Project management software maker Smartsheet (NYSE:SMAR) beat analyst expectations in Q4 FY2023 quarter, with revenue up 34.9% year on year to $212.3 million. However, guidance for the next quarter was less impressive, coming in at $214 million at the midpoint, being 1.73% below analyst estimates. Smartsheet made a GAAP loss of $42.7 million, improving on its loss of $53.1 million, in the same quarter last year.
Smartsheet (SMAR) Q4 FY2023 Highlights:
- Revenue: $212.3 million vs analyst estimates of $205.9 million (3.15% beat)
- EPS (non-GAAP): $0.07 vs analyst estimates of -$0.01 ($0.08 beat)
- Revenue guidance for Q1 2024 is $214 million at the midpoint, below analyst estimates of $217.8 million
- Management's revenue guidance for upcoming financial year 2024 is $945.5 million at the midpoint, missing analyst estimates by 1.19% and predicting 23.3% growth (vs 39.6% in FY2023)
- Free cash flow of $16.4 million, up from negative free cash flow of $4.65 million in previous quarter
- Net Revenue Retention Rate: 125%, down from 129% previous quarter
- Customers: 18,093 customers paying more than $5,000 annually
- Gross Margin (GAAP): 78.9%, in line with 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).
As you can see below, Smartsheet's revenue growth has been impressive over the last two years, growing from quarterly revenue of $109.9 million in Q4 FY2021, to $212.3 million.
And unsurprisingly, this was another great quarter for Smartsheet with revenue up 34.9% year on year. Quarter on quarter the revenue increased by $12.8 million in Q4, which was in line with Q3 2023. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.
Guidance for the next quarter indicates Smartsheet is expecting revenue to grow 27.1% year on year to $214 million, slowing down from the 43.8% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $945.5 million at the midpoint, growing 23.3% compared to 39.2% increase in FY2023.
Large Customers Growth
You can see below that at the end of the quarter Smartsheet reported 18,093 enterprise customers paying more than $5,000 annually, an increase of 647 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.
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'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 125% in Q4. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 25% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Smartsheet's customers are satisfied with their software and are getting more value from it over time. That is good to see.
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 78.9% in Q4.
That means that for every $1 in revenue the company had $0.79 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 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. Smartsheet's free cash flow came in at $16.4 million in Q4, turning positive year on year.
Smartsheet has generated $9.79 million in free cash flow over the last twelve months, 1.28% of revenues. This FCF margin is a result of Smartsheet asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.
Key Takeaways from Smartsheet's Q4 Results
With a market capitalization of $5.22 billion Smartsheet is among smaller companies, but its more than $456.4 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was good to see Smartsheet deliver quarterly revenue that was both strong in growth and above analysts' expectations. Both operating profit and free cash flow also exceeded expectations. On the other hand, it was unfortunate to see that Smartsheet's revenue guidance for the full year missed analysts' expectations and the revenue guidance for next year indicates quite a significant slowdown in growth. Overall, this quarter's results were mixed. The company is up 5.09% on the results and currently trades at $40.25 per share.
Is Now The Time?
Smartsheet may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Smartsheet is a good business. We would expect growth rates to moderate from here, but its revenue growth has been impressive, over the last two years. On top of that, 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.
The market is certainly expecting long term growth from Smartsheet given its price to sales ratio based on the next twelve months is 5.2x. 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 $47.9 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.
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