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.
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,