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Smartsheet (NYSE:SMAR) Posts Better-Than-Expected Sales In Q3


Full Report / December 07, 2023

Project management software maker Smartsheet (NYSE:SMAR) beat analysts' expectations in Q3 FY2024, with revenue up 23.2% year on year to $245.9 million. Revenue guidance for the full year also exceeded analysts' estimates but next quarter's guidance of $255 million was less impressive, coming in 0% below expectations. It made a GAAP loss of $0.24 per share, improving from its loss of $0.31 per share in the same quarter last year.

Smartsheet (SMAR) Q3 FY2024 Highlights:

  • Revenue: $245.9 million vs analyst estimates of $241.3 million (1.9% beat)
  • Billings: $268.5 million vs analyst estimates of $257.5 million (4.3% beat)
  • EPS (non-GAAP): $0.16 vs analyst estimates of $0.09 ($0.07 beat)
  • Revenue Guidance for Q4 2024 is $255 million at the midpoint, roughly in line with what analysts were expecting
  • Full year guidance raised for revenue (slight raise) and for non-GAAP operating income (large raise)
  • Free Cash Flow of $11.41 million, down 74.9% from the previous quarter
  • Net Revenue Retention Rate: 118%, down from 121% in the previous quarter
  • Customers: 19,389 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 80.9%, up from 78.5% in the 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.

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.

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 very strong over the last two years, growing from $144.6 million in Q3 FY2022 to $245.9 million this quarter.

Smartsheet Total Revenue

This quarter, Smartsheet's quarterly revenue was once again up a very solid 23.2% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $10.33 million in Q3 compared to $15.7 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, Smartsheet is guiding for a 16.7% year-on-year revenue decline to $255 million, a further deceleration from the 34.9% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 19.6% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, Smartsheet reported 19,389 enterprise customers paying more than $5,000 annually, an increase of 358 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.

Smartsheet 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.

Smartsheet Net Revenue Retention Rate

Smartsheet's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 118% in Q3. This means that even if Smartsheet didn't win any new customers over the last 12 months, it would've grown its revenue by 18%.

Despite falling over the last year, Smartsheet still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great 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. Smartsheet'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 80.9% in Q3.

Smartsheet Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Smartsheet'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.

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. Smartsheet's free cash flow came in at $11.41 million in Q3, turning positive over the last year.

Smartsheet Free Cash Flow

Smartsheet has generated $104.6 million in free cash flow over the last 12 months, a solid 11.5% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Smartsheet's Q3 Results

Sporting a market capitalization of $6.05 billion, Smartsheet is among smaller companies, but its more than $568.7 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was great to see how many new large contracts Smartsheet won this quarter. We were also happy its revenue narrowly outperformed Wall Street's estimates while billings outperformed more convincingly. Non-GAAP operating profit also outperformed nicely, showing that there is not only topline strength but operating efficiency and expense leverage. Lastly, guidance was solid, with full year guidance raised from the previous outlook. Zooming out, we think this was a decent quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $44.5 per share.

Is Now The Time?

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

We think Smartsheet is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been strong over the last two years. On top of that, its impressive gross margins indicate excellent business economics and its customers are increasing their spending quite quickly, suggesting they love the product.

The market is certainly expecting long-term growth from Smartsheet given its price to sales ratio based on the next 12 months is 5.6x. There's 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.

Wall Street analysts covering the company had a one-year price target of $53.6 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.

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