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Asana's (NYSE:ASAN) Q3 Sales Top Estimates But Stock Drops 12.2% On Weak Guidance


Full Report / December 01, 2022
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Work management software maker Asana (NYSE: ASAN) reported Q3 FY2023 results that beat analyst expectations, with revenue up 40.9% year on year to $141.4 million. However, guidance for the next quarter was less impressive, coming in at $145 million at the midpoint, being 4.04% below analyst estimates. Asana made a GAAP loss of $100.9 million, down on its loss of $69.2 million, in the same quarter last year.

Asana (ASAN) Q3 FY2023 Highlights:

  • Revenue: $141.4 million vs analyst estimates of $139 million (1.73% beat)
  • EPS (non-GAAP): -$0.26 vs analyst estimates of -$0.32
  • Revenue guidance for Q4 2023 is $145 million at the midpoint, below analyst estimates of $151.1 million
  • Free cash flow was negative $48.5 million, compared to negative free cash flow of $42.2 million in previous quarter
  • Net Revenue Retention Rate: 120%, in line with previous quarter
  • Gross Margin (GAAP): 89.2%, down from 90.4% 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 $58.9 million in Q3 FY2021, to $141.4 million.

Asana Total Revenue

And unsurprisingly, this was another great quarter for Asana with revenue up 40.9% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $6.54 million in Q3, compared to $14.2 million in Q2 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 29.5% year on year to $145 million, slowing down from the 63.7% 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 29.7% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Asana reported 18,700 enterprise customers paying more than $5,000 annually, an increase of 660 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.

Asana customers paying more than $5,000 annually

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 Net Revenue Retention Rate

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 120% in Q3. That means even if they didn't win any new customers, Asana would have grown its revenue 20% year on year. That is a good retention rate and a proof that Asana's customers are satisfied with their software and are getting more value from it over time. That is good to see.

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 89.2% in Q3.

Asana Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.89 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 $48.5 million in Q3, increasing the cash burn by 64.4% year on year.

Asana Free Cash Flow

Asana has burned through $174.3 million in cash over the last twelve months, a negative 34.2% 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 Q3 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 $3.83 billion and more than $545.4 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed seeing Asana’s impressive revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and that the sales momentum is slowing down. Overall, it seems to us that this was a complicated quarter for Asana. The company is down 12.2% on the results and currently trades at $15.88 per share.

Is Now The Time?

Asana may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Asana is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its growth is coming at a cost of significant cash burn, the good news is its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from Asana given its price to sales ratio based on the next twelve months is 5.6x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Asana doesn't trade at a completely unreasonable price point.

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