Smartsheet (SMAR) - 63% Growth!

[Ewaak]

To begin, I would like to say that I am grateful to all you who have spent an unfathomable number of hours selflessly sharing your knowledge with the board and helping me to learn and grow as an investor.
I have had an amazing year thus far and today, I hope to give back by introducing a new company to the board.

I came across Smartsheet (SMAR) about six weeks ago and after doing some initial due diligence, I decided to take a starter position. Five weeks later, I am now up 8% and 12.5% on my initial two buys. I believe the numbers from Q1 earnings report look great, but it would be helpful to get some feedback from those who have more experience delving deeper into the numbers and analyzing them in greater detail.

Smartsheet is a software as a service application for collaboration and work management that provides a powerful platform for organizations to plan, manage, automate and report on projects. It holds employees accountable and empowers them to execute with speed, saving time, improving productivity, and allowing for greater incremental revenue. Integrates with Salesforce, Google, Microsoft, Tableau, Workplace, Box, Dropbox, Jira, and Slack.

Competition includes Atlassian, Alphabet, Microsoft

Highlights from Q1 2019 Earnings:
• Total Revenue for the quarter was $36.3 million – an increase of 63% year over year
• Subscription revenue of $32.1 million – up 57% year over year
• Services revenue of $4.3 million – up 129% year over year
• Service revenue represents 12% of total revenue
• 80% gross margins (subscription 87% and services 29%)
• Non-GAAP operating loss of $11 million or $0.12/share
• Free cash flow was ($9.7 million) compared to ($7.8 million) in Q118
• Customers in 190 countries
• 75,642 domain-based customers
• The number of customers with annualized contract values (ACV) of $5,000 or more grew to 4,349 for an increase of 78% year over year
• 149% net dollar retention for customers with annual recurring revenue of $5,000 or more
• Average ACV per domain-based customer increased to $1,808, for a 47% growth YEAR OVER YEAR
• Dollar based net retention rate of 130%
• Market Cap of $2.6 billion
• TAM - $21 billion

For the second quarter of fiscal 2019, the Company currently expects:
• Total revenue of $38.5 million to $39.5 million representing year over year growth of 44% to 48%
• Non-GAAP operating loss of $14 million to $13 million
• Non-GAAP net loss per share of $0.14 to $0.13, assuming basic and diluted weighted average shares outstanding of approximately 102 million
• Q2 earning report is scheduled for September 4th

I look forward to your thoughts.

Ewaak

[EricPrzybylski]

When I think about where I want to be positioned in the software stack, I want to be as embedded in the business as possible. This tends to translate into greater conviction in IaaS and PaaS companies, and dissuades me a bit from the SaaS plays. Not a hard rule, of course, but high switching costs does create stickiness (for instance, my firm would have a hell of a time moving out of WorkDay). In other words, I want a subscribers to feel as though they’ll have to tear out the plumbing, not replace a faucet.

To SMAR, specifically, I believe Saul opened a position for about a week a few months back, which got me interested. I shied away from it after just looking at the hundreds of competing, similar applications (https://www.capterra.com/project-management-software/). While Capterra is just one data point, MS Project has the highest customer rating, Atlassian is third, and SmartSheet is ninth (https://www.capterra.com/project-management-software/#infogr…). Not terrible, but does seem to indicate that SMAR is not necessarily the best mousetrap.

But, what makes justifying a new position difficult is how easy it would be for a CTO to simply say, “For new starts, let’s use XYZ Project Management software.” Or, “Just use MS Project, since everyone already has it” (that’s what my client would say).

For accounting projects that I design, MS Project (or a simple Excel GANTT Chart with a PoAM) works perfectly well. Of course there are certainly much more integrated and complex projects out there in the $21B TAM, so there’s going to be a market for most of these. But I feel like the pie is going to be too fragmented. Any zero-based budgeting approach for IT will see some of these end-user apps always near the cut line.

So, high revenue growth today, but I don’t see a stable or lengthy runway for that growth.

My two cents. I’m an accountant, not a tech guy, so the opinion probably worth approximately that much.

Eric

[Torquepeak]

I use smartsheet at my company and it is a good task and project management software. I’m going to echo that there are virtually no switching costs. You can use an online excel sheet that works almost as well and is no incremental cost.

I don’t see a moat, profitability or compelling business case for enterprise or individuals.

[buynholdisdead]

I use smartsheet at my company and it is a good task and project management software. I’m going to echo that there are virtually no switching costs. You can use an online excel sheet that works almost as well and is no incremental cost.

I don’t see a moat, profitability or compelling business case for enterprise or individuals.

If that is the case Torque, then why does your company use it? Just curious.

Andy

[Torquepeak]

It gets used for larger projects. When you use it for project management, it has a nice reminder and notification feature you would have to do manually if you were using excel. It’s not worth it for smaller projects and teams.