Smartsheet(SMAR) - 2023 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (unaudited) Unaudited financial statements show 42% revenue growth to $186.7 million but a widened net loss of $62.3 million, with total assets at $994.2 million and positive operating cash flow Condensed Consolidated Statements of Operations Total revenue grew 42% to $186.7 million for the quarter, but operating loss expanded to $64.9 million and net loss to $62.3 million due to higher operating expenses Condensed Consolidated Statements of Operations (Three Months Ended July 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $186,691 | $131,736 | +41.7% | | Subscription Revenue | $173,533 | $121,110 | +43.3% | | Gross Profit | $146,140 | $104,270 | +40.2% | | Total Operating Expenses | $210,999 | $147,820 | +42.7% | | Loss from Operations | $(64,859) | $(43,550) | +48.9% | | Net Loss | $(62,313) | $(44,168) | +41.1% | | Net Loss Per Share | $(0.48) | $(0.35) | +37.1% | Condensed Consolidated Balance Sheets As of July 31, 2022, total assets were $994.2 million, with $455.7 million in cash and short-term investments, while total liabilities increased to $519.5 million Condensed Consolidated Balance Sheet Highlights | Metric | July 31, 2022 (in thousands) | January 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $227,370 | $449,074 | | Short-term investments | $228,294 | $0 | | Total Assets | $994,249 | $1,002,832 | | Deferred Revenue (Current) | $363,967 | $332,285 | | Total Liabilities | $519,546 | $498,053 | | Total Shareholders' Equity | $474,703 | $504,779 | Condensed Consolidated Statements of Cash Flows Net cash from operations was $5.2 million for the six months ended July 31, 2022, while investing activities used $234.7 million, primarily for short-term investments Cash Flow Summary (Six Months Ended July 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,168 | $(1,199) | | Net cash used in investing activities | $(234,708) | $(10,531) | | Net cash provided by financing activities | $8,972 | $12,809 | | Change in cash, cash equivalents, and restricted cash | $(221,793) | $894 | Notes to Condensed Consolidated Financial Statements (unaudited) Notes detail accounting policies, with $415.5 million in remaining performance obligations and $89.4 million in share-based compensation for the six-month period - As of July 31, 2022, the company had approximately $415.5 million in remaining performance obligations, with 93% expected to be recognized as revenue within the next 12 months[51] Share-Based Compensation Expense (Six Months Ended July 31) | Department | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Cost of revenue | $8,693 | $4,711 | | Research and development | $31,589 | $18,331 | | Sales and marketing | $31,452 | $18,971 | | General and administrative | $17,654 | $10,479 | | Total | $89,388 | $52,492 | - Subsequent to the quarter end, on August 26, 2022, the company entered into an agreement to acquire Outfit for approximately $20.6 million, with the acquisition closing on September 1, 2022[98] Revenue by Geographic Area (Six Months Ended July 31) | Region | 2022 (in thousands) | 2021 (in thousands) | YoY Growth | | :--- | :--- | :--- | :--- | | United States | $295,606 | $204,552 | 44.5% | | EMEA | $31,465 | $23,624 | 33.2% | | Asia Pacific | $13,566 | $9,642 | 40.7% | | Americas (ex-US) | $14,364 | $11,000 | 30.6% | | Total | $355,001 | $248,818 | 42.7% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 42% revenue growth to subscription plans, with key metrics showing 131% net retention and strong customer growth, while operating expenses increased due to investments Key Business Metrics Key business metrics show strong customer growth, with average ACV per customer increasing 27.8% to $7,557 and dollar-based net retention rate at 131% Key Business Metrics as of July 31 | Metric | 2022 | 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Average ACV per domain-based customer | $7,557 | $5,915 | +27.8% | | Dollar-based net retention rate | 131% | 128% | +3 p.p. | | Customers with ACV > $100k | 1,220 | 748 | +63.1% | | Customers with ACV > $50k | 2,738 | 1,856 | +47.5% | | Customers with ACV > $5k | 16,682 | 13,420 | +24.3% | Results of Operations Revenue increased 42% YoY for the quarter, driven by subscription growth, while operating expenses, especially sales and marketing, significantly increased due to investments - For the three months ended July 31, 2022, the $52.4 million increase in subscription revenue was driven by a $30.4 million increase from user-based subscription plans and a $22.0 million increase from pre-configured capabilities[126] - Sales and marketing expenses for the quarter increased by $46.9 million (61% YoY), primarily due to a $33.6 million increase in employee-related costs from higher headcount and a $6.0 million increase in brand awareness and demand generation costs[136] - Professional services gross margin decreased to 3% for the quarter from 14% in the prior year, driven by higher personnel expenses and costs of outside services that outpaced revenue growth[132] Non-GAAP Financial Measures Non-GAAP operating loss was $16.1 million for the quarter, while free cash flow was positive at $7.1 million, and calculated billings grew 44% to $205.6 million Non-GAAP Operating Loss Reconciliation (Three Months Ended July 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Loss from operations (GAAP) | $(64,859) | $(43,550) | | Share-based compensation | $45,836 | $28,633 | | Amortization of acquisition-related intangibles | $2,484 | $2,517 | | One-time acquisition costs | $461 | $0 | | Litigation expenses and settlements | $0 | $7,250 | | Non-GAAP operating loss | $(16,078) | $(5,150) | Free Cash Flow (Three Months Ended July 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,221 | $1,762 | | Less: Purchases of property and equipment | $(1,316) | $(3,755) | | Less: Capitalized internal-use software | $(1,798) | $(1,539) | | Free cash flow | $7,107 | $(3,532) | - Calculated billings for the three months ended July 31, 2022, were $205.6 million, a 44% increase from $142.9 million in the prior-year period[171] Liquidity and Capital Resources Liquidity is strong with $455.7 million in cash and short-term investments, supported by $365.3 million in deferred revenue, covering material contractual obligations - Principal sources of liquidity as of July 31, 2022, were cash and cash equivalents of $227.4 million and short-term investments of $228.3 million[172] - Material cash requirements include fixed minimum lease payments of $79.1 million and other contractual obligations of $158.7 million, primarily for cloud-based hosting services[175][176] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rates on $455.7 million in investments and foreign currency fluctuations, though no material impact is currently anticipated - The company had cash, cash equivalents, and short-term investments totaling $455.7 million as of July 31, 2022, which are subject to interest rate risk[193] - The company has foreign currency risks related to revenue and expenses denominated in currencies such as the British Pound Sterling, Euro, and Australian dollar, but has not engaged in hedging[196] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of July 31, 2022, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of July 31, 2022[198] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[200] Part II. Other Information Legal Proceedings The company may be subject to various legal matters in the normal course of business, with details on a settled indemnification claim in Note 12 - Information regarding legal proceedings can be found in Note 12, Commitments and Contingencies, of the condensed consolidated financial statements[203] Risk Factors The company faces significant risks including intense competition, reliance on a single platform, a history of net losses, security threats, and challenges in managing rapid growth - Competition: The market for work execution software is highly competitive, with rivals including Airtable, Asana, Atlassian, Monday.com, as well as larger players like Google and Microsoft who could bundle competing features[212][213] - Security: The company faces significant risks from cyber threats, and any failure to secure its platform could result in unauthorized access to customer data, leading to significant liabilities and reputational harm[220][224] - Financial Performance: The company has a history of cumulative losses ($675.3 million accumulated deficit as of July 31, 2022) and expects losses to continue as it invests in growth[252] - Infrastructure: The business depends on public cloud service providers (Cloud Providers), making it vulnerable to service interruptions, outages, or unfavorable renewal terms that could harm operations[230] - International Operations: Expansion abroad presents risks including currency fluctuations, regulatory compliance (e.g., GDPR), staffing challenges, and geopolitical instability[280][281][282]