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Smartsheet Inc. (SMAR) Q3 2022 Earnings Call Transcript

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Smartsheet Inc. (NYSE: SMAR)

Q3 2022 Earnings Call

Dec 02, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Smartsheet third quarter fiscal year 2022 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Aaron Turner, head of investor relations. Thank you.

Please go ahead.

Aaron Turner -- Head of Investor Relations

Thank you, Blue. Good afternoon, and welcome, everyone, to Smartsheet's third quarter of fiscal year 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are Smartsheet's CEO, Mark Mader; and our CFO, Pete Godbole.

Today's call is being webcast and will also be available for replay on our investor relations website at investors.smartsheet.com. There is a slide presentation that accompanies Pete's prepared remarks, which can be viewed in the events section of our investor relations website. During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends.

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool owns shares of and recommends Smartsheet. The Motley Fool has a disclosure policy.

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 U.S.

GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our investor relations website. With that, let me turn the call over to Mark.

Mark Mader -- Chief Executive Officer

Thank you, Aaron, and good afternoon, everyone. Welcome to our third quarter earnings call for fiscal year 2022. Today, I'd like to focus on three key areas: Our strong Q3 results, which saw an acceleration of our revenue in billings; our continuing momentum in both enterprise and SMB; and how SmartTreet is driving innovation in more departments across more industries than ever. While Pete will give you the details, I do want to highlight a few standout areas of Q3 performance.

Smartsheet revenue for the quarter grew 46% year over year to $145 million and billings grew 50% year over year on an adjusted basis, $262 million. We also exited the quarter with more than 9.5 million Smartsheet users. And in October, we set a Smartsheet record for licenses bought by new customers in a month. Overall, we increased our ARR 10% quarter over quarter.

Our reacceleration, our aggressive investment posture in our new high watermarks and pipeline, and large deal volume make me more bullish than ever on the prospects of the company. As many of you know, Smartsheet is a cloud-based platform for dynamic work that empowers employees and teams to transform how they work. Through a combination of a no-code platform, a global community, and a broad service offering, customers unlock business value by transforming projects, programs, and processes at scale. Rather than being just a task-oriented tool, Smartsheet can scale from a simple project used by a five-person firm to an enterprise SaaS platform that enables work across critical business systems at the largest companies in the world.

That extensibility is a huge factor driving the momentum we are experiencing in this emerging global work management market. That momentum often gets started when a specific team or department, let's say, performance marketing deploy Smartsheet to streamline campaign management. As work is shared with other departments via Smartsheet, those departments begin to understand the value of the platform and viral growth occurs. This low-friction method of trusted growth occurs across companies and is amplified by Smartsheet's work from anywhere accessibility.

As customers graduate from basic productivity use cases to transforming operational workflows, we see rapid uptake and acceptance across more departments. For example, in Q3, we had wins within marketing departments at companies like USA TODAY, United Airlines in Turner Broadcasting, HR departments at companies like Sonos, Avalara, and University of Southern California, in sales departments at Robert Half and Juniper Networks, in legal departments at Karos NetApp and Ambev, in operations at Estee Lauder and Piedmont Healthcare, and at government entities, including the U.S. Department of Agriculture, the U.S. Department of Health and Human Services, and the FAA.

A couple of use cases I'd like to call out. We saw expansion at Hewlett Packard Enterprise and Aruba and HPE Company where the marketing and sales departments are tracking events and consolidating input gathered from various sheets, Smartsheet forms, and update requests into a global calendar used by field sales and executives. And at Autodesk, the legal department is using Smartsheet Salesforce Connector to pull in deal data to track negotiation points, fallbacks used, and security issues. With Smartsheet, Autodesk reduces the manual effort related to inputting their deals, which allows managers to track and report on recurring issues, monitoring bandwidth, and improve strategic decision-making.

This continued momentum in the enterprise where we build deep relationships with customers at more senior levels is driving bigger deals and positioning Smartsheet as the preferred choice for work management across the enterprise. All of which ties back to our bookings for the quarter. Q3 saw both a new quarterly record of 203 deals of more than $50,000 and a new quarterly record of 77 deals of more than $100,000, up 92 and 114%, respectively, year over year. And this is occurring while we invest in high potential markets like Europe, Asia Pac, and the federal government.

Smartsheet regions, our regional Smartsheet offering is now available in the EU and enables customers to establish plans with their content hosted in Germany. On the federal government front, we continue to make progress scaling this long-term highly sticky opportunity. While government remains a small percentage of our total ARR, the ARR growth rate coming from the government entities grew in excess of 125% year over year in Q3 with a significant ramp in logos landed. Beyond the numbers, I'd like to talk for a minute about our Smartsheet innovations that are driving customer uptake.

Our investments in WorkApps, no-code solutions, and content management are paying off. With the pace of innovation quickening on WorkApps, configuration, and distribution, the table is setting up nicely for WorkApps to become a major driver in shaping how people interact with Smartsheet. More than 50,000 WorkApps have been created to date, providing evidence that strong demand exists within -- for creating composite solutions across the company's Smartsheet deployment while also helping them maximize yield from existing cloud investments such as Microsoft 365 and Google Workspace. Content creation and collaborative review is also going mainstream.

With nearly 0.25 million PDFs, images, and videos proofed within Smartsheet in the quarter, new muscle is being developed around how people enroll others in content review. With the integration between Smartsheet and Brandfolder deepening, new and existing customers choosing Smartsheet for digital asset management, have a more flexible and powerful way to securely store, customize, and share assets. Our platform and differentiated capabilities allow us to attach to a variety of workflows, placing us in the upper right of the leaders quadrant for both the G2 project and portfolio management and digital asset management grids. And customers consistently score Smartsheet highly in the CWM and PPM markets.

In fact, in those categories, we have the most five-star reviews in Gartner Peer Insights compared to all other vendors. The combination of providing simplicity at the end-user level and flexible capabilities to manage programs at scale plus security and governance controls required by enterprise IT is what sets Smartsheet apart. In PPM, we bring a modern approach that connects bottoms-up project and process management with portfolio level views that give senior leaders, organizationwide visibility to define standards, manage resources, and align on priorities. Smartsheet's ability to integrate equally well with both current and legacy systems of record gives our enterprise customers the ability to use the Smartsheet platform both wide and deep across their organizations.

In the digital asset management space, we've unified two market-leading solutions, Brandfolder Dam and Smartsheet CWM. By creating one platform for marketers and creatives, shared visibilities achieved and teams are positioned to respond quickly to asset performance. Our digital content life cycle and asset management capabilities enable Smartsheet customers like McLaren Racing to accelerate content workflows for planning, creation, and distribution using that single platform. For example, McClaren Racing's partners and fans will now be able to easily locate, access, and share content from race days.

Photographers and videographers on the racetrack can upload their content directly into Brandfolder and McLaren for the McLaren team to approve and distribute in real time. In Q2, we launched Smartsheet Advance, a new tiered way for customers to unlock the full potential of Smartsheet at scale. At the entry tier, Advanced Silver enables businesses to orchestrate sophisticated programs, projects, and processes at scale using premium capabilities like control center. Advanced Gold as the ability to connect Smartsheet solutions to other systems of record via data shuttle and bridge as well as connectors to platforms and tools like Salesforce and Jira.

At the top tier, Advanced Platinum adds capabilities for organizations that desire additional levels of compliance, governance, and advanced policy management. With Smartsheet Advance now in market for two quarters, we have seen that our packaging approach that enables customers of any size to benefit is hitting the mark. One notable customer win was with USA Today. Where the marketing team's executive leadership was charged with solving challenges of cutting inefficiencies, eliminating budget overrun, and reducing employee turnover in order to scale their events business.

Smartsheet Advance will support the phased implementation of multiple solutions, beginning with control center, data shuttle, and the Salesforce Connector. But Advance is more than a mechanism for expansion. 46 Advance deals in the quarter were sold to new customers of Smartsheet. The offering helps accelerate discussions with those who want to start big and start now.

Sansone Group was able to hit the ground running with advanced silver, migrating workloads from legacy tools into an end-to-end project, and portfolio management solution. From project intake to execution to executive reporting, Sansone Group uses Smartsheet Control Center to ensure that construction projects are deployed with consistency and key information is automatically surface to executive leadership of this rapidly expanding business. Advance is resonating with customers of all sizes, not just enterprise customers with 51 of the Advance deals coming from organizations with 200 employees or fewer. One of those customers, Sota Consulting, is using Advance to standardize their professional services offerings around client onboarding, project management, and service requests.

The centralization and visibility of key information has allowed the executive team to have true insight in the client projects, in particular, on resource allocation and capacity. Overall, this was a very successful quarter with 160 advanced deals closed. Before I pass the mic to Pete, I'd like to touch on the leadership appointments we announced a few weeks ago. The promotion of three senior executives, Jolene Marshall, Stephen Branstetter, and Andrew Bennett to C-level roles brings deep institutional knowledge and proven innovation into central roles for our next phase of growth.

Each of these decisions is grounded in our commitment to empower anyone to drive meaningful change and further positions us to provide clear ownership, drive operational excellence, capture the market opportunity, and best serve our stakeholders. Additionally, as previously announced, chief product and strategy officer, Gene Farrell; and chief legal officer, Paul Porrini, will be departing Smartsheet. Gene and Paul have been with Smartsheet since before the IPO and contributed to our growth from a $100 million company to an over $0.5 billion ARR category leader. I'm very grateful to Gene and Paul for helping position the company well for our future success.

Smartsheet veteran of three years, Praerit Garg, has assumed joint leadership of the product and engineering team at Smartsheet. I very much look forward to writing Smartsheet's next chapter with Praerit and the rest of the team. And on the topic of team, I'm proud of the recognition we have received for our strong company culture, including being named the best-led company by Inc. Magazine, being named the best place to work in Australia by WRK+, and earning seven comparable awards in 2021.

The momentum we're seeing in so many areas as demonstrated by our acceleration in revenue and billings driven by the best bookings performance in the company's history motivates our entire Smartsheet team. I look forward to talking with you in Q&A. But for now, I'm going to turn it over to Pete. Pete?

Pete Godbole -- Chief Financial Officer

Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q3 was a great start to the second half of the year, continuing our momentum of crisp execution against a backdrop of an improving global economy. Our Q3 outperformance relative to our guidance was a function of strong execution by our sales team, significant enterprise expansions, another record number of larger deals, and continued success of our advanced offering, which is resonating with companies of all sizes. I will now go through our financial results for Q3.

Unless otherwise stated, all references to our expenses and operating results on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentation that was posted before the call. Getting into the numbers now. Third quarter revenue came in at $144.6 million, up 46% year over year. Subscription revenue was $132.6 million, representing year-over-year growth of 46%.

Services revenue was $12 million, representing year-over-year growth of 50%. Turning to billings. Third quarter billings came in strong at $161.6 million, representing year-over-year growth of 44%. As you'll recall, in September of last year, we acquired Brandfolder.

As a part of the acquisition accounting, we recorded onetime billings of $4.7 million, associated with the acquired deferred revenue from Brandfolder's balance sheet. After adjusting for this $4.7 million, our year-over-year billings growth rate in Q3 is 50%. Approximately 91% of our subscription billings were annual with 5% monthly. Quarterly, semiannual, and multiyear billings represented approximately 4% of the total.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 56% year over year to 2,078. The number of customers with ARR of over $100,000 grew 72% year over year to 868. Both of these ARR customer segments experienced the largest sequential net additions in our company's history.

These customer segments now represent 53% and 38%, respectively, of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 85%. Next, our domain average ACV grew 37% year over year to $6,368. We ended the quarter with a dollar-based net retention rate of 131%, a three percentage point improvement from Q2.

Q3 was the first quarter to incorporate brand order, which was a headwind of less than 1%. The full churn rate dropped further and is now below 5%. Over the course of this fiscal year, we experienced large incremental improvements in our dollar-based net retention rate as we've replaced quarters negatively impacted by COVID with more normalized quarters. In Q4, we will complete the lapping of our COVID-impacted quarters from fiscal year '21.

Now that we will be lapping more normalized quarters, we expect our dollar-based net retention rate to stabilize around the 130% level. Now turning back to the financials. Our total gross margin was 82%. Our Q3 subscription gross margin was 88%.

We expect our gross margin for fiscal year '22 to be between 81% and 82%. Overall, operating loss in the quarter was negative $2.7 million or 2% of revenue, an improvement from 15% of revenue a year ago. This margin improvement was a function of scale across our sales and marketing and R&D lines inherent in our model. Free cash flow was negative $6.3 million, which overachieved against our guidance due to strong collections and the timing of a legal settlement, payment of which is now expected to occur in Q4.

Now let me move on to guidance. For the fourth quarter of fiscal year '22, we expect revenue to be in the range of 151 to $152 million. Billings to be in the range of 204 to $205 million, non-GAAP operating loss to be in the range of 20 to $18 million, and non-GAAP net loss per share to be between $0.16 and $0.14 based on weighted average shares outstanding of 126.5 million. Our net free cash flow is expected to be in the range of negative 6 million to negative $4 million.

Given our strong Q3 results and continued momentum in our business, we are raising our full fiscal year '22 revenue and billings guidance. We now expect our revenue to be in the range of 544 to $545 million, representing growth of 41%. Billings are expected to be in the range of 641 to $642 million, representing growth of 42%. We expect non-GAAP operating loss to be in the range of 40 to $38 million and non-GAAP net loss per share to be between $0.32 and $0.30 for the year based on approximately 125 million weighted average shares outstanding.

Our free cash flow margin in fiscal year '22 is expected to be negative 4%. We also expect the success we've experienced this year to continue for the foreseeable future. As such, we are providing initial billings for year-over-year growth guidance of 37% to 40% for fiscal year '23. To conclude, we were pleased with the quarter in several fronts.

The acceleration in revenue and billings, the success of Advance with the opportunity for it to be a significant future driver, and the net expansion rate that has crossed 130%. We see an enormous opportunity in front of us, and we will continue to invest behind this signal. Now let me turn it back to the operator for questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Brent Thill from Jefferies. Your line is now open.

Brent Thill -- Jefferies -- Analyst

Good afternoon. Mark, you called out record net new client wins. I'm curious if you could just drill in give us a little more color what you're seeing and effectively if you can talk a little bit about where you're seeing that? Are you seeing at the enterprise SMB international? Just give us a little more color on that, that would be great.

Mark Mader -- Chief Executive Officer

Yeah. You bet, Brent. I think part of it was in the last two quarters, we really have had an opportunity to balance our investment across a couple of investment areas. One being at the very high end, sort of capable advanced platinum, serve the most, I guess, sort of companies in terms of their policy management, and enterprise side.

And then on the other end of the spectrum, it's the antithesis of that. It's like how can you get someone who's passing by to check out your product and have it resonate with them and have them take a step forward. And in Q3, we refactored our entry-level plan called Pro Plan. And what we found was that by removing some of the restrictions on things like sheet capacities and limits, it gave people a lot more freedom to get started, and I think confidence and that has started to play out.

So the month of October was the highest new license total we've had in the company's history. And that was really exciting for the team. There's -- we take a lot of pride in our ability to expand. And I think there's equal excitement internally now about landing.

Brent Thill -- Jefferies -- Analyst

And maybe a quick follow-up for Pete. Just when you think about Mark's comments about net new coming in stronger, are you adjusting your quota-carrying capacity differently as you look at this? Or are you acting at a quicker rate? Or are you effectively trying to get the current reps just more productive?

Pete Godbole -- Chief Financial Officer

We're not adjusting our quota capacity. We've already leaned in heavily as a part of our investment posture. We think that serves us well to take care of the incremental demand, whether it comes from enterprise expansions or it comes from these new customer additions and new license additions.

Operator

Your next question comes from the line of Mark Murphy from JPMorgan. Your line is now open.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yes. Thank you very much. Congrats on a fantastic result. So, Mark, I believe Smartsheet is several years ahead of the field in terms of the FedRAMP certifications and I noticed the federal news network was highlighting Smartsheet for the rest of the agencies.

Could you talk to us about the traction there? Or does it feel like you're running the table with those massive contracts? And I guess I'm wondering is it helping to support this pretty robust billings guidance that you're giving us for the out-year?

Mark Mader -- Chief Executive Officer

I really related more to the early years of Smartsheet where we were planting many seeds. So I referenced the logo growth. And when you land at an agency, I mean I'd love to be able to say, Mark, "we're closing huge seven-figure contracts at every agency." We're not, but we're planting a ton of seeds. We're getting a sense for what the agencies want.

We're adjusting our R&D to support that. And I do expect in our years, as we talk about this being a highly sticky category, once you're in, we think and what we're observing is that the growth within those agencies absolutely exists. But I would really liken this too, that the earlier phase of Smartsheet really planting and then we shift into growth and then sort of hypergrowth in out years.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yeah, I see it. OK. And Pete, I was curious about the advanced version of the product. which specific elements of that package do you think are resonating the strongest? And is this something -- can we see that manifesting somehow in the financials? I mean, obviously, there's a lot of strength.

But I guess I'm wondering how that manifests. Is it helping -- your churn is extremely low now, your retention is strong. Is it coming through in the health of the billings numbers that we're seeing?

Mark Mader -- Chief Executive Officer

I'll take this one. When we introduce new product and innovation, you always hope that each of them are going to be a home run. And when they're actually in market and you see what the customer uptake is, then you really get to see it play out. And one of the things that we introduced in the spring through Advance was this product called Data Shuttle.

And Data Shuttle is a mechanism that allows people to take data sets from any source and to bring those into Smartsheet and then shuttle them back out once they've done processing on them within Smartsheet. That is the fastest-growing offering we've had at the company in its history. Now is it ratable? No, it's not charged on a ratable basis. However, it is a component, which is the capability of premium capability that people are really latching on to.

Those are the types of home runs you need within a portfolio to get attached. And one of the -- how that connects to a loss rate is that when somebody has a durable, repeatable process on your platform, they tend to stay. So the more people we can get exposed to these things, the better. The second one I would point to is relatively new, and we just turned on for our enterprise customers, which is a Snowflake powered analysis capability within the product that allows people to do things like time series reporting, the old adage, he or she who holds the Kingdom also hold time series.

And it's -- when I look at -- in the matter of a month and a half, more than 50% of the enterprise customers have utilized that capability. And thank you, Snowflake for putting us in a position to deliver that to our customers. But those are the kinds of things you look for in the portfolio that really, I think, helped drive the strength. And I think give us confidence for the out year.

I mean there are multiple things that give us confidence for the out year, but those are two things that have really landed.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

All right. Great. Very helpful. Thank you, Mark.

Operator

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

John Godin -- Needham and Company -- Analyst

Hey, guys. This is John Godin on for Scott Berg. Thanks for taking my question. First, I'm just kind of curious, how have your conversations around some of the more transformational deals been evolving? Are you starting to see the type of broader demand earlier in the sales cycle? And maybe are you increasingly seeing the end users start to push this upwards at a more rapid rate than previously? Thank you.

Mark Mader -- Chief Executive Officer

Yes. We are seeing the continued bottoms-up approach worked very well. And I think the better you can present your offerings and get them to discover them, utilize them, promote them, the better. I think there's another part of the approach, though, which is quite opposite to that, which is helping somebody understand how your innovations will drive value realization after which you have the right to monetize.

And that is not always in the bottoms of motion. So when I think about how we're going to some of these large brands and doing discovery sessions with them to help them understand how to unlock value on more of a strategic level. That is quite useful as well. So I think it is a hybrid approach.

How do you let discovery occur and self-directed growth to occur combined with more of that consultative approach, which really plays out well in those scaled environments? And we refer to that spectrum as the customer journey, right? An endpoint and end user is going to have a different journey expectation than maybe an executive.

John Godin -- Needham and Company -- Analyst


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Great. Thank you. And then, Pete, just quickly on gross margins, it looks like you've raised the level of expectation currently, I think 79 to 81, to 81 to 82 for the year. Is there anything specific to call out there on the gross margin line? Thank you.

Pete Godbole -- Chief Financial Officer

No, I think the reason we've raised the margin by the amount you mentioned is because we've only got one quarter to go, and we've seen the trend of how we've sort of worked on gross margin and maintained and raised that. That's really the way we set the table for you folks.

Operator

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

Allan Verkhovski -- Wolfe Research -- Analyst

Hey, there. This is Allan Verkhovski on for Alex Zukin. You touched earlier on all the new management changes of the company. And while we certainly see this going on as companies scale, can you just go a little bit more in depth in terms of what you're most excited about? What's the new members of the team? What could be done differently or better? And then I've got one follow-up.

Mark Mader -- Chief Executive Officer

Yeah. I think when you look at change in opportunity, I have to look at what -- how you apply risk to change. And one of the things I'm very grateful for is that if the new appointments, we have existing institutional knowledge. We have existing cultural alignment, which allows you to really move forward swiftly and with great confidence.

And one of the things that we're trying to achieve is how you accelerate decision-making. So as I look at the unification of marketing with Andrew as our CMO, looking after the demand and the brand, the product marketing, and other elements that constitute marketing, we have a much, much faster decision flow than we had prior, where we had elements of marketing existing within three different parts of our business. When I look at prayer taking on engineering and I look at the ability to have a unified product and engineering person help be the arbiter in the moment, that lets us make faster engineering decisions. When I look at Jolene taking on things like procurement and risk and working with our CISO, I look at the scope of legal also expanding.

So the neat thing about having institutional models brought into that SLT is that from a ramp standpoint, you get to bypass that in many cases. And when I look at having, what, 2,600 roughly people on the roster now, it's also an amazing thing to be able to point to someone growing their career within the business. So I think it's a really, really neat composite there. And I think on the Stephen front, on the COO, Stephen, as our SVP of Ops, just prior to getting the appointment of COO, he's been running the rhythm of the business.

And he is -- as we look at really formalizing our approach to expanding international, I really look forward to Stephen taking that institutional knowledge and applying it in our new markets.

Allan Verkhovski -- Wolfe Research -- Analyst

Got it. That's really helpful. Thank you for that. And lastly, as a quick follow-up.

Can you -- so you mentioned there's really strong statistics about new licenses and the strength that you saw overall in October? Can you just kind of touch on what you saw on a monthly basis. And the demand environment kind of through November, we went through Q3, through November, how are you seeing people approach their expansions with Smartsheet as they think about the remote work environment and plans for next year? Thanks.

Mark Mader -- Chief Executive Officer

Yeah. I think the neat thing about seeing strength is that when you see strength, you want to invest more behind it. So as we look at improvements to how people land and how they procure and how they expand, it just causes you to want to put more both engineering and go-to-market dollars behind it. So as we paired the launch of our new Pro Plan, we absolutely flexed in terms of making sure it was in front of more people.

And when we think about our marketing investments heading into next year, we look at top of funnel, we look at mid funnel, and we look at bottom of the funnel. And we're really ramping in each of those areas. As I think about the rest of the year and heading into next year, I think the awareness of mainline individuals within lines of business, being able to serve themselves and derive great value, like that is hitting mainstream now. So it's less about evangelizing a new concept that nobody understands and more about getting people aware of your solution on a concept that is really gaining steam.

I actually assign more to that than I do the notion of hybrid work or working remotely.

Allan Verkhovski -- Wolfe Research -- Analyst

Got it. Thanks for the color and congrats again on a really strong quarter.

Mark Mader -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Arjun Bhatia -- William Blair and Company -- Analyst

Yes. Thank you and my congrats on a great quarter. I think you mentioned that you should -- you're expecting net retention to stabilize around the 130% range going forward. Obviously, a very strong net retention rate.

Can you give us a sense for what's actually -- what the primary drivers are behind that? Is it uptake in advance? Or are you still seeing customers just user growth, the core user growth that's driving that as smart chip proliferates within existing customers?

Pete Godbole -- Chief Financial Officer

So Arjun, this is Pete. I think if you looked at the cut down of the net dollar retention rate, we're seeing strength across all verticals. First of all, it's coming all across every word vertical, every customer segment. And what we're seeing is expansions in large enterprise are going up and churn is coming down.

So that's the way this thing is getting built out. And we're seeing that reflected in the numbers that show up as the 131%.

Arjun Bhatia -- William Blair and Company -- Analyst

OK. Understood. And also advance it seems like there's a lot of good momentum there. Mark, you pointed out or you provided a handful of stats that point to the diverse kind of uptake we're seeing across the base.

I'm curious, is there a difference you're seeing yet in the size of a deal that includes Advance versus one that doesn't. Because I would assume that those customers are a little bit more sophisticated, I'd say, in their usage or smartly, but curious what you're seeing in terms of deal size?

Mark Mader -- Chief Executive Officer

Yep. Our top 10 deals in the quarter, six of them did have Advance elements to them. The really promising stat that I loved from the earnings call was the fact that we had many new customers buying Advance. So when I think about someone being prepared to take on more, in the past, we often talked about maybe a 1,500 or $3,000, let me just dip my toe in and get a couple of licenses.

They're now having more substantive discussions on how can we start a little bit bigger and a little bit faster. And the neat thing about advance is that it's simplifying the conversation. I think in past calls, we talked about the -- do you look at a menu with 32 items on it or you want to look at a menu with four items on it. The four-item menu is much easier to traverse.

And I do expect continued strength on the new lands as well. And again, those are happening in an assisted motion. Those are less the self-directed, but we have hundreds of quota-carrying reps now who are in a position to have that discussion. So yes, I think it's really setting up nicely.

Arjun Bhatia -- William Blair and Company -- Analyst

Wonderful. That's great to hear. Thank you and congrats again.

Mark Mader -- Chief Executive Officer

Thanks.

Operator

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

Joe Meares -- Truist Securities -- Analyst

Hey, everyone. This is Joe Meares on for Terry. Just wondering if there's any recent customer reaction on the new platform announcements that you guys made at the Engage event, including the customer-managed encryption keys, enterprise plan manager, and the data retention controls that you guys announced?

Mark Mader -- Chief Executive Officer

Yeah. I would say the reaction in many cases is, congratulations, you may now proceed. and I say that a bit jokingly. But if you don't have some of these things, and it's a hard requirement, you don't get the past go if you stop.

And I love the fact that we now have the right to proceed. We think we can deliver a ton of value to customers and getting boxed out on one of those, I'll call it, a technicality. It's an important technicality. That is like the worst thing to experience as a SaaS provider.

You've worked so hard to build, build, build, and you want to do that next big expand and you get stuck. So I just -- those three that you mentioned are just great examples of things that are very important to some people, and now we have a chance to really get past that nicely. And once you get into that scenario where like enterprise plan manager, it's less about a new discrete feature function for the end user. It's about making the administrator's life easier and let them sort of operate in a more confident manner.

And that's worth a lot once you get into those big accounts.

Joe Meares -- Truist Securities -- Analyst

That's really helpful. Thanks. And then just as a follow-up, just to kind of double-click on the promotions stuff. Related to Andrew Bennett's promotion to CMO, what does that mean for commercial sales and demand generation areas? Are there any new leaders emerging there or any other changes related to go-to-market or field sales?

Mark Mader -- Chief Executive Officer

Yep. Part of the unification I spoke to in a prior answer was about aligning the DemandGen, the brand, the product marketing under one leader. So Andrew, who previously owned DemandGen in his combination of commercial is to management brings that over with him to the sales or we are also looking at elements within our SDR function and keeping those aligned. So you really have a very tight top mid, lower-funnel grouping now.

And as it relates to our worldwide field operations on the sales side, very strong leaders in the U.K., Australia, East-West U.S., and they're working directly with our CRO right now.

Joe Meares -- Truist Securities -- Analyst

Thanks so much. Appreciate it.

Operator

Your next question comes from the line of Steve Enders from KeyBanc. Your line is now open.

Steve Enders -- KeyBanc Capital Markets -- Analyst

Hi. Great. Thanks for taking the question. I guess just want to touch on the $1 billion that you are providing for next year.

And I guess, what kind of really gives you the confidence to go hit at these numbers. I mean, is these things you've already seen that are booked? Or is this about the pipeline or the faster close rates you're seeing with advance? I guess, what are kind of the factors that are -- and they're contributing to the outlook here?

Pete Godbole -- Chief Financial Officer

So this is Pete. When I look at the confidence that we've seen in the last few quarters, we see -- we're very bullish in fiscal year '23. And we've seen this bullishness come in both the expansions we've seen at the enterprise level as well as the number of customers and new licenses we're adding. You've seen momentum in our, what I call, advanced sales.

And when you couple that with our ability to add and higher sales capacity, we see that as a natural extension of the plays we've run this year. So we're seeing that playthrough in the guide we've provided to you for next year between 37 and 40%.

Steve Enders -- KeyBanc Capital Markets -- Analyst

OK. Got you. Appreciate the color there. And I guess just as we think about the newer marketing use cases that you've been calling out with Brandfolder and some of those capabilities.

I guess what have kind of been the differentiating factors as you go away and close some of those marketing use cases with customers now?

Mark Mader -- Chief Executive Officer

We've seen customers appreciate being able to engage with one provider. And it's not just do they provide the capability sort of independently, but how do they work together? And when I think about the deepening of Brandfolder and Smartsheet coming together, it's about how do things like proofing in Smartsheet parlay into brand distribution for your Brandfolder. How can we understand the cost of our campaign development and the performance of an asset in Brandfolder? These are all things that are starting to be realized now, and that's the yield you get. Right after an acquisition is done, right? You have two basically independent products.

And then to what degree can you bring those two together? And as we head into next year and we look at our hundreds of quota-carrying reps, they're going to be in such a better position to talk about a unified dam and CWM product versus last year that, again, it's another one of those things that give us great confidence heading into next year. And I would say in this -- with this persona type, the marketing person type, I would say they're maybe even a little bit more particular about things working well. And again, as we -- one of the reasons why we're investing so much in the integration of these two.

Steve Enders -- KeyBanc Capital Markets -- Analyst

Perfect. Appreciate the color there and thanks for taking the questions.

Mark Mader -- Chief Executive Officer

Yeah. No problem.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Thank you very much for taking the question. Also, very impressive guidance you've given on the billings. I wanted to focus on two parts of that if I could, and then I was going to follow with just a quick clarification.

In terms of just a philosophical, you guide the kind of 130 on the net retention rate. And so, therefore, if we look at 37 to 40% kind of billings growth, I assume that we should just philosophically, think about kind of 30% from existing customers and the seven to 10% from new logos, so to speak. And just want to see if that's how philosophical we could approach it. And then the other question, if you could just describe a little bit on workouts.

Where is that really generating new activity? And where do you think that's -- where is that most specifically showing up in terms of that mostly new customers and the retention rate? Is it new? Just help us understand a little bit how WorkApps is driving competitive differentiation? Thanks. And then I just wanted to ask a quick follow-up to clarification afterward.

Pete Godbole -- Chief Financial Officer

So, Keith, I'll take the first part of your question, and then I'll let Mark answer the WorkApps part of your question. So as we described the stabilization of 130%, you should think of it as being -- here's the rough numbers that I would build my models on. And then as you think about the additional pieces that comes from essentially new business and other spots, which we've sort of talked about. So that is an accurate way to think about it.

Mark Mader -- Chief Executive Officer

On the WorkApps side today, WorkApps is something that is available to our enterprise customers. And so I would say the companies who are more fluent with our products, have deployed it, are now using WorkApps to come up with these more curated ways to enroll people in the product, distribute it either internally or externally. And we do hold that option in card to be able to say, as WorkApps becomes better and better, we have ways to reduce it to other plans, maybe even a trial user, we will fully pursue that. But right now, it is really more for the existing customers, those enterprise customers to derive significant value.

But we are actively thinking about the role it can play based on the resonance it's had.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. So it sounds like more of an upsell help today than particularly in the enterprise. OK. Terrific.

Just and just --

Mark Mader -- Chief Executive Officer

One thing one thing. So one thing I would add, though, is it's difficult to factor how the presence of something influences someone's initial decision, right? So even if you don't experience it in your trial or is a pro plan user and you know it exists, it may still play a role.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Fair enough. OK. All the demand metrics are just very sound and the guidance is quite impressive.

So the one thing that I wanted to ask though is a clarification, the free cash flow guidance is a little lower than we thought. You mentioned the tax or payment -- onetime payment in there. Could you just clarify what is the payment and how much for the Q4 free cash flow guidance?

Pete Godbole -- Chief Financial Officer

Yes, it's a onetime payment of $10 million as a part of the legal settlement, which we had previously disclosed. Unrelated to our ongoing business, it's just the cash part of the settlement if you will.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Perfect. Many thanks.

Mark Mader -- Chief Executive Officer

Thank you.

Pete Godbole -- Chief Financial Officer

You're welcome.

Operator

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

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you for taking my question. Mark, maybe if you could share some color on Smartsheet regions. And now that you've launched that, how your international momentum is built after you launch that into a new market?

Mark Mader -- Chief Executive Officer

Yep. Much similar to the conversation we had about some of those enterprise capabilities like the management encrypted keys and such. Regions is similar. If someone has a requirement for you to host their data in country, you don't have it, they move on to another option.

So I love the fact that we have the option card that we can present. And we have -- there are examples of people in the first week that we had it available elected to deploy their Smartsheet environment in that area. I think as quarters go on, we'll have a really good sense for what the economic impact is, how we decide to go into other regions, and how quickly. But it's really, really proud of the team for having gotten it ready, ahead of schedule, and in market and activated.

Again, I think the ability for the -- both the initial customer experience, that person who's considering pro or business or the enterprise, it actually is relevant to both populations. So I think both our inside team and our large enterprise team will be beneficiaries of this.

George Iwanyc -- Oppenheimer and Company -- Analyst

And following up, maybe broadly speaking on the competitive landscape. With the new customer momentum, is that typically a greenfield opportunity? Are you seeing those as competitive bid situations? And as you expand are you displacing or are you seeing natural growth?

Mark Mader -- Chief Executive Officer

So we see it as still -- I think this market is so fascinated because I think it is one of the most diversified TAMs in SaaS. And what I mean by that is you have tens, if not hundreds of thousands of buyers of these solutions. You don't have one person in IT. You don't have one CFO, you don't have one head of people ops who's buying an HRS system.

You have people in business units making these decisions. That results in many, many buying decisions happening in an uncontested way where an individual is considering it for their business unit, their team, or their division. And so how I described the new environment, very lightly contested, people graduating from the way they've done work overtime. In accounts of significance, you do start looking across other divisions, other teams, and seeing other tools used and such, so the importance of having diversity in your user base, critical.

And when we look at some of our biggest accounts and we see like 60 nodes of Smartsheet across six divisions, we -- I would actually prefer that hand over being super deep in one division. So I think that diversity is -- does create a lot of greenfields for a lot of companies and then just make darn sure you don't become known as, "Oh, they are a pure fill-in-the-blank division type company." You really want to -- we believe you really want to be able to spread.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you.

Operator

Your next question comes from the line of Tyler Radke from Citi. Your line is now open.

Boyoung Kim -- Citi -- Analyst

Please hang on. This is Boyoung Kim on for Tyler Radke. Thank you for taking my question. And I wanted to build on an earlier question about what's giving you the confidence to initiate a '23 billings growth outlook and better understand what's driving the strength this year as well.

We could break it down into use cases. To what extent do you see greater demand for use cases within the TWN category versus a traditional PPM category. If there are any use cases that you'd call out that's done particularly well since you updated last quarter guidance, that would be helpful. And then I have a quick follow-up.

Thanks.

Mark Mader -- Chief Executive Officer

Yeah. On the PPM front, I would say people are growing less satisfied with the old approach. And the old approach would be, give me a planning tool, and then I'll execute it in some other way. They're looking for a more unified environment.

So this notion of totally disconnected. I'm going to plan and allocate capital in one area and then just sort of have my team get it done in another way. That is feeling quite antiquated. And I think that, again, the market is getting more deeply familiar with a modern way of doing it, which is what we're really driving.

So even though we do experience as we talked about, legal departments, HR department, sales department, service departments are really the bow wave of a lot of demand remains centered on the project and process and program orientation and then it vectors from there. So it's interesting that you highlight the PPM round because it's still a very, very common theme of someone's initial buying criteria and decision.

Boyoung Kim -- Citi -- Analyst

Great. And then I want to touch on the USA Today example. I think you talked about how their use case evolved around on scaling the events business. So with that, are there any macro-level tailwinds that you're seeing from factors such as return of events and conferences? Anything that you call out on a broader level there? Thank you.

Mark Mader -- Chief Executive Officer

I would say our revenue is so distributed. I wouldn't call out one specific subsegment or sub-use case as a material contributor. I would say that there is growing evidence that people have figured out how to operate in a model, which is hybrid. And so when we look at how people are executing events, people are doing them still virtually, you are starting to see people execute events in-person as well as in that hybrid mode.

And I think that will -- I think people gain their confidence is growing in that. But people are not sitting still. They're making decisions.

Operator

Your last question comes from the line of Andrew DeGasperi from Berenberg. Your line is now open.

Unknown speaker

This is [Inaudible] on for Andrew. Thanks for taking my question. In the last quarter, you touched on the increase in partner deals, especially as partners that had like specific expertise in specific areas like healthcare and manufacturing. I was just wondering how you've seen this type of go-to-market with partners continue this quarter.

Are these partnerships growing? And how are they impacting the ACV?

Pete Godbole -- Chief Financial Officer

So we were really pleased with the performance with what I call, partner collaborated bookings. They represented a key part of how we close deals. The way this works is whether we have the expertise or partners have the expertise, we work collaboratively with them. Some of these are focused on individual verticals like manufacturing, etc.

And we've seen that this works really well because they are with us as we sell to the customer, a solution that works for the customer. In terms of numbers, the partner collaborative booking Kings represented what I call low teens of our business and really strong year-on-year growth. So we're pretty proud of how this played out with our partner channel.

Unknown speaker

Thanks. That's helpful.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Aaron Turner.

Aaron Turner -- Head of Investor Relations

Great. Thank you, and thanks, everyone, for joining us today, and we will see you out on the road and talk to you next quarter.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Aaron Turner -- Head of Investor Relations

Mark Mader -- Chief Executive Officer

Pete Godbole -- Chief Financial Officer

Brent Thill -- Jefferies -- Analyst

Mark Murphy -- JPMorgan Chase and Company -- Analyst

John Godin -- Needham and Company -- Analyst

Allan Verkhovski -- Wolfe Research -- Analyst

Arjun Bhatia -- William Blair and Company -- Analyst

Joe Meares -- Truist Securities -- Analyst

Steve Enders -- KeyBanc Capital Markets -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

George Iwanyc -- Oppenheimer and Company -- Analyst

Boyoung Kim -- Citi -- Analyst

Unknown speaker

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