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Asana (NYSE:ASAN) Q3 Sales Beat Estimates But Stock Drops


Full Report / December 05, 2023

Work management software maker Asana (NYSE: ASAN) reported results ahead of analysts' expectations in Q3 FY2024, with revenue up 17.7% year on year to $166.5 million. The company expects next quarter's revenue to be around $167.5 million, in line with analysts' estimates.

Asana (ASAN) Q3 FY2024 Highlights:

  • Revenue: $166.5 million vs analyst estimates of $164.1 million (1.5% beat)
  • Billings: $160.8 million vs. analyst estimates of $166.4 million (3.4% miss)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.11
  • Revenue Guidance for Q4 2024 is $167.5 million at the midpoint, roughly in line with what analysts were expecting
  • Full year guidance raised for revenue and non-GAAP operating income
  • Free Cash Flow was -$11.47 million, down from $14.61 million in the previous quarter
  • Net Revenue Retention Rate: 100%, down from 105% in the previous quarter (miss vs. expectations of ~103%)
  • Gross Margin (GAAP): 90.4%, up from 89.3% 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.

Project Management Software

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 very strong over the last two years, growing from $100.3 million in Q3 FY2022 to $166.5 million this quarter.

Asana Total Revenue

This quarter, Asana's quarterly revenue was once again up 17.7% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $4.05 million in Q3 compared to $10.04 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter, Asana is guiding for a 10.3% year-on-year revenue decline to $167.5 million, a further deceleration from the 34.2% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 11.6% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, Asana reported 21,346 enterprise customers paying more than $5,000 annually, an increase of 564 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

Asana customers paying more than $5,000 annually

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Asana Net Revenue Retention Rate

Asana's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 100% in Q3. This means that even if Asana didn't win any new customers over the last 12 months, it would've grown its revenue by 0%.

Despite falling over the last year, Asana still has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 90.4% in Q3.

Asana Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.90 left to spend on developing new products, sales and marketing, and general administrative overhead. Asana's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Asana is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Asana burned through $11.47 million of cash in Q3 , increasing its cash burn by 76.4% year on year.

Asana Free Cash Flow

Asana has burned through $48.3 million of cash over the last 12 months, resulting in a negative 8% free cash flow margin. This below-average FCF margin stems from Asana's poor unit economics or a continuous need to reinvest in its business to penetrate the market.

Key Takeaways from Asana's Q3 Results

With a market capitalization of $5.07 billion, Asana is among smaller companies, but its more than $268.3 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

It was encouraging to see Asana narrowly top analysts' revenue expectations this quarter, although calculated billings (revenue + change in deferred revenue) missed expectations. Additionally, net revenue retention, an important metric that could give hints on customer satisfaction, willingness to increase spending, and even competition, fell and missed. Guidance was good. Next quarter's guidance was ahead and full year guidance was raised for revenue and non-GAAP operating income. Overall, this was a mixed quarter for Asana. The company is down 5.8% on the results and currently trades at $21.95 per share.

Is Now The Time?

When considering an investment in Asana, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of Asana, we'll be cheering from the sidelines. Its revenue growth has been strong over the last two years, though we don't expect it to maintain that historical pace. And while its impressive gross margins indicate excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies. On top of that, its cash burn raises the question if it can sustainably maintain its growth.

Given its price to sales ratio based on the next 12 months is 7.3x, Asana is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

Wall Street analysts covering the company had a one-year price target of $20.9 per share right before these results, implying that they didn't see much short-term potential in the Asana.

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