ASAN - Smartsheet Q1 Earnings: Unraveling The Growth Story Beyond The Numbers

2023-06-07 18:32:02 ET

Summary

• Smartsheet Inc. had a mixed Q1 earnings report: a beat on top line estimates, but the quarter's performance may have peaked.
• There are concerns over maturing customer adoption growth rates and billings falling below revenue growth rates.
• Cautious outlook for fiscal 2024 despite strong revenue beat, raising questions about future Smartsheet performance.
• Substantial stock-based compensation raises concerns about Smartsheet's underlying profitability.

Investment Thesis

Smartsheet Inc. ( SMAR ) reported a very mixed Q1 result . The good news is that its top line beat consensus estimates . Also, Smartsheet's free cash flow for this year is expected to reach $100 million.

The bad news is that this earnings report appears to imply that the quarter just passed is perhaps as good as it's going to get for now.

Perhaps, the most piercing insight from this earnings report is that its customer adoption growth rates appear to be maturing.

Simply put, there's not enough here to make me bullish on Smartsheet stock.

Why Smartsheet? Why Now?

Smartsheet is a project management and collaboration platform that allows teams to plan, track, and report on their work. In some ways, it's similar to Asana, Inc. ( ASAN ), but Smartsheet focuses more on project planning and tracking, rather than being task-centric like Asana.

What makes Smartsheet stand out is its ability to streamline repetitive processes and save time. The goal of Smartsheet is to foster collaboration and provide a versatile and customizable platform.

As you can see below, as we headed into the earnings print, these IT-workflow companies have been on a tear.

Although, it should be noted that Smartsheet had, as we headed into the earnings result, unperformed its peers, with Asana significantly outpacing the group.

Moving on, as one would expect at this stage in the earnings season, there was the mandatory reference to AI in the press release proclaiming how Smartsheet is well-placed to benefit from the recent AI trends.

Nevertheless, more insightful, and something that investors should pay particular attention to, is the customer adoption curve.

Incidentally, if you've read my work before, you'll have seen me say, follow the customer, because the customer knows best. I believe that the customer adoption curve is the single most insightful aspect of the health of the business.

Here, Smartsheet's customer adoption curve appears to be indicating a slowing pace of adoption.

This time last year, Smartsheet growth in customers spending more than $5K per year was up 25% y/y, while this time around the customer growth rates were 16% y/y.

Another crucial metric that investors would not have been particularly pleased with regarding Smartsheet is its calculated billings.

As a reminder, billings are a leading indicator of future revenues to be booked. Ideally, you want billings to be roughly in line with revenue growth rates. In the best case, you want billings to be higher than where the revenue growth rates are headed. What you certainly don't want to see is if your growth company report billings that are less than your revenue growth rates are headed. This implies that the company is pulling through its billings, and will be left with a lull in its pipeline that it must fill with new orders.

With this in mind, we'll now turn our focus to discussing Smartsheet's outlook for fiscal 2024.

Revenue Growth Rates Very Much In Line

Smartsheet's fiscal Q1 2024 beat revenue consensus estimates by more than 300 basis points. One would have thought that on the back of such a strong revenue beat, Smartsheet would have been in a good position to upwards revise its full year out.

In actuality, Smartsheet did not upwards revise its full-year outlook, but rather reiterated its full-year guidance. Naturally, this caused investors to turn cautious and question, why did Smartsheet not upwards revise its full year?

Is it the case that management is being conservative? Or could it be that the quarter just reported is as good as it's going to get over the next several quarters?

More specifically, does it mean that for investors, the best that Smartsheet has to offer is now in the rearview mirror?

Profitability Profile, Is SBC A Real Cost?

For fiscal 2024, Smartsheet reaffirmed its target of reaching $100 million of free cash flow. This was the same guidance provided together with its fiscal Q4 2023 results. Surely, this is good news?

It depends on your view of SBC and whether the fact that more than 20% of Smartsheet's revenues go out the door as stock-based compensation, or SBC, is a real cost.

I don't put this forward to be contentious. But when Smartsheet guides that close to $220 million of its free cash flows is ''non-cash SBC'' and the business guides for $100 million of free cash flow, we are left, if we are frank, looking at an unprofitable business.

The Bottom Line

Smartsheet Inc.'s recent earnings report presented a mixed picture, with a beat on top line estimates but a suggestion that the quarter's performance may be as good as it gets for now.

Concerns arise from the maturing customer adoption growth rates, indicating a potential slowdown. Additionally, billings falling below revenue growth rates raise questions about future pipeline strength.

Although Smartsheet reaffirmed its outlook for fiscal 2024, investors remain cautious, questioning whether the company has already delivered its best near-term performance.

Furthermore, the substantial amount of stock-based compensation as a percentage of revenue raises concerns about Smartsheet Inc.'s underlying profitability. While attractive free cash flows and solid top line growth persist, these details create some pesky challenges for Smartsheet.

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