Asana's (NYSE:ASAN) Q1 Sales Top Estimates But Stock Drops

Work management software maker Asana (NYSE: ASAN) reported Q1 FY2024 results beating Wall St's expectations, with revenue up 26.3% year on year to $152.4 million. The company expects that next quarter's revenue would be around $158 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Asana made a GAAP loss of $61.5 million, improving on its loss of $98.9 million, in the same quarter last year.

Founded in 2008 by Facebook’s co-founder Dustin Moskovitz, Asana (NYSE:ASAN) is a cloud-based project management software, where you can plan and assign tasks to employees and monitor and discuss progress of work.

A lot of project planning and management work is still done with a mixture of emails, spreadsheets that only exist on one person’s computer, hand written notes and in-person meetings. As a result, a lot of time is lost tracking down who does what, when, and how, with team managers organizing multiple meetings to get accurate updates on the progress of a project.

Asana aims to reduce the amount of this "work about work" by integrating with a large number of other services like Dropbox, Slack or email and creating a centralised dashboard with a system of record for all information related to work planning.

For example, using Asana, editors can assign tasks to reporters and writers and in real time check progress on how different articles are coming together. Articles are linked and tracked from text documents directly into the dashboard, where editors provide writers with feedback. Asana also provides reporting features to visualize the status of the project and help the teams spot potential problems and keep work on track.

The future of work requires teams to collaborate across departments and remote offices. Project management software is both driving this change and benefiting from it. While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitively accelerated the demand for tools that allow work to be done remotely.

It is a crowded market and Asana is competing with companies like Atlassian (NASDAQ:TEAM), SmartSheet (NYSE:SMAR), Monday.com (NASDAQ:MNDY) and Productboard.

Sales Growth

As you can see below, Asana's revenue growth has been exceptional over the last two years, growing from quarterly revenue of $76.7 million in Q1 FY2022, to $152.4 million.

This quarter, Asana's quarterly revenue was once again up a very solid 26.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.18 million in Q1, compared to $8.79 million in Q4 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Asana is expecting revenue to grow 17.1% year on year to $158 million, slowing down from the 50.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.6% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Asana reported 19,864 enterprise customers paying more than $5,000 annually, an increase of 432 on last quarter. That is a bit less contract wins than last quarter and also quite a bit below what we have typically seen over the past couple of quarters, suggesting that the sales momentum with large customers is slowing down.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Asana's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 110% in Q1. That means even if they didn't win any new customers, Asana would have grown its revenue 10% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Asana's customers stick around but at least some of them get increasing value from its software over time.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Asana's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 90.3% in Q1.

That means that for every $1 in revenue the company had $0.90 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Asana to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Asana is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Asana burned through $17.3 million in Q1, reducing the cash burn by 59.1% year on year.

Asana has burned through $142.2 million in cash over the last twelve months, a negative 24.6% free cash flow margin. This low FCF margin is a result of Asana's need to still heavily invest in the business.

Key Takeaways from Asana's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Asana’s balance sheet, but we note that with a market capitalization of $5.17 billion and more than $523.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.

Asana topped analysts’ revenue expectations this quarter, even if just narrowly. We also liked to see the reduction in cash burn. On the other hand, it was less good to see the deterioration in revenue retention rate. Overall, it seems to us that this was a complicated quarter for Asana. The company is down 6.3% on the results and currently trades at $21.4 per share.

Is Now The Time?

When considering Asana, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Asana we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its impressive gross margins are indicative of excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies and its growth is coming at a cost of significant cash burn.

Given its price to sales ratio based on the next twelve months is 7.4x, Asana is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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