Yext, Inc. (YEXT) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Yext Third Quarter Fiscal 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Hart, Vice President of Investor Relations. Please go ahead.

Thank you, Andrea, and good afternoon everyone. Welcome to our quarterly conference call. With me today are Howard Lerman, CEO of Yext; Steve Cakebread, CFO; and Jim Steele, President and Chief Revenue Officer. As a reminder, this call cannot be taped or otherwise duplicated without the Company’s prior consent. Before we begin, I would like to remind everyone that this call may contain forward-looking statements, including statements about revenue and non-GAAP net income guidance, cash flow, gross margin, our industry outlook, market opportunities, business performance, financial outlook and other non-historical statements as further described in our press release. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to Yext’s growth, evolution of our industry, product development and success, market opportunities, adoption of accounting principles and general economic and business conditions. These statements reflect the Company’s current expectations based on its beliefs, assumptions and information currently available to it. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our most recent report on Form 10-Q and our press release that was issued this afternoon. During the call, we will also refer to non-GAAP financial measures. Reconciliations with the most comparable GAAP measures are also available in the press release, which is available at investors.yext.com. With that, let us begin by turning the call over to Howard.

Thank you, James, and thank you everyone for joining us today. We had another great quarter with record revenues and continued growth in our mid 30% range. To give you just a few highlights, revenue grew 33% over the third quarter last year. That's above the high end of our guidance. Gross profit increased 34% and we also substantially improved our quarterly non-GAAP net loss margin. And for the second consecutive quarter, we added nearly 80 new enterprise logos that’s the most new logos we’ve ever added in two quarters. We continue to see some of the best-known brands in the United States, Europe and Japan choose Yext. Brands like Air France, Lacoste, Papa John's, Krispy Kreme, Valentino, Tooney , Bane and Olson, the Texas Children's Hospital, The Body Shop, Thomas Cook, Pizza Hut UK, Welcia Yakkyoku that’s one of the Japan's largest drugstore and pharmacy chains. So far this year, we have added well more than 200 new enterprise logos, and that's nearly as many as we added all last year. And while we continue to add new logos, we’re always looking for ways to grow with our existing account. Let’s talk about that for a minute, this quarter we signed renewals or expansions with AutoZone, FedEx, Boston Medical Center, Stop & Shop, SunTrust Bank, Ameriprise Financial, Hyundai and many, many more. We believe every business and every geography needs digital knowledge management, healthcare, travel, financial services, food services. the United States, Germany, the UK, Japan is a business has a website that business needs Yext, and that's because websites are dumb. A website is nothing more than a big giant document that makes you think. Let me tell you about what I mean. Last month, we held our Annual User Conference, ONWARD. ONWARD brought together leaders from around the world, including senior execs, and many of our partners like Amazon, Google, Microsoft, Snap and Waze, with our largest and most successful event ever and we set a record with more than 1,200 attendees. And one of our speakers was Neil deGrasse Tyson, the world astrophysicist. If you want to know what time is he speaking? You’d have to visit www.onward18.com. You read the home page, you get where the agenda is. You click the page, you think it’s on. And you’ve got to read the whole thing until you find his name. Now, he spoke at the end of the day, so you’ve to read a lot of text to get it. A website makes you read, it makes you think. We believe this is a user experience of the past, and an experience built around dumb documents, but today the world is moving to smart databases that do the thinking for you. I’d much rather be able to ask, yes tell me what time Neil deGrasse Tyson is speaking at ONWARD? And just get the answer. Today every business in the world has a big giant dumb document, that’s a website, but we see a future where every business has a smart database, their brain and that’s why at ONWARD we unveiled the next generation of digital knowledge management, a revolutionary new concept called Brain. Brain allows businesses to create and relate all the facts about themselves in AI ready data structures and here is how it works. A business defines any fact about itself, and it creates relationships with those facts. They can create new entities, which could be pre-built objects like locations or people or events, or they can create totally custom objects and they can connect with together to establish a relationship. Yext Brain acts as a centralized platform that powers our suite of products. We added a couple of new products at ONWARD2. The first is a new product called AI Pages. With AI Pages, with a click of a button that business can create an AI ready page for their website for any entity stored in the Brain. The second is a product we announced called Yext Think. This is tightly integrated with Brain. Yext Think is an answers engine that lets the user ask a question they want and get an answer from Brain like, give me a wealth advisor with expertise in tax planning who speaks Mandarin, or I need an orthopedist near me that accepts Cigna insurance. We've all experienced the crappy fake search bar. You search for something you want, you get a series of blue link connected to documents indexed by a keyword, you've got to click in, you have to read until your find your answer. But with Yext Think, you ask a question and you get an answer, all from the Brain. Now as powerful as that is, we have also added analytics to help the business understand exactly what consumers are asking, this lets the customer do two things. First they can look and see queries how they are trending, and they can be more responsive to those queries by expanding their content in the Brain. We can even nudge a business to supply content to the brain that they know that they are looking for so that creates a better experience. And second, they can use this data to better understand what's driving the behavior of their targeted customers. This makes Yext an even more powerful platform within even stronger ROI value proposition. In fact, we've seen customers who implement Yext achieve a 15x ROI or higher. ROI from Yext comes from a revenue lift, because their brand has become more discoverable in the search ecosystem. And by the way, speaking of search we look to this sample of more than 72,000 of our customer locations in the U.S. and Europe. This sample looks across a wide spectrum of verticals including finserv, food, retail, healthcare and hospitality. And when you compare their experience before using DKM, these businesses saw an average of 49% more views on search mass and other services in their first 12 months from using Yext. The ROI of Yext and digital knowledge management is clear improving. And as we continue to enhance it by adding new services to our knowledge network like our recent integration globally with Snapchat that one of the world's most active social platforms over 180 million DAUs. This new service puts businesses in control of the information consumers see about them and Snapchat Context Cards and Organic Venue Geofilters. A business can power information like its name, address, phone number and hours of operation and then consumers can easily find accurate information about these businesses in Snapchat. The addition of Snap to our knowledge network says that they along with over 150 other services around the world with whom we work understand the value of our knowledge base and the integrity of our platform. As we look to the future we believe there will always be new interfaces and new services that consumers use to explore the world around them. Every one of those services is going to need a complete set of facts about a business to deliver its service and intelligent service to use the user, and that's why we founded Yext. For more than a decade, we have innovated to put our customers in control with perfect information about them everywhere. We always have, and we always will. And with that, I would love to turn the call over to Jim.

Thanks Howard. As Howard said, we are very pleased with the year we've had so far and are excited with the energy and enthusiasm coming out of ONWARD as we head into the fourth quarter. We continue to win new business this quarter closing nearly 70 deals with at least $100,000 in contract value. There is a broad range of deals including new wins, renewals and expansions of existing accounts. We also saw success in key verticals as well as across all of our geographies. EMEA had its best ever quarter for new business. In short, this was a very balanced portfolio of new business, which is something we love to see. It tells us our success it not limited to just one specific region or one particular type of customer. As Howard described, every business needs Yext whether it's a large multinational corporation or a local mom and pop. We've created a go-to-market strategy to address these three customer types small, medium and large. If we look at how we're doing across each of these with small business this quarter, we accelerated our move away from the direct sales approach in favor of going deeper with our partners to address single license accounts. S&P is an attractive market, but we want to pursue this channel in the most economically rational way. In mid-market, we have built out the leadership team, but are still in the early days. Mid-market should be such a sweet spot for us given the profile of the customers, so we're looking to ramp here quickly and as quickly as possible and have more work to do. For our enterprise business, we could not be more pleased with the team we have in place and the results they have achieved so far. Their pipeline is strong and we are continuing to ramp up the enterprise sales force to meet the demand. We are very pleased with the momentum we are seeing in the market for enterprise. This is evidenced by the terrific brands have signed on to Yext and the growing number of customers, who have signed times six, seven, and even eight figure deals with us. One of the reasons, we continue to win is because companies increasingly see Yext, as a software platform that can do two things. First, we can improve the efficiency of their operations because the customer can manage their digital knowledge faster from a single source of truth, usually with fewer resources. And second, as we improve the distribution of that knowledge, our customers often see meaningful lifts in revenue. To give you just one example, the largest ear, nose, throat and allergy practice in the United States ENTA has over 200 physicians and 42 clinical offices and see over 80,000 patients a month. The marketing at ENTA was finding it very difficult to manage all of their digital knowledge. Physicians move between offices, changing their hours and making other updates to their profile. ENTA found that it would take weeks to update information on their website. They are also adding doctors to the practice and previously handled this process manually. This required a lot of time reaching out to online directories to get new information posted. Now with Yext they add information to make updates with just the click of a button. Yext also improve the discoverability of their business and has driven more patients to the proprietary appointment booking tool, in fact they saw appointments grow more than 200% within three months of launching with Yext, that's a 3x improvement in the number of patients. That means where they had one patient booking an appointment they now see three. And just two months after launching with Yext, the saw their highest monthly traffic ever and a year-over-year increase of 40%. These results are exciting and should power digital knowledge management. Many customers have told this how they've achieved a strong return on their investment in Yext through some combination of higher traffic, higher revenue and improved efficiencies within their operations. With that, I'll the turn the call over to Steve.

Thank you, Jim. As Howard and Jim have mentioned, we’re really pleased with our results this quarter and over the first nine months of the year. The revenue of $58.7 million grew 33% over the third quarter last year. If we exclude the decline related to direct SMB, revenue increased 38% this quarter, and 41% over the first nine months. As Jim said, we're focused on enterprise which is performing very well. We're just getting started in mid market and transition away from direct SMB. Growth is coming from a mix of new customers, expansion up sales with existing customers. Our net revenue retention was a 109% this quarter and just to note our retention and enterprise in this markets continue to be consistent or even a bit stronger than our usual levels. Deferred revenue increased 40% from the year ago quarter to $83.2 million. And as we previously discussed, we will see variability in this balance from time to time. We remain comfortable with our long-term trends, and as Jim discussed, we're pleased with our business opportunities. Now, looking at profitability, gross margins were 74.7% this quarter. This is an improvement of 100 basis points over the third quarter last year and reflects improved economies of scale. We continue to be comfortable with operating our gross margins in the mid 70% range. Total operating expenses increased from 49.9 million in the third quarter last year to 68.7 million this quarter. The largest driver to this increase was sales and marketing. This was primarily due to the higher headcount of quota-carrying sellers. In addition, ONWARD happened in the third quarter as compared to the fourth quarter last year, so incurring these expenses sooner this year. Looking at other expense lines both R&D and G&A as a percent of revenue were in line with last year, quarterly GAAP net loss increased from 17.1 million a year ago to 24.8 million this quarter. On the basis of our 99.6 million weighted-average shares outstanding, net loss per share of $0.25 this quarter compares to a $0.19 loss a year ago. And looking at non-GAAP results, which exclude stock compensation, quarterly non-GAAP net loss went from 11.1 million a year ago or 25% of revenue to 11.8 million, or 20% of revenue in the current quarter that’s a 500 basis point improvement and continues our trajectory of improving non-GAAP loss margin on a year-over-year basis. Our non-GAAP net loss of $0.12 per share this quarter compared to the $0.12 non-GAAP loss per share a year ago. Our press release has a comparison of non-GAAP results to GAAP. Now let's turn and look at the balance sheet and cash flow. Cash and cash equivalents, marketable securities totaled $107 million as of October. Net cash used in operating activities this quarter was $22.6 million. You remember, we told you last quarter to expect a greater use of cash this quarter. This use of cash was mostly due to the timing of certain factors like that of ONWARD, deal flow, billings and collections, but we do continue to make progress with our cash flow overall. Over the first nine months of the year cash flows improved by nearly $5 million from the year ago period. And we’re still targeted to be operating cash flow breakeven for the fourth quarter. But this is well is dependent on timing of deal flow with certain other factors. Let’s turn to expectations going forward here. First, regarding the impact of our adoption of ASC 606 at the end of this year, we will no longer qualify as an emerging growth company. Accordingly, we expect to adopt 606 at the end of the fiscal year. You will see this when we release our fourth quarter and full year results. In the mean time we're going to continue to evaluate its impact on our financial statements. We’ve not completed that evaluation and our guidance provided today remains consistent with our past practice and is on a 605 basis. With that, we expect fourth quarter revenue of between 62 million and 63 million; that takes the full year revenue range to 227 million to 228 million; in terms of profitability we expect our non-GAAP net loss per share to improve meaningfully from the third quarter due primarily to the timing of ONWARD and other spent. Accordingly, we see a loss of between $0.09 and $0.10 in the fourth quarter. This assumes a weighted average share count of approximately 101.7 million shares. For the full year, we expect non-GAAP net loss per share between $0.41 to $0.42 and that’s based on an assumed weighted average share count of approximately 98.5 million shares. With the new features and services we recently announced our business opportunities remain strong; as both Howard and Jim have indicated we’re making great progress with a strategy that we believe has the potential to build a very large and highly differentiated technology leader. With that, let's open up your questions. Operator, can you please provide instructions?

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Mark Mahaney of RBC. Please go ahead.

Let me ask two financial questions. Steve, could you just walk through the variability of deferred revenue? What factors would cause that to go -- to accelerate or decelerate? And just maybe give us some thoughts on, what that number could look like next quarter? And then just on the guide, I know you reiterated your breakeven in terms of cash flow for the fourth quarter, have you talked at all or could you talk now about how we should think about cash flow going into next year directionally?

With regard to deferred revenue and we’ve had this conversation a number of times, it is seasonal with our business as well, but there's a number of things that influence the deferred number on the balance sheet. One is our billing, so if we have monthly, semiannual, quarter annual, now we continue to drive our customers, to annual. But as we've had in previous quarters we do take semiannual and quarterly and monthly billing depending on the deal and a lot of some of the smaller businesses are still on monthly. So that mix continues to move around. We continue to drive it to annual, but it does influence in the calculations that you’re going to have. Obviously, since we’re enterprise driven right now in terms of big deals, deal timing has a big influence on that too in terms of when we may close the deal when we build that deal. So those are the two big variables that influence a lot of what you see in deferred revenue and a lot of what we look at in terms of billings I’ll also say that the third component is we have a pretty seasonal business here. So Q1, Q2, Q3 all can behave slightly differently. So those three effects will impact in what you see in deferred and a year-over-year basis often times. With regard to cash flow you’re right we’re driving this company as best we can to get to cash flow breakeven for the fourth quarter. In terms of longer-term cash flow, a couple of things, we’re still working on next year's budget, so I can't speak specifically to what might be next year, I will say that and I think we've proven this since going public. We said we will continue to drive non-GAAP margins and improve those year-over-year and we’re still driving towards breakevens. This is no exception. We've done that this year so far we will continue to do that. We have also said that our longer-term business goal is to get to cash flow breakeven. I think we’re doing that as well. We’ve lowered our cash burn in the first nine months and I think we’re going to continue to focus on that. That said it's really important that we make sure we invest in this business and look for the opportunities of growth expansion and we are going to do that. But I think you look at the historical trends that we have done and we are on our trajectory to drive this company's breakeven. The timing is something that we have not talked about and it's still uncertain based on our business opportunities.

Our next question comes from Brent Bracelin of KeyBanc Capital Markets. Please go ahead.

This is Clark Jefferies on for Brent. First question for Howard. One of the articles at Crawford Desk early this week was, the Bank of India experiencing branches of its bank having the phone number changed, fraudsters trying to direct phone traffic away from the physical location. Wondering if you could just maybe have a quick take on that and situations like that so that can be a demand driver for your business? And maybe as it relates to the international market, the relative dependency on search engines and how some markets may see greater value in your solution?

It made me think I wish we had already set up our operations in India, we are ready to go. It underscores the fact that digital knowledge management is a global opportunity. Every business in the world whether you are a small business or a multinational enterprise or you are a bank in India with regions across the entire subcontinent needs to have a structured set of information and take control of their information everywhere. And it underscores what can happen when you don't do it. It's funny. Finserv is one of our biggest categories. We work with tons of banks and financial services institutions around the globe that can benefit from Yext. I wish we were already in India and set up, Jim maybe we will send you there soon.

I'm ready.

And then a question for Jim, still strong enterprise logo adds, still strong 100K deal activity. Anything you could comment about, what is the nature of those maybe even midseason kind of strong adds, and maybe anything if you could talk to the pipelines to your end maybe in the $1 million deal activity?

Yes, sure. So, the enterprise business is really one of our great success stories. We started almost two years ago with building a whole new focus on the enterprise and we had a number great logos but we were selling a product, maybe a couple of years ago, and we've really shifted in last year with kind of our year of transforming that enterprise team to focus on selling the top form and selling a solution. And that's a very different way that to engage it, it requires new skills and some cases we hired many new people. We trained our team on how to engage in enterprise. Most importantly, we hired great enterprise leadership with Dave Rudnitsky whom I worked with for 20 years at Salesforce and other companies. And in Europe we hired three amazing MDs that have tremendous enterprise experience. And Japan we did the same thing. So enterprise has really been a great bright spot for us. As we like to talk about the logos and the significant brands and what we are focused on is building C level engagement within these big enterprises and that's helped us a lot as we have gone from selling products to selling a solution and a platform. So on top of that our client services team has done just an amazing job at driving very high the world class performance in terms of renewals and retention in the enterprise space that's really been just a total bright spot, the tam there is enormous, the pipeline I'm not going, I can't give you any numbers on that, but I can tell you that's something I think about every single day we focus on it. So it's really now just executing in the enterprise, we're hiring like crazy, it's about capacity and it's a big investment and enablement to make sure that our enterprise team is well-equipped. So that's what I'd say plus we have a great product roadmap and it certainly helped with ONWARD to announce Brain, and Think. And our enterprises love that when they see us the evidence of us really building the platform are supported by that announcement.

Our next question comes from Naved Khan of SunTrust. Please go ahead.

Few questions and maybe a clarification, first, so I think Steve just said that or maybe Jim you said that. One of the factors is seasonality in terms of deferred growth and billings and how it affects deferred. Can you just sort of clarify how the seasonality is in the business between the four quarters so that we have a better understanding? And then I had a couple of follow-ups.

We are a software company and technology, generally Q1s are light, Q2s are good, Q3s some can be light, if you don't have a good August or it start slow in August, and then Q4 is strong. So you'll see that reflected if you're doing top billings and as I've said before, for a company of our size at this stage a top billing's is rather volatile metric to be looking at, but as that -- but and I appreciate everybody does it. But I believe that were on track and I think the message is seasonality will move differed revenue around, if you guys all know. But our enterprise business is really doing well and we continue to believe that the product roadmap the excitement that came out of ONWARD is something that we are looking forward to in the future.

And by the way thank you for your business, SunTrust bank was expansion and renewal in the quarter, we appreciate it.

We will make sure that there no scammers taking over your Google listings.

Good to hear. So a follow-up I had was on the, I guess, earlier this year you said or kind of mention a goal of sales direct sales being 20% of the overall headcount now that you are getting closer to year-end do you feel you're going to hit that number or just kind of give us some commentary there?

I don't think we are announcing our the number yet we're going to announce that at the end of the year, but Naved, we are hiring very aggressively not just in the enterprise, but midmarket on our partner team as well. And you will see those numbers -- we will tell you the numbers at the end of the year, but that's been our goal and every week at our management meeting that's the first thing Howard ask, let's go through our hiring and capacity because this is really we've been talking about this for a while. This is a market that we've been building and capacity is everything and then the enablement of that capacity. So, we are hiring aggressively in the sales organization and you will hear us tell that story at the after our fourth quarter.

And then one last question if I may so, can you just sort of comment on the clients willingness to upgrade to higher tier packages such professional or ultimate, what are you seeing there?

Yes, we're -- in the newer geographies like in Europe and in Japan, we’re kind of in the land grab mode where we're going in and say, we have a lot of new business and a lot of new logos, and we would expect that business to be highly skewed towards new, new landings. And in the U.S. now where we had a more mature business, we been here for few years and we've got great success in the enterprise. You'll see that our mix is pretty even, I don’t think we’re talking about the percentages, but we see a lot of customers upgrading to either expanding their footprint with us to new locations and new entities. We talked about the healthcare business where doctors are not locations there the way we look at that, that's a new license opportunity for a doctor for example, even though they might have a certain number of medical facilities like the example I used with ENTA. So, we’re seeing a lot of our customers are expanding their footprint as they've been successful in one division, they come back and say, okay, now we’re willing to look at this other division and that's additional licenses. We're also seeing customers expanding to our pages for example from listings and reviews as well and now with events. So, we were seeing and that’s really our strategy, it's land and expand strategy and it's we're a couple years ahead in the U.S., and I'll expect now with a strong base that we have in Europe and starting to see in Japan, we will see that same kind of progress.

Our next question comes from Stan Zlotsky of Morgan Stanley. Please go ahead.

I hate to beat on billings but this is just preempting the question that we’re going to get tomorrow morning. Is there any maybe big deals that slipped out of Q3 and into Q4 because you did mention the 80 new enterprise logos, which is very much in line with what we saw in Q2, but it just a little odd to see the deferred revenue dynamics and just a sequential quarter on quarter decline in billings. And maybe just more broadly for Jim, what are you seeing as far as just like the productivity and the consistency of execution within your sales organization, and the just a very quick follow-up for Steve after that.

Well, thanks for the questions, Stan I will talk about Brain. So Stan, there is something of note that came out in terms of big deals moving overall. We have a couple for an enterprise business you're always going to get that particularly in the Q3, Q4 timeframe while people assess by this and everything, but I think this is again when you do the calculation it is volatile. You can go look back and see this number's moved around quite a lot. In terms of the deferred again it's somewhat influenced by seasonality. This quarter has August in it when we lost a lot of Europe in August obviously. So there’s -- I think there’s a point I’d like to make is the number does move around because we’re still too small and a small change will move that number around to make it somewhat volatile; the fact of the matter is that we have really strong enterprise quarter which you saw the logos we’re building our midmarket and feel really good about that. And it's still a little early days but it's starting to grow, we’ve got the right team in place and we have small business which we’re trying to transition -- and so I don't think there's anything wrong with the business, the metrics just kind of move around a little bit more than would feel comfortable but nothing of any bad note.

Yes I would just add to that Stan, with the enterprise especially in some of the big deals, you're always going to see that lumpiness. You know it's not linear kind of growth, necessarily it is highly based on buying cycles and so every quarter is going to be different on the enterprise. With that said, we are doing great in the enterprise across the board, especially in Europe in the third quarter and so the -- consistency is something we obviously strive for, across the three different types of markets that we’re going after between enterprise, midmarket, and SMB, just to piggyback to what Steve said. In the SMB, we made a very strategic decision that our partners can do such a much better job selling into that market, it is a much more economical way to do it so we definitely plan to as we’ve done moved that from direct to indirect and so you’re going to see maybe a bit of a lag on the SMB side and the very low-end, the onesie-twosie’s. Midmarket, we’ve really -- we’re about a year behind where we were with enterprise. When I came in my main focus was on enterprise and we hired executive at the end of last year, guy, I used to work with at Salesforce Dave Lehman, to run our midmarket. He’s brought in new leadership, he’s brought in new processes, we’ve hired a bunch of people there and that's where we’d expect to see as I said, we think that should be a huge sweet spot for us and we’d expect to see that market really start to perform in the coming quarters. So every market go after is different, every type of customer is different every geography is different, and they all have different performance results and we are always looking for that balanced performance and right now I’d say that the big plus for us is the enterprise business and we’ll -- when we see that on midmarket we’ll be happy to tell you about it in the future.

And maybe Steve just a very quick follow-up, you mentioned 41% growth year-to-date in the enterprise part of the business. Could you just maybe and I missed that I was jumping between quarter and between different calls, but did you give exact the growth rate in the quarter ex-SMB?

Yes, we did.

38% for the quarter, 41% for the nine months year-to-date, and again that -- and we talked about before too, the SMB business is falling off here, so it’s significantly smaller enough, that’s somewhat of creating the volatility in deferred right now too.

Our next question comes from Tom White of D.A. Davidson. Please go ahead.

Surprise, surprise I have got a question about Brain, but maybe before that just one on guidance. So, it looks like you guys raised full year revenue outlook by maybe slightly less than the amount of the third quarter be I guess versus the midpoint of the guide anyway. Anything in the fourth quarter that’s maybe looking a little bit different than it was a few months ago? And then just on Brain, we would love to hear your early observations, maybe about how customers are starting to use the custom entity functionality? Specifically, I guess I'm particularly interested in the mix between them creating entities for their first party assets versus ones that are purely for distribution to third-party sites. And curious about, what that first party to third party mix might look like over time, if you have any predictions?

On Q4 guide, it's our largest quarter and so I think we are very thoughtful about what we're going to do. We have obviously a lot of brand-new business to bring in, but also we have large renewals. So, there's nothing there. Like I said, we feel really good about where we are at and what we are doing but we are pretty thoughtful since Q4 is always a huge number for us.

Couldn’t be more excited about Brain. We unveiled the beta version at ONWARD on stage with us demoing that we had Steward Health, we had Wendy's and Morgan Stanley showcasing their use of the Brain. Brain is a breakthrough product. It enables a company to create any type of entity they want and to relate them together in a way that is designed to power their knowledge and search, in their third-party search services and voice search in Alexa and Google assistant and also in their first party search experiences using our product called Think. And Think and Brain are highly tightly integrated they allow the Company to get structure to give their end users answers instead of documents that are searching on their website. It's funny a decade ago Google went through the shift of blue links on a page when you search to one box sensors, maps math sensors so just telling you the answer when they know it. Today, we see that companies are going to begin to be able to do the exact same thing, and instead of going to a website and searching for a nearby typing a location or give me a doctor that has certain attributes and getting a set of documents that match that query back, a company can now will be able to the Brain put those answers into the Brain and just give answers back. We see access the platform of truth, the source of truth for every company that today has a website that’s a dumb document that’s going to need to structure their information in a smart way for third and for first party as you point out Tom, assets that is one place to update third and first party services to their Brain.

Our next question comes from Alex Zukin of Piper Jaffray. Please go ahead.

Maybe just another crack at the deferreds, I'll ask in a different way. If I look at the sequential deferred in 2Q, it was actually a lot stronger than your historical seasonal patterns which lends [indiscernible] volatility comment. But I guess -- is that, is one of the reasons for the third quarter kind of sequential weakness was that actually maybe some business got pulled into 2Q from 3Q? Or is it more of the pushing from 3Q to 4Q?

A lot of this has got pushed, pulled into Q4 for sure, and a lot of enterprise deals are as Jim described, timing is always a challenging part of this. So, it’s a little bit of all of those that's why you know, like I said, the deferred number is still 40% what's really strong, but that's also why we have the optimism around of business that we're in and what we're doing. So, yes a little bit of all those Alex.

And then maybe just to that optimism then, looking beyond billings, looking beyond deferred, I know you are not giving guidance to fiscal -- for the next fiscal year, but just some high level commentary around your confidence? I mean you can see how consensus estimates are at, any confidence or commentary around just 30 plus percent growth being an intermediate goal?

Well, like I said we haven't really gone through our numbers yet. I mean we have consistently believed that over the long-term we will be able to grow at 30% plus, so that's not changed, but we need to look at all other factors in terms of our product and the roadmap which continues to grow which is the positive. But building out to the sales force as Jim described they were hiring enterprise and midmarket sellers now because that's a big area, and I think that's the area that we need to build-up to get some of this seasonality and flexibility taken out of the system. But all-in-all, I think we feel pretty good about where we're at and what we're doing, but we just need to get through our budget and planning, we have another 60 days and see what next year is going to look like.

And then maybe on dollar-based net expansion, as you lap the [indiscernible] and I apologize if you mentioned this in the beginning, I was also jumping between the calls. As you lap that merger I guess where should we expect that number to trend? Is it fair to expect that the trend back into kind of the one teens or is kind of 109 or less than 110 million normal?

Hey, Alex sorry. It's Howard. I wanted to jump in here and add something to the optimism. When I look at our business, I look primarily at our non-SMB growth, that is to me the critical thing that we're looking at everyday because that's where were making the investment in the business to grow. And so, when I look at 41% year-to-date 38% in the quarter, I'm feeling really good about our first off obviously Q4 with the guidance we've given. But you know, looking next year and beyond and our ability to continue to deliver results particularly as SMB becomes a smaller and smaller percentage overall of our mix, even if it maybe kind of shrinks a little bit faster than we'd even wanted it to originally just because of the path they were totally focusing these other areas. So the optimism I see is in that 41% that we've seen year-to-date and the 38% and the vast majority of our business that isn’t a drag on everything else.

And then maybe on the dollar base net expansion, Steve?

The dollar base net expansion, I think again we're using a 12 months rolling metric. It's clearly leveled out right now to 109 to 110 range. So, we feel good about that. We'll see as we get into enterprise to midmarket because as I've mentioned, we're not losing those as we say really good with our accounts, but it still will take some time to goes back into 113.

This concludes our question-and-answer session. I would like to turn the conference back over to James Hart for any closing remarks.

Alright, thank you, Andrea, and thank you everyone for joining us today. We look forward to reporting our fourth quarter results to you next year. But in the mean time, hope you will enjoy the holidays and if you have any follow-up questions, please reach out to me, I'll be available.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.