way, they should respond. So the evidence we saw last quarter on international direct territories at a Boston positive give us lot of confidence and continuing to with that plan that we had set forth in the beginning of the year, which was to get people on the ground over there.

[John DiFucci, Jefferies]

Great, great, thanks a lot.

[Operator]

Your next question comes from Bhavan Suri with William Blair. Your line is open.

[Bhavan Suri, William Blair]

Hey, guys. Thanks for taking my questions. I'll try to keep it at two specifically here. But first, just on the R&D spend, as you think about sort of R&D, how do you think about spreading that between obviously accelerators, which are driving great growth and sort of just product enhancements, product expansion and sort of new feature functionality outside of Accelerators connectors or whatever it is. How should we think about how you guys think about that?

[Gene Farrell, Senior VP of Product]

Bhavan, this is Gene Farrell. I would say that for us, I would certainly start by saying that about 95% of our roadmap really is driven by feedback and input we get from customers and we've been spending a lot of time with customers. We actually just had our first product advisory committee a couple weeks ago and had 11 of our customers deeply engaging around our roadmap and the areas we're investing. And I would tell you that we're really trying to balance a combination of how do we address known pain points or improvements that we can make in our existing offerings to our customers that say, hey, I love this feature, but if you can just have it do this or you can just had this capability.

And so we'll continue to invest in the core. And then really investing and how do we move to support higher value, more complex use cases for customers. And that's what you're seeing with Accelerators. That's what you're seeing with the investments we're making in automation and workflow and really being able support where customers have said, I really like what you doing here, but I want to be able to support these more complicated workflows or more complex workflows. And so you'll continue to see us investing there.

And then I'd say the third area is really around driving engagement overall with our platform both between our existing customers and then the partners that want to try and engage and build solutions on top of our platform. And so we're building features that enable that both end-users to be able to do more and partners to be able to build solutions on top of us.

[Bhavan Suri, William Blair]

Thanks Gene. And that's obviously the expansion piece work out well, so congrats there. I just one for the team there, so when you look at the sales priority you obviously had a ton of the free collaborators. And I guess, I love to understand what's strategies you're deploying, so maybe little more technical question, but sort of what's strategy been deployed to increase the conversion rates for free to sort of paid, how do we think about how you guys are tackling that market? I think about saying, we've got a ton of the pipeline if I think about the funnel, its huge in the free side, but the sort of conversion fees and have you seen that accelerate? Thank you.

[Gene Farrell, Senior VP of Product]

Yes. I think that the way that we think about collaborators is it's really one of the best ways to introduce individuals to the power of our platform, because we allow free collaboration and sharing, they can onboard and see the power of Smartsheet. We think it's really our responsibility to make sure that that collaboration experience is engaging, intuitive and that they -- those collaborators and see the power of Smartsheet. And then importantly we're running more plays to suggest to collaborators how they can do more by having a license. And so there are number of different plays that we run both with the in-app experience and through collaborative process where we suggest to them that they can do more and get more power from Smartsheet by being a licensed user. And we'll continue to refine that over time.

[Mark Mader, President and CEO]

I think one thing to add there, Gene, is as you were saying, as the offering gets bigger and our capabilities increase in number the opportunities are also not have to give it all capabilities to everybody exists, right? So compare what we offer today versus what we had a year or two years ago. Collaborators historically have had access to everything and in some cases they are extraneous [ph]. In other cases, there's lot of value assigned to those. So we get to exercise that choice long-term on what we provide to that huge population. I think there will be opportunities plus to be able to, as Gene said, get people to shift from one to the other based on what we introduced.

[Bhavan Suri, William Blair]

Yes. That's helpful. Thank you guys and congrats, just really nice job. Thanks.

[Operator]

Your next question comes from Terry Tillman with SunTrust. Your line is open.

[Terry Tillman, SunTrust]

Yes. Good afternoon. And I'll echo my congratulations. Hi, Mark, Gene and Jenny. First question, Jenny for you just relates to, I don't know if you had said it earlier in the call and I missed it. But the actual quantification for the user conference expense in third quarter. I know that's one of the reasons for the seasonal increase. And then secondly for you Jenny is there some sort of potential sales lift that we could see coming out of the conference. In other words it's an opportunity to sell until we could see some benefit to billing, either late in the third quarter or in the fourth quarter? And I then have a follow-up.

[Jennifer Ceran, CFO]

Hi, Terry. Okay. First one on the user conference, I didn't give out the expense but it’s a couple of billion dollars to put that into your model. And in terms of sales lift, I mean we factored that in potential sales lift into our guidance for the year. What's your third question?

[Terry Tillman, SunTrust]

Thanks for that. The other question just relates to the connectors. Maybe an update on the and I'm not sure who does this for, but just I'll start out with the team, but just quantification on what kind of revenue uplift you're getting from connectors. And if you all been able to look at some sort of correlation on customers use more connectors going bigger with the platform or being bigger ACV customers? Thank you. And again nice job.

[Jennifer Ceran, CFO]

Hey, Terry, can you just repeat that question. Terry?

[Terry Tillman, SunTrust]

Jenny, can you hear me?

[Jennifer Ceran, CFO]

Yes. Can you repeat that real quick?

[Terry Tillman, SunTrust]

Yes. Sorry about that. Just the question relates to the connectors, it’s a revenue monetization opportunity. So what kind of uplift are you getting from connectors? And you’ve all been able to look at data that talk about the more connectors being leveraged in terms of like integrated workflows, those correlate with bigger customers on average? Thank you.

[Jennifer Ceran, CFO]

Yes. So, the connectors are a small percentage of our total revenue right now, about 2%, but to your point, I think it adds a ton of value and we are seeing in terms of bookings a larger number than the 2%.

[Gene Farrell, Senior VP of Product]

Yes. I think the other thing I would add to that is in general customers that use connectors are typically deploying higher value solutions on Smartsheet and also typically tend to – have more use cases across the organization. And so I think that I personally don't think of connectors as much as a primary revenue driver, as much as they are a way to be a more strategic app for our customers and create a faster spinning flywheel over time as we support broader use cases across an enterprise.

[Operator]

Your next question comes from Mark Murphy with JPMorgan. Your line is open.

[Unidentified Analyst]

Oh thank you, this is [Indiscernible] sitting in for Mark. Congratulations on the quarter from me as well. Seems like most of the questions have been asked, but on a high level, Mark, as you look forward, to say the next three years, what are some of the areas that that you'd say you're betting at this point in time and maybe at this point in time you characterize that real wildcards that could positively impact growth in the future?

[Mark Mader, President and CEO]

I think one of the things that we highlighted during the road show was this very significant untapped population of business users who have not really been empowered fully to deploy tools to their advantage. So when we think about what we build in terms horizontals, what we built in solutions it is really catering to enable that population. So in terms of upside its pretty consistent with what we said for the last year, and how we position ourselves to enable those people in an IT conforming manner which is secure and scale like that combination is the big thing.

Now as Gene spoke of, its not just us building discrete features, it is us building discrete capabilities combined with solutions, combined with enabling third parties to do that on our platforms. So when we think about our vision, it is not putting us in the way of sales velocity. So how do you get other people who have IT, who have ideas productive on your platform? So you asked the three-year horizon. It is absolutely part of the three-year horizon. The third-party enablement is not a big portion of our financial plan this year, but we do see that composite of Smartsheet driven and third-party driven offerings to be very very significant over time.

[Unidentified Analyst]

Interesting. Thank you. And if I can quickly, Jenny, the dollar based net retention obviously, pretty solid. I think I heard that the gross retention improved. Did I hear that correctly and what is driving that?

[Jennifer Ceran, CFO]

Yes. I would say that on the loss rate was 11% the last time we've talked to you guys and it still rounds to 11% but it's coming down. It's closer to the 10.5% now. So if you take that then our gross retention has improved.

[Unidentified Analyst]

Yes. Got it. Thank you.

[Operator]

Your next question comes from Robert Simmons with RBC. Your line is open.

[Robert Simmons, RBC]

Could you give us little color on what drove the acceleration in your billings growth this quarter?

[Jennifer Ceran, CFO]

In what growth?

[Robert Simmons, RBC]

Billings, there's a nice pickup in year-over-year growth in your billings.

[Jennifer Ceran, CFO]

Yes. So, we have some very strong, very large transactions that were above 25k mark this quarter, and so that was very helpful. Just generally from seasonality Q2 tends to be a stronger quarter for enterprise upsell and renewal and so that what's drove the improvement from Q1.

[Robert Simmons, RBC]

Okay, great. And then beyond like the integrations that you were talking about are there any other notable recent product updates that you can give us things like in-app purchasing?

[Mark Mader, President and CEO]

Well, I can tell you that we have a customer conference coming out in about four weeks and you should stay tuned for that, because we have a lot of new product capabilities that we are going to be announcing at that time.

[Robert Simmons, RBC]

Got it. Okay. That makes sense. Thanks for taking the questions.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to the presenters.

[Mark Mader, President and CEO]

Great. Well, thank you for joining us today for our second quarter conference call. We look forward to speaking with you again next quarter.

[Operator]

This concludes today's conference call. You may now disconnect.