2023-12-20 21:48:40 ET
Summary
- Smartsheet Inc. exceeded EPS and revenue expectations in Q3 2024, with YoY revenue growth of 23%.
- The company is successfully growing its enterprise customer base and has untapped growth potential internationally.
- Smartsheet has a solid financial position, although cautious of competition and demand downtrend amongst the SME segment.
Smartsheet Inc. ( SMAR ) recently released its Q3 2024 , beating EPS expectations by $0.07 to reach $0.16 and revenue expectations by $4.6 million to reach $245.9 million, growing YoY by 23%. Since going public in May 2018, the company has rewarded investors with 150.21% returns. Although the market is competitive, there are concerns about its SME customer growth. The company is successfully growing its enterprise customer base, initiating easier upsell opportunities through Self-discovery features, and it has a lot of untapped growth potential internationally, with plans to provide data hosting services in Australia. Furthermore, it has a solid financial position to reinvest in the company and potentially reward investors. Therefore, investors may want to take a bullish stance on this stock.
Company overview
Smartsheet, founded in 2005, is in the competitive application software industry. It provides a versatile and highly customisable project management platform for diverse vertical enterprise and SME customers. The company has grown to 13.9 million Smartsheet users and ended Q3 with an annual recurring revenue of $981 million. In Q3, 89 customers increased their ARR by more than $100,000, and 256 companies expanded by over $50,000.
Its solution is well regarded by its customers for its customisability and versatility, which sets it apart from more out-of-the-box solutions. However, the complexity and learning curve required to use and implement the solution could also act as a barrier for potential new customers. It attracts potential customers through its free plan. It has a Pro plan, which is $84 per user per year. It also has a business plan which is $300 per user per year if billed annually. 94% of its subscriptions are billed annually and came in at $268.5 million in Q3 2023. It also generates income through its services, which make up 6% of total revenue.
As the company grows its enterprise base, its plans are tailored depending on contract duration and functionality requirements. In Q3 2024, it announced a large-scale win of a 3-year contract valued at $4.5 million, with growth potential. Furthermore, it invests in additional capabilities such as Smartsheet Advance, access to its Beta AI-powered skills, and increased upsells through trial add-ons within the solution, known as Self-discovery.
If we examine the company's growth prospects, we can observe that it is exercising caution as it approaches its FY2024, mainly due to the declining demand trend for SMEs. The expected total revenue stands between $955 million and $957 million, indicating a growth of 25%. Additionally, the operating margin is estimated to rise from $82 million to $84 million, representing a 9% increase. Although no specific targets have been established for FY2025, we can anticipate a potential upside from the company's investment in international opportunities, the development of features suited for enterprise customers, and the growth of its existing customer base.
Financial overview
Smartsheet has exceeded its expected earnings per share and revenue in every quarter since its initial public offering. Looking at its top line, we can observe consistent teen growth over the past five years, with the same growth expected for FY2024 and FY2025 as predicted by 19 analysts. In the third quarter, Smartsheet's revenue increased by 23% YoY to $246 million.
One of the issues faced by the company is its low operating margin, which currently stands at 8%. However, in Q3 2024, the total gross margin was 84%. On the bottom line, the company has been incurring losses for the past five financial years. Although, it has consecutively reduced over the last four years to an EPS of negative 0.22 for FY2023. In the last four quarters, the EPS has been positive, and it is estimated that this year, the company will deliver a positive annual normalised EPS of $0.69.
The company's impressive TTM positive levered free cash flow of $243.89 million, steadily growing annually, indicates available funds for reinvestment in the business, debt clearance, and rewarding investors.
The company has a robust balance sheet, with $568.74 million in total cash, ensuring ample liquidity. With a current ratio of 1.32 and a quick ratio of 1.23, it comfortably covers short-term liabilities, reflecting its strong financial position.
Valuation
Smartsheet went public in 2018 and hit its peak trading period at $84.41 in February 2021. Analysts are feeling positive, with 17 of them revising their earnings forecasts for FY2024 in the last 90 days. However, its forward price-to-earnings ratio sits at 67.67, and the TTM price-to-book ratio stands at 11.32, which might not seem very attractive. SeekingAlpha's Quant rating gives it a D.
Although historical data cannot predict the future with certainty, it reveals a consistent upward growth trajectory in both revenue and profit for the company, even during turbulent economic times. The company has outperformed the S&P 500 index for four consecutive quarters. Additionally, the company is expanding into international markets, experiencing a year-on-year increase in its Annual Recurring Revenue ((ARR)) and gaining traction among enterprise customers, indicating promising potential for expansion. With a healthy cash balance, the company's strategic use of these resources could further drive growth.
Risks
Investors should be cautious of several risks associated with the company. The company's SMB segment has been affected by macro-related pressures that have negatively impacted its performance, and the company warns that it may impact the next quarter as well. Moreover, almost one-third of the revenue generated by the company is from only 6% of its customers. This means that if a large customer decides to leave the company, it could have a negative impact on the company's growth prospects. Additionally, larger enterprises need more extensive features that involve higher development costs and time. Sometimes, these costs might outweigh the actual utilisation of the features. Furthermore, the company deals with a lot of sensitive data across multiple channels. Any security breaches could severely impact its reputation and future growth prospects. Therefore, it is wise to keep these risks in mind while investing in the company.
Final thoughts
Smartsheet had a successful Q3 in 2024, surpassing both earnings and revenue expectations. It has exceeded expectations every quarter since it went public and is continuing to improve its financial performance. Despite concerns from its SME segment, Smartsheet's efforts to expand its customer base to include large enterprises, introduce innovative features, and expand internationally suggest that the company has significant growth potential in the future. Therefore, investors may want to consider adopting a bullish approach to this stock.
For further details see:
Smartsheet: Embracing Enterprise Clients And International Expansion Opportunities