Smartsheet Inc  (NYSE: SMAR) Q1 2021 Earnings Call Transcript

Smartsheet Inc  (SMAR) Q1 2021 earnings call dated Jun. 03, 2020

Corporate Participants:

Aaron Turner — Investor Relations

Mark Mader — Chief Executive Officer

Jennifer Ceran — Chief Financial Officer

Gene Farrell — Chief Product Officer

Analysts:

Arjun Bhatia — William Blair — Analyst

David Hynes — Canaccord — Analyst

Stan Zlotsky — Morgan Stanley — Analyst

Scott Berg — Needham — Analyst

Brent Thill — Jefferies — Analyst

Alex Zukin — RBC Capital Markets — Analyst

Keith Bachman — Bank of Montreal — Analyst

Walter Pritchard — Citi — Analyst

Rishi Jaluria — DA Davidson — Analyst

Terry Tillman — SunTrust Robinson — Analyst

Pinjalim Bora — J.P. Morgan — Analyst

George Iwanyc — Oppenheimer — Analyst

Steve Koenig — Wedbush Securities — Analyst

Brett Knoblauch — Berenberg Capital Markets — Analyst

Presentation:

Operator

Thank you for standing by and welcome to the Smartsheet First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I’d now like to hand the conference over to your speaker today, Aaron Turner, Investor Relations. Thank you. Please go ahead.

Aaron Turner — Investor Relations

Great. Thank you, Jesse. Good afternoon and welcome everyone to Smartsheet’s first quarter of fiscal year 2021 earnings call. We will be discussing the results announced in our press release issued after the market close today. With me today are Smartsheet’s CEO, Mark Mader; and our CFO Jennifer Ceran. Our Chief Product Officer 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 the Federal Securities Laws. We have based these forward-looking statements largely on our current expectations and projections about future trends — future events, financial trends and our expectations around the impact of COVID-19 on our business. 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 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 — Chief Executive Officer

Thank you, Aaron and thank you everyone for joining us on our first quarter earnings call. The last couple of months have underscored just how interconnected we are; our communities, employees, customers and partners. In that spirit, I’m pleased to see how our team despite significant disruptions to our collective personal and professional lives has worked to support one another. Our team’s commitment to each other and to our customers has never been stronger despite or perhaps because of these extraordinary circumstances. I’m grateful for the team’s work and dedication.

For the first quarter, we generated revenue of $85.5 million and non-GAAP operating loss of $13.6 million, above the guidance we set in March while billings came in below our guidance at $89.9 million, as a result of a lower net dollar retention rate and the extension of accommodations to customers impacted by COVID. Since the onset of the pandemic, we’ve seen how the speed with which the Smartsheet platform can be deployed and the agility it enables has aided in our customer’s response to COVID.

For example, a global healthcare customer recently expanded their use of Smartsheet in order to coordinate the scaled distribution of antibody tests to thousands of analyzers at hundreds of lab sites across the US. The speed with which the Smartsheet solution could move from concept to production became a clear differentiator and demonstrated our ability to rapidly orchestrate high-value enterprise scale workloads. In March, we made available a set of templates that enabled the creation of a COVID operations dashboard. To date, the offering has deployed nearly 14,000 times as an information hub and resource center for employees and as a way that organizations can assess risks and collect data on health changes in their employee base.

We are also supporting the government’s ongoing response to COVID. As announced during our last call, US government agencies responding to the crisis can use our FedRAMP authorized environment Smartsheet Gov, free of charge and without obligation. To-date, nearly 100 federal, state and local agencies have availed themselves of this offer. While on the topic of Smartsheet Gov, I’ll mention that we made significant progress toward achieving Department of Defense Impact Level 4, IL4 authorization. Doing so, will enable the Aerospace and DoD sectors to securely and efficiently deploy Smartsheet Gov platform to modernize their workflows and processes.

We believe we’re in a solid position to expand the use of Smartsheet in these sectors and expect to achieve IL4 authorization in the near future. We saw many organizations on the front lines of COVID significantly increase their use of Smartsheet during the first quarter. For example, the Department of Health and Mental Hygiene for one particularly hard hit American city, saw their number of active users increase by 700, a 12-fold increase. A medical air transport company, which has been a Smartsheet customer since 2015, saw active users increase by more than 1,500, a 10-fold increase and a payment processing company for vehicle fleets increased their usage by nearly 1,800 active users, an 8-fold increase.

Overall, total users were over 6.75 million at the end of Q1, up from 6.3 million at the end of Q4. These and many other enterprises now recognize that Smartsheet has become an increasingly mission critical platform for empowering and enabling a dynamic workforce. A workforce capable of working from anywhere, adapting to rapidly changing conditions and staying deeply connected to their individual work and the mission of their teams. Helping customers adapt to an abrupt shift in their business operations was a hallmark of our first quarter.

To that end, our product team developed and deployed 30 templates that specifically designed to help our customers manage through the crisis. These templates focused on areas such as CDC Preparedness, PPE Inventory Tracking and Remote Employee Onboarding to name just a few. They were deployed over 37,000 times in Q1. More recently as customers begin planning for a safe and responsible return to the workplace, we are releasing assets to help organizations manage risk and employee awareness. We also launched a number of meaningful updates to our product this quarter, including larger faster sheets, a new form builder with conditional logic, a Smartsheet extension for Adobe Creative Cloud and an Accelerator for CCPA, California’s new privacy regulation that augments our GDPR Accelerator, enabling customers to comply with the latest privacy regulations.

Preliminary analysis of May’s pipeline development and sales performance suggest stabilization of the disruption caused by COVID. That early data reinforces our commitment to investing such that Smartsheet is best positioned for continued growth and category leadership. At a time when collaborative work management solutions are increasingly recognized as an effective mechanism for delivering digital transformation in high value workflows, we are allocating our capital to expand product development and innovation, deepen our selling capacity and position us as a company that succeeds over the long term.

As enterprises recognize the importance and of adapting to a new work from home reality, we were able to quickly respond and be in market with a campaign highlighting Smartsheet’s ability to empower dynamic and agile workforces. Workforces capable of being productive from anywhere. As these companies emerge from the initial phase of the COVID disruption and seek to build organizational resilience and agility, we will promote the value and importance of using Smartsheet to help businesses everywhere, navigate a changed world.

In a few minutes, Jenny will walk through the details of our Q1 financial results. I feel we had a good first quarter given the market conditions. It has been a challenging time for many businesses, but the churn impact was most pronounced among our SMB customers. In addition, the net expansion rate which includes gross expansions and reductions declined, but remained a healthy 140%. That said, the broad and diverse set of industries that make up Smartsheet’s ARR serve to diminish the impact as other segments such as life science, healthcare and finance and technology performed well.

Despite an evolving sales environment trial activity remained strong and we saw many large organizations continuing to lean in. 15 customers expanded their ARR by more than 100,000 versus 13 in Q1 a year ago, 51 companies expanded their ARR by over 50,000 in Q1 versus 34 in the same quarter a year ago. And at the end of Q1, we had six customers with ARR of more than $1 million.

Even before COVID, the world of work was already in the midst of rapid evolution. It had become more distributed than ever and the secular shift to digital workflows had begun in earnest. The disruption has proven to be a tipping point because it brought a new and unforeseen variable, the pivot to widespread remote work into the mix. The business leaders and customers we are serving are looking over the horizon. They understand that thriving now and in the future, goes well beyond connecting people through communication tools. That success and high performance will not come simply from out communicating. They know that to ensure their business is prepared to meet the changing needs of their customers, to continue to innovate and to empower their teams to succeed, they need instead to out execute, out process, out automate and out interpret the important signals their business receives every day.

And as enterprises across the globe seek to enhance their ability to respond no matter the circumstance, the value of Smartsheet’s work execution platform will become increasingly relevant and increasingly clear. The conviction we have for the value of our offerings and opportunity to transform businesses remain strong. Though COVID presented itself mid-stride, we are not hesitating but taking steps forward. We continue to focus on international expansion, our government initiatives, increased sales and service capacity, brand marketing and product innovation.

COVID is more than an accelerant causing the inevitable to happen sooner. Market needs and expectations are vectoring in a new dimension. It’s not work from the office or work from home, it’s a hybrid. It’s not collaboration through video or collaboration through work execution, it’s a balance of the two. And it’s not IT driven digital transformation or business unit led change, it’s the two working together. I believe that there is a strong return on balancing optimism with realism, it’s why we’re working as best we can to enroll people in what’s possible, empower them to achieve and partner in navigating a new landscape.

With that, let me turn the call over to Jenny to provide additional detail on our financial results. Jenny?

Jennifer Ceran — Chief Financial Officer

Thank you, Mark and good afternoon, everyone. We delivered better-than-expected revenue, operating loss, and net income for the first quarter. Free cash flow came in within our guidance range, while billings came in below, as we experienced some headwinds from customers impacted by COVID in the back half of the quarter. Revenue was $85.5 million, up 52% year-over-year and billings were $89.9 million, up 30% versus last year. Many large industries and organizations and particularly those on the front lines of COVID exhibited strong demand for our product. The annual recurring revenue or ARR coming from our Fortune 500 customers grew 48% year-over-year in Q1 and 79% of the Fortune 500 are now Smartsheet customers.

Contrasting enterprise strength, we saw COVID related softness in our SMB segment, which represented approximately 28% of our ARR at the end of the quarter and from customers in certain impacted industry segments notably, travel and hospitality and retail. We care deeply about the well-being of our customers, and as such supported those most impacted with extended terms or adjustments to quarterly and semi-annual billings. This support had a negative impact to our billings growth rate in the quarter. Our operating loss came in better than expected at negative $13.6 million and free cash flow was negative $28.2 million.

During the quarter, our cost structure benefited from savings generated from our work from home environment as well as lower than planned marketing investments. Extending payment terms to some customers offset some of the cost savings we achieved resulting in free cash flow that was in range. Despite the negative effects of COVID on the global economy, we believe our long-term market opportunity remains significant. The ability to deliver real-time workflows and digital solutions to an even more distributed workforce is more important than ever today.

Given this belief, we continue to invest in our most important go-to-market initiatives and product plans. We will host our ENGAGE Customer Conference as a virtual event on October 1 and look forward to bringing together a much larger global community for an online day of learning and new product announcements. We make these decisions from our position of financial strength as we remain well capitalized with $544 million of cash on the balance sheet and no debt at the end of the quarter.

Next, I’ll provide more color on our first quarter financial results. 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. As we mentioned, first quarter revenue came in at $85.5 million, up 52% year-over-year, subscription revenue was $77.2 million, representing year-over-year growth of 53% [Phonetic] and services revenue was $8.3 million, representing year-over-year growth of 42%.

The strength in our subscription revenue growth rate was helped by customer demand across many industries including life sciences, healthcare, technology, manufacturing and finance. Our services revenue growth rate accelerated versus the fourth quarter as we delivered on a large services backlog. As we are already set up to work in a fully digital environment, our team was able to deliver on customer training and professional services remotely.

Turning to billings. First quarter billings came in at $89.9 million. As mentioned, we saw an impact from COVID on larger customers and impacted industries and on the SMB segment, which we define as organizations with fewer than 200 employees. In addition, when requested and where appropriate, we offered COVID billing accommodations to help with customer’s cash flow constraints. These accommodations and other related actions due to COVID reduced our billings by approximately $2 million. For the quarter, approximately 89% of our subscription billings were annual with 8% monthly. Quarterly, semi-annual and multi-year billings represented over 2% of the total.

Turning to reported metrics. We now have 9,576 customers paying us $5,000 or more per year, 1,040 paying more than $50,000 or more per year and 391 now paying us $100,000 or more per year. These segments grew 41%, 101% and 107%, represent 77%, 40% and 26% of total ARR. ACV grew 45% year-over-year to $3,866 as we continue to see expansion from more licenses and additional products to plan and track work, build workflows and create dashboards for visibility and reporting.

Our net dollar retention rate declined 3 percentage points from the prior quarter to 132%. The decline was driven by lower net expansion rates, while the churn rate improved by a tenth of 1% compared to the end of the prior quarter and rounded up to 8%. Due to the ongoing impact from COVID, we expect our net dollar retention rate to trend down during the second quarter to the high-20s.

Turning to gross margins. Our total gross margin declined 1 percentage point to 81%, driven by incremental costs related to our migration to the public cloud. We are ahead of schedule to complete this transition during the fiscal year and expect our gross margin to trend towards our long-term target of 78% to 80% as a result.

Turning to operating expenses. Sales and marketing expense as a percentage of revenue was 58%, 1 percentage point better than both the prior and year ago quarter. Research and development as a percentage of revenue was 24%, 6 percentage points better than the prior quarter and 8 percentage points better than the year ago quarter and general and administrative costs as a percentage of revenue was 14%, 1 percentage points and 2 percentage points better than the prior and year ago quarters, respectively. The scale in operating costs during the quarter was driven predominantly by lower than planned personnel, travel and marketing expenses.

Operating loss in the quarter was negative $13.6 million and free cash flow was negative $28.2 million. Operating loss was better-than-expected due to reduced spend in several areas mentioned above. Our personnel expenses represented 67% of our total expenses. We have slowed the pace of hiring but intend to continue to add headcount where needed to support our planned investments.

Now let me move on to guidance. While we remain bullish on our path to $1 billion in revenue, we expect that COVID will continue to impact the demand environment especially in certain segments in the near term. So, against this backdrop, we are adjusting our full year top line revenue guidance assuming that COVID will continue to be a headwind for the remainder of the year. As Mark mentioned earlier, we will continue investing against our key initiatives, notably, our migration to the public cloud, new enterprise capabilities and functionality in our platform and product, our brand and ENGAGE Conference and systems to scale our operations.

For the second fiscal quarter, we expect revenue to be in the range of $86 million and $87 million; billings to be in the range of $91 million and $93 million; operating loss to be in the range of negative $21 million and negative $19 million; and non-GAAP net loss per share to be between $0.18 and $0.16, based on weighted average shares outstanding of 119.5 million. Our free cash flow is expected to be in the range of negative $11 million and negative $9 million.

For the full fiscal year, we expect our revenue to be in the range of $360 million to $370 million; operating loss to be in the range of negative $65 million and negative $55 million; and non-GAAP net loss per share of between $0.54 and $0.45 for the year based on approximately 119.5 million weighted average shares outstanding. Due to our limited visibility into the back half of the year stemming from COVID, we are withdrawing our previous full year billings and free cash flow guidance. However, we are providing directional guidance for free cash flow. Given the size of the market opportunity and our decision to invest for the long-term growth of our business, we expect our free cash flow burn for fiscal year ’21 to exceed the low end of our previously issued guidance of negative $11 million.

I will now turn it over to the operator for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia — William Blair — Analyst

Hi guys. Thanks for taking my questions. Mark, you mentioned this in your prepared remarks briefly, but I was hoping you could just elaborate a little bit on some of the stabilization trends that you saw in May. And if you could specifically maybe talk about the — how some of the pipeline dynamics have evolved over the past handful of weeks that would be great.

Mark Mader — Chief Executive Officer

Yeah. I think throughout May, we saw a good improvement in terms of opportunity development to a point where we’re exiting the past with the most significant we’ve had — the pipeline we’ve had leaving any months in the history of the company and this isn’t just at the enterprise layer, this is really across the stack. Quarter-on-quarter every single one of our customer segments in terms of company size increased in ARR and both our commercial reps and strategic reps had a very productive month in building that pipeline and now we need to go execute on.

Arjun Bhatia — William Blair — Analyst

Perfect. That’s helpful. And then a quick follow-up. I know since — essentially since the IPO, there has been kind of this focus on moving to enterprise and investing in both the product and kind of the go-to-market function. How do you think the current environment impacts that? And when we look into the other side of this, should we think of Smartsheet as accelerating on the enterprise track that it’s been on or do you think it’s going to be relatively steady in the trend that you’ve been performing so far?

Mark Mader — Chief Executive Officer

Well, I’m very grateful that we made that decision a couple years ago because as we talk to customers who are looking to make investment decisions ad hoc purchases at scale aren’t happening much. Your ability to connect to real business value and articulate how process can change and our customer experience changes, that matters today and the transactions we’ve closed some of which were material in the quarter are significant in size, we’re hooked to those types of business processes and business impact. So, I’m quite pleased with that continued move. The customer thing we’ve heard in the prior, a couple years around our focus in developing, lead experiences for marketers for example, these are all get us [Phonetic] conversations that a couple years ago we weren’t getting. So, I’m very pleased that we’re deepening the offering. I’m pleased that we can speak at a different elevation within companies.

Arjun Bhatia — William Blair — Analyst

Got it. All right. Thank you for taking my questions.

Operator

Your next question comes from David Hynes with Canaccord. Your line is open.

David Hynes — Canaccord — Analyst

Hey. Good morning, guys or afternoon. Mark, just trying to think through kind of where you’ve seen some of the impact. Are there certain use cases that used to drive more growth that you haven’t seen as much momentum in or is it really just SMB and certain verticals that have been charged?

Mark Mader — Chief Executive Officer

Yeah. I think the, it’s really some of the decisions that we go through as a business, we’re inspecting every investment decision north of $25,000 within our own business and we’re seeing that within our customers as well. So, the transactions that are flowing freely are the ones that are clearly business — clearly articulated, have a business exec sponsor, again, we’re talking about the transactions at size. Business is still happening on the micro transactions, right. But if anything has sort of a five-digit number north that is having a different close process than it has had in the past. So, we’ve adjusted our mechanisms, we’ve adjusted how we work with our sales reps and how we check down as we go through that pipeline with them.

So, what we saw in the SMB side, we saw a little bit more pronounced, the full churn on the SMB side and at the larger companies, it really wasn’t a change in full churn. Our overall loss rate actually improved on the quarter, but we did see the delay or the deferral of some decisions. I think, we’re seeing companies try to figure out when is reopening going to happen, what’s the shape of the recovery and a lot of people are still asking those questions much like we are as a provider.

Jennifer Ceran — Chief Financial Officer

Yeah. And I might want to just to add a little bit to what just Mark said. From an industry perspective, there were a number of interest — industry to dollar net retention rate increased in size. So, you think about healthcare, telecommunications, finance, education, we actually saw acceleration in the dollar net retention rate. Where we saw a deceleration more pronounced were in the sectors that truly are being heavily impacted by COVID. So, the retail industry as well as travel and hospitality, both declined and that influenced the overall outcome of our business results.

David Hynes — Canaccord — Analyst

Yeah. Okay. That’s helpful. And then Jenny just I want to make sure I heard you right on the billings shortfall in the quarter. So, it was $2 million attributable to flexible payment terms, gross attrition was unchanged and any further delta then would have been driven by lower upsell, is that the right way to frame it?

Jennifer Ceran — Chief Financial Officer

That is exactly it. That’s exactly it. Yeah.

David Hynes — Canaccord — Analyst

Okay, perfect. Thanks, guys.

Operator

Your next question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

Stan Zlotsky — Morgan Stanley — Analyst

Hey, guys. Good afternoon and thank you so much for taking my questions. A couple from my end. When you guys think about the withdrawal of guidance for the rest of the year and you noted limited visibility, help us kind of rank where that you have the least visibility. Is it on potential for further churn, is it continuing and continuous — continuing changes to billing payment terms or is it just straight-up uncertainty around new logo acquisition?

Mark Mader — Chief Executive Officer

I think a lot of the guidance is influenced Stan by what we’re looking at the schedule for things coming back online. And as we look at the hiring decisions we’re making in the first half, we have very good visibility in what’s happening this month and the next month. In terms of second half, the decision to increase quota carrying reps is going to be partially a function of what we see on the macroeconomic side, what we see within our state of Washington, New York, Boston, Sydney, London. These are all things that are to be still unfolding. So, it is, more about our ability to react to those motions than it is any other major determinant.

Stan Zlotsky — Morgan Stanley — Analyst

Got it. So, maybe just on the Q2 billings guidance. Help me reconcile essentially the — your expectation for net revenue retention to be somewhere in the high-120s and the midpoint of billings at the, let’s call it 16%, is the delta there a function of continuing payment term changes? Just directionally help me close that gap?

Jennifer Ceran — Chief Financial Officer

Yeah. So, we’re continuing to get requests from customers for either extended payment terms or request for quarterly billings. I will say that in May, the percentage was down, which I think is a good sign. What’s really driving the billings guidance right now is the April results. It was a significant change from what we had seen in March. Businesses are still closed, small businesses, certain industries people still aren’t flying for the most part. So, it’s just reflective of the pain that we’re seeing in certain customers and their ability to purchase right now.

Stan Zlotsky — Morgan Stanley — Analyst

Got it. Thank you.

Operator

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

Scott Berg — Needham — Analyst

Hi, Jenny and Mark. Thanks for taking my questions today. I guess, Mark, I know the sample size is probably small, but do you see anything differently on the sales trends internationally than domestically here in the United States?

Jennifer Ceran — Chief Financial Officer

So, new growth rates international, we saw acceleration in Q1 in EMEA very healthy and in the US. We saw a slight 1 percentage point deceleration in Asia. And then the other markets, the Americas markets went down a little bit more. So, that’s sort of the trend that we saw. In general, if you look at the dollar net retention rate, Mark talked about the 3 percentage point decline, that was really a global phenomenon. So, whether you were looking at the US or international customers, who spend more than $5,000, customers who spend less than $5,000, I think this pandemic is really affecting everyone to some degree.

Scott Berg — Needham — Analyst

Got it. Helpful. And then from a follow-up question perspective, we’ve obviously seen a lot of different technology tools benefit from a work from home strategy and I think most of us on this call would believe that Smartsheet fits in that bucket obviously in the used cases. But as you’ve had conversations with customers during the last two months in this period, are you seeing the decisions become more strategic to get more higher level kind of managers or CXO individuals be a part of these conversations or is it still more of a department level sale in general? Thank you.

Mark Mader — Chief Executive Officer

I think it’s a function of the size of the transaction. And as you move into six figures and north that’s typically the key driver on who is participating. In terms of the tools and technologies used and I think we all reacted to being at work from home. So, the first stop was can we communicate with one and other. And I think what we will see as that, as we talk previously around the different phases of what people will be deploying. I do anticipate that people have now quote master the ability to communicate and they will be looking for subsequent technologies to benefit them.

Scott Berg — Needham — Analyst

Great. Super helpful. Thank you.

Operator

Your next question comes from Brent Thill with Jefferies. Your line is open.

Brent Thill — Jefferies — Analyst

Thanks. Jenny, last call you mentioned you wanted to hire more quota reps this year than last. Is that, is that still on track given Mark’s comment about the record pipeline?

Jennifer Ceran — Chief Financial Officer

It is. Yeah. We hired 50 reps in Q1. So, that was very good. We are going to hire few more in Q2 and then as Mark mentioned we’re going to step back and see where the landscape is, how things are opening back up, but yeah, we hired reps this year and we’ll continue to do so based on the demand that we see.

Brent Thill — Jefferies — Analyst

And Mark just to circle back to the May comment you made, I think a number of tech companies that we all work with have been saying things are getting better day-by-day, week-by-week. You can see it across many of the industries, we all track. I guess when you look at May, would you consider this to be kind of a normal month from what you’ve seen historically and this is really just more of an April issue, what — everyone is just trying to figure out how you would frame the differences that you saw this past month or the month before?

Mark Mader — Chief Executive Officer

Yeah. I think there was a very concerted effort on our sales organization also to accelerate out of April. Like people got on their horses and went and engaged customers. The good news was customers were picking up the phone, conversations were being had and the quality of the pipeline being generated I would say is going under deeper inspections than in prior quarters. The key is for all the companies who are speaking about pipeline development, now it’s your job to convert that pipeline, right. So, I think we were very pleased to see the team’s activities in May. And now, we need to do the same this month and then convert on the business that’s in front of us.

Brent Thill — Jefferies — Analyst

Okay. Thanks.

Operator

Your next question comes from Alex Zukin with RBC Capital Markets. Your line is open.

Alex Zukin — RBC Capital Markets — Analyst

Hey, guys. Thanks for taking my question and hope you’re staying safe. I guess maybe first Jenny, I’m trying to figure out what exactly are the, the payments from adjustments that you are making that were impacting billings and is primarily for the SMB cohort? It sounds like, I’m trying to reconcile the no change in dollar churn with the payment flexibility. Are you basically not seeing them change their ACV commitment to you but just shifting that maybe from a TCV perspective or is there something — or is there some other nuance? And then I’ve got a quick follow-up for Mark.

Jennifer Ceran — Chief Financial Officer

Yeah. So, we’re seeing some requests for extend payment terms so if you think about an airline, they’re not generating any revenue right now, they still want to use us, they don’t want to downgrade. Even in some cases they want to upgrade for something they need us for. So, we’re seeing request for our typical terms of 30 days and in those instances where our folks just don’t have money right now to pay us because their business is shut down, we’ve extended 90, in some cases 120 day terms and there were about 150 customers where that was relevant. And then we have some others that just say I’m still generating revenue but not as much, instead pay quarterly versus pay annually. And so we’ve been extending some of those offers as well.

Alex Zukin — RBC Capital Markets — Analyst

Okay. So I guess what is happening to the SMB cohort? If the churn is not changing and really again, the ACV is not changing, what is changing for within the SMB cohort? What is the impact that you’ve actually seen?

Mark Mader — Chief Executive Officer

Yeah. The full churn out on the SMB cohort did go up in the quarter. So, the reaction to SMBs in the COVID environment was that we saw more full churn than we had prior. So, there was an increase. As a company — in aggregate, as a company, our overall loss rate improved slightly. Okay. So, with the segment statement. Within the SMB segment, loss went up, full loss went up that’s full churn.

Alex Zukin — RBC Capital Markets — Analyst

Got it. Okay. So, that’s dollar — that’s encompassing dollar and logo, and I guess are you seeing Mark, a change because — is there a change in engagement I guess is what your being in the SMB customers as well as engagements going up but temporarily monetization is going down and that could — that could revert over the next few quarters if the situation does improve?

Mark Mader — Chief Executive Officer

Yeah. I mean unfortunately when someone trips the engagement goes to zero. Right. As a population we saw engagement increasing within our larger company segments and stay level and slight — in some segments decline based on industry, we saw that occur. So, overall when we release for instance COVID hits, templates issued, spike in trials, like people coming to the site, people engaging, some of that results into pipeline we’ve created. But in terms of the activity level within the SMB segment specifically, I would say, we saw more pronounced engagement level within our larger clients than we did with our SMBs.

Jennifer Ceran — Chief Financial Officer

And I’ll give you one example because I have to approve every single one of these accommodations. An event marketing, a small business, they do weddings. My daughter was getting married in September, it’s been pushed out a year now. She requested a COVID accommodation because she literally has no business right now. She loves Smartsheet, she needs us for all of the management of her programs that she does, but she just has no business right now. So, she needs to get her business restarted. And then, I expect to see her fully engaged in our product again.

Alex Zukin — RBC Capital Markets — Analyst

Okay. And then sorry, just one more. I’ll just sneak in. I guess Mark when you’re seeing these customers trip, is it business destruction or is it going to a different vendor?

Mark Mader — Chief Executive Officer

In a lot of these case, the vast majority of these are vendor citations. I mean, we look at this data critically and the COVID mentions, we saw a more pronounced uptick due to business challenges, inability to operate, continue operations. That was, that was the largest uptick we saw.

Gene Farrell — Chief Product Officer

Business disruption.

Mark Mader — Chief Executive Officer

Yeah.

Alex Zukin — RBC Capital Markets — Analyst

Got it. Thank you, guys.

Mark Mader — Chief Executive Officer

Thanks, Alex.

Operator

Your next question comes from Keith Bachman with Bank of Montreal. Your line is open.

Keith Bachman — Bank of Montreal — Analyst

Hi. Thank you. I want to follow on the thread a little bit of the past couple of questions. And just, I’m stuck on the billings guidance. When you’re effectively moving from a situation in April where round numbers you’re billings were 30% and moving to a situation where you’re guiding to 15% to 16%, so roughly cut in half. And I’m trying to piece together what you said about May. You didn’t say that there was a material increase but it certainly sounds like stabilization.

So, I’m just trying to thread together why billings — it’s understandable why it would move lower because April, I imagine, was probably the bottom. But you’ve talked about stabilization in May. I’m trying to thread why that billings number would get cut in half versus moving lower, some say, the 30%. You’ve explained some of the billings terms but that, it certainly doesn’t seem to cover anywhere close to that magnitude of a change. So, is there any other — anything else you could point to — in terms of billings number and then I’ve a follow-up question.

Jennifer Ceran — Chief Financial Officer

Yeah. So what we saw in May was a slight improvement to April and we did see demand for our products in terms of our pipeline increase nicely. People do you want to buy, so that’s all good. But what we didn’t see is we’re not back to pre-COVID selling levels yet. So, I believe that as we begin to open up, it’s going to be a very good thing because I know that there are people who want to buy the product but until that actually happens, we’re just assuming June and July is similar to what we see in May and if it’s better, we will be.

Keith Bachman — Bank of Montreal — Analyst

Okay. And maybe just taking up a level then is, as you indicated that the free cash flow guidance is rescinded. I understand you gave some parameters around it, but just talk a little bit more about your longer-term targets. And I think most investors had assumed that you would turn free cash positive as we looked out over the course of next year. But does everything get pushed out or how should we be thinking about the free cash flow objectives that you have as you look to get through the COVID situation?

Mark Mader — Chief Executive Officer

I think as Jenny remarked as we look at our path to $1 billion, within our three to five-year frame, I think what COVID has done it pushes a little deeper into that three to five-year frame. But I mean we remain, I have high conviction on our ability to generate operating margin at that level. We are fully invested in this. As we come up with our models for the second half, there are a wide variety of scenarios, right, and until you see evidence in terms of things happening within our locales and within businesses coming online, those models are again, which one do you want us to choose, right.

So, this is what we’re planning. So, what we want to do is we want to be in a position to maintain optionality where we can respond, we can invest further, whether it be on a marketing dimension, a sales rep dimension, what have you to be able to go after that. But in terms of the impact to our long-term business prospects, solving for the decade, not the second half of the year, right. So, we are really trying to stay very true to that and I think we are still in a position where we feel we can hit within that three to five-year window and that’s a continuation of our past comments.

Jennifer Ceran — Chief Financial Officer

Yeah. I would just like to add that I really feel that this situation with our billings number this quarter which impacts collections for the short term, is really a COVID related issue. When we gave guidance in mid-March, we did not see any impact of this coming, right. We didn’t even know that we were all going to be sequestered to our homes and that we were going to be continued to be sequestered to our homes until this changed. So, our business until March 25, was performing fine, performing really well.

What we saw late March and into April was really this oh shit, oh excuse me, I didn’t mean to say that, but other businesses going uh-oh, we’re not Airbnb, no one is going to stay at homes, no one is flying, no restaurants are happening, that kind of stuff is what, what really impacted our business. So, when we get through this, I feel pretty confident that we’re going to see a lot better performance.

Mark Mader — Chief Executive Officer

And the good news is, you look at the leading indicators, look at trials, look at number of organizations trying us on a monthly basis, look at the pipeline across all segments. If I was seeing softness on that front that would have me more concerned. So, we’re going to be there to serve the customer. We’re going to continue to improve the product. I do believe that the market will recover and we need to be best positioned to own that market when it does.

Keith Bachman — Bank of Montreal — Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Walter Pritchard with Citi. Your line is open.

Walter Pritchard — Citi — Analyst

Hi. Thanks. I’m wondering if you — two questions. First, just on, on the private companies in the space and there’s been a pretty aggressive I think push up from the low end. I’m wondering if you’re seeing that sort of moderate as you’ve moved into this environment and I had a follow-up.

Mark Mader — Chief Executive Officer

Yeah, well. So, I’ll take that one. We really haven’t seen a change in the trend that we’ve seen in that we’ve reported on the past. We continue to see the vast majority of our transactions are replacing the status quo. We have had a couple of situations where we had large customers that have consolidated to Smartsheet and actually pushed out a number of smaller providers that had small footholds in those brands and those were pretty large brands. Both of those happened in this quarter. But yeah, we’re not seeing really any encroachment. We still feel like we are super early days and it’s very much a land grab.

Walter Pritchard — Citi — Analyst

Got it. And then Jenny, just I think everybody is kind of dancing around this question of the affected industries. Could you maybe highlight for us, I understand SMB is an overlap, but what percentage of your revenue is from these industries like your retail, hospitality, event planning, and so forth? Just to help us sort of understand the magnitude of what their impact is.

Jennifer Ceran — Chief Financial Officer

Yeah. So, we reported that last quarter, it was roughly 4%, but SMB is kind of in other industries as well, it’s not just retail and travel and hospitality. The — go ahead.

Mark Mader — Chief Executive Officer

I was just going to add one thing to that. I think, and one of the things that’s important to understand is, across industries and company size, the disruption caused by COVID has caused almost every company to take a step back and the uncertainty they see in the market and really be thoughtful about how they spend, because nobody knows with certainty what the recovery curve looks like. And so, I would say that we saw companies across the board delaying decisions and taking longer in contemplation and one of the advantages of our business model is we have a relatively short for a lot of our transactions sales cycle. But when companies start to slow down that shows up a little bit more quickly in the numbers. And I think that’s what we’re seeing this quarter. But the pipeline build, the trial build, all of those things give us a ton of confidence that as certainty emerges in the recovery path, we expect to see a lot of those, those — that hesitation to unlock and we expect the trends to improve.

Walter Pritchard — Citi — Analyst

Great. Thank you.

Operator

Our next question comes from Rishi Jaluria with DA Davidson. Your line is open.

Rishi Jaluria — DA Davidson — Analyst

Hi, everyone, Mark and Jenny, and thanks for taking my questions. I hope everyone is staying safe out there. I wanted to start by asking a little bit of a philosophical question. So, in the prepared remarks, Jenny, I believe you had mentioned that you’re slowing down the pace of hiring a little bit, still obviously continuing to hire in areas that matter right now. Maybe help me understand why not be more aggressive in hiring given the huge opportunity you have ahead, given the big TAM that you’re going after. I think it was what Marc Benioff that said one of the regrets he made — he has from ’08/’09 was not — he was taking his foot off the accelerator, so maybe want to understand how you’re thinking about that and the investment philosophy in this environment. And then I’ve got a follow-up.

Mark Mader — Chief Executive Officer

Yeah. I think in aggregate, we look at very few things now, right. So, when I think about investing in engineering and innovation and the pipeline, we have to deliver on our product road map to unlock enterprise and mid-market growth, like hammer down, like we are hiring people, we are innovating. We had an incredibly productive spring. We’re having incredibly productive spring. I think one needs to be pretty darn thoughtful when you think about adding quota-carrying reps, especially people who have compensation on the line right. Make sure that the team members you have, the 60 or so people we’ve just added with quota-carrying are well served, that they have good territories, that this territories are producing, but we are very mindful of that. So, we are aware of pipeline,we’re aware of pipeline conversion, new territory development, government, all those pieces go into it. On the marketing dimension if we decide to push brand spend, a portion of brand spend into a quarter when a market repoen as supposed to when a market is closing, that seems like a prudent investment. So, these are all puts and takes that we’re making. But I think back to [Indecipherable] comment absolutely do not stop innovating because this category is alive and well. You need to be there with the best product and we’re continuing to do that.

Rishi Jaluria — DA Davidson — Analyst

Got it. That’s helpful. And then, Mark, you said something really interesting in prepared remarks about work environment and I completely agree with you on that. You also mentioned that maybe some of the delays in deals are from people waiting for office reopenings. I guess from a market perspective, is there kind of a sweet spot where Smartsheet is most valuable in a hybrid work or versus a purely remote one or a purely on — in the office kind of physical presence sort of environment? Thanks.

Mark Mader — Chief Executive Officer

Yeah. I think when we think about the transition, it’s, I think the reopening and sort of the deal flow and the deferral is less about whether someone is in the office or not and more about their confidence in the economic situation of their business. So, I just wanted to clarify that. The notion of, of hybrid on all those dimensions I mentioned, I think people often like to think there’s one thing that’s going to make it all work. Well, it’s never quite that simple in life, right. Remember, back in the day, 10 years ago, when it’s like, it’s all about my mobile phone and my mobile and my mobile calendar, say, well, it’s a little bit more than that and that’s when our category emerged like eight years later, right.

So, when you think about this work from home, work from the office, I think it’s not quite as clear-cut, like people will be going back to the office. Will it be different. Absolutely. And I think people are going to be bridging between remote technologies and office technologies, connecting people across companies. So, it’s — I just wanted to clarify, though, that it’s less about the work from home or not and more about the economic condition of customers. Gene, you were going to add something?

Gene Farrell — Chief Product Officer

I’ll just add — I’ll add one thing to that, and that is that I think we saw evidence of in the number of sectors, particularly technology where you have folks working from home and seeing tremendous value in moving more workloads on the Smartsheet, we saw actually increases in usage in those segment, where I think the companies had better certainty on their business prospects. So, I think that reinforces Mark’s point that a lot of it depended on how confident the company is and where their environment is.

The other thing I would add is, I think that this pandemic actually created a great opportunity for us. It was realized across a number of customers where they really appreciated the agility and speed at which we can help them configure or reconfigure business workflow and business process to meet an emerging demand or a changing business need and we had customers that were leveraging Smartsheet to reconfigure supply chain. We referenced some of the COVID use cases around testing and coordination on both managing government activities as well as companies switching to remote work. So, being able to adapt quickly and offering that dynamic platform, I think is a real differentiator for us. And we, I think we actually gained a lot of mine share through this process.

Rishi Jaluria — DA Davidson — Analyst

Great. That’s really helpful. Thank you.

Operator

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

Terry Tillman — SunTrust Robinson — Analyst

Yeah. Thanks for taking my questions. Good afternoon, Mark, Jenny, Gene and Aaron. The first question just relates to, we’ve been talking to a lot of your customers, has been really helpful for our research and I would say we can confirm they’re using your software more than they had in the past across whatever the KPI you’d look at from an activity standpoint. When we talk to them though and what I’m curious about in terms of kind of thinking about sales playbooks, some of these capability-based solutions, whether it’s the Accelerators, Dynamic View, or Control Center, sometimes they don’t know about them or maybe we didn’t ask the question, right.

But it seems like you could turn dialed with some of these business that are using it aggressively and are actually resilient. What are you doing to maybe go in there and when you’re seeing those aggressive activity levels maybe they didn’t know about dynamic deal and what that could do. So, what are you doing right now because of what’s going on? Is there an opportunity around the heavy users that do have some budget and will buy those add on, so how that going? And then I’ve got a follow up.

Gene Farrell — Chief Product Officer

Yeah. I agree with your observation Terry and I would say that we are running plays both on product marketing and sales motion side to better educate and identify, help customers identify opportunities and understand how they can leverage capabilities. I would also tell you that we have a very significant investment in flight right now on the product development side to improve discoverability and make it much easier for the average user and more easily enable that capability. So, I think it’s really a huge opportunity for us but it’s a balanced approach between go-to-market and actually product improvement.

Terry Tillman — SunTrust Robinson — Analyst

Okay. Thanks, Gene. And I guess the question Jenny. I think I had asked about this last quarter because kind of the way you all would quantify capability-based revenue, generation. It could change going forward in part of it could be this new premier SKU. I see it now on the website. So, it’s a separate kind of product packaging. How is that trending because I could see where again for businesses that are more steadier, it’s a lot easier to just buy a bunch of stuff, including connectors in one — in one packaging as opposed to the a la carte. [Phonetic] So, how is it playing out with the premier SKU? Thank you.

Jennifer Ceran — Chief Financial Officer

Yeah. We’ve had increasingly strong demand for the enterprise primer SKU. What strength in Q4, we sold less of it in Q1, but that’s very typical because people are buying into it as the year end starts or ends and then absorbs it in the first quarter..

Terry Tillman — SunTrust Robinson — Analyst

Thank you.

Operator

Your next question comes from Mark Murphy with J.P. Morgan. Your line is open.

Pinjalim Bora — J.P. Morgan — Analyst

Hey. This is Pinjalim sitting in for Mark. Mark, or Gene, I think you’ve added automated workflows capabilities about a year ago. Based on what you’ve seen maybe in this last year, do you think Smartsheet could become the workflow execution hub within an organization over time? And are you seeing any kind of a relationship between say retention and those customers using the workflow capabilities?

Mark Mader — Chief Executive Officer

Yeah, well, so I would, to your first question, do I think we can become the workflow hub. Absolutely. And I think we have, we’ve seen almost a doubling in the number of automated workflows triggered over a 30-day period and it’s in the millions now, we don’t disclose all the specific numbers, but we’re seeing really, really nice growth there and that continues to accelerate month-over-month. And as you mentioned automations, we started two years ago with automations with very simple, single step automation. We now support multi-step, much more complex automation, and we have some new capabilities coming later in the year that will allow us to even move further up the — up the capability stack, if you will, to serve both our power users as well as IT and citizen developers to orchestrate and manage workflows.

But importantly, the place that we will play there is really managing workflow that crosses systems and the demand signal we hear strong from customers because there’s a lot of work to manage Smartsheet that they want to be able to drive based on either intake from other large systems of record like a ERP or CRM or be able to report back to those systems on the results of a workflow that’s run in Smartsheet. So, we are super bullish on that and I think the cost, value, speed and agility of deployment are going to be real differentiators for us in that space.

Pinjalim Bora — J.P. Morgan — Analyst

Understood. Thank you. And Jenny, just on the, the guidance on billings, obviously you talked about the net expansion or net retention rate being 120s. What are your assumption or what did you see in Q1 and what are your assumption on net logo ARR? Is that, is that — did it took a big hit in Q1 and what are you thinking for the rest of the year?

Jennifer Ceran — Chief Financial Officer

When you say net logo ARR, if you look at…

Pinjalim Bora — J.P. Morgan — Analyst

As a net, net [Indecipherable].

Jennifer Ceran — Chief Financial Officer

Yes, overall logos increased for the quarter and if you look at dollar ARR as Mark mentioned earlier, ARR increased as well across every industry.

Pinjalim Bora — J.P. Morgan — Analyst

Okay, understood. Thanks.

Operator

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

George Iwanyc — Oppenheimer — Analyst

Thank you for taking my questions. Could you possibly give us a bit more color on what you’re seeing in the government vertical with any FedRAMP benefits?

Mark Mader — Chief Executive Officer

Yeah. So, the pipeline is continuing to grow as we said last quarter. We’re looking for really the big breakthrough deal that unlocks it. I think the work that we’re doing on the DOD side in IL4 will provide a couple of new unlock opportunities for us and again, we will report out as soon as we have one of those. The team in terms of its — the team we have in place in DC, I feel very good about. I think from an operation standpoint and offering standpoint, a big piece around Control Center, which is really one of our anchor capabilities is on the cusp of now being approved for government as well and that really allow us to go into some very, very compelling use cases for those government prospects. The number of transactions we’re doing continues to go with multiple agencies. North of a million dollars ARR now out of the Fed gov platform. So, we’ve definitely planted seeds and we’re expecting a good outcome this year.

George Iwanyc — Oppenheimer — Analyst

And just following up, with all the near-term COVID-related disruption you’re seeing, is there anything especially with your larger customers that you’re seeing in the conversations that suggest you might be, maybe a second play beneficiary from all of the changes that have to happen?

Mark Mader — Chief Executive Officer

I don’t think customers are articulating it quite that explicitly. I think we remain centered on the transformation of their workloads into modern mechanisms and they’re not delineating between we’re doing this first and that second. That’s really our perspective on people’s motions. So, again, just reinforcing the importance of us to connecting to things that really matter. The question earlier around, is there correlation between important workloads and being more sticky, you’re having more success, I think absolutely.

And one of the reasons why as Gene said, we’re investing in this cross-system integration capabilities so that CIOs can look at their system say holy smokes, I have invested all this money in my ERP system, how can I extract more yield from it and we’re starting to come up with these motions not just to do automation within Smartsheet, but how do you actually get unexpected yield from those other systems. That is the theme that is resonating really well and we’re now on the cusp of being able to respond to that.

George Iwanyc — Oppenheimer — Analyst

Thank you.

Operator

Your next question comes from Steve Koenig with Wedbush Securities. Your line is open.

Steve Koenig — Wedbush Securities — Analyst

Hi, Smartsheet. Thanks for taking my question. I just have one for Mark. Mark, I would love to get some color on what you’re seeing in terms of awareness trends and specifically recognition of collaborative work management as a category and Smartsheet as a brand? As you’re doing your investments here, what are you seeing in those trends both secular and I’m curious in the last three months? And just to add to that and how is that translating to, to lead gen as well? How, what are those trends? Thanks very much.

Mark Mader — Chief Executive Officer

Yeah. I was really pleased to see with Anna, our CMO having been on now for a little over a year. We’ve continued to checkpoint studies in terms of aided and unaided recall within our category, we are leading in terms of on both fronts, aided and unaided and that is up very nicely over the course of the year. So, I’m really pleased to see that. On some of our larger transactions, we saw sponsors who had not been users themselves of Smartsheet, make statements around, oh, yes, that’s a brand, yep, we’re familiar with it, we’ve heard about it. So, even if they can’t perfectly articulate what it does having softened that beachhead, really important. So, we’re really pleased with those results.

In terms of the ongoing investments as Terry asked, mentioned a couple minutes ago, the importance now is to say how do you articulate and bring the full value of Smartsheet to bear. It’s not just are you aware of our name but what can it do for me. So, we’re entering that next phase now and I think we’ve set some really good foundation to build on them.

Gene Farrell — Chief Product Officer

I would just add that over this quarter, we’ve spent some time with some software industry analysts and they have reported out a market increase in inquiries around collaborative work management and I think at least a signal we’re getting from neutral third parties is that there is an expanding awareness and appetite and interestingly enough, you saw us introduce a number of capabilities targeted at marketing departments, the number one category or source of those inquiries within the companies are function is marketing.

Steve Koenig — Wedbush Securities — Analyst

Got it. Great. Thanks for answering my questions.

Operator

And our last question comes from Brett Knoblauch with Berenberg Capital Markets. Your line is open.

Brett Knoblauch — Berenberg Capital Markets — Analyst

Hi, guys. Thanks for taking my question. Hope, you are both well. Can you just talk about how capabilities maybe Accelerators performing in quarter and how that performance might have been or differed from the core business? And then just a follow-up on maybe the timing of these payment combinations you’re giving to customers, was this mainly in a particular week or in April and have you seen that meaningfully kind of decelerate in terms of the number of customers asking for payment accommodations?

Jennifer Ceran — Chief Financial Officer

Yeah. I’ll start with your second question. So, when we, we didn’t start seeing any of these until the third week in March. In the third week in March we started to see them and there were most pronounced in April and, like I mentioned earlier, we had about 150 customers that asked for and were given extended terms of the 90 days, 90 to 120 days and we have about 33 customers that asked for quarterly billing terms.

Mark Mader — Chief Executive Officer

And on the capabilities side we saw activity across our connectors to systems of record, we saw Dynamic View Data Uploader. We really had all products firing in Q1. That was sequentially on the heels of an unbelievably strong Q4 and so, we haven’t seen a disinterest in any one of those categories. And I would expect the capabilities and sort of the building on a foundation someone has to again reignite as things open up a bit. I think right now, people are really looking at core licenses, making sure the bases are covered. They’re interested in learning about those capabilities, but I think some of the deferral decisions are on some of those ancillary products.

Brett Knoblauch — Berenberg Capital Markets — Analyst

All right. Perfect. Thanks guys.

Operator

With that, I’ll turn the call back to the presenters for any closing remarks.

Aaron Turner — Investor Relations

Great. Well, thank you for joining us and we’ll speak to you again next quarter.

Operator

[Operator Closing Remarks]