SurveyMonkey Inc. (SVMK) CEO Zander Lurie on Q4 2018 Results - Earnings Call Transcript

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Earning Call Audio

SurveyMonkey (NASDAQ:SVMK) Q4 2018 Earnings Conference Call February 13, 2019 5:00 PM ET

Company Participants

Karim Damji - Vice President, Investor Relations

Zander Lurie - Chief Executive Officer

Tim Maly - Chief Financial Officer and Chief Operating Officer

Tom Hale - President

Conference Call Participants

Mark Murphy - JP Morgan

Brad Sills - Bank of America Merrill Lynch

Stephen Ju - Credit Suisse

Youssef Squali - SunTrust

Ivy Kong - Wells Fargo Securities

Ron Josey - JMP Securities


Good day, ladies and gentlemen. And welcome to the SurveyMonkey Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference will be recorded.

I would now like to introduce your host for today's conference Karim Damji, Investor Relations. Please go ahead, sir.

Karim Damji

Thank you. Good afternoon and welcome to SurveyMonkey's fourth quarter and fiscal year 2018 earnings conference call. On today's call, we have our Chief Financial Officer, Zander Lurie; Tom Hale, our President and our Chief Financial Officer, Tim Maly.

Prior to this call, we issued a press release and a shareholder letter with our financial results, and commentary for our fourth quarter and full year 2018. Those are posted on our Investor Relations website at during the course of the call management will make forward looking statements which are subject to various risks and uncertainties including statements relating to our strategy, investment, revenue and cash flow.

Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, in particular, the section entitled risk factors in our quarterly and annual reports and we refer you to use filings.

On our discussion today, we will include non-GAAP Financial measures. These non-GAAP measures should be considered, in addition to and not a substitute for or in isolation from, our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release and shareholder letter, which are furnished with their 8-K filed today with the SEC, and may also be found on our IR Web site.

I would like to now turn the call over to Zander.

Zander Lurie

Thank you, Karim. Good afternoon, everyone and thanks for joining us today. 2018 was a transformational year for SurveyMonkey. We set some very aggressive goals and we delivered on them. We reaccelerated our top line growth, invested to build and scale our sales team, launched a new team's plan, generated robust cash flow and executed a successful public offering.

I am proud of the hard work and appreciative of all the dedication from our employees who executed against our plan. Special thank to our millions of users and supporters along this journey. In 2018, we grew revenue to $254 million, or 19% core revenue growth. We also delivered $46 million in unlevered for cash flow for an 18% margin. We cap off the year with the strong fourth quarter with $68 million in revenue for 19% year-over-year growth, and generated $12 million in unlevered for cash flow for 18% margin.

These results demonstrate our focus on delivering disciplined growth while making investments for the future. We operate across three multibillion dollar segments. Customer Experience Management, Market Research and Talent Management. All of these markets are ripe for disruption and SurveyMonkey is leading the charge. I am going --few minutes talking about growth levers and the progress we are making.

First, enterprise sales. We laid our strategy on our IPO roadshow in September to embrace and leverage our massive user base to move upmarket and serve directly into the enterprise. And it's working. We had our first $10 million enterprise sales bookings quarter which was driven by over 80% year-over-year growth in sales. We find our first $1 million sales customer and we ended the year with almost 3,600 enterprise sales customers, up 11% quarter-over-quarter.

We welcome hundreds of new enterprise customers including Workday, GoDaddy, Weight Watchers, Lion Bike and one of the largest financial institution in the United States. Every company in the world can get better by listening to their customers and employees. Here is an example that demonstrates just how big our opportunity is. In coding industries where you might not expect software to play a key role and how they operate and their critical business decisions.

Sell it On Truck Key; one of the ten largest truckload carriers in North America with around 6,000 employees had issues with driver attrition during the first 90 days on the job. In an industry where turnover is around 100% annually. Using the combination of SurveyMonkey enterprise and our sales force integration, they build a program to automatically collect driver feedback during onboarding and ran at subsequent regular intervals.

By listening to their drivers and acting on their feedback, Sell it on was able to improve drive retention by 68%, significantly reducing hiring and training cost. This is proof that listening and acting on feedback can transform businesses. And that SurveyMonkey provides strong business value to enterprises. Market conditions have never been more in our favor. And we are confident that our strategy is working.

So, we are continuing with our plan to invest in and accelerate enterprise sales. We hired world class sales leaders out of sales force at Delby, Google Cloud, Facebook, YouTube and more to recruit and enable our sales team. Scale our sales motion, generate strong pipeline and close deals. We also recently hired our Head of EMEA sales to kick off our European sales efforts. We continuously to see 4 x increases in annualized revenue upon the initial up sell a SurveyMonkey enterprise directly to organizations.

Our enterprise sales strategy focuses on the top 10% of our 345,000 organizations where we already have a large footprint of team users. We are only at 1% penetration today with plenty of Greenfield ahead. As we increase this penetration to 3%, 5% and so on. And ship more and more organization from self-serve to enterprise, our pan user growth should accelerate and our monetization should increase. Through the initial up sell, higher retention, as well as expansion across our opportunities.

Now on to our initiatives to scale our self-serve Teams product. We are making strong progress monetizing our new Teams plan, which we will launch in late Q3. Both new and existing leaders are moving on Teams plan where they can collaborate to collect feedback in a secure environment. And turning more of our shared accounts into Teams, it is also driving acceleration our paying users. That shifting more of our customer base to multi-user accounts whether through Teams or enterprise seats not only are we increasing an initial monetization but we're expecting these customers to retain at higher rates than individual users, thus resulting in higher LTV customers for SurveyMonkey.

Our paying user growth is accelerating both sales and SurveyMonkey enterprise and adoption of our team's plan drove over 25,000 quarter-over-quarter increase in paying users. Our net revenue retention is also increasing. During the year, our dollar base net revenue retention from organizations which comprises 85% of our revenue, equates 100%. We are early in the enterprise installing effort and in our Teams roll out. We are seeing promising results and I'm thrilled with our execution thus far.

Closing it out with International. International revenue comprises approximately 36% of our total revenue. To date, we grown our international business just by delivering the basics, translating our websites and providing local payment options. This year we are taking prescriptive measures to accelerate adoption and growth. We're investing in marking efforts to build a winner outside of English speaking markets, launching our European data center in the first half of 2019 to improve the user experience, website speed and provide locally hosted data, and building out a brand new sales team in Europe.

Organizations need to collect feedback from their most important constituents, so they can drive innovation and growth. In Internet economy businesses must be data driven and responsive to their customers. Companies must test campaign messages and pricing to renew customers. In an increasingly competitive war for talent, organizations are investing more into their employee culture.

Understanding how to measure, benchmark and act on the sentiment data define today's agile and successful companies. Strong, secular tailwinds across the markets readdress bode well for our growing category. The acquisition of our largest competitor in the enterprise market by an international ERP conglomerate provides more opportunity to grow our business and take market share.

We have a beloved brand and one of the largest footprints of users around the world with over 17.5 million active users, and 647,000 plus paying customers across more than 345,000 organizations, including paying user in 98% of the Fortune 500. 2019 mark SurveyMonkey's 20th anniversary and our first full year as a public company. We have a compelling plan to double our business in the next few years, and our results demonstrate that our plan is working.

So, looking to new invest in efforts to drive enterprise sales, fuel growth in our core self served channel and expand our international business. We will do this in a disciplined manner ensuring that business continues to generate robust cash flow. We are a leading brand in a multi billion category, one that we pioneered and we are going after the massive opportunity in front of us.

I'll now turn it over to Tom to discuss Teams in more detail.

Tom Hale

Thanks Zander. We launched SurveyMonkey and started to roll out account verification late Q3. Teams enabled user collaborate on survey projects and account verification, notify users when accounts are being shared. On our last call, we were days in the account verification roll out. Now with a full quarter under our belts, we're seeing great results from our team strategy. Teams and account verification solve an important problem for our customers. SurveyMonkey users collaborate on what questions to ask, on who to survey and how to collect the data and to analyze and share the insights.

For many years sharing accounts on SurveyMonkey was the only way for our users to collaborate, and as a result account sharing is rampant on our platform. Teams enable users to collaborate securely similar to the Google G Suite apps. Users need to know who is commenting, who should receive updates and who can see the data. So the system requires on log in, one account per user.

Account verification helps organizations migrate from shared log-ins to one account per user, which opens the door for Teams. Now we're taking a very customer centric approach to the rollout and we've learned how to best support users in organizations as they adopt Teams. On return on account verification, some Teams form and purchase the team's plan right away, while other organizations take more time to choose a plan and migrate their surveys and data.

We're striking a balance between the paces of roll out and delivering a great customer experience. And so far we've turned on account verification for about a third of our base and will notify the balance in the coming quarters. We are really encouraged by the uptake of Teams. Upgrade from existing customers makes up the majority of team's volume but a significant portion is new customers buying Teams straight of the bag. The average team currently consists of four paying users, a big improvement over one paid fee for four users. More importantly, we're seeing good, early signals a viral expansion of additional fee once the team is established.

Now Teams plan have been purchased in over 50 countries around the world and in 97 of the Fortune 500 companies and a 27 of the Fortune 100 companies. And in Q4, Teams adoption in larger organizations opened up the door for multiple enterprise sales opportunities. Account verification having a positive impact on enterprise sales as well. Several larger Q4 deals closed in weeks much faster than we expected. We believe that the benefit from our team strategy will play out for years to come, driven by new Teams, viral expansion of existing Teams, and upgrade from our base and better renewal rates.

In addition rolling out team in Q4, we delivered several new capabilities to support our growth. We ship new features in text analysis and dash boarding. We introduce new layouts, graphics and design capabilities for surveys, enabling customers to turn their surveys into engaging branded experiences. We tested and shipped a newer version of audience with an improved interface for selecting panel demographics. And we launched our new sales force integration with SurveyMonkey applies. And we ship our integration with Microsoft Power BI and analytics tool.

Our customers continue to tell us that they don't need another system to help them improve the customer experience. They want their sentiment data combined with business data to enable timely action. Our strategy is to bring that sentiment data to users in the applications they work in and not hurl them into another wall garden. It has been demonstrated time and time again that open systems win and our approach here is diametrically opposed to our nearest competitor in the enterprise market.

And we believe that our strategy can be even more disruptive now that they are entrenched within a legacy ERP company. One of the top five technology companies in the world is one of many customers that validated our strategy. If large organizations needed to collect customer feedback from multiple channels across a wide range of products and analyze responses in real time. SurveyMonkey enterprise and our APIs allow them to collect tens of thousands of responses and route them to multiple business systems so their Teams could better support their customers and continuously improve their products.

Now before I hand it over to Tim, I'd like to quickly address a big opportunity that we see in the trend towards Agile Research. Instead of research in the industrial model where projects take weeks or months and costs hundreds of thousands of dollars, Agile Research enables customer focused innovators to use our audience product to quickly select a demographic and field research in days at a fraction of the cost. Hedge funds, PE funds and VCs use SurveyMonkey audience to track consumer opinions on existing and potential new investment positions, identifying shifting consumer attitudes and usage to give them an edge.

Consumer goods companies use SurveyMonkey audience for innovative approach to testing product concepts, naming, and branding and empowering customer focused innovation Teams to conduct agile research. For example, Unilever use SurveyMonkey audience to validate flavor named and ingredient combinations for their new healthy ice cream brand Culture Republic. Each week the Unilever team reviewed new data from health conscious consumers who still want to indulge to fine tune their strategy in their product.

We believe that SurveyMonkey is extremely well positioned to capitalize on the trend toward agile research with our audience product, and we look forward to updating you about further developments in this space over the course of 2019.

And with that I'll turn it over to Tim.

Tim Maly

Thanks Tom. In 2018, our goal was to reaccelerate revenue growth while continuing to generate robust cash flow. I'm proud to say that we deliver on both parts of that equation with core revenue growth of 19, an eight percentage point increase in growth rate over 2017 and in unlevered free cash flow margin of 18%. We also invested to fuel further growth in cash flow for 2019 and beyond. We close the year with a very strong fourth quarter with year-over-year revenue growth of 19 % reflecting strength across both our enterprise sales and self-serve channels.

We ended 2018 with approximately 647,000 paying users, up 7% year-over-year and up over 25,000 paying users from the end of Q3, The increasing paying users was driven primarily by sales of SurveyMonkey enterprise and adoption of our self-serve Teams plans. In the process, we drove annual mix of paying users to 77%, up from 76% a year ago, shipping more of paying user base to higher value and higher retention products and increasing customer LTV.

Annualized ARPU for Q4 was $425, up 13% year-over-year and 2% quarter-over-quarter, a result of our steady march of increased monetization. Finally, our organizational dollar base net retention rate which is consistently been over 95% eclipsed 100% during the year as we grew enterprise sales and launch self-serve Teams. Before moving on to expenses and profitability, I want to clarify that unless otherwise noted all income statements and cash flow measures that follow are non- GAAP.

You'll find a reconciliation of GAAP to non-GAAP results in our earnings release and shareholder letter which we provided with our 8-K filed today with the SEC and may also be found on our IR website. As we previously discussed, we manage the business primarily on an annual basis and we manage for revenue growth, in unlevered free cash flow generation. For full year 2018, gross margin was 74%, up from 73% in 2017. For our plan, we increased investment during the year in R&D to continue to enhance and integrate on our products.

And in sales and marketing to build out our enterprise selling efforts given the large market opportunity in front of us. We also made incremental investment in G&A to operate as a public company. As a result, operating profit was $15 million or 6% margin compared to $24 million or 11% margin in 2017. While operating margins contracted, we expanded cash flow by reducing CapEx, result of our ongoing transition to the cloud and capitalized software, as well as by improving working capital.

As a result, our unlevered free cash flow increased to $46 six million for an 18% margin, up from $37 million and 17% margin in 2017. Total headcount grew to 859 employees, a 17 % increase over last year.

Turning to the balance sheet. We ended the year with $154 million in cash and cash equivalents and $217 in total debt for net debt of $63 million. As mentioned on our Q3 call, in October we refinanced our credit facility, reducing the spread on our term loan by 75 basis points and extending the maturity date. We also pay down over $100 million in existing debt with the proceeds from our IPO, substantially strengthening our balance sheet and giving ourselves more strategic financing flexibility.

Before I get into our outlook, we are adopting the new lease accounting guidance under ASC 842 effective January 1st, 2019. Under this guidance, lease payments associated with our San Mateo headquarters will be treated as operating expense in the income statement beginning in 2019. Prior to 2019, these lease payments were primarily treated as interest expense. We anticipate a headwind to non-GAAP operating income of approximately $6 million on a full-year basis, or approximately $1.5 million each quarter, as these lease payments move from interest expense to operating expense. Of course, there is no impact to our free cash flow from this accounting change.

Turning to our financial outlook. Or growth investments are yielding strong results and we have even more conviction in our enterprise sales strategy. Therefore, we are continuing to invest to scale our sales and marketing efforts in 2019. Despite this investment, we expect to continue generate significant cash flow. For Q1, 2019, we expect revenue to be in the range of $67.5 million to $68.5 million or 16% year-over-year growth at the mid point. Non-GAAP operating margin to be in the range of 0% to 1% and diluted weighted average shares outstanding to be approximately 126 million.

For comparative purposes, under the new accounting guidance, Q1 of 2018 non-GAAP operating margin would have been 0%. For the full year 2019, we expect revenue to be in the range of $290 million to $295 million or 15% year-over-year growth at the mid point. Non -GAAP operating margin to be in the range of 2% to 3.5% and unlevered free cash flow to be in the range of $55 million to $58 million or 19% margin at the mid point.

We expect 2019 fully diluted weighted average shares outstanding to be in the range of $126 million to $129 million. For comparative purposes, under the new accounting guidance, 2018 non -GAAP operating margin would have been 3.6%. Our accelerated growth in the first half of 2018 was driven in part by the pricing changes we made to our SurveyMonkey self-serve plans in 2017. This sets up a more difficult comparison per year-over-year growth in the first half of 2019. However, growth investments and enterprise sales in self-serve Teams are performing very well. And we expect them to underpin faster revenue growth in the second half of the year.

In addition, the investments we've been making in international expansion should being to bear fruit toward the end of the year. Paying user growth and ARPU growth are beginning to return to more normalized levels and this will continue over the course of 2019, with paying user growth ultimately outpacing ARPU growth, driven by adoption Of SurveyMonkey enterprise and Teams.

I'll close by noting this is a bittersweet moment for me. After 10 years at SurveyMonkey and 20 across Wall Street and Silicon Valley, I'm retiring to pursue my passion for climbing, skiing and adventure in the mountains. SurveyMonkey has come a long way from the tiny team of 15 people I joined a decade ago. It has been incredible journey and I'm honored to have played a role in building the company.

The business is stronger than it's ever been, the team is truly exceptional and I have tremendous confidence in both the compelling market opportunity in front of the company and the team's ability to capture it. And I fully believe that SurveyMonkey's best days are ahead.

I'll now turn it over Zander for some final comments before we move to Q&A.

Zander Lurie

I'd like to thank him for his decade of service to SurveyMonkey and wish him well as he embarks on a new chapter in his life. Tim's leadership, business acumen and resilience helped us achieve many critical milestones over the course of his 10 year journey here. He also helps build an outstanding finance and accounting organization. And we are well positioned for continued success going forward.

We have a very stable and highly predictable business model. Over 90% of our revenue is subscription based. And more than 75% of this year's forecasted revenues sit on the balance sheet in deferred revenue or is in our renewals pipeline with existing customers. And front end team will drive further growth; continue to generate robust cash flow. And invest to position the company for even stronger 2020. The category continues to grow at a rapid clip and our product and marketing our position as to win in the enterprise sector.

Our outlook is built on a massive base of subscribers and an exciting strategy to move up market around the world with enterprise sales and self-serve Teams. That's how we'll drive long-term shareholder value at SurveyMonkey in the quarters and years ahead.

I'll now turn it over to Q&A. Operator?

Question-and-Answer Session


[Operator Instructions]

And our first question comes from Mark Murphy with JP Morgan. Your line is now open.


Thank you and congrats on the robustness. And Tim all the best to you in your future endeavors. Zander wanted to hone in on your mention of a plan to double the business in the next few years. And I'm curious what is giving you the incremental confidence to make that statement. It's whether it's driven more by the team's opportunity or the enterprise traction under John's show and sign that you saw this quarter.

And also just assuming that a few years' means three to four years, should we interpret this as a bit of improved visibility on maintaining a glide path around this level near 20% once you move past those tough comps?


Thanks a lot for the good words. So let me address your question head on. First, here is my confidence. It is underpinned by our $10 million booking quarter. We have a killer sales leadership team. We will capitalize on this massive data of subscribers and the footprint of relational domain. And so if you look at the fact that we were 11% quarter-over-quarter in the enterprise, net revenue retention up to year over a 100%, we are landing expanding and our products are singing once we get inside the four walls of these enterprises.

So we are winning the most discerning customers of the year now out there and our Teams are just getting better at capitalizing on proprietary 360 multi million sector. So that's on the enterprise side. Team, we heard from Tom, there is no company in the world that has an opportunity like us that remains a SurveyMonkey. 17.5 million active users. Our users tell us they're sharing their accounts because they need to collaborate.

So we now have a secure, now go to adopt like product that they works in their IT departments want them to have their own account. So I love the two strategies, we have to grow our business. 2019, and I think you will see continued acceleration in the second half, words about cash flow, 2020 will be better than 2019. Otherwise we did a terrible job on kind of hiring and pursuing that strategy. So I do have confident that we will reaccelerate revenue in 2020 beyond 2019. If you look at our paid user growth this quarter 25,000 net users now over 5,000 in Q3.

So I think the trend they are well hilled and there are adjacent products that are interested in quick jet pipeline but I think in years to come we will expand our overall AV and products we can sell into enterprise. So, yes, I think we aim to double the size of the business in the next few years and I would going to still looking for.


Okay, well, there's a lot to, finger keyed into there and we will have to try to learn more about the product that adjacencies that you're talking about. So, Tim, just very quick one for you Tim. I think that team users addition 26,000 it is a very large number this quarter. I went back and I think it's equivalent to the prior six quarters combined. And so just I guess I'm interested if you just have any comment on that and any help and just the extent to which is driven by the account verification versus the enterprise versus the self serve agent.


Yes. Absolutely. Hey, Mark. Thanks for the nice sentiment and in great question. So the two primary drivers of the acceleration in paying user growth were sales of SurveyMonkey enterprise where we get in and transition people were using our individual basic accounts for free into paying seats within an enterprise deployment. And then account verification where, using Tom's example, we take four people who are sharing one paid account and in turn that into four paid seat in the team's plan. So both of those strategies are working really well, and contributed to that paying user growth, which we continue to accelerate through the course of 2019 and as we pursue these strategies.


Okay. And just based, Tim, on you are ordering that with the enterprise impact was a little more than the verification impact.


The both contributed very significantly to the growth in paying users over the quarter. And we are not breaking it out sort of between the two, but I think you can -- way between the lines that both of them were very significant growth drivers


And just as important as the incremental paid users is the quality of our customer base. And so as more of our paid seats become Teams and enterprise deployments, further just much higher LTV customers because the net revenue retention in the years to come will be significant. It's just a very different place than the average individual annual or monthly plan.


Thank you. And our next question comes from Brad Sills with Bank of America Merrill Lynch. Your line is now open.

Brad Sills

Hey, guys. Thanks for taking my question and congratulations Tim. Wish you the best of luck on your new pursuit. And I just, yes, I guess the question for me on the net revenue retention. Obviously, a nice step up here. Could you help us understand a little bit? Is that coming from gross retention improvement with just a higher mix of enterprise? More users sold. Any early traction with cross selling of these applications, any color on kind of what's driving that metric improvement. Thank you.


Thanks for the question, Brad. It's a multitude of factors and so I think it goes back to the core strategy of selling enterprise, as well Teams, both are going to drive higher net revenue retention. Now if you take Teams plans first, obviously, it's terrific return for shared users who used to be on one seat into four paid seats with one administrator I think. In all likelihood we are going to see significantly higher net revenue retention. We haven't renewed any of these folks because they're all on the annual plan. So we just launched in Q3 but if the administrator clearly have more ownership and responsibility for collecting and distributing surveys, helping people collaborate and delivering more value to the enterprise than individual subscribers.

So we are bullish about net revenue retention from Teams. An enterprise, the vast majority of our deals whether there are brand new deals or ones that are capitalizing on a large subscriber footprint, we see that 4x revenue increase on the initial up sell, but Brad, there are opportunity to scale more broadly into these massive company. Take for example; we had our first million customers ever in Q4. The deployment into that company is a small subset of their employees. It literally one big department.

So now we have on the same place, our products will be used and they are appropriate about the IT group. We just have a lot more opportunity to see viral uptake and broader deals for expansion as well up sell. So sales enterprise and self-serve Teams will drive not revenue retention and that number should be higher in the quarters to come.

Brad Sills

Thanks Zander. And then on that $1 million deal could you elaborate on just the use case? What is the customer using SurveyMonkey for? Departmentally, are here any use cases you'd highlight?


Yes. I think this one is related to HR, I'll tell you. I'm super proud of our culture and we've been fortunate to have some of the best periodical in the world recognizes as one of the great places to work. Our software helps companies do that. We help companies not only understand what's going on with their customers but when your employees can be closer and more customer centric, it drive their overall employee experience.

And so we're just seeing a lot of demand for our products to help improve the overall culture of the company. And if you read anything about what's going on today, if the information can be known and will be known and employed are demanding out of world class employee value proposition. The best thing you can do is listening to your employees. How are they engaged? What benefits do they want? Do they understand the company strategy? That is how SurveyMonkey is being used and this particular customer is our first seven figure customer is massive company and they are using just for HR purposes. So I look forward to seeing our sales team bringing up some more wins in that organization.


Thank you. And our next question comes from Stephen Ju with Credit Suisse. Your line is now open.


Okay. Thank you, so Zander your international revenues currently 36% of the total. And I guess the key source of opportunity for you, so is it just a matter of copying and pasting the existing business model to overseas and is it your belief that the brand is as well known overseas as it is here domestically? And any color you can give us on what percent of your users are domestic versus overseas? And also, Tim, I will add my congrats to your future endeavors and your plans also. Okay, thanks.


Thank you, Stephen. I will take your questions in reverse order. First off, our user base is more international than our revenue contribution. So given the fact that we have more users, free users folks that are not on our highest price plans internationally, we don't have sales that have been set up outside the U.S. Users outside the United States. First thing, I would say this is an inherently global product and platform we have. There is nothing Yankee like about the need to collect feedback from your customers employed and doing market research.

Today, our best markets are primarily the English speaking markets outside of the United States. So I'll give you an example, our Teams plan which as you know has been live since late Q3, we have four Teams in 50 countries. I can't name half of them. So our focus right now is stand up European data center, we know that in full site speed, we know that it locally helps data. It's critical for companies that are in the market for products like our-- who just hired sales leader.

We are putting more dollars behind local marketing and look like in the products. So we have good products inside each of these major developed countries. But for a half dozen countries where we're putting specific focus and accountability on the Teams , it's all about product marketing, the data center and then having a sales team go in and sell aggressively in what we know is a competitive global market.

So we don't have the same brand recognition we have -- it's not uniform throughout all the developed countries, but there isn't no SurveyMonkey of Germany or France or Belgium, U.K. So we are-- it's a market for us to go and take share and help inflect that overall growth rate.


Thank you. And your next question comes from Youssef Squali with SunTrust. Your line is now open.


Okay. Great. Thank you very much. Youssef Squali. So first of all happy 20th anniversary. Tim, sorry to see you go, but certainly happy for what you have planned. Two questions for me. It looks you’re your ARPU for the quarter was pretty strong despite a tougher year-over-year comps, and historically we are in last couple of quarters you've been talking about how enterprise and team is more of an accelerant to paying user growth, but headwind to ARPU, so was just trying to understand, what helps you maintain that for the quarter, and then can you, let's see-- oh, yes, the other question is around just your 19 non-GAAP operating income margin, I think you guys are guiding to 2% to 3%, if I look for 2018, I think it was 3.8%, if I adjust for the accounting changes, if I understand it correctly, I think it was 3.6%. So it looks like there is still some de-leverage in the model, and just try and understand where that deleverage would be coming from? If you can help us understand where the areas of investment are, that would be great?


Sure, as you can hear from the call and from our materials, Youssef, the focus is on driving acceleration and adoption of our platform both from the Enterprise and in Teams. So that paid user growth especially in those shared accounts, merchant-user account enterprises is most critical. We highlighted in the road show that there could be ARPU headwinds as we have some volume discounts from selling. We think that there is a lot of pricing leverage. We have seen an uptick in the premier Teams on the sell side if you go to our pricing page.

We have seen a higher mix of folks buying our kind of premier fully functioning Teams plan. So that has been a pleasant surprise on the ARPU front. I think we did a lot of pricing leverage here; our largest competitor is priced significantly higher than us and gives a lot of win to move upmarket. On the EBIT margin questions, we are guiding through healthy and honorable free cash flow growth this year, given that we are looking at double playing now for some hardware as well as the cloud and I think it would be fully migrated on to the cloud by the end of this year, and that will help us in our margin fronts.

But, yes, I mean right now our free cash flow, as far as EBIT this is, we are -- we got more conviction in our strategy than we had in September when we saw all of our new investors and so we are really just doubling down on getting folks hired, enabled and then trained up to capitalize on what is this proprietary opportunity to sell into enterprises where we already have a large installed base.

So, I think you will see both the revenue growth accelerated in 2020 above 2019 and the opportunities for EBIT margins to expand, can't make any promises there, I just know we are going to have a lot more productive sales people reaching four quarters and full quarter this year.


Thank you. Our next question comes from Ivy Kong with Wells Fargo Securities. Your line is now open.


Thank you for taking my question. I have two questions. First question is about your collaboration with sales force. I was just wondering since last quarter you've seen further progress on products and development, and the distribution with sales force and whether you have been benefiting and/or do you anticipate to benefit your sales force growth relationships with enterprises?

My second question is related to margin as well. So this quarter we saw some de-leverage on gross margin, which you mentioned is related to cloud migration, you answered this a little bit, but I was just wondering where the cloud migration progress is since like you did some migration in the fourth quarter, and during Q1 2019 you will have some other migration in International markets. Should we assume that the cloud migration impact our gross margin will minimize its impact in 2Q to 2019? Thank you.


Hey Ivy, it's Tom. I will start with the sales force question and then I will pass it over to Tim for the margin question. So in Q3 and Q4, we actually shift bunch new software immigrations with sales force. We had CX connector, we had the apply connector which we talked about on the call. We are continuing to invest in two directions; one is to bring the lightning user interface to our connector, so that when people are saying that they're using the latest and greatest sort of user interface codes that the sales force can provide.

And then secondarily, we are actually looking to expand to other clouds. They were only on the sales cloud and the service cloud and we want to expand to the additional cloud that like the marketing cloud that sales force offers.

Our real focus actually in the next quarter or so is really going be about go-to-market. We've been really --if you are brushing up on both how sales force goes to market to the sales organizations, building and getting more leads and more pipeline from the app exchange which is a great place for us to get leads and really starting to scale that up or so. We are very optimistic, we got some nice stuff going on and we'll be keeping you got apprised about the developments as they happen. Tim, you want to hit the --?


Hey Ivy, it's Tim, thanks for your question. So on the gross margin, yes, we did drive slight de-leveraging in Q4, and as Zander mentioned as a result of effectively double paying for a period of time for both our core key location facility, as well as AWS in the cloud. And what you will see as we move forward is reduction in gross margins over time, both as we wind down payments of the call out facility and amortization of equipment that we bought previously starts to run off. Where you are seeing the benefit already is in reduced CapEx and we need to buy few and fewer machines in our call out facilities as we move to the Clouds.

So expect the migration to continue over the course of 2019, and we expect to increase gross margin over the medium to long run.


Thank you. And our next question comes from the line of Ron Josey, JMP Securities. Your line is now open.


Great. Thanks for taking the question. Tim congrats on your decision to retire, it sounds fantastic. Two please, more maybe as a follow-up to the last question, but just on the customer 360 tool, we talked about the evolution there for a while and I know it just launched maybe in the first quarter of 2018, but last quarter you talked about enhanced productions and enhanced capabilities for up sell and cross-sell, just wanted to understand how that sort of fits into your sales strategy, how much customer 360 impacted that million dollar client et cetera.

And then the next one is sort of bigger picture. Last quarter, we talked a lot about your sales deals are more proprietary, you don't go through the RFP process on average, we get a lot of questions as to why not, and I think the answer, one of the answers could be you have what 345,000 organization on SurveyMonkey plus you have customer 360 as a key advantage, but have you ever thought about maybe going through formal lot of fee processors are offering that? Thank you.


Hey, Ron. It's Zander. Good question. Let me take the second question first, as you mentioned, I think companies are just now starting to think more holistically about how to harness feedback collection, curiosity across their CX program, market research providing these tools in a secured environment and have a relationship with the IT group. It's just not acceptable to collect mission-critical data and run individual account at JMP.

And so I feel innovations are getting more aggressive, what's going on. The people have been doing is to help make great business institutions inside the organizations, so that's why we have paying customers inside of 345,000 companies. The fact is we get to enter our fee process I personally think that we are late to the selling process. We are using our proprietary customer 360 to really understand, where we have density, where we have strong footprint, how they are using our product, how active, having survey, survey responses they are collecting, and maybe then to show them the full power of our enterprise product.

So I think the vast majority of deals especially mid-market deals we are going to win, are the ones we are lighting up the signals and feeding great leads to our sales team. The larger customers and all you have high 6 figure, 7 figure deals in all likelihood, those do grow to be our piece and I love our chances there. Our base biggest competitor is staring, and staple into SAP customer base. The vast majority that are tipping our platform is much more relevant for our sales force and Microsoft customers so I think our chances to win those deals is a lot better because apart in spite anybody we are a huge price disruptor, our open immigration strategy is winner and may get deals that we are moving aggressively to win.


That’s great. Any insight on Customer 360, that's very helpful, Zander. Just on the prediction capability and maybe how that impacted the quarter?


Yes, hey, it's Tom. I think one of the things I would frame up is that Q4 in many ways the account verification really was the best picking, if you well, for our sales force. I will give you an example where an account that had 150 employees sharing their accounts or another account with 70 employees sharing six accounts; it is just great sales opportunity. And so, there was a lot effort against that. We just recently had our sales kick off and one of the main topics was how to use customer 360 to its greatest advantage. And I guess if I had to characterize, I would say the technology, the ability to predict, the ability to automate is probably running ahead of our operationalization of that in the sales force.

So I actually think there is probably room for us to see customer 360 make our sales force more efficient than it already is because it's incredibly efficient already, more efficient as we go forward.


That's great. Thank you. And maybe sneak one, any replacement for Tim or thoughts about -- on the CFO process, and I will get back in the queue. Thank you.


Yes. It's my top priority in Q2. I think it's starting on Valentine's Day, super excited to interview candidates for what is I believe a world-class CFO opportunity in a company that has a terrific culture and a huge opportunity to double our business over the next three years. So given our board of directors and all of our connections in the industry, I am looking forward to bringing on it terrific partner who can help lead our financing and accounting, cash treasury organization.

End of Q&A


Thank you. And this does conclude today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.