Smartsheet (NYSE:SMAR) Surprises With Q3 Sales, Stock Soars

Full Report / December 01, 2022
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Project management software maker Smartsheet (NYSE:SMAR) beat analyst expectations in Q3 FY2023 quarter, with revenue up 37.9% year on year to $199.5 million. The company expects that next quarter's revenue would be around $206 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Smartsheet made a GAAP loss of $40.1 million, down on its loss of $36.7 million, in the same quarter last year.

Smartsheet (SMAR) Q3 FY2023 Highlights:

  • Revenue: $199.5 million vs analyst estimates of $194.3 million (2.69% beat)
  • EPS: -$0.31 vs analyst estimates of -$0.48 (35.1% beat)
  • Revenue guidance for Q4 2023 is $206 million at the midpoint, above analyst estimates of $204.4 million
  • Free cash flow was negative $4.64 million, down from positive free cash flow of $7.1 million in previous quarter
  • Net Revenue Retention Rate: 129%, in line with previous quarter
  • Customers: 17,446 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 78.5%, down from 79.6% 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 two years, growing from quarterly revenue of $98.9 million in Q3 FY2021, to $199.5 million.

Smartsheet Total Revenue

And unsurprisingly, this was another great quarter for Smartsheet with revenue up 37.9% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $12.8 million in Q3, compared to $18.3 million in Q2 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Smartsheet is expecting revenue to grow 30.8% year on year to $206 million, slowing down from the 43.2% 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 28.4% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Smartsheet reported 17,446 enterprise customers paying more than $5,000 annually, an increase of 764 on last quarter. That's in line with the number of contracts wins we are used to seeing over the last year, suggesting that the company is able to maintain its current sales momentum.

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 129% in Q3. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 29% 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.


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 78.5% in Q3.

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 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 burned through $4.64 million in Q3,

Smartsheet Free Cash Flow

Smartsheet has burned through $9.34 million in cash over the last twelve months, resulting in a negative 1.31% 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 Q3 Results

With a market capitalization of $4.01 billion Smartsheet is among smaller companies, but its more than $194.4 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. On the other hand, there was a deterioration in revenue retention rate. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 7.65% on the results and currently trades at $35.15 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. We would expect growth rates to moderate from here, but its revenue growth has been impressive, over the last two years. 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 $44.3 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.

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