Project management software maker Smartsheet (NYSE:SMAR) reported Q3 CY2024 results exceeding the market’s revenue expectations, with sales up 16.7% year on year to $286.9 million. Its non-GAAP profit of $0.43 per share was 41.6% above analysts’ consensus estimates.
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Smartsheet (SMAR) Q3 CY2024 Highlights:
- Revenue: $286.9 million vs analyst estimates of $283.9 million (16.7% year-on-year growth, 1.1% beat)
- Adjusted EPS: $0.43 vs analyst estimates of $0.30 (41.6% beat)
- Adjusted Operating Income: $56.36 million vs analyst estimates of $43.13 million (19.6% margin, 30.7% beat)
- Operating Margin: -1.2%, up from -14.4% in the same quarter last year
- Free Cash Flow Margin: 21.5%, similar to the previous quarter
- Customers: 20,430 customers paying more than $5,000 annually
- Net Revenue Retention Rate: 111%, down from 113% in the previous quarter
- Billings: $297.3 million at quarter end, up 10.7% year on year
- Market Capitalization: $7.81 billion
Company Overview
Founded in 2005, Smartsheet (NYSE:SMAR) is a software as a service platform that helps companies plan, manage and report on work.
Project Management Software
The future of work requires teams to collaborate across departments and remote offices. Project management software is both driving this change and benefiting from it. While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitively accelerated the demand for tools that allow work to be done remotely.
Sales Growth
A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Smartsheet’s sales grew at an impressive 29.1% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.
This quarter, Smartsheet reported year-on-year revenue growth of 16.7%, and its $286.9 million of revenue exceeded Wall Street’s estimates by 1.1%.
Looking ahead, sell-side analysts expect revenue to grow 14.6% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is noteworthy and suggests the market is baking in success for its products and services.
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Billings
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Smartsheet’s billings punched in at $297.3 million in Q3, and over the last four quarters, its growth slightly outpaced the sector as it averaged 14% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth. 
Customer Retention
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
Smartsheet’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 114% in Q3. This means Smartsheet would’ve grown its revenue by 13.5% even if it didn’t win any new customers over the last 12 months.
Despite falling over the last year, Smartsheet still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.
Key Takeaways from Smartsheet’s Q3 Results
It was good to see Smartsheet significantly beat analysts' EPS and adjusted operating income estimates this quarter. On the other hand, its billings missed and its net revenue retention decreased. Overall, this was a mixed quarter with strong bottom-line performance but mediocre top-line results. The stock remained flat at $56.07 immediately following the results.
Smartsheet underperformed this quarter, but does that create an opportunity to invest right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.
