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Pluralsight, Inc. (PS) Q3 2019 Earnings Call Transcript

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Pluralsight, Inc. (NASDAQ: PS)
Q3 2019 Earnings Call
Oct 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2019 Pluralsight Earnings Conference Call. [Operator Instructions]. I will now like to hand the conference over to your speaker today, Mr. Mark McReynolds, Director of Investor Relations. Sir, please go ahead.

Mark McReynolds -- Director of Investor Relations

Thank you. Good afternoon and welcome to Pluralsight's Third Quarter 2019 Earnings Conference Call. With me today are Aaron Skonnard, Co-Founder and CEO; James Budge CFO and Ross Meyercord, our new CRO. Some of our remarks will include forward-looking statements within the meaning of the federal securities laws.

Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our SEC filings. Any forward-looking statements that we make on this call are based on information and assumptions as of today and we assume no obligation to update these statements.

During this call, we may present both GAAP and non-GAAP financial measures. Except for revenue, balance sheet amounts and billings, all financial amounts discussed are non-GAAP and growth rates are compared to the prior-year comparable period unless otherwise stated.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release is available on our website at investors.Pluralsight.com. Before we hear from Aaron. I'd like to remind you that James and I will be attending several conferences over the next couple of months, all of which are listed on our IR site and we hope to see many of you at these conferences.

And with that, I'll turn the call over to Aaron.

Aaron Skonnard -- Chief Executive Officer

Thanks, Mark. Good afternoon everyone and thanks for joining our Q3 2019 Earnings Call. We had a solid quarter and improved many of our growth metrics, demonstrating that the operational improvements we put into motion at the beginning of the quarter are working.

I met with over 90 customers and prospective customers since our last earnings call. In every meeting, there was a clear need for tech skills transformation at scale and strong recognition for how we can be that solution. I'm happy with the progress we made in the quarter and recognize we still have work to do.

B2B billings grew 32%, total billings grew 28%, revenue grew 34% and our guidance for 2019 remains inside the range we provided and reiterated earlier in the year. We're seeing signs of improvement and I'm confident this will continue under our new Chief Revenue Officer Ross Meyercord.

Over the course of the last few months, I met incredible CRO candidates from some of the best software companies in the world. Ross stood out as the best fit for Pluralsight. He brings a unique combination of skills and experience to our business. In his most recent role as EVP of sales at Salesforce, Ross led the North American sales team, responsible for upselling and cross-selling into large existing enterprise customers. He also managed the sales strategy, business development and sales operations of the North American enterprise business. In his previous role at Salesforce as CIO, Ross live the real life role of our typical buyer. He understands the mindset of those we sell to and how to best position the product. He scaled the organization, processes and applications that supported the business during this period of remarkable growth. During his time at Salesforce, annual revenue grew from $2 billion to more than $16 billion.

Before Salesforce, Ross was a senior partner in the high-tech practice at Accenture, one of the largest consulting firms in the world. While there, he built a massive network of CIOs and CTOs helping them to manage scale, execute digital transformations and move their businesses to the cloud. He gains unique insights into an important go-to-market channel we expect to develop further. We are thrilled to have Ross lead us through the next phase of our growth as a public company, and I have asked him to share a few words with you here today. Ross?

Ross Meyercord -- Chief Revenue Officer

Thanks, Aaron. It's great to be here. And what an exciting time in the evolution of the company. As a former tech leader, I see a rare opportunity to solve a massive problem that impacts every organization in the world. The need to transform tech skills at scale in a way that aligns with our tech strategy. I was a CIO and the customer of Pluralsight. I understand what keeps tech leaders up at night. Having the right skills to execute and deliver for their business.

I look forward to working with my network of tech leaders to help provide the fastest path to skills development. I also see the opportunity to build a strong channel motion of Pluralsight, which is something I know first hand from my 22 years at Accenture. I'm confident that the sales team here is focused and I'm looking forward to implementing the operational rigor necessary to further grow the business.

Aaron Skonnard -- Chief Executive Officer

Thanks, Ross. We're really happy to have you here with us. I'll share more later in the call about our progress with new and existing customers and our partners. But first I'd like to turn the call over to James to review the numbers. James?

James Budge -- Chief Financial Officer

Thanks, Aaron. In Q3, improved execution drove billings growth of 28% to $92.1 million and revenue growth of 34% to $82.6 million. Our B2B billings increased by 32% to $80.7 million. Learnings and expanding is one of the top strengths of our business as we work with customers to become a solution that is prioritized at the organization level, not just within a few departments. The evidence said that this is working is the growing number of customers with larger deal sizes. By the end of Q3, we saw a 51% increase in customers with annual billings of over $100,000, and 81% increase in customers with annual billings exceeding $500,000, and a 91% increase in customers with annual billings exceeding $1 million. As of the end of Q3, our top 25 customers have now expanded to 23 times their initial purchase. The continued growth in our largest accounts demonstrates the value we continue to provide, which has helped keep our net revenue retention above 120%.

Our go-to-market efforts in Q3 were mostly focused on our high-end commercial and our enterprise customers, which resulted in our highest average deal size to date, up 30% higher than the same period a year ago. The trade-off in Q3 was a higher percentage of churn in our smaller accounts, which offset the new logos we added in the quarter. The larger deal sizes have resulted in slight increases in our average deal closing cycle, which increases the variability of those close date. Reducing this churn will receive an increased emphasis going forward as we increase our investment in customer success and enhance our customer coverage model.

Our Q3 gross margin was 80%, up from 77% last year. Gross margin is ahead of pace as 80% is our target gross margin and we're proud of achieving this earlier than expected. Non-GAAP net loss per share in Q3 was $0.08, an improvement over our net loss per share in Q3 last year of $0.10. We closed the quarter with total cash and investments of $561 million and our on-balance sheet backlog as expressed by our deferred revenue was $195 million at the end of the quarter.

Turning now to guidance. For the full-year 2019 revenue, we are holding the midpoint constant with what we've said in the past and with one quarter left in the year tightening the range to $314 million to $316 million, an increase of 36% over 2018 at the midpoint of the range. On the bottom line, given the year-to-date results through Q3, we expect the full-year non-GAAP net loss per share to be in the range of $0.35 to $0.37. The full-year 2019 EPS estimate assumes a weighted average shares outstanding number of approximately 137 million.

For the next few quarters, we expect marginal improvements in our billings performance compared to the mid 20% growth we've seen over the last six months. And given the continued opportunities we see, we expect to accelerate our go-to-market investments next year in order to capture the top-line growth opportunities we see ahead of us. For example, on our last earnings call, we said we had increased our target hiring plans for quota-bearing sales reps and we have made good progress toward those increased hiring object. More sales reps plus deeper investments in customer success and other go-to-market initiatives will increase our losses in 2020 as compared to 2019. However, we do expect to exit 2020 on a positive cash flow trajectory. We will provide specific revenue and EPS guidance for 2020 on the next call in February. But generally speaking, the recent billings growth in the mid 20% range, will now roll through to our anticipated revenue results in 2020, and with that, I'd like to turn the call back over to Aaron, Aaron?

Aaron Skonnard -- Chief Executive Officer

Thanks James. We have a lot to be proud of with our Q3 results. Let me share some of the positive themes that I saw in the quarter. As James mentioned, we had nearly 100% growth in our largest customers and we continue to sign new customers from all verticals. For example, this quarter, we signed one of the largest and oldest banks in the world. We also signed a top European auto manufacturer, a Fortune 500 American farm machinery company and one of the world's largest telco companies. These new customer wins continue to demonstrate that our platform works for any industry at scale.

Having spent so much time with customers recently., I'd like to share an example that is a great illustration of a company that is turning cashiers into engineers with the help of Pluralsight. the Home Depot was founded on a simple premise, put customers and associates first. To do that and in an innovative way, the do-it-yourself giant is committed to its investment in technology skills development, to create a pipeline of skilled associates to fill upwards of 1,000 open technology rolls.

The Home Depot rolled out an immersive skills boot camp dubbed Orange method and commented, we looked internally and we have 400,000 people that orange aprons for us every day there's got to be a pool of associates passionate about technology. So let's start there Pluralsight been a strategic partner since day one, so as Anthony regarding the Director of technology enablement when you look at the content it aligns perfectly with the technology stack that Home Depot sees as a competitive advantage for us going into the future.

Home Depot's Orange method leaders leverage Pluralsight analytics to track progress and see what their new technologists are interested in. So they can incorporate the latest and greatest into upcoming curriculum and eventually into a customer and associate experiences. Helping Home Depot fill open technology rolls, while creating a better future for their associates is a great example of why Pluralsight was founded and how we're fulfilling our mission to democratize technology skills. We're proud to be working with innovative companies like Home Depot that see the value in their people and see Pluralsight as the platform to help increase that value. If you, joined us at Pluralsight Live, you heard a lot about different now called Pluralsight flow.

Flow exceeded our internal billings expectations growing by over 100% and in Q3, we signed our first seven figure deal for Flow. We are encouraged by the progress and excited by the demand we're seeing for our engineering analytics platform. We're actively building our unified SaaS offering that we're on track to launch in Q1, 2020 and we believe that this will create even more opportunity to penetrate our large and expanding TAM. On the partnership front, we continue to be encouraged by our progress with Microsoft, Google and Amazon. We now have over 35 Google Cloud authored courses on our skills platform and since launching just a few months ago, we've already had over 1,700 business customers access this content.

Similar to our partnership with Microsoft, Google is now selling a slice of targeted content to their community, and we're excited to see the impact our platform will have on GCP users. We continue to invest in our sales collaboration with AWS both deepening our relationship with existing customers by aligning with important cloud initiatives as well as expanding to new customers to support them on their Cloud journey. We believe that our unmatched content and strong partnerships reinforce our position as the unquestioned leader in Cloud skills.

Before I close, I'd like to provide a brief update on our social enterprise Pluralsight One. Our community of nonprofits in K312 schools, leveraging the product has now surpassed 400 organizations spanning 13 countries. We're proud of the impact Pluralsight One is having in helping provide opportunities to underserved communities all over the world. To close, I'm pleased with the progress we made as a company in Q3 and recognize we still have work to do. Our market remains as strong as ever. We are doubling down on execution to unlock that potential and we are confident that Ross join our leadership team will bring us to that vision faster. And with that, I'll the call back over to the operations for some Q&A.

Questions and Answers:

Operator

Your first question comes from the line of Saket Kalia of Barclays Capital and your line is open.

Saket Kalia -- Barclays Capital -- Analyst

To take my questions here and welcome Ross

Ross Meyercord -- Chief Revenue Officer

Thank you.

James Budge -- Chief Financial Officer

Hey Saket, Happy Birthday from all of us here.

Saket Kalia -- Barclays Capital -- Analyst

Thanks James. Yeah maybe for you Aaron as you reviewed last quarter's performance. I guess in a post-mortem and I know we talked a lot about this at the Analyst Day but as you dug deeper, can you just talk about what role competition played, if at all, in last quarter's result and this quarter frankly. And maybe just broadening that question, can you just give us an update on what you're seeing competitively from the likes of LinkedIn learning and others in the space?

Aaron Skonnard -- Chief Executive Officer

You bet. We're seeing very little impact directly related to competition as I dug into the win-loss data for both Q2 and Q3. We saw very little impact in terms of dollars impacted that the sales force would have attributed to competition. More broadly, when we look at the space and especially the larger deals that we're now penetrating much more deeply. We are positioning ourselves as the go-to-platform for tech skills, transformation within these companies, which means we're selling to the tech leader not into HR, which allows us to happily coexist with any of those other products you mentioned.

So I think that's a big reason why we don't see direct impact due to competition today and I think if you mentioned LinkedIn specifically with their recent announcement that they're moving more toward an LXP model, a learning experience platform. I think that signals to some degree, their move to be even more horizontal in nature, whereas Pluralsight's recent investments and decisions, such as the acquisition of GiftPrime have signaled that we're going even deeper in our vertical and tech. So I think our strategies are very different. And also to some degree a very complementary.

Saket Kalia -- Barclays Capital -- Analyst

That makes sense. Aaron maybe if I may my follow up I just stay with you to your point, your prepared remarks very evident that you spent a lot of time with customers in the quarter. I'm curious, what's the tone that you heard from customers on their willingness to invest in a tool like Pluralsight in the face of what frankly some could speculate it could be a softer macro backdrop in 2020.

Aaron Skonnard -- Chief Executive Officer

Yeah, it's.-- I've been paying close attention to that because I'm curious about what's happening in 2020 like everyone else is. And I'll tell you the senior C level buyers that I'm talking to are looking at this tech skills investment as as a critical aspect to exceeding on their long-term technology strategy.

So I think that makes that the macroeconomic situation come less into play, than perhaps in other areas, but I would acknowledge there's still probably some concern there, but we're seeing, we're seeing a strong need for this in the marketplace overall.

Saket Kalia -- Barclays Capital -- Analyst

Got it. Very helpful, very helpful guys. I'll get back in queue. Thank you.

Aaron Skonnard -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Brian Peterson from Raymond James, your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi, gentlemen. Thanks for taking my question and congrats on the strong billings number. So it sounds like flow has been really well out of the gate. I'm curious how were those conversations been with customers. I'm curious if the successes you've seen at least so far has mostly been with Pluralsight customers, or are you seen new prospects coming into the fold as well.

Aaron Skonnard -- Chief Executive Officer

Yeah, we're seeing, we're seeing a lot of strength on both sides of that today. We mentioned the the -- our first seven figure win with Flow and that particular deal has already led to another deal in the pipeline for Q4, which is another seven figure deal for Skills. So a great example of a customer who started and landed with Flow that's now cross-selling and transitioning to Skills and we've also activated our entire sales force with a referral model to send leads and pipeline from our existing Skills customer base over to the Flow team.

But remember, they are operating independently today as a stand-alone go-to-market team and we'll be doing the full integration with an overlay model in 2020.

Brian Peterson -- Raymond James -- Analyst

Got it. Thanks, Aaron. And James, I appreciate the color on the retention dynamics, but can you bifurcate that a little bit, was that a function of users or do we see a little bit of pickup in churn on the logo side and if it's the latter any commonality on what drove that. Thanks.

James Budge -- Chief Financial Officer

Yeah, on the user side probably nothing unique to Q3. We do have some here and there. On the user side nothing different in Q3 on the customer side, we did have more churn on the logos side down at the lower end of the business, as we focused on the higher end. We're deploying more resources there. We're dropping our coverage models that we pick up more of those smaller end customers and make sure we retain them and that's something we need to do better on as we move forward, but that was the impact in Q3, A little bit more churn at the lower end of the business.

Brian Peterson -- Raymond James -- Analyst

Thank you.

James Budge -- Chief Financial Officer

Yep.

Operator

Your next question comes from the line of Arvind Ramnani from KeyBanc. Your line is open.

Arvind Ramnani -- KeyBanc -- Analyst

Hi, congrats on the good numbers. So my first question is, I know you provided a lot of color at Pluralsight Live about the infrastructure you've built around the sales and sales process. And can I just provide an update on, how much of that infrastructure is permanent or is that still sort of evolving? Just to make sure that, you're kind of really incorporate some of the -- additional feedback you're getting from new leadership.

Aaron Skonnard -- Chief Executive Officer

Yeah, a lot of the quick fixes and adjustments we've made in terms of sales process and execution have laid the foundation for a new permanent model. That we will also continue to innovate and incrementally improve and we're already seeing some great improvements in our predictability and clarity as a result of those key changes and with Ross coming on board, he is also a very quickly identifying further improvements that can be made. Anything you'd like to add to that Ross?

Ross Meyercord -- Chief Revenue Officer

Yeah Arvind, thanks. As I've jump in here, we've got a great team and adding in my external perspective here. I think there's some opportunity to continue to optimize existing processes and shore up a couple of the areas.

Arvind Ramnani -- KeyBanc -- Analyst

Great. So, I mean I guess I'd live, Ross, while you are probably going to the interview process, one of the concerns that, I guess that was raised was essentially the new unnamed CRO would come in and essentially going to upset the kind of the dynamics of the team and culture. Are there steps you're taking to make sure that there is not like a spike in attrition or some of the kind of the good part of the sales kind of gets retained with you taking taking over the the process.

Ross Meyercord -- Chief Revenue Officer

Yeah Arvind, thanks. I had an opportunity even before I joined to meet the senior leaders around the world and I'm really confident that we have a great leadership team in place. I'm still getting a chance to meet all the way down through the organization. We have a good team in place now and as James articulated, we're continuing to add a lot of capacities. We have the opportunity to continue to add the right resources in right regions to help us scale for success.

Aaron Skonnard -- Chief Executive Officer

And I would add on Arvind that this is an excellent time for Ross to be entering the business in terms of the timing within the year in preparation for 2020 which allows him to further impact the very questions you're pointing to and things like commission plans and coverage model and territory assignments.

And so the timing is very advantageous. And we think that will help bolster confidence across the sales force moving into the new year.

Arvind Ramnani -- KeyBanc -- Analyst

Great. And just last question from me on Flow. I mean clearly, you're seeing some good commercial success. Can you give us an update a little bit on the -- on the integration of Flow with the core offering and as you look forward in the next six months or so will it combined or a tighter integration with the core offering drive kind of even bigger deals or sort of most of the integration is already put into place.

Aaron Skonnard -- Chief Executive Officer

No, there is a lot more integration still to do, which we're actively working on both the product side, as well as the go-to-market side of the business. And so I'll just address that across both of those independently. The product integration has been under way since day one of signing the deal and we've already released some simple experiences that bring some of that integration to live today. So we're continually releasing some value experiences to our customers before we get the holistic unified offering that will be released at some point in Q1 2020. That unified offering will give us even more ability to extract additional value from our customer base and the existing customers who are currently using skills.

And now on the go-to-market side, we have not done a lot of integration yet and that was intentional because we didn't want to disrupt the ongoing sales execution and sales plans for 2019 across the sales force. So they are operating independently. There is a lead generation referral model with incentives attached to it that encourages our core sales reps to refer business over to the Flow sales reps and that's happening and we're seeing a lot of good success from that.

But the bigger impact will happen in 2020 when we introduce an overlay model. So we'll have overlay Flow specialists supporting our entire army of sales reps that are going to be selling both products. And now you will see the big uptick in pipeline and obviously future TAM and opportunity.

Arvind Ramnani -- KeyBanc -- Analyst

Great. Yeah, and I guess one of the things you had mentioned when we spoke last was this should be a big part of driving essentially bill rate sort of increases or kind of price increases and I assume that's something it's still sticking with.

Aaron Skonnard -- Chief Executive Officer

Yeah, I know Arvod definitely a customer that has skills and Flow we would expect certainly to have them pay more than each of those independent. So definitely expect price increases as a result of Flow going into the market on a combined offering in 2020. We're still working through what that increase ought to look like. So, I don't have a specific number for you right now, but we'll have that in the next few months.

Arvind Ramnani -- KeyBanc -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Sterling Auty from JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Analyst

Yeah, thanks. Hi guys. So I wanted to start off with Ross, you mentioned some improvements in processes, etcetera. Can you give us maybe one or two examples of the things that you'd like to come in and focus on along those lines?

Ross Meyercord -- Chief Revenue Officer

Yeah, thanks Sterling, it's early days here for me as I'm walking through the company, but as we are working through specific issues and opportunities, they really seeing the opportunity bring in best practices that I've learned from my days Accenture from our experiences of sales force here to bear. I know in regards to things as broad as forecasting, how we do territory planning, how we do estimate etcetera. So really, really across the board. I think a number of opportunities to really tune what has already been working well for the company.

Sterling Auty -- JP Morgan -- Analyst

Okay, great. And then, James one follow-up question for you. You talked about with the investments next year cash flow going negative, but I wasn't clear, we talked about cash from operations or free cash flow and you expect it to be negative every quarter through the year or perhaps break into positive cash flow for maybe let's say the fourth quarter.

James Budge -- Chief Financial Officer

Yeah, more the latter, Sterling we're -- because of the building that we're finishing up here in the first half of 2018, it has toe be free cash flow positive for at least the first half. Once that the big expenditures around that go away and we get into more efficiencies in the back half of the year, we would expect to exit fourth quarters. So, I think to be very specific, I could probably look negative in the first three quarters and start to trend positive in the fourth quarter. I might just maybe just super quick. I just want to add on to what Ross and other things I really love about Ross also that I I know is going to dig here as well.

is the whole channel opportunity we have. We've done really well with our cloud partners and there is huge opportunities in my mind to go deeper into some of the systems integrators and obviously with with Ross' background, we've got tremendous opportunity there.

Sterling Auty -- JP Morgan -- Analyst

All right, great. Thank you.

Operator

Your next question comes from the line of Corey Greendale from First Analysis. Your line is open.

Corey Greendale -- First Analysis -- Analyst

Hey, good afternoon. First question I had -- someone asked about the price opportunity around Flow, one of the questions that I think going to come in people minds since last quarter is more of the same product basis pricing and whether some of the floor billings is because of customer -- increased customer pushback on price or and repeated price increases. Can you just comment on kind of how much you think that dynamics impacting the company, what you expect for kind of future same product price changes?

James Budge -- Chief Financial Officer

Yeah. I mean, look at the price increases given the value that we provide even prior to low has been going up over the last couple of years, I think we've been open that a couple of years ago, our average billing rates were around $240 [Phonetic] and now they've increased to well over $300 [Phonetic] and they increased again in the third quarter relative to all the prior quarters. So, we don't feel like there is always no customer loves to have their price increase, including me, when I'm a customer. But when you compare that to the value of the product in the platform we provide it's usually pretty well accepted that we have opportunities to increase pricing. We've seen that through this year.

With Goodprime more Flow as we roll through into 2020 that add the massive amount of value to our customer. And so we definitely expect those price increases to continue to average -- on average go up.

Corey Greendale -- First Analysis -- Analyst

Okay. And you talked, in a couple of ways about changes to sales structure around the integration. Maybe could you give us a little detail around kind of the sales planning process and where it's at this year versus last year. And if there is any insight you can give at this point on just, are you going to have a full blown separate farmer team versus the hunter team, are you going to do like an SMB versus enterprise or just some thoughts on how the sales are going can be structured next year?

Aaron Skonnard -- Chief Executive Officer

Yeah, Corey. This is Aaron. We are in really good shape this year in our planning cycle from a timing perspective, much better -- in much better shape than we've ever been in prior years. We are very committed to hit the ground running in January with clarity at the rep level around territories and accounts and we've worked back from that with a very clear set of milestones and date driven deadlines to ensure that we are making all the key decisions that have to be made at the right time and this is another reason why I am so advantageous for Ross to be coming in right now, when he is, because it gives him time to participate in that progress, where a lot of the key sales level specific decisions are made and those are critical decisions to get everything right into ensure sales -- sales rep retention and setting those teams up for success next year.

So at a high level, I would say we're in really good shape from a timing perspective. And we're continuing to hit all of those deadlines as they come week by week and we're really encouraged by where we're at today as a result. So what was the second part of your question. Corey?

Corey Greendale -- First Analysis -- Analyst

Good to hear [Indecipherable] any preliminary thoughts on the sales structure, hunter versus farmer teams and thank you.

Aaron Skonnard -- Chief Executive Officer

Yeah. We are making some changes, some shifts going from '19 in to '20 specifically on that front and we do see moving to a more traditional hunter farmer model, which we've been experimenting with in 2019. So that won't be a massive shift. We've already learned quite a bit through our experience this year, but we do believe that will continue to deliver more net new billings and better focus on the right types of expansion opportunities and of course the renewals.

So you will see some of those steps. We can share more detail around what that looks like specifically on one of our future calls.

James Budge -- Chief Financial Officer

Yeah. I might just add Corey. It's a model that's not too dissimilar than what Salesforce has and their kind of the apex of how people how to think about their SaaS model. So certainly something that Ross is familiar with managing.

Corey Greendale -- First Analysis -- Analyst

Excellent. And I look forward meeting you, Ross.

Ross Meyercord -- Chief Revenue Officer

Thanks, Corey.

Operator

Your next question comes from the line of Terry Tillman from SunTrust Robinson Humphrey. Your line is open.

Terry Tillman -- SunTrust Robinson -- Analyst

Thanks for taking my questions, Aaron, James, Ross and Mark. Hopefully I got everybody there. The first question, Aaron just relates to you in terms of -- the tanker cloud ecosystem partners Microsoft, definitely is been there for several years and I think a meaningful contributor to the business. I would love some more specifics on AWS and Google in terms of their alignment. I mean, are there some hard targets or somewhat hard targets in terms of how they're actually going to drive revenue. And just maybe in the spirit of about seven parts are there to my question. Just where are we in terms of overall tech or cloud partners in terms of how much of the business that are driving up? And then I have a follow-up.

Aaron Skonnard -- Chief Executive Officer

When you ask about targets, do you mean internal sales targets, billings targets or something else?

Terry Tillman -- SunTrust Robinson -- Analyst

Yeah. Now let me correct. Yeah, billings or just revenue?

Aaron Skonnard -- Chief Executive Officer

Yeah. Got it, OK. We don't break down and create targets by partner internally, but we do look at each of these significant vendors as a source of pipeline and future opportunity for the business and in many cases they are influencing business for us, which we then show up in different parts of our enterprise or commercial business. So like the benefit of working with the Microsoft like we have over the last decade is we're partnering with them to produce content in many cases the spoke content that we then deliver out with them to their ecosystem of developers. We spent touches all of the other companies that we sell into.

And with our land and expand motion, they then bring us into their companies and off we go to produce more billings there so. So it's, we see the impact of those three partners as as more focused on pipeline versus direct billings over time and we're continuing to figure out better ways to cooperate with them and so work in tandem with them to produce more of those build is more like a channel model and so.

So we're focusing more on it from that perspective than we are from the direct billings perspective although at times we do derived direct billions from those partners when we sell directly to them. Anything you want to add to that. James.

James Budge -- Chief Financial Officer

Yeah, I'll just add in there that today the direct or indirect contribution that comes from those partners is about 7% to 8% of our billings and as we mentioned at our Investor Day between those cloud partners and some of the systems integrators like Accenture Fujitsu and others.

We expect that total contribution to grow to over 20% over the next 3 to 4 years.

Aaron Skonnard -- Chief Executive Officer

As a good example of this terry the JEDI contract that was just awarded to Microsoft, that's a massive contract obviously is a great example of that being the trend that's playing out right now for us with big organizations everywhere, including the federal government of the United States moving everything to the cloud.

And given our relationship with Microsoft, we are perfectly positioned to partner with Azure, and Microsoft in assisting the federal government with that transformation, which will require a massive transformation of those underlying tech skill.

Terry Tillman -- SunTrust Robinson -- Analyst

Yeah, that's great.

Well, you've got Ross on the call. Can I ask, my follow-up question is still there is. Yeah. I went away from me.

Ross you have worn lot of hats, CIO, SI and then running big sales ops and big part of P&L sales force. we're in kind of a little bit of we're not sure where we're going to go in terms of a macro perspective, and just economic activity. Just knowing that the backdrop is a little bit maybe less certain what do you think of the two products are an easier to sell in a more uncertain time frame and I'm sure you would love both these sort of the same, but I want you to tell me Skills or Flow. What would be the Weds, what's the spear -- tip of the spear into a new account given kind of the macro backdrop if you can answer that. Thanks.

James Budge -- Chief Financial Officer

Absolutely Terry, well as a father of three children. I'm well familiar with the who do you love more dad. But, what I would say is I'm equally excited about both products but for different reasons.

Yeah, I actually last night went through our internal enablement session for Flow and I couldn't be more excited about the opportunity to provide engineering leaders, the level of business metrics that the rest of their counterparts [Indecipherable] have. And I'm super excited about going to talk to my contacts and our existing customer base to really talked about the benefits of Flow.

On the other hand, had I look at the opportunities with Skills and really it's just the growing need for organizations to go through that tech skills transformation and I think it's absolutely the right product to solve that business problem that really all entities have as Aaron talked about it's not just public companies. It's, it's private companies, it's non-profits, it's government organizations. This -- the skills transformation is really a global challenge that I'm excited about skills really helping solve.

So I guess in the end I love my children equally.

Aaron Skonnard -- Chief Executive Officer

If I could, if I could jump in and throw in my two cents, if large tech organizations are being pushed to become more efficient and I think that does create more demand for Flow because it surfaces efficiency metrics that are useful to those tech leaders. So it'll be interesting to watch this play out.

Terry Tillman -- SunTrust Robinson -- Analyst

Thank you, gentlemen.

Aaron Skonnard -- Chief Executive Officer

Thank you.

Operator

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

Scott Berg -- Needham -- Analyst

Hi, everyone. Congrats on a good quarter and thanks for taking my questions. I guess Aaron, first one probably for you. I can't remember if it's you or James talked about billings, our expectations billings improved nominally from this mid '20s level over the next couple of quarters.

I guess how should we think about that? Is that because you feel on the new sales side, things have stabilized to a point where you are generally happy with, or is that improvement driven maybe by improvement in gross retention.

Aaron Skonnard -- Chief Executive Officer

Yeah, we -- we see -- the reason we're seeing marginal for the next few quarters is because of the sheer amount of change and transformation we're going through here internally as Ross comes in and we really start to execute on the new 2020 strategy.

So that's why you're hearing a little bit of caution in our language and the further we get into 2020, the more optimistic we are about that billings growth strengthening. So both increases in gross retention. We expect to see a clear impact there from the investments where we're making in customer success and other operational process improvements and we also expect to see improvements with net new business, given the direct focus with the shift to a hunter farmer model. So we expect both of those metrics to rise and the further we get into 2020, the more both of those will strengthen.

Scott Berg -- Needham -- Analyst

Got it. Very helpful. And then, James, I just wanted to follow up on the expense commentary for next year about the investments. Should we think about those investments strictly on the sales side, sales capacity side or are there other investments there to maybe consider for the first half of the year.

Unidentified Speaker

Yeah, definitely, sales and marketing line is where you'll see that the tech and content line the G&A line will probably look fairly similar relative to as a percentage of revenue. But the sales and marketing line will increase in 2020 relative to 2019.

Corey Greendale -- First Analysis -- Analyst

Got it. Very helpful. Thanks for taking my questions.

Unidentified Speaker

Yeah. Thank you, Scott.

Operator

Your next question comes from the line of Jeff Meuler of Baird. Your line is open.

Jeff Meuler -- Baird -- Analyst

Yeah. Thank you. Want to better understand the smaller account churn that is occurring. Is this a issue of usage at that end and kind of needing a more intensive process to I guess activate usage and is that the case or is a something else in any reason why it's occurring increasingly now?

Aaron Skonnard -- Chief Executive Officer

Yeah, I would say, given what we mentioned in the call, an increased focus, the shift in focus across the business toward the larger deals, which we've emphasized a few times today, it caused us to take our eye off the ball a bit more on the smaller accounts and there is a big part of the smaller accounts that got t very little coverage in both Q2 and Q3.

And so we have seen that shift and the churn in those smaller accounts increased and so we've been actively working to shift that focus in the 2020 coverage models. There are specific coverage model shifts that will occur in January that will ensure that a much larger portion of those smaller account dollars are covered by CSM with a one-to-many coverage ratio and we will also introduce a new digital motion that coverages, all of the remaining dollars and those things have not been happening to date.

And so I think what you saw in the last few quarters is, as we started to see more and more demand for the larger and larger deals, more of the company's time focus resource is shifted to those deals and that caused a little more churn in those smaller accounts.

Jeff Meuler -- Baird -- Analyst

Got it.

James Budge -- Chief Financial Officer

Maybe the other thing I'd add there, Jeff is, since you brought and usage. I know we shared a bunch of usage metrics at our Investor Day. I would add just anecdotally those haven't changed materially we view them as a really good back in August when we met with many of you here and we still view them as really good and -- and so we're really confident in the usage of our customers in the platform is really more as Aaron mentioned.

It's something we can go correct on our own way, planning to do that.

Jeff Meuler -- Baird -- Analyst

Got it. And then second question on gross margin, I guess I'm surprised to see a pretty sizable upside surprise on gross margin. I would have thought it would take longer to see the expansion as the usage of the courses take time to migrate to the lower author payout rate courses.

So what drove that and are there specific expenses that you're managing in the cost of revenue line? Thanks

Aaron Skonnard -- Chief Executive Officer

No, I mean, look, you got it. The majority of the expense there are the author fees and I would just note here that our author NPS is at an all time high well above 60, which is fantastic. And we have 63% more of our authors making over $100,000 than they did a year ago. So there handsomely paid and what you're seeing in the margin line is the impact of some of the lowering of those average commissions or fee rates that we pay. And that's the primary driver there.

Jeff Meuler -- Baird -- Analyst

Thank you.

Operator

Your next question comes from the line of Brad Sills from Bank of America. Your line is open.

Brad Sills -- Bank of America Merril Lynch -- Analyst

Hey, guys, thanks for taking my question. Earlier in the call you mentioned longer sales cycles. I think that -- iss that just a result of you going after larger deal naturally they're going to have longer sales cycles? I guess where are the sales cycles today. And do you expect some improvement there.

Just any color on that comment please.

Aaron Skonnard -- Chief Executive Officer

Yeah, James can speak to the specifics on the length of cycle, but the quick answer is yes. Given the shift in focus these larger deals and we're seeing a lengthening of that cycle not super dramatic but it is, it is lengthening and also a little more variability in predictability of close date.

Obviously, and when you have large -- a large number of large deals in your pipeline targeted to close at the end of the quarter that are all very binary in nature that that does introduce a little bit of variability there like we saw represented in Q2. So we're working very carefully to ensure that we are conscious of the lengthening deal cycle and getting our arms around the predictability of how many of those deals will actually close. James, you want to add?

James Budge -- Chief Financial Officer

Yeah. Yeah, happy to. Thanks, Brad. And I think Aaron hit it there. But in general a enterprise or large commercial deals is going to be around six and nine months for the deal cycle. A mid-market deal is going to be sort of in that three to six month range and a small deal could be short as a month. The cycle there hasn't changed much, but what you're seeing is as more of our business has shifted to that enterprise or high end commercial deal a higher percentage of our of our billing shifting into that mix you does have an overall waiting shift to the longer sales cycles. That's how, that's what we're seeing and that's how we look at understood.

Brad Sills -- Bank of America Merril Lynch -- Analyst

Thanks guys. And then, Ross, earlier you had mentioned the opportunity to go after the SI channel here. Just curious, any color on kind of how you would go to market with the SI as part of a bigger cloud project, you could add some training to that or is it even a stand-alone sale opportunity to sell training separately?

Aaron Skonnard -- Chief Executive Officer

Yeah, Brad. I think all options are still on the table for us. We have a series of meetings over the next weeks and months to really explore with a number of the SIs kind of what we think makes the most sense for both of us. But from my experience really when we can have the fantastic solution we have with our SaaS(inaudible) offerings that size can wrap with their professional services and our even potentially additional software they wrap around ours as when it becomes a really win-win for both organizations and that's really what propel a successful channel model.

Brad Sills -- Bank of America Merril Lynch -- Analyst

Great, thank you. And then, James. Last one, just on net revenue retention. I think you said it was north of 120% I think last quarter it was 126%, was it similar to what we saw last quarter or just over 120% any color there, please.

James Budge -- Chief Financial Officer

Yeah. It dropped from 126% to 124% because of the churn we mentioned. But as we get our arms around and put more resources around our customer success, we -- we definitely see a path back into the high 120s again as we move to next year.

Brad Sills -- Bank of America Merril Lynch -- Analyst

Great, thanks, James.

James Budge -- Chief Financial Officer

Yeah.

Operator

Your next question comes from the line of Brett Knoblauch from Berenberg Capital, your line is open.

Brett Knoblauch -- Berenberg Capital -- Analyst

Hey guys, thanks for taking my questions. I guess mine's really on the gross margin impact on GiftPrime [Indecipherable] is a percentage of the total revenues. How does that work with GiftPrime given that not really course content related readiness?

Aaron Skonnard -- Chief Executive Officer

Hey, Brad. I think got most of the question, I think you're asking about how they GiftPrime model does or does not impact our gross margin, is that what I heard?

Brett Knoblauch -- Berenberg Capital -- Analyst

Yeah, just because authors technically that revenue is not coming from forces a great so they shouldn't get I guess [Indecipherable]

Aaron Skonnard -- Chief Executive Officer

Yeah. you're absolutely right. There isn't the author component, so they don't have two thirds of their cost of goods sold. I shouldn't say they're part of us now, but the Flow gross margins are not impacted by the author fee model that Pluralsight is historically had but there are other costs of their model Flow through cost of goods sold as well that put them roughly equivalent to the same gross margins that we have. So when you net it all out, it doesn't -- the model that we inherited from GiftPrime doesn't have a material impact one way or the other.

Brett Knoblauch -- Berenberg Capital -- Analyst

Okay, that's good, that's it. To make. Thanks guys.

Aaron Skonnard -- Chief Executive Officer

Yeah. Thank you.

Operator

I am showing no further questions at this time, I would now like to turn the conference back to Mr Aaron Skonnard, sir.

Aaron Skonnard -- Chief Executive Officer

Okay, I'll just close with a big thanks to all of our customers, our shareholders, our authors and our team members for your continued support. We look forward to speaking with you all again next quarter. Thanks everyone.

Unidentified Speaker

Thank you.

Operator

[Operator Instructions].

Duration: 53 minutes

Call participants:

Mark McReynolds -- Director of Investor Relations

Aaron Skonnard -- Chief Executive Officer

Ross Meyercord -- Chief Revenue Officer

James Budge -- Chief Financial Officer

Unidentified Speaker

Saket Kalia -- Barclays Capital -- Analyst

Brian Peterson -- Raymond James -- Analyst

Arvind Ramnani -- KeyBanc -- Analyst

Sterling Auty -- JP Morgan -- Analyst

Corey Greendale -- First Analysis -- Analyst

Terry Tillman -- SunTrust Robinson -- Analyst

Scott Berg -- Needham -- Analyst

Jeff Meuler -- Baird -- Analyst

Brad Sills -- Bank of America Merril Lynch -- Analyst

Brett Knoblauch -- Berenberg Capital -- Analyst

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