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Smartsheet (NYSE:NYSE:SMAR) Delivers Strong Q2 Numbers, Upgrades Full Year Guidance


Full Report / September 07, 2021
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Project management software maker Smartsheet (NYSE:SMAR) reported Q2 FY2022 results topping analyst expectations, with revenue up 44.4% year on year to $131.7 million. Smartsheet made a GAAP loss of $44.1 million, down on its loss of $26.5 million, in the same quarter last year.

Smartsheet (NYSE:SMAR) Q2 FY2022 Highlights:

  • Revenue: $131.7 million vs analyst estimates of $125.4 million (4.99% beat)
  • EPS (GAAP): -$0.35
  • Revenue guidance for Q3 2022 is $138.5 million at the midpoint, above analyst estimates of $129.9 million
  • The company lifted revenue guidance for the full year, from $512.5 million to $531.5 million at the midpoint, a 3.7% increase
  • Free cash flow was negative $3.53 million, compared to negative free cash flow of -$8.2 million in previous quarter
  • Net Revenue Retention Rate: 128%, up from 125% previous quarter
  • Customers: 13,420 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 79.1%, up from 77.3% previous quarter

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.

While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitely 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 year, growing from quarterly revenue of $91.2 million, to $131.7 million.

Smartsheet Total Revenue

And unsurprisingly, this was another great quarter for Smartsheet with revenue up an absolutely stunning 44.4% year on year. On top of that, revenue increased $14.6 million quarter on quarter, a very strong improvement on the $7.21 million increase in Q1 2022, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 27.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter Smartsheet reported 13,420 enterprise customers paying more than $5,000 annually, an increase of 765 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 128% in Q2. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 28% year on year. Significantly up from the last quarter, 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, licences, technical support and other necessary running expenses was at 79.1% in Q2.

Smartsheet Gross Margin (GAAP)

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. Significantly up from the last quarter, 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.

Key Takeaways from Smartsheet's Q2 Results

With a market capitalization of $10.4 billion, more than $442.8 million in cash and the fact it is operating close to free cash flow break-even the company is in a strong financial position to invest in growth.

We were impressed by the very optimistic revenue guidance Smartsheet provided for the next quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is down -0.61% on the results and currently trades at $82.38 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 exceptional, 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 17.9. There is definitely a lot of things to like about Smartsheet and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

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