Smartsheet(SMAR) - 2021 Q1 - Quarterly Report

Part I. Financial Information This part presents the company's unaudited financial statements, management's analysis, market risk disclosures, and an evaluation of internal controls Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for the three months ended April 30, 2020 Condensed Consolidated Statements of Operations and Comprehensive Loss The company reports a 52% revenue increase to $85.5 million and a net loss of $27.8 million for the quarter | Metric | Three Months Ended April 30, 2020 (in thousands) | Three Months Ended April 30, 2019 (in thousands) | | :--- | :--- | :--- | | Total Revenue | $85,487 | $56,194 | | Subscription Revenue | $77,163 | $50,321 | | Gross Profit | $67,046 | $45,709 | | Loss from Operations | ($28,824) | ($20,881) | | Net Loss | ($27,784) | ($19,809) | | Net Loss Per Share | ($0.23) | ($0.19) | Condensed Consolidated Balance Sheets The balance sheet shows total assets of $782.6 million and total shareholders' equity of $510.4 million as of April 30, 2020 | Metric | April 30, 2020 (in thousands) | January 31, 2020 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $544,178 | $515,924 | | Total Current Assets | $603,630 | $630,962 | | Total Assets | $782,606 | $797,714 | | Deferred Revenue (Current) | $162,740 | $157,972 | | Total Current Liabilities | $211,606 | $233,240 | | Total Liabilities | $272,243 | $283,654 | | Total Shareholders' Equity | $510,363 | $514,060 | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased by $3.7 million, primarily driven by the quarterly net loss - Total shareholders' equity decreased from $514.1 million at January 31, 2020, to $510.4 million at April 30, 2020, driven by the net loss of $27.8 million[20] Condensed Consolidated Statements of Cash Flows The company experienced a net cash outflow from operations of $24.3 million and a net increase in cash of $28.1 million | Cash Flow Activity (in thousands) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($24,285) | ($9,185) | | Net cash provided by (used in) investing activities | $47,270 | ($2,891) | | Net cash provided by financing activities | $5,373 | $6,055 | | Net increase (decrease) in cash | $28,109 | ($6,044) | Notes to Condensed Consolidated Financial Statements These notes detail key accounting policies, including revenue recognition, business combinations, and share-based compensation - The company operates as one operating segment, with its Chief Executive Officer acting as the chief operating decision maker[32] - As of April 30, 2020, the company had approximately $171.7 million of revenue expected to be recognized from remaining performance obligations[50] - On May 1, 2019, the company acquired 100% of Artefact Product Group, LLC ("10,000ft") for approximately $27.8 million in cash[57] - For the three months ended April 30, 2020, total share-based compensation expense was $14.4 million, a significant increase from $6.3 million in the prior year[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 52% revenue growth, key business metrics, the impact of COVID-19, and non-GAAP financial measures Overview and Impact of COVID-19 The company outlines its cloud-based work execution platform and the initial business impacts of the COVID-19 pandemic - Smartsheet is a cloud-based platform for work execution, enabling teams to plan, manage, automate, and report on work[92] - In response to COVID-19, the company restricted travel and implemented a mandatory work-from-home policy for its global workforce[97] - During the quarter, purchasing decisions of some customers were impacted and deferred due to uncertainties around COVID-19[98][99] Key Business Metrics The company reports strong growth in customer annual contract value (ACV) and a high dollar-based net retention rate | Metric | As of April 30, 2020 | As of April 30, 2019 | | :--- | :--- | :--- | | Average ACV per domain-based customer | $3,866 | $2,675 | | Dollar-based net retention rate (trailing 12 months) | 132% | 134% | | Customers with ACV of $5k+ | 9,576 | 6,779 | | Customers with ACV of $50k+ | 1,040 | 518 | | Customers with ACV of $100k+ | 391 | 189 | Results of Operations This section analyzes the drivers of the 52% revenue growth and the significant increase in operating expenses Revenue Comparison | Revenue Type | Q1 FY21 (in thousands) | Q1 FY20 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Subscription | $77,163 | $50,321 | 53% | | Professional services | $8,324 | $5,873 | 42% | | Total Revenue | $85,487 | $56,194 | 52% | - The $26.8 million increase in subscription revenue was driven by a $21.0 million increase from user-based subscription plans[122] - Total cost of revenue increased 76% to $18.4 million, causing the total gross margin to decrease from 81% to 78% year-over-year[123][124] - Operating expenses increased significantly, with sales and marketing up 55% to $54.8 million and research and development up 28% to $26.0 million[128][129][130] Non-GAAP Financial Measures Reconciliations for non-GAAP operating loss and free cash flow are provided to supplement GAAP results Non-GAAP Operating Loss Reconciliation | Metric (in thousands) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | | :--- | :--- | :--- | | Loss from operations (GAAP) | ($28,824) | ($20,881) | | Share-based compensation expense | $14,417 | $6,296 | | Amortization of acquisition-related intangible assets | $845 | $200 | | One-time acquisition costs | $8 | $330 | | Non-GAAP operating loss | ($13,554) | ($14,055) | Free Cash Flow Calculation | Metric (in thousands) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($24,285) | ($9,185) | | Less: Purchases of property and equipment | ($1,018) | ($1,338) | | Less: Capitalized internal-use software | ($2,244) | ($1,553) | | Less: Payments on principal of finance leases | ($680) | ($1,014) | | Free cash flow | ($28,227) | ($13,090) | Liquidity and Capital Resources The company's liquidity remains strong with $544.2 million in cash, deemed sufficient for the next 12 months - As of April 30, 2020, the company's principal source of liquidity was cash and cash equivalents totaling $544.2 million[147] - Management believes existing cash will be sufficient to meet needs for at least the next 12 months[149] - A substantial source of cash is from deferred revenue, which was $163.2 million as of April 30, 2020[150] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are identified as interest rate and foreign currency exchange rate fluctuations - The company's primary market risks are interest rate risk on its $544.2 million in cash and foreign currency exchange risk[168][171] - A hypothetical 10% change in interest rates or foreign currency exchange rates is not expected to have a material impact on financial results[170][171] Item 4. Controls and Procedures Management concluded that disclosure controls were not effective due to previously identified material weaknesses - The CEO and CFO concluded that as of April 30, 2020, the company's disclosure controls and procedures were not effective[173] - The ineffectiveness is due to previously identified material weaknesses related to the control environment, IT controls, and revenue processes[175] - Remediation efforts have commenced, including engaging consultants, designing new controls, and hiring a Senior Director of Internal Audit[180] Part II. Other Information This part covers legal proceedings, risk factors, unregistered equity sales, and a list of filed exhibits Item 1. Legal Proceedings The company reports no material legal proceedings but notes a potential indemnification claim - The company is not currently a party to any material legal proceedings or claims that would have a material adverse effect on its business[183] Item 1A. Risk Factors This section details significant business risks including a history of losses, competition, and the impact of COVID-19 Risks Related to Our Business and Industry Key operational risks include a history of net losses, intense market competition, and potential data security breaches - The company has a history of cumulative losses, incurring a net loss of $27.8 million for the quarter, and expects losses to continue[188] - The market is highly competitive, with competitors including Airtable, Asana, Atlassian, Google, and Microsoft[189][191] - Security breaches or unauthorized access to customer data could lead to significant liabilities and damage the company's reputation[193] - The business is dependent on co-location data centers and public cloud service providers; any service disruptions could harm operating results[206] Risks Related to Ownership of Our Common Stock Stock ownership risks include price volatility and anti-takeover provisions in the company's charter - The market price of the Class A common stock has been and is expected to continue to be volatile[310] - Sales of a substantial amount of stock by insiders could cause the market price to decline[314] - Provisions in the company's articles of incorporation and bylaws could make a potential acquisition more difficult[319] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities and no material change in the use of IPO proceeds - There were no unregistered sales of equity securities during the three months ended April 30, 2020[326] Item 6. Exhibits This section lists the exhibits filed with the report, including required officer certifications - The exhibits filed with the report include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[328]