Call with SMAR CFO

Ms. Ceran, the CFO of Smartsheets very graciously spent some time with me on the phone. Here are my notes. Any errors are mine and mine alone. Unfortunately, I was away from my computer when she called so part of this was me scribbling on a piece of paper. I have horrible hand writing. Bold is me. Her responses follow.

I see that Smartsheet is migrating to the public cloud. Ms. Ceran said the long term gross margin target is 78-80%. Do you anticipate lower gross margins than the long term target while migrating from the co-location model to the public cloud?

Gross margins will not temporarily drop below the long term target of 78-80% during the transition despite having both co-loc and public cloud operating simultaneously for a while.

30% service margin they model long term to be closer to 20%.

2) How long do you expect the migration to the public cloud to take?

18-24 months co-loc/public cloud and depreciating servers. Maybe a little more, maybe a little less.

3) I’ve followed your number of customers with ACV >5k, 50k, and 100k with interest. Can you provide more color on those customers? Do you have data on how many are new lands in each subgroup (5k, 50k, 100k) vs existing customers that have expanded into a new ACV tier?

customers >100k fortune 100-500, 50k> above some midmarkets, greater than 5k many small businesses.

New lands start small and expand into the larger ACV brackets.

Churn for all domain customers is a little less than 10%. 75-90% of all churn is customers with an ACV <5k. Churn at >5k is about 2%. Churn for customers >100k ACV is basically nonexistent. About 66% of revenue is from >5k ACV customers.

4) The conference call and earning slides seem to indicate Smartsheet’s strategy is to focus on expanding customer accounts which we have seen very nicely in the rising DRR and ACV. How are you guys thinking about balancing new lands vs expands?

New business comes exclusively through their website. No outbound selling is done. Last year they didn’t have the funds to develop the website. Now the website is a priority so digital leads (website) may increase which we would see as an increase in domain customers.

Expand process is as follows.
Once a customer has an ACV >1k then reach out to them. Business with >50 people are reached out to. >5k ACV they have a designated person.

New business lands are getting a bit bigger.

5) Should I be looking at a metric besides Domain Customers for the number of lands each quarter?

Domain customers is the correct metric.

My Take
Many of us speculated that SMAR was landing large new contracts. I don’t think that is the case. Ms. Ceran hinted that their new lands are bigger but ultimately their new lands start small and can grow big. Their CEO said the same thing in the conference call. I do think they need to increase their number of lands so I’ll be watching that closely.

Smartsheets is impressive. They have SaaS leading margins, incredible accelerating DRR now at 134%, their service revenue’s margin is an impressive 30+% and yet I hadn’t bought them because I was worried that their product wasn’t “special” enough. At this point I can’t ignore the numbers anymore, they are just too good. I’ve opened a position as SMAR should easily stay in the 50% + revenue growth, if they stay near the 50% range SMAR should be a very good investment even assuming a gradual decline in EV/S from 22 to 20 then 18 over the next two years.

I’ll be watching the Domain Customer adds as well as the ACV >5k, 50k, 100k cohorts closely.

all the best,
Ethan

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ethan,

I don’t know what kind of magic wand you have to get the highest financial officer of the company to return your call, especially as a non-owning (but as an interested) investor… but huge kudos to you for doing so, and for writing up her answers. I have felt lucky to even get an email back from a low level IR representative before, never a call, and never the damn CFO directly.

Amazing stuff in her answers. those churn numbers per customer bracket gives us a perfect glimpse into their story – they upsell well once they have a customer hooked, and as the customer use grows (hooked more and more), they don’t leave. With their Accelerator initiatives (which sound like custom front-end apps and dashboards over spreadsheet data entry forms for common biz actions), and you can see why – customers are getting highly tailored apps that help them run their day to day operations, and then immediate dashboards over it.

But I agree, they need to focus on getting more on that first hook (the land). If their Accelerator plugins have a long tail of applicability across various industries, this could go places.

I’m already long SMAR with a 2% nibble, and am getting interested in more. I plan on looking more into what the Accelerators do over the base product, and to confirm what is so sticky about it.

-muji

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Ethan, that was a great and unique interview with SMAR’s CFO. Thank you so much for sharing it with us.
Saul

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Should I be looking at a metric besides Domain Customers for the number of lands each quarter?

Domain customers is the correct metric

Ethan,
Domain customers have been growing only at 7% yoy and have the highest churn. It is interesting that the CFO mentioned Domain customers as the correct metric. My impression was there was no need to look at that number given that many of those companies are probably much smaller anyway and contributing to the churn.

Higher ACV customers have been growing much faster and have the lowest churn. They have 147 customers with ACV>$100k which has grown by 126% yoy. Do you know how much penetration SMAR has in the Fortune 100 and 2000 companies? This will get a sense of how much more growth or TAM that they may have.

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Texmex good question but I think you might be thinking about this incorrectly.

Domain customers includes ALL their customers. The breakdown of ACV >5, 50, 100k are subsets of the domain customers. So all customers have a churn of a little bit less than 10%, the subset of customers >5k have a churn around 2%. Just subset analysis.

Most of the people that enter into the ACV >5k, 50k> 100k brackets have grown from the brackets below(expands). I.e some of the acv >5k customers become >50k customers but very few to none of the large brackets are new lands. The only way to tell a new customer(land) is to look at the domain customers.

However, I think it is very important to watch the subsets that they broke down for us because it helps tell the story of how many customers are growing into being big customers…or the expands.

best,
Ethan

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