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Smartsheet (NYSE:SMAR) Posts Better-Than-Expected Sales In Q1 But Stock Drops


Full Report / June 27, 2022
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Project management software maker Smartsheet (NYSE:SMAR) reported Q1 FY2023 results that beat analyst expectations, with revenue up 43.7% year on year to $168.3 million. The company expects that next quarter's revenue would be around $180.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Smartsheet made a GAAP loss of $70.4 million, down on its loss of $37 million, in the same quarter last year.

Smartsheet (SMAR) Q1 FY2023 Highlights:

  • Revenue: $168.3 million vs analyst estimates of $162.5 million (3.54% beat)
  • EPS (GAAP): -$0.55
  • Revenue guidance for Q2 2023 is $180.5 million at the midpoint, above analyst estimates of $179.3 million
  • The company reconfirmed revenue guidance for the full year, at $758.5 million at the midpoint
  • Free cash flow was negative $9.06 million, compared to negative free cash flow of $2.74 million in previous quarter
  • Net Revenue Retention Rate: 133%, in line with previous quarter
  • Customers: 15,879 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 77.9%, 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).

Sales Growth

As you can see below, Smartsheet's revenue growth has been impressive over the last year, growing from quarterly revenue of $117 million, to $168.3 million.

Smartsheet Total Revenue

And unsurprisingly, this was another great quarter for Smartsheet with revenue up 43.7% year on year. But the growth did slow down a little compared to last quarter, as Smartsheet increased revenue by $10.9 million in Q1, compared to $12.7 million revenue add in Q4 2022. 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 37% year on year to $180.5 million, slowing down from the 44.4% 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 34.6% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Smartsheet reported 15,879 enterprise customers paying more than $5,000 annually, an increase of 729 on last quarter. That is a bit less contract wins than last quarter but about the same as what we have typically seen over the last year, suggesting that the company still has decent sales momentum, even if this was a weaker quarter.

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 133% in Q1. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 33% year on year. Trending up over the last year, this is 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 77.9% in Q1.

Smartsheet Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still 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.

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 burned through $9.06 million in Q1, increasing the cash burn by 10.6% year on year.

Smartsheet Free Cash Flow

Smartsheet has burned through $21.6 million in cash over the last twelve months, resulting in a negative 3.59% 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 Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Smartsheet’s balance sheet, but we note that with a market capitalization of $5.04 billion and more than $446.6 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Smartsheet delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see the slowdown in new contract wins and gross margin deteriorated a little. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $35 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. There are a number of reasons why we think Smartsheet is a great business. First, its revenue growth has been exceptional. 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.

Smartsheet's price to sales ratio based on the next twelve months is 6.4x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Smartsheet's qualities as a business really stand out and we do like the look of the company at current prices.

The Wall St analysts covering the company had a one year price target of $85.5 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.

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