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Smartsheet (NYSE:SMAR) Q4 Sales Beat Estimates But Stock Drops 10.4%


Full Report / March 15, 2022
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Project management software maker Smartsheet (NYSE:SMAR) beat analyst expectations in Q4 FY2022 quarter, with revenue up 43.2% year on year to $157.3 million. Guidance for next quarter's revenue was $162.5 million at the midpoint, which is 1.56% above the analyst consensus. Smartsheet made a GAAP loss of $53.1 million, down on its loss of $28.6 million, in the same quarter last year.

Smartsheet (SMAR) Q4 FY2022 Highlights:

  • Revenue: $157.3 million vs analyst estimates of $151.5 million (3.81% beat)
  • EPS (GAAP): -$0.42
  • Revenue guidance for Q1 2023 is $162.5 million at the midpoint, above analyst estimates of $159.9 million
  • Management's revenue guidance for upcoming financial year 2023 is $752.5 million at the midpoint, beating analyst estimates by 2.96% and predicting 36.6% growth (vs 42.7% in FY2022)
  • Free cash flow was negative $2.74 million, compared to negative free cash flow of $6.3 million in previous quarter
  • Net Revenue Retention Rate: 134%, up from 131% previous quarter
  • Customers: 15,150 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 79%, up from 77.8% 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 $109.8 million, to $157.3 million.

Smartsheet Total Revenue

And unsurprisingly, this was another great quarter for Smartsheet with revenue up 43.2% year on year. Quarter on quarter the revenue increased by $12.7 million in Q4, which was in line with Q3 2022. 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 38.7% year on year to $162.5 million, in line with the 36.9% 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 $752.5 million at the midpoint, growing 36.6% compared to 42.7% increase in FY2022.

Large Customers Growth

You can see below that at the end of the quarter Smartsheet reported 15,150 enterprise customers paying more than $5,000 annually, an increase of 922 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 134% in Q4. That means even if they didn't win any new customers, Smartsheet would have grown its revenue 34% 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, licenses, technical support and other necessary running expenses was at 79% in Q4.

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. 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 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 $2.74 million in Q4, with cash flow turning negative year on year.

Smartsheet Free Cash Flow

Smartsheet has burned through $20.7 million in cash over the last twelve months, resulting in a negative 3.77% 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 Q4 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 $5.47 billion and more than $449 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 glad to see the acceleration in new contract wins. Overall, we think this was a strong quarter, that should leave shareholders feeling positive. But investors might have been expecting more and the company is down 10.4% on the results and currently trades at $38.97 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. Its revenue growth has been exceptional. And while its cash burn raises the question if it can sustainably maintain its growth, 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 7.6x. 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.

The Wall St analysts covering the company had a one year price target of $92 per share right before these results, implying that they saw upside in buying Smartsheet even in the short term.

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