Smartsheets just announced their Q3 earnings and the market seems to like it, as the stock is up +15% after hours, to what I believe is a new all time high.
Summary & Highlights
Surprisingly, they didn’t beat guidance, pretty much came in almost exactly in line with the midpoint of the guidance provided three months ago, with revenue increasing +38%, compared to +41% last quarter.
Subscription revenue is now $91 million of their $99 million total revenue
They emphasize that they are doing really well with government customers. Also large customers are growing quite a bit faster than average:
Customers with ACV of $50k+ grew +73%
Customers with ACV of $100k+ grew +81%
Dollar based retention rate is 125%. I think I heard them say on the call that some customers actually contracted in Q1 and Q2 early in the pandemic and they saw some of those customers start to expand again in Q3. They said they have a “big pipeline of larger deals”.
The guidance for Q4 implies only +31% revenue growth next quarter, so I’m a little surprised the after hours action is so strong. I missed the first 30 minutes of the conference call so maybe something really positive was said, but the stock has been up 10% or more even before the call started.
They also announced a new CFO. He was previously the CFO of a division of VMWare, as well as CFO of two other companies that I am not familiar with, Hearsay, and GoodData.
During the Quarter, they completed their transition from their own data center, to the public cloud, which they say will improve margins going forward. Margins are already pretty good, at close to 80%.
One of the analysts mentioned, while asking their question, that job listings have increased substantially over the past two months.
I had written up a summary on Smartsheets in early August when it looked interesting to me
and one of the things that I talked about was how, by several metrics, SMAR looked as good, if not better, than Fastly, yet had a much lower valuation (I understand they are in very different businesses however).
I essentially surmised that this was because Fastly’s growth was likely to accelerate, while Smartsheets’ was likely to decelerate.
Well, here we are one earnings announcement later, and Smartsheets is growing at 38%, just slightly below Fastly’s 41% this quarter. SMAR’s revenue is quite a bit higher than FSLY ($99m this quarter vs $71m for FSLY) and SMAR’s margins are much higher at 78% over the past four quarters (and likely to increase now that they have exited their in-house data center) compared to Fastly’s margins of only 58% over the past year.
Yet Fastly’s market cap is $9.7 billion, while SMAR’s is still only $7.5 billion at today’s close (will be about $8.6 billion tomorrow if the after hours price holds)
But let’s put aside FSLY since many of us have exited that name in recent months, let’s compare SMAR to OKTA for a minute.
OKTA grew revenue at 42% this quarter, yes a little bit better than SMAR’s 38%. SMAR’s 78% margins are a little better than OKTA’s 74%.
Yet OKTA’s P/S (about 40x) is about double SMAR’s (which was about 21x prior to today’s after hours pop).
You can certainly argue that OKTA is in a more dominant position. Maybe their business is stickier to customers (tho I would argue that SMAR’s is also pretty darn sticky too), so OKTA probably should have a higher premium, yes. But twice as high? I don’t think so.
I had noted in my November portfolio summary that I built up a small 3.2% position in SMAR last month. I added to it a bit last week, and a little more today. I’ve been selling some of my Jan’21 NTNX calls that I don’t expect to move much more before expiration to free up cash, buying both SMAR, and I continue to buy more Magnite, even at prices over $20 (it still looks cheap to me even after doubling over the past month).
So my SMAR holdings were about 5.5% of my port at today’s close (all '23 LEAP’s as I originally was only planning it be a small position, but whoops, a few add’s later and it became more of a mid-sized position for me). If today’s rise holds tomorrow, it may quickly grow to become a pretty decent sized position for me.
I admit I was hoping for more of a beat of revenue guidance and a raise of Q4 guidance which we didn’t get. I’ll have to listen to the replay of the conference call to see if I missed anything. But regardless, I think the price action after hours is reflective of the fact that the company was simply undervalued before, and even without what I would consider a “blow-out” report, the steady performance is demonstrating their multiple was simply too low and they deserve a higher one.
I also think this bodes well for MongoDB’s earnings which come out tomorrow, as Smartsheets is the most similar business to Mongo that I own/follow.
Mongo had only guided for +26% revenue growth this quarter, down from +39% last quarter. The market clearly doesn’t believe that low 26% guidance, as MDB’s stock has been strong recently. If I recall correctly, Mongo also made it sound, on their last earnings call, like they were being super-conservative and only counting revenue that was essentially locked in already, and not accruing for any other new business. If so, their growth could/should be more in the mid to high 30%'s.
That’s still not huge growth compared to many of the companies we follow, but keep in mind that both SMAR and MDB were probably negatively impacted by COVID, as opposed to many software companies that got tailwinds this year. So my expectation is that both companies’ growth rates will remain at least as high, or higher than they were in 2020, over the next year, or more. Mongo in particular I still believe will be much much bigger company a decade from now and is a true buy and hold.