A lot of people on the board, including some very respected members, have taken starter positions in Asana in the last weeks, and I’m looking for smaller hyper-growth companies so thought to dive in. I focus on leadership and the numbers below. Current market cap is around $5.8bn and EV/annualised Q3 sales almost 25.
WHAT ASANA DOES
Asana’s mission is “to help humanity thrive by enabling the world’s teams to work together effortlessly.” - so a collaboration tool focused more on projects/tasks than the others in this space such as Slack: messaging, Zoom: Video conferencing, etc. It is a next-gen project/work management tool ideal for remote teams imho - focusing on coordination of activities in an organisation. They state that:
“Asana is a leading work management platform that helps teams orchestrate their work, from daily tasks to strategic initiatives. Asana adds structure to unstructured work, creating clarity, transparency and accountability to everyone within an organization—individuals, team leads and executives—so they understand exactly who is doing what, by when.”
THE FOUNDERS
Oct 2020 FT article with CEO Dustin Moskovitz and his Linkedin profille. Dustin goes to Burning Man regularly. He was a co-founder at Facebook and its first CTO and worth $16bn from FB at age 36. Him and his wife’s big passion is philanthropy - he’s a proponent of effective altruism, in which followers direct their resources to causes that will help others the most — often using hard data.
https://www.ft.com/content/15ffce3b-cee3-44ad-b961-e22459b7b…
https://www.linkedin.com/in/dmoskov/
2018 Forbes Q&A with co-founder Justin Rosenstein - early employee at Facebook and also a billionaire from that. He lives in a commune with 14 friends (“an intentional community called Agape”), likes Yoga, has a strict sleep regimen and journals for 5 minutes every morning and evening…he is on the board but is no longer involved in any exec position. He was CEO in 2009 and 2010 and president until 2019.
https://www.forbes.com/sites/oliversmith/2018/04/26/how-to-b…
THE VISION AND COMPANY
An intro to Asana prezzo Dec 2020: https://investors.asana.com/events-and-presentations/present…
Future of ASANA product vision: https://asana.com/vision
RESULTS AND OPINIONS
Short S1 overview: https://medium.com/@lecarpentier.claire/asana-s1-analysis-e7…
Q3 2021 results: https://investors.asana.com/overview/default.aspx
Bert Hochfield likes the company as an investment : https://seekingalpha.com/article/4378169-asana-leader-in-wor……
Some Foolish discussions:
https://discussion.fool.com/asana-asan-34637066.aspx?sort=whole#…
https://discussion.fool.com/asana-q3-2020-results-34689550.aspx?..
https://discussion.fool.com/asana-34703407.aspx?sort=whole#34703…
TAM
From the S-1: “According to a June 2019 IDC report, the markets for collaborative applications and project and portfolio management, in aggregate, are expected to grow from $23 billion in 2020 to $32 billion in 2023.”
→ I tend to take these with a pot of salt usually, but it says enough to know that there’s a large market out there.
SHAREHOLDING & COMPENSATION
CEO Moskovitz holds 49% of all shares (9.7% A and 39.2% B) giving him 39% voting rights.
Rosenstein holds 21.2% of all shares (3.5% A and 17.7% B) giving him 17.5% voting rights.
→ The two of them control the company and hold 70% of the shares; Moskovitz did not receive any salary in 2020 (ok he did - $1) nor does he have any share options.
So why is the CEO doing this I wonder? He already has $16bn which he does not know how to give away from FB, gets no compensation from his role, but he does control the company with his friend, holds almost half of the shares and funded the convertible loan. So what is his motivation and does it align with shareholders’? That is a key one for me
https://asana.com/company has this to say, possibly shedding some light on that question:
“Dustin and JR found inspiration in Buddhist principles to center and guide the product they wanted to build: bringing ease, focus, and flow to a world otherwise full of chaos. Asana is a Sanskrit word that refers to the place and posture in which a yogi sits. A pose requires marrying form and flow, staying centered while moving through distractions.
We typically pronounce Asana with the emphasis on the second syllable: uh-sah-nuh. But we’re not prescriptive about it. We welcome other pronunciations too, including the Sanskrit pronunciation ah-suh-nuh.”
…Ag ja no well fine…https://en.wiktionary.org/wiki/ja_well_no_fine
REVENUE
2019 $76.8m
2020 $142.6m +86%
2021FC: $226.7m +59% (assuming a 9% beat - against guidance for Q4)
**$m $m $m $m QoQ QoQ QoQ QoQ**
**Rev. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4**
2019 14.3 17.6 20.6 24.3 23% 17% 18%
2020 28.0 33.1 38.1 43.5 15% 18% 15% 14%
2021 47.7 52.0 58.9 **10% 9% 13%**
So revenue growth has been decelerating over the last 2 years - already in 2020 - pre-pandemic, with QoQ growth lower than the prior year in all fiscal 2020 quarters. In fiscal 2021 the slowdown has been even sharper. QoQ growth is down 5%pts in Q1 vs the prior year, down 9%pts vs Q2 of 2020 and 2%pts vs Q3. Still, revenue growth of 13% qoq is a marked uptick vs the prior two quarters, and equates to 63% yoy annualised: not to be sneezed at.
DBNRR
2019: >110%
2020: >125%
2021 Q1: 120%
2021 Q2: 115%
2021 Q3: 115%
Overall DBNRR declined as a result of the COVID-19 pandemic and a disproportionate impact on smaller businesses that were particularly affected by the pandemic.
However,
Customers spending >$5k:
2019: >115%
2020: >125%
2021Q3: >125%
→ So >$5k NRR accelerated a bit in 2020 and stayed there in 2021.
Customers spending >$50k:
2019: >140%
2020: >140%
2021Q3: >140%
→ So >$50k NRR very high and stable.
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Now for a bit of nit-picking on Asana’s NRR.
If their >$5k customer have NRR above 125% and increasing, and these customers generate the bulk of their revenue - 59% in Q3, how can their overall NRR be down vs prior Qs?
To answer this I thought to compare the NRR definitions of Crowdstrike and Asana (it’s non-GAAP so definitions are important):
Crowdstrike:
“We calculate our dollar-based net retention rate as of period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of contraction or churn over the trailing 12 months but excludes revenue from new subscription customers in the current period. We then divide the Current Period ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.
Asana:
We calculate our dollar-based net retention rate by comparing our revenues from the same set of customers in a given quarter, relative to the comparable prior-year period. To calculate our dollar-based net retention rate for a given quarter, we start with the revenues in that quarter from customers that generated revenues in the same quarter of the prior year. We then divide that amount by the revenues attributable to that same group of customers in the prior-year quarter. Current period revenues include any upsells and are net of contraction or attrition over the trailing 12 months, but exclude revenues from new customers in the current period.
Notice how Crowdstrike starts by defining their cohort of customers as customers who were there a year ago and Asana starts by defining their cohort as the current Q’s customers who generated revenue a year ago. Both will yield the same overall NRR, but not if applied to a specific cohort by my interpretation.
Suppose the following (just an example):
y1: 3 customers of which 1 had revenue >$5k annualised, as follows:
A: $1k
B: $6k
C: $3k
Total: $10k
y2: 4 customers of which 2 had rev >$5k, but 1 churned and 1 is new:
A: churned
B: $5k
C: $6k
D: $1k
Total: $12k
Both will yield the same overall NRR of 11/10 = 110% (for customers A,B,C), but not if applied to a specific cohort.
To calc NRR for customers with >$5k revenue I will apply first CRWD’s method, then ASAN’s (or at least how I interpret it)
CRWD:
Using CRWD’s method of starting at the prior period customers results in the following:
Customer B was the only >$5k customer in y1 so I start there and compare with y2 annualised revenue for B.
So NRR for customers with >$5k is $5/$6k = 83%
ASAN:
I start with end period customers in y2 who were also revenue generating a year ago and compare them to the prior period: so B, C qualifies as they both had annualised rev >$5k in y2 so together $11k in y2, and compare to the same customers in y1, which is B and C in y1, together $9k
So in this fictional example NRR for customers >$5k $11k/$9 = 122% using the qualifying customers in the current q vs the 83% if using the qualifying customers in the prior year q. It seems to me that Asana uses the second method, which should inflate NRR if you are adding a lot of new customers in the >$5k bucket.
END OF EXAMPLE
————————
→ I don’t feel that comfortable with the information content of Asana’s high stated NRR’s for customers spending >$5k with them, because of the way that they define that metric (by my reading of it). It does not tell me if large customers tend to spend more after they become large; it tells me that many customers who were below $5k are now above $5k.
Also this particular part further complicates matters, from the Q3 prepared comments of the CFO:
”As a reminder, our dollar based net retention rate is a trailing four quarter average calculation.”
Maybe I’m missing something here, and if yes, please weigh in.
My take:
Revenue growth has decelerated in the last year and also in the year before, it would seem. Their NRR numbers don’t make complete sense to me and inspires too much confidence on the face of it, if my reading of how they calc it is correct. QoQ growth has been on a 3 year deceleration - averaging close to 20% qoq in 2019, about 5%pts lower - or around 15% - in 2020 and around 10% in 2020. Not all of it can be due to COVID, methinks as the deceleration predates the pandemic. However their latest Q’s qoq revenue growth, if sustained, will yield yoy rev growth in excess of 60% - so an acceleration vs prior years.
Overall it sounds like a decelerating overall growth story with a potential COVID-induced acceleration starting now, due to longer-term structural changes to a more hybrid and remote way of working. This after the initial COVID-induced deceleration due to a hit to certain industries (hospitality, etc) and SMB customers specifically.
MARGINS
Gross profit margins
**GP% Q1 Q2 Q3 Q4**
__**2019 81% 82% 84%**__
__**2020 85% 86% 86% 87%**__
__**2021 87% 87% 88%**__
→ GP margins are great and have improved from 81% in Q2 2019 to 88% in Q3 - almost 1% per quarter for the last 9 quarters. So no fault here.
Adjusted operating margins
I look at adjusted operating margins - taking out stock-based comp which was huge in a couple of quarters - to see what’s going on in the underlying business. On that front things are not looking great. I can’t really see a positive trend; in fact operating margin for the latest Q was on par the worst it has been in the last 10 quarters - equal to Q2 2019 at -63%.
**Op M% Q1 Q2 Q3 Q4**
2019 -64% -53% -46%
2020 -49% -42% -56% -51%
2021 -50% -52% -63%
→ Adj. op margins not great; no sign of operating leverage yet, which is of course because they are making huge investments in marketing and R&D. Including SBC (which is excluded in the adjusted margins above) R&D was 56%!! of Q3 revenue up from 50% in Q2 and 47% in Q1. And S&M was 82%!!! up from 75% in Q2 and Q1.
My take:
GP margins are great and have shown steady improvement. Can’t see anything wrong there.
But I can’t really make a call on how or whether they are properly managing their opex yet to have a path to achieving operating leverage and profitability in time or whether they are just spendthrift. With a multi-billionnaire CEO, President, Chair (yes Moskovitz holds all three), majority shareholder and debt funder at the helm I guess his personal motivations are very important. Perhaps spending smartly is not top priority? Regardless, given the stage of their growth, I would tend - carefully - towards seeing the high spend as them trying to capitalise on an opportunity to extend the lead they seem to have in the space. The percentages are very high nonetheless.
FREE CASH FLOW
The company is still burning a lot of cash; more this year than last - a function of their spending habit described above. It has $424m cash on hand, but also roughly $360m debt which is mostly convertible notes taken up by the CEO (who already owns 49% of the shares). They have enough cash to keep going for a long time though, so no real concern.
FCF in $m
2020Q1 -7.3
2020Q2 -6.5
2020Q3 -11.6
2020Q4 -19.2
2021Q1 -17.1
2021Q2 -29.9
2021Q3 -19.5
CUSTOMER GROWTH
No customer concentration, which is good: no customer accounts for more than 1% revenues, and top 100 customers account for approximately 10% of our revenues.
Good international presence: in fiscal 2020, revenue split 59% US / 41% outside the US.
Paying customers
2020Q1 66,000
2020Q2 71,000 +8% qoq
2020Q3 73,000 +3% qoq
2020Q4 75,000 +3% qoq
2021Q1 77,000 +3% qoq
2021Q2 82,000 +6% qoq
2021Q3 89,000 +9% qoq
→ Looking at total paying customers, there is an acceleration of adoption - the last 2 quarters increased by 6% and 9% qoq vs 3% in the prior 3 quarters.
Customers with annualised rev >$5k
2020Q2 4,808 47% of revenue
2020Q3 5,648 +17% qoq, 51% of revenue
2020Q4 6,555 +16% qoq, 54% of revenue
2020Q1 7,346 +12% qoq, 56% of revenue
2020Q2 7,933 +8% qoq, 58% of revenue
2020Q3 8,938 +13% qoq , 59% of revenue
→ So in the important larger customer segment - which contributes almost 60% of revenue and counting - they have been growing very nicely - faster than total customers growth (which was already very good) and prior qoq growth, but slower than a year earlier, at 13% qoq vs 17% qoq a year ago. Higher-paying/larger customers are becoming a bigger and bigger part of their business.
Customers with annualised rev >$50k
2020Q2 109
2020Q3 156 +43% qoq
2021Q2 283 +16% qoq, 160% yoy
2021Q3 318 +12% qoq, 104% yoy
→ we don’t know how much this segment contributes of the 59% that >$5k customers contribute but growth in this segment has been very strong, albeit slower than in the prior periods that I could find info on.
My take: Customer adoption seems very impressive, especially in the larger size customers that they seem to be moving towards, and in the context of the pandemic. Their huge marketing spend of the last quarter or so could end up further boosting this.
Q3 2021 EARNINGS CALL
CEO:
Last quarter, we mentioned that we saw short-term headwinds from COVID and long-term tailwinds. Now we feel like the short-term headwinds have diminished. Our churn rates have reverted to pre-COVID levels and markedly improved from their peak in April. Beyond COVID, we’re seeing promising signs of continued durable growth in at least three trends. One, acceleration of new customer additions. Two, faster deployment in some of our existing customers. And three, some of our largest enterprise expansions to-date.
→ this sounds very bullish for the future
This year, we released more than 130 new features including approvals, status, goals, dashboards, platform integration, Zoom, JIRA, Slack, Microsoft Teams, Tableau, Power BI and more
COO:
In Q3 we saw notable improvements across many of our key metrics, including record top of funnel traffic and signups, accelerated incremental paying customers, and expanding deal sizes
CFO:
We have nearly doubled our sales team over the last year, because we are confident as demand for work management continues to move mainstream.
Q&A
Q: 3% user penetration in current customers, where will it end?
A: That reflects the huge potential to expand in existing base still. Aiming for 100%, will be faster in smaller co’s slower in bigger ones.
Q: Retention, NRR headwinds/lack thereof, esp in SMB, what do you expect?
A: Seeing churn diminish vs Q1 and Q2. Note NRR is 4Q rolling ave, so expect some cohorts to work their way through in next Qs?About SMB: secular winds is the primary driver, but “what I can tell you is that the revenue growth rate for customers spending less than $5,000 with us on an annualized basis accelerated in Q3 versus the growth rate in Q2.”
Q: Salesforce/Slack deal - what does it mean for Asana?
A: Overall collaboration landscape has 3 parts: 1) Content (storage, file sharing), 2) Communication (video, chat) and 3) Coordination - which is where Asana plays. so no overlap and important to integrate with the other parts - Slack and Salesforce are existing customers and integrations. ”I think this is just building an even stronger partner for us for the future.”
Q: billings up 25% qoq - why?
A: We allowed customers to renew early to lock in old pricing in Q3 which elevated it a bit, but ”it’s really the secular tailwinds and the strength of the business”
Q: Customer adds very strong. How much was COVID catch-up?
A: Saw strength in top of funnel in both Q2 and Q3, but what changed what lower churn in Q3.
Q: Why the need for the massive opex investments and how will you bring it back to more normal levels?
A: Believe the category is new and under-penetrated so focus should be on landing new customers also investing to again double the sales team to expand in existing customers.
Q: How does Asana fit into new models of work post COVID?
A: See a hybrid of remote and at office. ”clarity and alignment is really difficult for teams to achieve even when they’re working in an office environment, but it’s particularly difficult with remote work”
Q: Maturity of Enterprise sales build-out - what results are you seeing?
A: Still early days, focused on expanding, encouraged by what we’re seeing:Two-thirds of the Fortune 500 are already free or paid customers. In Q3, four of our biggest customer expansions were in the Fortune 50, but we’re still only 3% penetrated in the addressable employee base. We’re seeing really strong traction.
CONCLUSION
I can see the appeal to a strategy director of cascading objectives and achieving tight alignment of same across the entire organisation, and to a CMO of managing complex cross-functional projects with Asana. And the customer adoption validates this view.
I’m not 100% convinced of the founder’s motivations and his commitment to building a company that actually makes money. His excellent (4.9 stars) ratings on Glassdoor could simply be a function of exceptionally large pay packages, which they seem to be paying. And his passion seems to be more focused on how to give away his wealth (he is one of the youngest signatories of the giving pledge), which leads me to worry a bit about the company’s spending habit.
The airy-fairy nature of some of their materials is also off-putting to me personally and the relatively mechanical view of work and collaboration does not fit comfortably into my worldview.
The NRR numbers for larger customers feel like they are potentially painting a too rosy picture.
Nevertheless, the key question is: is this a good investment?
I think so.
The market is wide open, they’re the leaders in the field and they’re spending like crazy to capitalise on the opportunity.
Their top-line customer acquisition engine is firing very nicely, and they are successfully growing existing customers into larger customers at an impressive rate. In addition they have a huge customer base in which they can deploy their nascent enterprise sales force to expand the number of seats further from the current 3% penetration in their 89k customers, to something higher.
Lastly and probably most importantly, revenue growth seems to be at an inflection point. If they manage to accelerate qoq revenue growth in Q4 to above Q3’s 13%, then it seems clear that the business could be accelerating towards an underlying 60%+ revenue growth.
I am strongly considering buying a starter position, but would like to hear some others on the board’s view before doing so.
Best,
WSM
(No position in ASAN yet)