A deeper look at Smartsheet (SMAR)

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Smartsheet (SMAR)

General:

  • Founded in 2005 to build a universal application for work management that doesn’t require coding. IPO 4/27/18.

  • Geared toward non-technical business users and teams.

  • Their main product is a cloud-based platform for work execution to capture, manage, automate and create reports for unstructured work (email, notes, spreadsheets, meetings, calls, etc). They have broad use cases that apply to almost any industry. They categorize their products at the Individual, Team, Business and Enterprise levels. It is currently available in eight languages. Their products integrate with Office 365, Google G Suite, Salesforce, Atlassian, ServiceNow, Tableau, Dropbox and Box.

  • They run a cloud-based software subscription model. Their basic go-to-market strategy consists of an unassisted freemium (with available self-service upgrade), inside sales, enterprise sales and reseller channels.

  • They are currently in the Accelerated Certification Program for FedRAMP, which allows them to sell to government. They expect that to happen sometime in FY 2020.

  • TAM estimated at $21.4B in '17 and $31.6B in '21.

The Numbers:


Revenues (4Q19 is current guidance)				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$13.66	$15.79	$17.84	$19.68	$66.96		2017	 	 	 	 	0
2018	$22.24	$26.67	$29.39	$32.96	$111.25		2018	62.8%	68.9%	64.7%	67.5%	66.1%
2019	$36.32	$42.38	$46.87	$50.00	$175.60		2019	63.3%	58.9%	59.5%	51.7%	57.8%

Subscription Revenues					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$12.84	$14.76	$16.45	$18.37	$62.42		2017	 	 	 	 	0
2018	$20.38	$23.80	$26.44	$29.76	$100.37		2018	58.7%	61.3%	60.7%	62.0%	60.8%
2019	$32.06	$37.47	$41.52	 	 		2019	57.3%	57.5%	57.0%	 	 

Op Expenses						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$14.13	$16.23	$17.34	$20.30	$67.99		2017	 	 	 	 	0
2018	$24.94	$44.00	$34.18	$35.43	$138.55		2018	76.5%	171.2%	97.1%	74.6%	103.8%
2019	$42.03	$47.19	$54.57	 	 		2019	68.5%	7.2%	59.7%	 	 

non-GAAP Gross Margin	* Targeting 78-80%
	Q1	Q2	Q3	Q4	YR
2017	79.5%	79.0%	78.8%	78.7%	79.0%
2018	79.9%	80.1%	80.8%	81.6%	80.7%
2019	80.4%	81.6%	82.2%	 	 

Non-GAAP Subscription Gross Margins
	Q1	Q2	Q3	Q4
2017	 	 	 	 
2018	 	 	88.0%	89.0%
2019	87.0%	88.0%	89.0%	 

non-GAAP Services Gross Margin	
	Q1	Q2	Q3	Q4
2017	 	 	 	 
2018	 	 	20.0%	12.0%
2019	29.0%	30.0%	31.0%	 

Op Ex as % Revenues			
	Q1	Q2	Q3	Q4	YR
2017	103.4%	102.7%	97.2%	103.2%	101.5%
2018	112.1%	165.0%	116.3%	107.5%	124.5%
2019	115.7%	111.3%	116.4%	 	 

Calculated Billings (4Q19 guidance)				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$17.38	$19.47	$20.66	$22.59	$80.10		2017	 	 	 	 	0
2018	$30.34	$33.62	$32.52	$39.35	$135.82		2018	74.5%	72.7%	57.4%	74.2%	69.6%
2019	$45.38	$52.20	$54.86	$59.56	$212.00		2019	49.6%	55.3%	68.7%	51.4%	56.1%

Customers wth ACV >$5K (000)				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	2.44	2.82	3.28	3.79	 		2018	 	 	 	 	 
2019	4.35	4.96	5.58	 	 		2019	78.5%	75.6%	70.2%	 	 

Customers with ACV >$50K					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 		2017	 	 	 	 	0
2018	100	121	145	189	 		2018	 	 	 	 	 
2019	239	298	360	 	 		2019	139.0%	146.3%	148.3%	 	 

ACV per customer (000)						% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$0.90	$0.96	$1.02	$1.11	 		2017	 	 	 	 	0
2018	$1.23	$1.35	$1.49	$1.64	 		2018	37.1%	40.9%	46.8%	48.3%	 
2019	$1.81	$2.00	$2.21	 	 		2019	47.0%	48.7%	48.5%	 	 

non-GAAP Op Income (4Q19 guidance)			% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$3.07	-$3.53	-$2.99	-$4.44	-$14.02		2017	-22.5%	-22.3%	-16.8%	-22.6%	-20.9%
2018	-$6.65	-$6.72	-$9.41	-$7.50	-$30.28		2018	-29.9%	-25.2%	-32.0%	-22.8%	-27.2%
2019	-$11.02	-$8.73	-$10.24	-$14.00	-$44.00		2019	-30.3%	-20.6%	-21.9%	-28.0%	-25.1%

Non-GAAP Net Income					% Revenues				
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	-$15.20		2017	 	 	 	 	-22.7%
2018	-$6.64	-$6.65	-$9.31	 	-$49.10		2018	-29.9%	-24.9%	-31.7%	 	-44.1%
2019	-$11.00	-$8.07	-$9.41	 	 		2019	-30.3%	-19.0%	-20.1%	 	 

Free Cash Flow				
	Q1	Q2	Q3	Q4	YR
2017	-$1.23	-$1.30	$2.35	-$1.89	-$2.07
2018	-$7.75	-$2.40	-$5.15	-$9.96	-$25.26
2019	-$9.72	-$4.20	-$1.98	 	-$15.90

non-GAAP EPS				
	Q1	Q2	Q3	Q4	YR
2017	 	 	 	 	 
2018	-$0.08	-$0.08	-$0.11	 	 
2019	-$0.12	-$0.08	-$0.09	-$0.13	 

* $212M cash
* dollar-based retention was a record 132% last Q, climbing steadily from 116% in 1Q16
* Dollar-based retention of 149% for ACV $5K+ entering 2018

My Take:

The Good

  • It’s obviously easy to like the revenue growth. It should stay above 50% for a few quarters at least.

  • Subscription growth and gross margins both fit with companies we discuss here. Their subscription margins are strong. They even make a little on their service revenues, which isn’t the case for some other SaaS companies who are looking to expand.

  • The ACV (annual contract value) and dollar-based retention rates both grabbed my attention. Their expand of the land and expand equation seems to be real.

The Not-So-Good

  • I’m not crazy about the Op Ex rates either quarterly or as a percentage of revenues, but it’s not out of line with some other recent IPO’s stressing growth (say ESTC).

  • Their operating and net income losses as a percentage of revenues are still pretty strong. They have contracted slightly the last few Q’s, but I noticed they’ve guided for an expansion in 4Q. A beat would alleviate this, but it’s something to watch.

  • I have some general concern as to just how mission-critical their software is. Their products are about improving existing functions rather than being vital to the business operation itself like say data analysis, communication centers or security. While their retention rates suggest existing customers clearly see the value, I’m wondering how their ability to add new customers would be affected in a general economic slowdown. The truth is potential new customers don’t necessarily need their product to survive.

Summary:

I liked what I saw enough to personally add a starter position early this month with a small add a couple of days ago. In technical terms I believe I shot first and am asking questions later. Regardless, I thought the name was worthy of a deeper look in this forum.

I hope everyone is off to a good start in 2019.

Joe

45 Likes
2

Hi Joe:

Good Writeup.

I took a look at SMAR a couple of weeks back and liked it enough to start a small test flight
position. It was their growth that caught my eye but their latest earnings conf call sealed
the deal for me. Here it is if anyone is interested:

https://seekingalpha.com/news/3414099-smartsheet-plus-2_9-pe…

CEO Mark Mader’s opening conf call comments included these quotes:

“Our customers are expanding faster with us at a rate never seen before as the product
enhancements we’ve made over the past year enable Smartsheet to address increasingly high value
workloads…”.

“For many of our largest and fastest grouting customers, their use of Smarsheet has evolved from
being a valuable tool for collaboration and work tracking by individuals and teams to also
serving as mission critical work platform that drives operationally important processes across
their business.”

Then he gives some examples. So maybe they are addressing the problem of how critical the software is to general business operations.

What gave some credence to his statements was the company raising guidance.

Still not all that convinced but their next earnings report should be good and your writeup definitely helped me. thanks

all the best

6 Likes
3

Here is a Forrester Wave report on Collaborative Work Management (CWM) tools (what Smartsheet does), calling Smartsheet a leader.

https://www.smartsheet.com/sites/default/files/RES142468.pdf…

I find it interesting that their customer count of 77,893 was up only 7% vs the year before, but the average annual contract value is up 48%.

(Page 7 of the last quarter slide deck)

https://seekingalpha.com/article/4226179-smartsheet-2019-q3-…

So customers love them and are spending significantly more money each year, but they aren’t getting many new customers.

Do they have an awesome, expanding product, but are running out of available customers?

Jim

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4

In the last earnings call, SMAR mentions in the Q and A section that the churn rate is 10-11%, this gives us the answer to the total customer question.

So they sign up around 18% new customers each year, but loss 10% to churn, for a net customer growth of around 8%.

From the excellent growth in customers above $5000, customers above $50,000, and net retention rate, the customers that stay love them and expand their use.

Jim

5

Jim -

All good and valid points on the overall customer count. Here are the numbers again including total customers:


Domain-based customers (000)				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	57.84	61.21	64.78	66.65			2017					0
2018	69.04	71.02	72.53	74.12			2018	19.4%	16.0%	12.0%	11.2%	
2019	75.64	76.69	77.89				2019	9.6%	8.0%	7.4%		

Customers wth ACV >$5K (000)				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017							2017					0
2018	2.44	2.82	3.28	3.79			2018					
2019	4.35	4.96	5.58				2019	78.5%	75.6%	70.2%		

Customers with ACV >$50K				% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017							2017					0
2018	100	121	145	189			2018					
2019	239	298	360				2019	139.0%	146.3%	148.3%		

Average ACV (000)					% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$0.90	$0.96	$1.02	$1.11			2017					0
2018	$1.23	$1.35	$1.49	$1.64			2018	37.1%	40.9%	46.8%	48.3%	
2019	$1.81	$2.00	$2.21				2019	47.0%	48.7%	48.5%

I didn’t list the total count in my first write up but did consider it before buying. My thesis for now is that a ~78K customer base with some churn is plenty to draw from in growing their current >$5K (5,575 customers) and >$50K (360) bases. Thanks for the additional clarity on the churn percentages as I didn’t note that when I reviewed their call.

Given the paid growth rates above, the rise in the average ACV per customer and a record 132% retention rate last Q, I’m OK seeing if they can continue to monetize the customers currently using their freemium or lesser offerings. Something to watch for sure.

6

I’m in. Glassdoor rating of CEO Mark Mader 99%! That’s super.

Next earnings according to Yahoo are March 7.

Here’s why I bought besides the numbers which are fantastic. I’m a retired engineer and my last and longest gig was working as a contractor for a very large energy company at a nuclear power plant. You could ask ANY of the 100’s of engineers working there, including me, that the absolute worst part of the job was dealing with project management. And I don’t mean the project managers, although they were no saints. I mean the project management that we, the engineers, were being asked to do. I cannot think of a bigger waste of an engineers time than doing time estimating, time management, and detailed hour by hour task reporting. I don’t have any experience with SMAR (as I am blissfully retired now) but if it’s even the slightest bit better than the CF that we were dealing with, it will do well.

Peace,
Dana

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