Smartsheet Inc. (NYSE:SMAR) Q4 2023 Earnings Call Transcript

Smartsheet Inc. (NYSE:SMAR) Q4 2023 Earnings Call Transcript March 14, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet Fourth Quarter Fiscal 2023 Earnings Conference Call. It is now my pleasure to turn today’s call over to Mr. Aaron Turner, Head of Investor Relations. Sir, please go ahead.

Aaron Turner: Thank you, Brent. Good afternoon, and welcome, everyone, to Smartsheet’s fourth quarter of fiscal year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are Smartsheet’s CEO, Mark Mader; and our CFO, Pete Godbole. Today’s call is being webcast and will also be available for replay on our investor relations website at investors.smartsheet.com. There’s a slide presentation that accompanies Pet’s prepared remarks, which can be viewed in the Events section of our investor relations website. During this call, we will make forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends.

These forward-looking statements are subject to a number of risks and other factors, including, but not limited to, those described in our SEC filings available on our Investor Relations website and on the SEC website at www.sec.gov. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results may differ materially and adversely. All forward-looking statements made during this call are based on information available to us as of today, and we do not assume any obligation to update these statements as the result of new information or future events, except as required by law. In addition to the U.S. GAAP financials, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable U.S. GAAP measures is available in the presentation that accompanies this call, which can also be found on our Investor Relations website.

With that, let me turn the call over to Mark.

Mark Mader: Hello, and welcome to our fourth quarter earnings call for fiscal year ’23. Our fourth quarter results cap off a strong year for Smartsheet, a year in which we extended our leadership position in collaborative work management, delivered our best year ever for new customer bookings, acquired outfit to strengthen our marketing and creative management solutions, added 2.2 million users to the Smartsheet platform, and generated positive free-cash flow for the year for the first time. While Pete will provide additional details, I want to call out some of our highlights from the quarter. Revenue for the quarter was $212 million, up 35% year-over-year. We added $62 million in annual recurring revenue in Q4, bringing our total ARR to more than $854 million.

In Q4, we saw expansions at Volvo, USA Today and Allscripts among many others. And we have new customer wins at companies such as TSO Aviation, cameras and Experia. Our expansion motion within our customer base continued with 311 customers expanding by $50,000 or more and 118 expanding by $100,000 or more. In Q4, we had two transactions of more than $1million and now have a total of 45 customers with ARR over $1 million. Despite these successes we’ve seen the change in macroeconomic environment negatively impact expansion rates across customer segments. However, even with these less favorable macro backdrops, our enterprise customers continue to exhibit the fastest growth rates. Our product investment and go-to-market strategy is focused on winning the enterprise.

And we have seen great success in this segment. We now have over 3,300 large enterprise customers, defined as organizations with over 10,000 employees. ARR from just this customer segment is now over $260 million and grew over 40% in FY ’23. We believe this segment alone represents a multi-billion dollar revenue opportunity for Smartsheet. While we may have seen some companies being more thoughtful with spending in this environment, we believe that in the long-term, enterprises, especially large enterprises remain the best opportunity to drive long-term profitable growth and no one in this category is winning the enterprise, like we are. In FY ’23, in response to the changing macroeconomic environment, we took steps to improve our profitability.

These actions resulted in Q4 profitability, non-GAAP operating income and free-cash flow, exceeding our guidance. As we look-ahead, we expect our scale, combined with our increasingly efficient operating model to generate positive operating margins and over $110 million of free-cash flow in FY ’24. Our scale and profitable business model further secured Smartsheet as the leader in collaborative work management. We are operating at an ARR scale, enterprise adoption rate and profitability level that are unmatched in category. This leadership position is recognized by top tier review sites and publications. We recently earned a top-five placement on G2’s 2023 Best Products for Enterprise list, making us the only CWM platform to rank anywhere in the top 50.

The list recognizes software companies that have best-in class enterprise customer service, products and experiences. And earlier this month, we were recognized for our industry leading enterprise work management and digital asset management solutions on Fast Company’s Most Innovative Companies list in the enterprise category. At Smartsheet, adoption of our capabilities based products play a key role in our enterprise success. These capabilities now make up 31% of our subscription revenue, up five points year-over-year. Capabilities drove many large customer expansions in Q4. For example, a leading enterprise human capital management provider signed a three-year enterprise license agreement that will give all 8,000 Smartsheet users at the company, access to a full suite of advanced capabilities.

Through January, on a year-over-year basis, they created 67% more forms, provisioned at 132% more control center projects and created 210% more WorkApps. A key Smartsheet use case at this HCM provider is in at professional services award, where they use Smartsheet to manage customer deployments. Smartsheet has become their global standard for customer deployments in part because our enterprise grade security gives them the ability to manage sensitive customer data on our platform, while still allowing for efficient collaboration. Our secure collaboration model has allowed this company to bring more than 42,000 external collaborators from different client organizations on to the Smartsheet platform. Q4 was a strong quarter for Smartsheet Advance.

A Fortune 500 global manufacturer had a high six figure annual expansion that included an upgrade to a higher advanced here. This upgrade resulted from the viral adoption of Smartsheet across the organization. This year alone, they created over 5,000 dashboards, increased their WorkApps used by 430% and provisioned nearly 5,000 projects using control center. This company will now use Smartsheet to help achieve its $1 billion three-year operational cost-savings initiatives. Advanced usage through connected users also drove a seven-figure expansion at a Fortune 100 telecom company, which brought the customers’ total ARR to over $3 million. Over 50,000 Smartsheet users across 11 departments in eight countries now use Smartsheet. This deal was driven by increased demand and adoption as more teams look to centralize their work on Smartsheet.

Our platform underpins over 1,000 WorkApps, 4,000 projects managed using control center, and over 28,000 dashboards. It is now the starting point for thousands of workflows that span integrated apps such as Salesforce, Jeera and Flac, and serves as essential hub for the company’s collaboration with more than 500 external organizations. Win such as these speak to the power of the Advance model where the value of Smartsheet increases as the use of Smartsheet grows. In January, we published our Inaugural Future Work Management Report, which showed that over 80% of workers at every level across organizations say, project management is being done by people whose title for job description doesn’t include project manager. The research also showed a significant perception gap between leaders and workers with respect to their current project management tools.

60% of leaders say they’ve made the necessary investments in tools, but just 36% of workers who responded feel this way. This gap drives a robust continuous flow of opportunity for Smartsheet. Here is a great example of how the best tools can empower people and business transformation. In Q4, we had an RFP win against three CWM competitors, which expanded our footprint at a Fortune 500 global biopharma company. The seeds of this win were planted when one team member in the purchasing organization took the initiative to design a Smartsheet based system to automate the company’s complex and time consuming paper and email based purchase order management process. Smartsheet didn’t just modernize PO management, or platform also reached the company’s transformation office, where Smartsheet is now supporting the company’s critical initiatives.

As the company’s business transformation platform Smartsheet Control Center and WorkApps are now helping them manage five strategic portfolios of work, each containing dozens of workstreams that will guide the Company towards its goal of positively impacting the health of 2.5 billion people in the next 10 years. On the product front, we closed out another year of customer-focused innovation having delivered over 400 product enhancements. In Q4, we launched the Smartsheet desktop application, content automation with integration of outfit, capacity view and numerous automation enhancements. We also further increased platform scalability to power sophisticated workflows and drive thousands of business-critical work streams for customers of all sizes.

In FY ’24, our investment efforts will be focused on helping our biggest customers grow faster with us as well as driving efficiency and how we sell to and serve our emerging customers. To enhance customer experience and value, we continue to evaluate and integrate artificial intelligence into the Smartsheet platform. Our AI innovation began in 2018 following our acquisition of Converse.AI,. More recently, we have enabled petabyte scale, intelligent content management through our proprietary powered AI engine brand intelligence. Using recognition models, content is analyzed and tagged, making it easier for people to find creative assets with natural language search. And for over a year, predictive models have powered navigation recommendations in Smartsheet.

Now, our sights are set on the next wave of innovation, generative AI. The progress we’ve made in our early development is very promising and the impact to accelerating customer on-boarding, solving for advanced business designs and unlocking self-directed discovery, can serve as a catalyst for growth in FY ’25 and beyond. In closing, I’m proud of how our team executed in FY ’23, expanding our enterprise leadership position, while navigating macro headwinds and driving significant efficiencies in the business. We continue to keep our customers needs top-of-mind as we prioritize investments that enable them to drive meaningful change for their organizations. Q4 was another showcase of our CWM leadership, our winning enterprise strategy, the power of our platform and the scalability of our business model.

We are excited to continue this momentum in FY ’24 and beyond. Before I turn the call over to Pete, I want to acknowledge the transition of Smartsheet’s Board Chair role. We recently appointed Mike Gregoire as the new Chair of our Board of Directors. He succeeds Geoff Barker, who is been on our Board since 2012 and has served as Chair since 2017 and will remain on the Board following this transition. We appreciate and thank Geoff for his leadership. His commitment to governance and execution during the company’s transition from private to public and in the years that followed, strengthen our ability to deliver value to customers and shareholders. Mike has been a valuable member of the Smartsheet Board since late 2019. His expertise in operating technology companies at scale aligns very well for our next phase of growth.

We are pleased to welcome Mike to the Chair position and look forward to working with him more closely. Now, let me turn the call over to Pete. Pete?

Pete Godbole: Thank you, Mark, and good afternoon, everyone. As Mark mentioned, Q4 was another strong quarter. We exceeded our guidance across the top and bottom-line and posted quarterly operating income for the first time. We saw particular strength in our largest customers, who continue to exhibit expansion rates above our overall net dollar retention rate, and Advance, which contributed a record level of billings and revenue in the quarter. Despite strength in these areas, we saw the impacts of a worsening macro-environment. Similar to past quarters, we see these pressures manifest a smaller deal sizes and longer sales cycles, which ultimately led to lower expansion rates among our customers. In FY ’23, we placed an intense focus on driving operational efficiencies which has resulted in a faster path to profitability than previously contemplated.

We focused on driving operational efficiencies by eliminating lower value activities, while maintaining sales capacity. These operating efficiencies have contributed to our outperformance in our operating income and free cash flow in Q4, and our guidance for FY ’24. We expect the macro to worsen in FY ’24, but the plan we have created, positions the company to capitalize and improving economy when that eventually occurs. We continue to pursue sustained growth and profitability in a disciplined and thoughtful manner, while focusing on allocating capital to growth initiatives. Our strategy of focusing on large accounts for the last several years has been a part of that thinking. And this year we plan to invest in four areas. First, widen our competitive lead on the dimension of enterprise scale.

Second, unlock product led discovery and adoption. Third, enhance IT, governance control and security. And fourth, elevate our user experience. I will now go through our financial results for the full-year and fourth-quarter. Unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentation that was posted before the call. For the full-fiscal year ’23, we ended with total revenue of $766.9 million, up 39% year-over-year. Billings of $892 million, up 35% year-over-year. Operating loss of $36 million and free-cash flow of $9.8 million. We ended the year with annual recurring revenue of over $854 million, a year-over-year increase of $215 million.

Next. I will provide more color on our fourth-quarter financial results. Fourth quarter revenue came in at $212.3 million, up 35% year-over-year. Subscription revenue was $198.9 million, representing year-over-year growth of 37%. Services revenue was $13.5 million, representing year-over-year growth of 15%. Capabilities made up 31% of subscription revenue, up from 26% of revenue in Q4 of last year. Turning to billings. Fourth quarter billings came in at $286.7 million, representing year-over-year growth of 28%. Approximately 94% of our subscription billings were annual with 3% monthly. Quarterly and semi-annual represented approximately 3% of the total. Multiyear billings represented less than 0.5% of total billings. Moving on to our reported metrics.

The number of customers with ARR over $50,000 grew 36% year-over-year to 3,206 and the number of customers with ARR over $100,000 grew 45% year-over-year to 1,484. These customer segments now represent 62% and 48% respectively of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is now 89%. Next, our domain average ACV grew 20% year-over-year to $8,377. We ended the quarter with the dollar-based net retention rate of 125%. The full churn rate remains below 4%. Consistent with our assumption of the macro-environment in FY ’24, we expect our net dollar retention rate to trend lower into the high-teens by the end-of-the year. Now turning back to the financials. Our total gross margin was 82%. Our Q4 Subscription gross margin was 86%.

We expect our gross margin for FY ’24 to remain above 80%. Overall, operating income in the quarter was $7.5 million or 4% of revenue, which represents a 6 percentage point sequential margin improvement. Free-cash flow in the quarter was positive $16.4 million. Now let me move on to guidance. Our guidance reflects the expectations of a worsening macroeconomic environment. Therefore, we have incorporated more conservatism into our guidance philosophy. If the macro-environment does not decline, this should be a source of upside to our current full year expectations. In FY ’23, we placed heavy internal focus in operational rigor and moderating our hiring plan to adapt to the changing macro economy. In FY ’24, these initiatives, combined with the natural economies of scale in our business, will result in significant improvements in our margin profile and free-cash flow performance.

In FY ’24, we are investing in enterprise growth with the ramped sales team and continue to invest in widening the technology advantage of our platform. As a business approaching $1 billion of ARR, we are set-up to leverage this natural scale, the operational initiatives that we started in FY ’23. For the first quarter of FY ’24, we expect revenue to be in the range of $213 million to $215 million and non-GAAP operating income to be in the range of $8 million to $10 million. We expect non-GAAP EPS to be $0.08 to $0.09 based on diluted weighted average shares outstanding of $136 million. For the full-fiscal year ’24, we expect our revenue guidance to be $943 million to $948 million, representing growth of 23% to 24%. We expect services to be 6% of total revenue.

We expect our non-GAAP operating income to be in the range of $35 million to $45 million, representing an operating margin of 4% to 5% and a non-GAAP net income per share to be $0.31 to $0.38 for the year based on approximately 137.5 million diluted weighted average shares outstanding. We expect FY ’24 billings growth to be 20%. And we expect our free-cash flow for FY ’24 to be $110 million. To conclude, Q4 was another strong quarter, highlighted by our continued outperformance, our strength in the enterprise and emerging profitability. We see FY ’24 as a year where our enterprise investments set us up for durable long-term growth. Now let me turn the call over to the operator. Operator?

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Q&A Session

Operator: Your first question is from the line of John DiFucci with Guggenheim Securities. Your line is open.

John DiFucci: Thank you. Well, first of all, congrats on elevating Mike Gregoire to the Chairman position. I think he sets really well with our view at least of how you guys approach the business. He is pretty straightforward. It’s also nice to see you demonstrate the profit power of the software model with both the results this quarter, but also in your guidance for next year. So it’s great to see that two, guys. But my question, Pete, you said guidance reflects a worsening macro. So it sounds, its a little more conservative than usual, which I think is the right thing to do here. But last quarter you gave some specifics around go-to-market metrics and you talked about positive comments on pipeline, close rates, sales productivity, quota attainment.

You also said you’d be close to fully rep sales force and I think you sort of mentioned that too here. Can you sort of hit some of those, you think that are most important and what your – what is in implied in guidance in this — this year? Are they all — are you assuming all of those things sort of moderate throughout the year or are there some of them that actually hold steady and some sort of moderate?

Pete Godbole: So, John, I’ll pass that question down to what you asked. So let’s start with Q4. We exceeded our guidance relative to the expectations we had set, based on Advance booking and larger transactions that we did. But as we build through the quarter, we saw a nominal worsening relative to past trends. And what that meant was, a slight degradation in the close rate and an elongation in the sales cycle. We’re seeing a strong pipeline. It’s the close rate that we’re seeing a slight degradation on. So given that phenomenon, what we’ve opted to do is, be conservative in building a normally worsening guide for those in FY ’24 as it relates to our topline view.

John DiFucci: Okay, that makes sense. And if I could, just a quick follow-up to that, Pete. It sounds like the NRR is going to — what you said is the clients to the high-teens by the end-of-the year. So it sounds like you are progressively and I realize that’s a trailing 12 month metric, but does that imply — should I be thinking about that as like the year-over-year subscription growth or perhaps the ACV growth will also decelerate throughout the year two or is it not quite led?

Pete Godbole: So the net dollar retention rate, John, aligns with our billings guide. If you think of the topline, those are intertwined. And the same factors that affect the billings guide we just walked through, are at play for the net dollar retention rate. See, you’re seeing a basic macroeconomic impact. We have a pretty healthy growth rate, but there is a macroeconomic impact that puts a slight pullback from those rates, if you will.

John DiFucci: Okay, that all makes sense. And this is good to see. Thanks a lot, guys.

Pete Godbole: Thanks, John.

Operator: Your next question is from the line of Brent Thill with Jefferies. Your line is open.

Brent Thill: Mark, on the enterprise, it seemed like that held up better. Can you just give us a little more color on what you’re seeing? And kind of back to the Pete’s comments in the monitoring of demand are — what are you factoring in for the enterprise closed in the back half? And for Pete, just, when you think about the economic headwinds worsening, did you see that across multiple countries? Was it more pronounced in Europe versus U.S.? Any color you can give from a geographic perspective, will be great. Thanks.