Work management software maker Asana (NYSE: ASAN) beat analysts' expectations in Q2 FY2024, with revenue up 20.4% year on year to $162.5 million. The company also expects next quarter's revenue to be around $164 million, in line with analysts' estimates.
Asana (ASAN) Q2 FY2024 Highlights:
- Revenue: $162.5 million vs analyst estimates of $157.8 million (2.96% beat)
- EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.12
- Revenue Guidance for Q3 2024 is $164 million at the midpoint, above analyst estimates of $162.8 million
- The company slightly raised its revenue guidance for the full year, it now stands at $645 million at the midpoint (slight beat)
- Free Cash Flow of $14.6 million is up from -$17.3 million in the previous quarter
- Net Revenue Retention Rate: 105%, down from 110% in the previous quarter
- Gross Margin (GAAP): 90%, in line with 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.
As you can see below, Asana's revenue growth has been impressive over the last two years, growing from $89.5 million in Q2 FY2022 to $162.5 million this quarter.
This quarter, Asana's quarterly revenue was once again up a very solid 20.4% year on year. On top of that, its revenue increased $10 million quarter on quarter, a very strong improvement from the $2.18 million increase in Q1 2024. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that Asana is expecting revenue to grow 16% year on year to $164 million, slowing down from the 41% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 14.3% over the next 12 months before the earnings results announcement.
Large Customers Growth
This quarter, Asana reported 20,782 enterprise customers paying more than $5,000 annually, an increase of 918 from the previous quarter. That's quite a bit more contract wins than last quarter but also quite a bit below what we've typically observed over the last year, suggesting that the company may be reinvigorating growth.
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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 105% in Q2. This means that even if Asana didn't win any new customers over the last 12 months, it would've grown its revenue by 5%.
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%+.
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% in Q2.
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's free cash flow came in at $14.6 million in Q2, turning positive over the last year.
Asana has burned through $85.4 million of cash over the last 12 months, resulting in a negative 14.8% free cash flow margin. This low FCF margin stems from Asana's poor unit economics or a constant need to reinvest in its business to stay competitive.
Key Takeaways from Asana's Q2 Results
Although Asana, which has a market capitalization of $4.69 billion, has been burning cash over the last 12 months, its more than $537.5 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
This was a mixed quarter. It was good to see Asana beat analysts' revenue expectations this quarter and generate positive free cash flow,. On the other hand, billings (another important topline metric) missed, and net revenue retention both fell from last quarter's levels and was below expectations. On a positive note, we were glad that next quarter's revenue guidance came in higher than Wall Street's estimates. Full year revenue guidance was raised slightly, but full year non-GAAP operating profit guidance was reduced. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $21.5 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. Although Asana isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its impressive gross margins indicate 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.
The market is certainly expecting long-term growth from Asana given its price to sales ratio based on the next 12 months is 6.8x. 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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