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Smartsheet's (NYSE:SMAR) Q2 Sales Top Estimates But Full Year Guidance Underwhelms


Full Report / September 20, 2022
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Project management software maker Smartsheet (NYSE:SMAR) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 41.7% year on year to $186.6 million. However, guidance for the next quarter was less impressive, coming in at $193.5 million at the midpoint, being 1.43% below analyst estimates. Smartsheet made a GAAP loss of $62.3 million, down on its loss of $44.1 million, in the same quarter last year.

Smartsheet (SMAR) Q2 FY2023 Highlights:

  • Revenue: $186.6 million vs analyst estimates of $180.5 million (3.39% beat)
  • EPS (GAAP): -$0.48
  • Revenue guidance for Q3 2023 is $193.5 million at the midpoint, below analyst estimates of $196.3 million
  • The company reconfirmed revenue guidance for the full year, at $752.5 million at the midpoint
  • Free cash flow of $7.1 million, up from negative free cash flow of $9.06 million in previous quarter
  • Net Revenue Retention Rate: 131%, in line with previous quarter
  • Customers: 16,682 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 78.2%, down from 79.1% same quarter last year

Founded in 2005, Smartsheet (NYSE:SMAR) is a software as a service platform that helps companies plan, manage and report on work.

The software offers a collaborative spreadsheet interface where users can assign tasks to others and create visual dashboards that track the progress of work across projects.

Project management software typically replaces a combination of manual processes, in-person meetings and things like whiteboards and email. Smartsheet integrates with a large number of other services like Slack, Salesforce or cloud storage and aims to become a company's central hub for everything related to work planning.

For example a company can be using Smartsheet to track progress across their portfolio of products to help them ensure that new features are delivered on time and within budget. While every product manager is focused on reporting their own status, the higher level management is able to aggregate this information and zoom out to see the summaries across business units, and compare it with their business plan. To prepare for the weekly C-suite level meeting, the company used to have a large number of employees just focused on gathering updates from all the different departments, but now all the information is automatically updated in real time.

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.

Smartsheet’s competitors include Monday.com (NASDAQ:MNDY), Asana (NYSE:ASAN) and Atlassian (NASDAQ:TEAM).

Sales Growth

As you can see below, Smartsheet's revenue growth has been impressive over the last year, growing from quarterly revenue of $131.7 million, to $186.6 million.

Smartsheet Total Revenue

And unsurprisingly, this was another great quarter for Smartsheet with revenue up 41.7% year on year. On top of that, revenue increased $18.3 million quarter on quarter, a very strong improvement on the $10.9 million increase in Q1 2023, and a sign of acceleration of growth.

Guidance for the next quarter indicates Smartsheet is expecting revenue to grow 33.7% year on year to $193.5 million, slowing down from the 46.1% 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 33.3% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Smartsheet reported 16,682 enterprise customers paying more than $5,000 annually, an increase of 803 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Smartsheet 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.

Smartsheet Net Revenue Retention Rate

Smartsheet'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 131% in Q2. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 31% year on year. Despite the recent drop this is still a great retention rate and a clear proof of a great product. We can see that Smartsheet's customers are very satisfied with their software and are using it more and more 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. Smartsheet'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 78.2% in Q2.

Smartsheet Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Smartsheet 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 Smartsheet is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow 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. Smartsheet's free cash flow came in at $7.1 million in Q2, turning positive year on year.

Smartsheet Free Cash Flow

Smartsheet has burned through $11 million in cash over the last twelve months, resulting in a negative 1.67% free cash flow margin. This below average FCF margin is a result of Smartsheet's need to invest in the business to continue penetrating its market.

Key Takeaways from Smartsheet's Q2 Results

With a market capitalization of $4.3 billion Smartsheet is among smaller companies, but its more than $227.3 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We enjoyed seeing Smartsheet’s impressive revenue growth this quarter. And we were also glad to see the acceleration in new contract wins. On the other hand, it was unfortunate to see that the revenue guidance for both the next quarter and full year missed analysts' expectations. Overall, this quarter's results could have been better. The company currently trades at $36 per share.

Is Now The Time?

When considering Smartsheet, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Smartsheet is a good business. Its revenue growth has been exceptional. And while its customer acquisition costs are higher than we like to see, the good news is its customers are increasing their spending quite quickly, suggesting that they love the product, and its impressive gross margins are indicative of excellent business economics.

Smartsheet's price to sales ratio based on the next twelve months is 4.6x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about Smartsheet and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $53.7 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.

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