Smartsheet(SMAR) - 2019 Q4 - Annual Report

Part I Business Smartsheet Inc. provides a cloud-based work execution platform serving over 95,000 customers with a subscription model and blended go-to-market strategy - Smartsheet is a cloud-based platform for work execution, designed to manage unstructured or dynamic work without requiring coding capabilities[18][19][21] - As of January 31, 2019, the company had over 95,000 customers, including over 78,000 domain-based customers, with a significant presence in Fortune 100 (over 90 companies) and Fortune 500 (three-quarters of companies)[18][23] - The company employs a blended go-to-market model, including a digital self-service sales model, an inside sales team using machine learning, and a targeted field sales team for large enterprises[24][25] - Key growth strategies focus on attracting new customers, expanding within the existing base (including converting over 4.0 million collaborators to paid users), growing internationally (24% of FY2019 revenue was international), and enhancing product functionality[35][36][37] Our Platform and Products The Smartsheet platform offers a comprehensive suite of tools and premium solutions for work execution, designed for broad adoption by business users - The platform provides a suite of tools for work execution: Smartdashboards for real-time visibility, Smartportals for resource access, Smartcards for workflow visualization, Smartgrids for tracking, Smartprojects for collaboration, Smartcalendars for timelines, Smartforms for data collection, and Smartautomation for repetitive processes[46][47][48] - Premium offerings include Connectors for integration with leading systems (Salesforce, Atlassian, ServiceNow), Control Center for consistent execution at scale, and Accelerators, which are pre-packaged solutions for specific use cases like IT PMO, M&A, and Professional Services[55][56][57] - The platform is designed for broad adoption, with an intuitive interface that allows business users to configure and modify workflows with little to no training[21][30] Competition and Intellectual Property Smartsheet competes against manual processes and dedicated software vendors, protecting its intellectual property through patents and trademarks - Primary competition comes from manual, spreadsheet-based processes from Microsoft and Google, as well as specific work execution software from Asana, Atlassian, Planview, and Workfront[76] - As of January 31, 2019, the company held 10 issued U.S. patents (expiring between 2019 and 2035), three international patents, and had seven pending U.S. patent applications[78] - The company owns two U.S. and 23 international trademark registrations for the "SMARTSHEET" mark[79] Risk Factors The company identifies numerous risks including cumulative losses, intense competition, reliance on third-party data centers, and a material weakness in internal controls - The company has a history of cumulative losses, with a net loss of $53.9 million for the year ended January 31, 2019, and an accumulated deficit of $160.5 million, with profitability not assured in the foreseeable future[86] - The market for work management platforms is highly competitive, with rivals ranging from large companies like Microsoft and Google to specialized vendors like Asana and Atlassian[87][88] - Security breaches or unauthorized access to customer data could lead to significant liabilities, damage the company's reputation, and cause customers to stop using the platform[97] - A material weakness in internal control over financial reporting was identified due to a lack of sufficient qualified accounting personnel, which has not been fully remediated as of January 31, 2019[171] - The dual-class stock structure concentrates voting control with holders of Class B common stock (10 votes per share), limiting the influence of Class A common stockholders on corporate matters[211] Properties The company's corporate headquarters are in Bellevue, Washington, with additional leased facilities in Boston and Edinburgh - Corporate headquarters are in Bellevue, Washington, with approximately 155,000 square feet of leased space under agreements expiring between 2019 and 2026[226] - Additional long-term leased facilities are located in Boston, Massachusetts, and Edinburgh, Scotland[226] Legal Proceedings Smartsheet is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not party to any legal proceedings that would individually or in aggregate have a material adverse effect on its business[228] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Smartsheet's Class A common stock began trading on the NYSE in April 2018, and the company does not intend to pay cash dividends - Class A common stock has been listed on the NYSE under the symbol "SMAR" since April 27, 2018[230] - The company does not intend to declare or pay any cash dividends in the foreseeable future[232] - The Initial Public Offering (IPO) closed on May 1, 2018, providing the company with net proceeds of $160.4 million after deducting underwriting discounts, commissions, and offering expenses[238][239] Selected Consolidated Financial and Other Data This section presents key historical financial data and business metrics, showing significant revenue growth and increasing customer value Consolidated Statements of Operations Data (in thousands) | | Year Ended January 31, | | | | :--- | :--- | :--- | :--- | | | 2019 | 2018 | 2017 | | Total revenue | $177,722 | $111,253 | $66,964 | | Gross profit | $143,873 | $89,571 | $52,831 | | Loss from operations | $(55,084) | $(48,978) | $(15,155) | | Net loss attributable to common shareholders | $(53,885) | $(53,664) | $(15,184) | Consolidated Balance Sheet Data (in thousands) | | January 31, | | | :--- | :--- | :--- | | | 2019 | 2018 | | Cash, cash equivalents, and short-term investments | $213,085 | $58,158 | | Total assets | $308,744 | $116,604 | | Deferred revenue, current and non-current | $96,133 | $57,281 | | Total shareholders' equity (deficit) | $166,992 | $(80,741) | Key Business Metrics | | January 31, | | | | :--- | :--- | :--- | :--- | | | 2019 | 2018 | 2017 | | Domain-based customers | 78,959 | 74,116 | 66,645 | | Average ACV per domain-based customer | $2,454 | $1,640 | $1,106 | | Dollar-based net retention rate (trailing 12 months) | 134% | 130% | 122% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant revenue growth, continued investment in operations, and liquidity, including non-GAAP reconciliations and critical accounting policies Results of Operations Total revenue increased by 60% in fiscal 2019, driven by subscription and professional services, while operating loss widened due to increased expenses Revenue Comparison (FY2019 vs. FY2018) | | Year Ended January 31, | | Change | | | :--- | :--- | :--- | :--- | :--- | | (dollars in thousands) | 2019 | 2018 | Amount | % | | Subscription | $157,529 | $100,368 | $57,161 | 57% | | Professional services | $20,193 | $10,885 | $9,308 | 86% | | Total revenue | $177,722 | $111,253 | $66,469 | 60% | - The increase in subscription revenue was driven by existing customers (dollar-based net retention rate of 134%) and new customers (7% increase in domain-based customers)[282] - Sales and marketing expenses increased by 45% to $106.1 million in FY2019, primarily due to a $25.4 million increase in employee-related costs and a $5.4 million increase in marketing costs[290] - Research and development expenses increased by 57% to $58.8 million in FY2019, mainly due to a $16.2 million increase in employee-related costs from higher headcount[289] Non-GAAP Financial Measures The company uses non-GAAP measures like operating loss, calculated billings, and free cash flow to evaluate performance, showing strong billings growth despite negative cash flow Non-GAAP Operating Loss Reconciliation (in thousands) | | Year Ended January 31, 2019 | | :--- | :--- | | Loss from operations (GAAP) | $(55,084) | | Add: Share-based compensation expense | $15,903 | | Add: Amortization of acquisition-related intangible assets | $480 | | Add: One-time acquisition costs | $196 | | Non-GAAP operating loss | $(38,505) | Calculated Billings (in thousands) | | Year Ended January 31, | | | | :--- | :--- | :--- | :--- | | | 2019 | 2018 | 2017 | | Total revenue | $177,722 | $111,253 | $66,964 | | Change in deferred revenue | $38,852 | $24,569 | $13,140 | | Calculated billings | $216,574 | $135,822 | $80,104 | Free Cash Flow (in thousands) | | Year Ended January 31, | | | | :--- | :--- | :--- | :--- | | | 2019 | 2018 | 2017 | | Net cash provided by (used in) operating activities | $(2,855) | $(13,581) | $58 | | Less: Purchases of property and equipment | $(5,767) | $(6,006) | $(1,820) | | Less: Capitalized internal-use software | $(3,017) | $(3,350) | — | | Less: Payments on capital lease obligations | $(3,253) | $(2,326) | $(303) | | Free cash flow | $(14,892) | $(25,263) | $(2,065) | Liquidity and Capital Resources Smartsheet's liquidity was significantly bolstered by its IPO, providing sufficient cash to meet operational needs despite a history of negative cash flows - Principal sources of liquidity as of January 31, 2019, were cash and cash equivalents of $213.1 million[333] - The company received net proceeds of $160.4 million from its IPO on May 1, 2018[335] Summary of Cash Flows (in thousands) | | Year Ended January 31, 2019 | | :--- | :--- | | Net cash used in operating activities | $(2,855) | | Net cash used in investing activities | $(13,784) | | Net cash provided by financing activities | $171,321 | - As of January 31, 2019, the company had total contractual obligations of $104.1 million, with the largest component being $79.1 million in operating lease obligations[349] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency exchange risks, though a 10% fluctuation is not expected to have a material impact - The company's primary market risk exposures are interest rate risk on its cash and cash equivalents and foreign currency exchange risk from international operations[392][395] - A hypothetical 10% change in interest rates or foreign currency exchange rates is not expected to have a material impact on the company's financial results[394][395] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, including statements of operations, balance sheets, and cash flows, along with detailed notes Consolidated Statements of Operations For fiscal 2019, Smartsheet reported significant revenue growth but incurred an operating loss and net loss per share Consolidated Statements of Operations Highlights (in thousands) | | Year Ended January 31, 2019 | | :--- | :--- | | Total revenue | $177,722 | | Gross profit | $143,873 | | Loss from operations | $(55,084) | | Net loss attributable to common shareholders | $(53,885) | | Net loss per share, basic and diluted | $(0.65) | Consolidated Balance Sheets As of January 31, 2019, total assets increased significantly, primarily due to cash from the IPO, while total shareholders' equity turned positive Consolidated Balance Sheet Highlights (in thousands) | | January 31, 2019 | | :--- | :--- | | Cash and cash equivalents | $213,085 | | Total assets | $308,744 | | Deferred revenue | $96,133 | | Total liabilities | $141,752 | | Total shareholders' equity | $166,992 | Consolidated Statements of Cash Flows For fiscal 2019, net cash provided by financing activities, primarily from the IPO, offset cash used in operating and investing activities Consolidated Statements of Cash Flows Highlights (in thousands) | | Year Ended January 31, 2019 | | :--- | :--- | | Net cash used in operating activities | $(2,855) | | Net cash used in investing activities | $(13,784) | | Net cash provided by financing activities | $171,321 | | Net increase in cash, cash equivalents, and restricted cash | $154,646 | Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in internal control over financial reporting, related to insufficient qualified accounting personnel - Management concluded that disclosure controls and procedures were not effective as of January 31, 2019, due to a material weakness in internal control over financial reporting[553] - The material weakness, first identified in fiscal 2018, stems from a lack of qualified accounting and financial reporting personnel with appropriate experience[555] - Remediation efforts are underway, including hiring additional staff and implementing new controls, but the material weakness has not yet been fully remediated as it requires validation over a sustained period[557] Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information for these items is incorporated by reference from the company's forthcoming 2019 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, and principal accountant fees is incorporated by reference from the forthcoming 2019 Proxy Statement[564][565][566] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, equity plans, and required certifications - Lists all exhibits filed with the Form 10-K, including corporate governance documents, equity plans, executive offer letters, and material contracts[570] - Includes certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002[572]