Smartsheet (SMAR) Stock Q1 FY2021 Earnings Results Review

Smartsheet (SMAR) released their Q1 (April end) FY2021 earnings report on June 3rd. They delivered a strong beat on revenue and EPS for the prior quarter. However, billings and forward revenue guidance were below expectations. The market responded by dropping the stock price by 23% the next day. This followed a strong run-up before earnings on expectations that SMAR would be a COVID-19 beneficiary. Smartsheet also released a number of product enhancements during the quarter, primarily focused on providing tools for organizations to manage their COVID-19 response. In this post, I review Smartsheet’s Q1 earnings results and other business updates. I then dig into the competitive landscape for collaborative work management, which has evolved significantly over the past year and attracted more entrants from adjacent categories. As a consequence, I have sidelined my personal investment in SMAR until Smartsheet’s competitive position in the expanded collaborative work management category becomes more clear.

Headline Financial Results (EPS is Non-GAAP)

• Q1 FY2021 Revenue of $85.5M, up 52% year/year. This compares to the consensus estimate of $81.4M, which would have represented growth of 45%. Smartsheet’s guidance from Q4 earnings was for revenue of $82-83M. Smartsheet beat estimates by 7% of annualized growth. Q4 FY2020 revenue growth was 50.6% year/year, so Q1 represented a slight acceleration.

• Smartsheet generated billings of $89.9M in Q1, versus analyst expectations for $94.1M. Q1 Billings were down 11% sequentially and grew 30% year/year. Comparatively, in the prior year from Q4 FY2019 to Q1 FY2020, billings increased from $64.1M to $69.1M, for growth of 8% sequentially. In all past quarters, billings growth has remained above 50% year/year. The billings deceleration was the primary cause of the stock drop post earnings.

• Q1 Non-GAAP operating loss was $13.6M, for an operating margin of -16%. This compares to an operating loss of $14.1M in the year ago period, representing an operating margin of -25%. Q4 operating margin was -22%.
• Q1 Non-GAAP net loss was $12.5M for an EPS of ($0.11) versus ($0.19) consensus, representing a beat of $0.08. This compares to Q1 FY2020 net loss of $13.0M or ($0.12) EPS.
• Q1 FCF was ($28.2M) for a FCF margin of -33%. This compares to ($13.1M) or FCF margin of -23% in the year ago period. Management attributed $3.9M of free cash flow in Q1 to CapEx spend. Q1 FCF was also impacted by adjustments to billing terms for some customers due to COVID-19 disruption.

• Q2 FY2021 Revenue estimate of $86-87M, representing year/year growth of 34% at the midpoint. This compares to the consensus revenue estimate of $88.5M, or 37% growth.
• Q2 Billings estimate of $91-93M, representing year/year growth of 15% to 17%. This compares to consensus estimate of $104.2M.
• Q2 Non-GAAP estimated operating loss of $21.0M to $19.0M, representing an operating margin of -23%.
• Q2 Non-GAAP EPS estimate of ($0.16) – ($0.18) versus consensus estimate for ($0.14).
• Q2 FCF estimate of ($11M) to ($9M), representing a FCF margin of -11.5%.
• FY2021 Revenue estimate of $360-370M, representing year/year growth of 35% at the midpoint. This compares to consensus revenue estimate of $371.5M and the company’s prior guidance of $373-378M. FY2020 revenue growth was 52%.
• FY2021 Non-GAAP operating loss of $65.0M – $55.0M, for an operating margin of -16.4% at the midpoint.
• FY2021 Non-GAAP EPS of ($0.54) to ($0.45), compared to ($0.56) estimated.
• Withdrew previously issued FY2021 billings and FCF guidance.

• As of April 30, 2020, Smartsheet had cash and cash equivalents of $544M.

Other Performance Indicators

• Subscription revenue was $77.2M, growing 53.5% year/year. The remainder of revenue is for services, which grew 41.7% to $8.3M. Growth in subscription revenue is a better indicator of Smartsheet’s long term opportunity.
• Non-GAAP gross margin was 81% in Q1, declining by 1% year/year. This reduction was driven by incremental costs associated with Smartsheet’s public cloud migration. Management expects gross margin to trend toward their long-term target of 78% to 80%.
• Dollar-based Net Retention Rate was 132% at the end of Q1. This compares to 135% in Q4 and 134% a year ago. Due to the ongoing impact from COVID-19, management expects the net dollar retention rate to trend down during the second quarter to the high-120s.
• Average ACV by Domain grew 45% year/year to $3,866.

• Smartsheet continued to experience strong customer growth metrics:
  • The number of customers with ACV of $5,000 or more grew to 9,576, an increase of 41% year over year
  • The number of customers with ACV of $50,000 or more grew to 1,040, an increase of 101% year over year
  • The number of customers with ACV of $100,000 or more grew to 391, an increase of 107% year over year

• 15 customers expanded their ARR by more than $100k in Q1 versus 13 in the year ago period. 51 companies expanded their ARR by over $50k in Q1 versus 34 in the same quarter a year ago. Had 6 customers with ARR of more than $1M at the end of Q1.
• ARR generated by Fortune 500 customers grew 48% year/year in Q1. At this point, 79% of the Fortune 500 are Smartsheet customers.
• Non-GAAP OpEx spend as a percentage of revenue by category showed decreases year/year. S&M and G&A spend decreased slightly, while R&D expense decreased by 8% year/year. They attributed the reduction in R&D spend to lower personnel expenses and recruiting costs.

Earnings Call Notes

• On the earnings call, management addressed the substantial drop in Q1 billings and Q2 guidance. They attributed $2M of the Q1 shortfall to payment accommodations extended to some customers directly impacted by COVID-19. Additionally, the net dollar retention rate in Q1 was lower by 2% year/year. Guidance takes expected headwinds from COVID-19 into account. The churn impact for Q1 was most pronounced among SMB customers, which represented approximately 28% of ARR at the end of Q1. The impact was greatest for customers in certain industry segments like travel, hospitality and retail. Management cited a few examples of businesses in travel and event planning that simply had no new business themselves, so it became difficult to justify the need to pay for a work management tool. Leadership team is confident these customers will return to high use once their business picks back up.
• Preliminary analysis of May’s sales pipeline and performance suggests stabilization of the disruption caused by COVID-19. That early data reinforces management’s commitment to continue investment for growth and category leadership. Areas include expanding product development and selling capacity.
• The CFO remains bullish on their long-term path to $1B in revenue, but leadership acknowledges it will likely materialize later in their target 3-5 year window. This target was introduced in 2019.
• Management discussed some customer expansions in the quarter, several related to health care and government:
  • A global healthcare customer recently expanded their use of Smartsheet in order to coordinate the scaled distribution of antibody tests to thousands of analyzers at hundreds of lab sites across the US.
  • US government agencies responding to the COVID-19 crisis can use the FedRAMP authorized environment Smartsheet Gov, free of charge. Nearly 100 federal, state and local agencies have taken advantage of this program. 
  • The Department of Health and Mental Hygiene for one large American city saw their number of active users on Smartsheet tools increase by 700, a 12-fold increase.
  • A medical air transport company, which has been a Smartsheet customer since 2015, saw active users increase by more than 1,500, a 10-fold increase.
  • A payment processing company for vehicle fleets increased their usage by nearly 1,800 active users, an 8-fold increase.

• CFO commented that they are continuing to get requests from customers for extended payment terms or quarterly billings terms. Coming into May, the percentage of customers making that request came down. The billings guidance is being driven by the April results, which was a significant change from what they had seen in March. This is reflective of the business challenges for certain customers and their ability to purchase currently.
• Regarding forward business traction, management cited their leading sales indicators, like trials, where the pipeline appears strong. Not seeing softness on new customer interest.
• Speaking to competition: “We really haven’t seen a change in the trend. We continue to see the vast majority of our transactions are replacing the status quo. We have had a couple of situations where we had large customers that have consolidated to Smartsheet and actually pushed out a number of smaller providers that had small footholds in those brands and those were pretty large brands. Both of those happened in this quarter.”
• Hired 50 sales reps in Q1. Plan to hire a few more in Q2 and then step back to assess the demand environment going forward.
• Have seen almost a doubling in the number of automated workflows triggered over a 30-day period (in the millions now) and that continues to accelerate month-over-month. Smartsheet started enabling automation two years ago in a very simple, single step process. Now support multi-step workflows and more complex automation. Mentioned having some new capabilities coming later in the year that will move Smartsheet further up the capability stack. This will serve both power users as well as citizen developers to orchestrate and manage workflows.

Analyst Reactions

Following Smartsheet’s Q1 earnings announcement on June 3rd, seven sell-side analysts provided updated coverage reports. They all raised their price targets, in reaction to the results. Four analysts rated the stock at a buy equivalent, while three maintained their neutral rating. The average price target for these updates is about $54, representing a 19% increase over the closing price on June 4th of $45.50.

Date	Analyst	Rating	Price Target
6/4	Oppenheimer	Outperform	Raised from $48 to $52
6/4	Wedbush	Neutral	Raised from $40 to $45
6/4	Canaccord	Buy	Raised from $45 to $55
6/23	Wells Fargo	Equal Weight	Initiated at $50
6/23	Morgan Stanley	Overweight	Raised from $53 to $58
6/25	Needham	Buy	Initiated at $67
7/8	DA Davidson	Neutral	Raised from $45 to $50

Directly following earnings, Canaccord issued the highest price target, raising from $45 to $55. Analyst Richard Davis provided the following commentary.

Canaccord analyst Richard Davis raised the firm’s price target on Smartsheet to $55 from $45 and keeps a Buy rating on the shares. The analyst said its earnings miss was a surprise but he believes the selloff is an overreaction. He said top-of-the-funnel activity improved in May and the long-term opportunity remains healthy despite management being cautious and lowering guidance.

thefly, June 4, 2020

Wedbush maintained the lowest price target, raising from $40 to $45 and keeping a neutral rating. Analyst Steve Koenig provided the following commentary.

Wedbush analyst Steve Koenig raised the firm’s price target on Smartsheet to $45 from $40 and keeps a Neutral rating on the shares. The analyst notes that the company beat Q1 revenue and EPS targets, but missed on billings and guided sharply lower on Q2 billings.

thefly, June 4, 2020

Finally, in the weeks following earnings, some sell-side analysts issued new reports after discussions with management. DA Davidson provided an update on July 8th, in which analyst Rishi Jaluria raised the price target from $45 to $50 and kept a neutral rating.

DA Davidson analyst Rishi Jaluria raised the firm’s price target on Smartsheet to $50 from $45 but keeps a Neutral rating on the shares after holding talks with its management. The company should be a long-term beneficiary of the pandemic, though customers’ increased investment scrutiny could pressure its near-term results, the analyst tells investors in a research note. Jaluria adds that Smartsheet management has cited “accelerators, the Federal vertical, and third party engagement” as opportunities for the company.

Thefly, July 8, 2020

Smartsheet Product Development Activity

Over the course of Q1, Smartsheet made several enhancements to the product offering. The main focus was to lean into the COVID-19 situation and provide tools for government agencies and organizations to manage COVID-19 specific workflows. Additionally, the product and engineering teams made other incremental improvements to the core offering.

On March 18th, Smartsheet announced the availability of COVID-19 specific resources for government agencies. They made the company’s government specific instance of Smartsheet, called Smartsheet Gov, available for free and without obligation for 120 days. Smartsheet Gov has achieved FedRamp Authorized status. It is built on AWS GovCloud and offers strict protocols to secure data, control user access, and facilitate sharing of information outside the organization. At the time of the announcement, management claimed that several government agencies had already utilized the capabilities of Smartsheet Gov to plan, track and coordinate their COVID-19 response.

Smartsheet also released a set of templates that any organization can use to manage their COVID-19 response and communicate with employees. These were built internally for the Smartsheet organization itself and then shared with the broader user base. Smartsheet leadership emphasizes that they are the biggest users of their own product (dogfooding). These templates provide an operations dashboard that serves as an information hub for employees. The organization can use a set of pre-built forms and sheets to collect data and assess risks for employees.

As part of the Q1 earnings call, Smartsheet leadership mentioned that these resources have been deployed nearly 14,000 times and were in use across several industries including healthcare, professional services, and technology. In addition to the templates added in mid-March, the product team developed and deployed 30 more templates specifically designed to help customers manage through the COVID-19 crisis. Templates focused on areas such as CDC Preparedness, PPE Inventory Tracking and Remote Employee On-boarding. As customers begin planning for a return to the workplace, Smartsheet will release new assets to help organizations manage risk and employee awareness.

In addition to providing COVID-19 support, Smartsheet made significant progress toward achieving Department of Defense Impact Level 4, IL4 authorization. Doing so, will enable the Aerospace and DoD sectors to securely utilize the Smartsheet Gov platform to modernize their workflows and processes.

Smartsheet launched a number of other meaningful product updates during the quarter. These included:

• Larger faster sheets. Increased the limits on sheets to 20k rows, 400 columns and 500k cells. Also, improved performance of sheet load time by 2x, sheet scrolling by 6x and cross-sheet reference loading by 2x.
• New form builder with conditional logic. Adds conditional logic rules to forms. These can be set up to display fields on the form based on the response to a prior field. This allows customization of the form based on user responses and improves relevance. The logic controls are fairly basic at this point. The user can check whether a field is set (or not) to certain values. The other test is whether a field is left blank or not. I expect Smartsheet will make this logic more sophisticated over time, likely adding programmability through code snippets.

• Extension for the Adobe Creative Cloud. The Smartsheet extension for Creative Cloud enables creative and marketing teams to collaborate on assets within Adobe tools. The extension adds a panel to the Adobe product UI that allows employees to connect to their Smartsheet tasks, add their current work artifacts as attachments and send proof review requests. This is all done without having to leave the Adobe interface. Smartsheet supports seamless creative content production planning, tracking, review and confirmation.

• Accelerator for CCPA. This added a new accelerator to manage California’s privacy regulation (CCPA). It augments the existing GDPR Accelerator. This new accelerator enables privacy leaders to apply an operational framework to inventory, organize, report, and demonstrate compliance with the CCPA regulation. Organizations can easily scale a privacy compliance program and maintain data inventories, gather evidence of compliance and facilitate the real-time tracking of consumer requests. 

Competitive Landscape

Smartsheet enjoys high penetration among Fortune 500 companies, with over 75% of them as customers. Smartsheet leadership contends that the sales opportunity with many large enterprises is still greenfield, in that Smartsheet products are replacing offline processes or shared spreadsheets, rather than competitive work management offerings. On a recent analyst call, the CEO referenced a few large enterprises in which the customer decided to consolidate all workforce productivity tooling onto Smartsheet and ramped down use of competitive products.

This underscores one of the main strengths in Smartsheet’s business model, its land and expand strategy. They have demonstrated significant dollar based expansion rates, with the highest expansion experienced within Fortune 100 customers at a DBNRR of 159%, which is best in class. The chart below is from Smartsheet’s Analyst Day presentation in October 2019.

However, as noted in the Q1 results, the DBNRR rate dropped for the first time in Q1 over the prior 12 month period. Leadership attributed much of this to attrition and slower spend in the SMB segment due to COVID-19 impact. Given that Q1 FY 2021 spanned February – April and COVID impact was most acute from mid-March through April, this impact is understandable. On the earning call, though, the CFO mentioned that they expect overall DBNRR to drop into the high 120% range over the next couple of quarters.

While a good portion of this anticipated drop in DBNRR can attributed to SMB impact due to business disruption as a consequence of COVID-19, I wonder if other factors are coming into play. This is where we need to take another look at the competitive landscape. In the past year, several companies have emerged that appear to be encroaching on Smartsheet’s market share. These companies existed previously, but have recently started moving upmarket agressively. Also, established players in adjacent categories are expanding their product offerings in ways that overlap more closely with Smartsheet’s product set. This is further complicated by the evolution of the target market, from project and resource planning to full-blown collaborative work management, which goes beyond workflow mapping and task tracking to encompass all communications between teams in executing that work.

In October 2018, Forrester Wave published their report on Collaborative Work Management (CWM) Tools for the Enterprise. In the report, they reviewed the 10 most significant providers along a set of 34 criteria. Smartsheet scored the highest at that time across all measurements, which included product offering, distribution strategy and market presence.

Forrester described Smartsheet as “leading the pack” with a strong combination of product features and market support. This perspective carried Smartsheet through 2019 with strong momentum and a perceived market leading position. Over the last year, though, several of the other players in this landscape have grown their visibility and size to pose a reasonable threat to Smartsheet’s position. They have begun launching vertical specific solutions, similar to Smartsheet’s Accelerators, as well as broadening the set of features they support.

In May 2020, Forrester published an update to their CWM report. This year, they didn’t provide a leader’s quadrant, but rather listed all the providers in the category by revenue segment. The list of contenders has expanded significantly. In the 2018 report, they evaluated 10 providers. This year, they listed 25 total. These were sub-divided into 3 segements by estimated annual revenue generated by products targeted at CWM. There were 11 Large providers with revenue > $120M a year, 7 Mid-size with $20M < revenue < $120M, and 7 Small providers with < $20M.

A few noteworthy additions in 2020 in the Large category are Facebook, Slack and Atlassian. This is interesting, as we wouldn’t normally consider Facebook and Slack to have competitive offerings to Smartsheet. Yet, I think it is reflective of the perceived importance of the space and expansion of communications software offerings into the work management domain.

Looking at Forrester’s definition of Collaborative Work Management (CWM) tools, this addition makes sense. “Software tools that support the confluence of project and process work by allowing users to create personal and team workspaces; invite other users, internal and external to the organization, to collaborate on digital artifacts; identify workload requirements and capacity; and allocate activities to other users to deliver on work items and then track progress.”

Facebook provides CWM tools through its Workplace product suite, targeted at enterprises. They describe Workplace as a communications tool that connects everyone in a company. As with other providers, their product positioning has shifted recently towards facilitating remote work. Primary features revolve around communications, including groups, chat, rooms and live video broadcasting. The suite also includes newer features for project management. They list several notable enterprise customers of Workplace, including Walmart, Nestle, Starbuck, Domino’s and Farmers Insurance. It’s not clear how extensively these customers are using Workplace for work management, but they do represent a captive audience as Facebook extends their capabilities.

Slack is an interesting addition as well. Slack doesn’t formally (yet, at least) advocate replacing traditional product management tools with a solution provided by Slack. Their app directory for Project Management includes a long list of popular work management tools that have integrations built into Slack. Yet, as evidenced on their solutions page for project management, it is clear that Slack wants to own all communication and collaboration that sits on top of the foundation of the project plan. Collaboration among enterprise employees is facilitated by setting up dedicated Slack channels for each project. They advocate fairly granular channels by team or even role.

Interestingly, Slack recognizes a superset of project management functionality and defines that as workflow management. In their view, workflow management allows an organization to map their day-to-day processes onto workflows that clarify roles, increase productivity through automation and reduce waste through clear coordination. To help facilitate this purpose through Slack, they currently recommend several third-party tools that have integrations. These are Smartsheet, Trello, Asana, Monday.com and Airtable.

As one more data point for competitive consideration, in January 2020, IDC MarketScape published a vendor assessment for Work Management (Project and Portfolio Management). IDC sees modern work management tools as representing an evolution from traditional project/resource management. In their view, work management tools facilitate workforce execution through the combination of capabilities to track project tasks, resources and status (traditional project management), as well as layering on communication features to enable collaboration between teams as they coordinate work.

IDC sees work management leveraging and relating to two key functional areas — team collaboration applications (TCA) and project and portfolio management. IDC observes opportunities for coordination across areas via engaging work management solutions that serve as an on-ramp for communication, collaboration, and work execution — a key adoption strategy demanded by enterprises as they evolve their current and future work strategies.

IDC Marketscape, Work Management, Jan 2020

It is this collaboration layer (they call Team Collaboration Applications) that has broadened the scope of project management tools and effectively expanded the market for collaborative work management, in which Smartsheet operates. I think this is why traditional communications tool providers, like Slack and Facebook, appear more interested in this space. While an expanded TAM for Smartsheet is a benefit, it has also drawn in many more players by expanding the boundaries of the playing field.

As these different surveys reveal, there are many contenders in the collaborative work management space and no real clear leader at this point. We see large software vendors (Microsoft, Atlassian) recognizing that enterprises are seeking to revamp their workforce and business processes to facilitate better outcomes through collaboration. This has been accelerated by the remote work requirement. Vendors see this trend of enabling team collaboration as a communications layer on top of work planning. As such, it creates a broader category that they need to participate in. Similarly, the layering of collaboration/communication over project management has pulled in the communication tool providers, like Slack. They likely see an opportunity to extend their collaboration expertise into task management and resource allocation. Rather than promoting integrations for project management, they may eventually launch their own product offering. Finally, the traditional project/resource management tool providers are quickly adding collaborative features, like commenting and embedded video widgets. They likely see an opening to offer communication services.

This has created a web of providers within which Smartsheet is competing for attention. The emergence of collaborative work management as a super category has reshuffled the provider pecking order and leaves customers wondering which toolsets will really empower their workforce. I think this creates risk to the Smartsheet investment thesis, at least until sub categories emerge within the super category, each with a clear TAM, product feature grouping and vendor rankings. Smartsheet may push through this product / market reshuffling and emerge as a leader in a particular category. Until then, investors should monitor progress, likely from the sidelines. I prefer investments in which the category is well defined and the trade-offs between category leaders and size of market are understood. Smartsheet’s competitive position is more difficult to qualify at this point, which makes future revenue growth for the next few years harder to estimate.

To illustrate the point, let’s take look at some of the emerging providers of collaborative work management tools, which in Forrester’s 2018 report on CWM were behind Smartsheet or not included. It is not meant to be exhaustive. Merely the size of the list with comparable positioning makes the competition argument. Several of these companies have benefitted from sizable capital raises and are rapidly growing their employee base, investing in R&D and enterprise sales. For comparison, Smartsheet currently has about 1,600 employees.

Airtable

Airtable describes themselves as “part spreadsheet, part database, and entirely flexible. Teams use Airtable to organize their work, their way.” Users of Airtable can organize any type of data – including projects, customer lists, ideas, places, etc. The basic view looks like a spreadsheet, but has a highly flexible data model that allows easy creation of non-standard spreadsheet cells, like multi-select, checkboxes, attachments or labels. In that regard, it starts to look more like a web app than a spreadsheet. Data can be collected through configurable forms and organized into different types of views, like grid, calendar, Kanban or gallery cards. Each Airtable project can have collaborators associated with it, who can tag and message each other directly in the context of the workflow. Airtable supports a large number of integrations with popular workforce apps. Similar to Smartsheet’s Accelerators, they provide a broad set of pre-built templates to address a wide variety of use cases and audiences.

Airtable supports customization through its Blocks feature. Blocks represent small app-like widgets that can be embedded into the Airtable UI. Examples are maps, charts, video chat windows, pivot tables, translations, etc. Some blocks are provided by Airtable themselves and third-party partners have developed a number of them. Most interesting is that any developer at an enterprise can build their own custom block using React, which is a light Javascript framework for building web components. Airtable provides a full Blocks SDK, with API documentation, examples and online guides.

Airtable was founded in 2012. It is private and has raised $170M so far. They are based in San Francisco and have about 250 employees. They claim to have over 170,000 customers, including some big names like Netflix, Expedia, Shopify and Box.

Asana

Asana is a robust workflow management platform. It has a project management oriented focus. Teams can create projects, assign work to team members, add date targets and communicate with each other through the same interface. It includes various reporting tools and calendar views. Asana provides a great deal of customization and modularity, even to the point where some complain it can be overwhelming for the average user without training. To simplify set up, they do provide a number of standard templates for various industries and categories of work.

Asana was founded in 2008 by Facebook co-founder Dustin Moskovitz and ex-Google, ex-Facebook engineer Justin Rosenstein. They both worked on improving the productivity of employees while at Facebook. Asana is private and has raised over $400M. They are based in San Francisco and have over 600 employees. Gartner estimated they generated about $100M in revenue in 2018. Asana provides a long list of impressive customers, including Salesforce, Deloitte, GE, Spotify, Airbnb and NASA.

Monday.com

Monday.com offers project and workflow management tools through a visually appealing interface. Like Asana, they allow a great deal of customization, without looking complicated. Monday.com describes themselves as a “Work OS”, which is a “team management platform that connects people to workplace processes.” Monday.com targets companies of all sizes and industries. Similar to Smartsheet, their solutions go beyond project management to enable modeling of many types of workflows. Like other work management products, Monday.com enables messaging and collaboration features within the context of the workspace. They provide over 100 pre-built automation recipes and integrations to most popular work applications.

Monday.com provides more customization than some other tools, allowing teams to create enterprise business apps on top of the platform through low-code and no-code tools. They provide a set of pre-built components that can be snapped together through configuration as well as the ability to build custom views, widgets, automation workflows and integrations through their Apps framework. Developers can use HTML, CSS and JavaScript to build their own components and connect to Monday.com APIs to pull in data.

Monday.com was founded in 2012 by a small team coming out of Wix.com (WIX). The company is privately held and has raised over $234M to date. They are headquartered in Israel, with offices in New York. Gartner estimated Monday.com had 280 employees in 2019 and about $90M in revenue. They claim over 100,000 organizations use their products, including some large enterprises like Uber, Apple, GE, Costco, Unilever and Hulu.

Trello

Trello is a simpler tool than the others, primarily geared towards project management based on a Kanban work style. The main information components are cards, lists and boards. Project tasks can be modeled as cards and then assigned to a “swimlane” status, like “In process” or “Done”. As tasks are addressed, they move from one swimlane to another. Each card has a flexible data model, that can accommodate many types of metadata, even attachments. Trello offers workflow automation through a feature called Butler, which provides rule-based triggers, custom buttons and commands pinned to dates. They also offer developer customization through “Power-Ups” and have a REST API to facilitate integration with third-party systems.

Trello was created in 2011 by Fog Creek Software founder Joel Spolsky and spun out into its own company in 2014. That was later sold to software behemoth Atlassian (TEAM) in 2017 for $425M. The Butler automation functionality was added through an acquisition in 2018. In Oct 2019, Trello claimed to have 50M users. They list Google, Costco, Pinterest and Bose as customers.

Wrike

Wrike offers a full-featured collaborative work management platform. The UI is designed around a minimalist, multi-pane approach. It provides features that started in project management, but later expanded into modeling any type of workflow. Users can create work items, assign resources, set up dependencies and track time spent. Collaboration features facilitate communication between team members, asset creation and decision-making. Wrike has a unique “inbox” feature with browser notifications to alert users of changes to task status or new assignments. Like Smartsheet, Wrike provides custom tools for marketing workflows. This was their first vertical solution, launched in 2016. For this, they provide project intake forms, asset proofing, approvals and document version tracking. Wrike offers numerous integrations with third-party apps and have invested in creating unique security features for encrypting assets and account data with individual encryption keys.

Wrike was founded in 2006 and was self-funded for 7 years, before raising $26M in several funding rounds. In 2018, they were acquired by Vista Equity Partners a well-known private equity firm, which indicates Wrike is being groomed for some sort of exit. Gartner estimates they had 915 employees in 2019 and the company is headquartered in San Jose, CA. They claim to have over 20,000 customers, including Okta, Airbnb, Siemens, Dell and Ogilvy.

Workfront

Workfront provides an enterprise work management platform that orchestrates and tracks work. It has a project management focus, but has been extended to model other workflows. Workfront supports native collaboration around tasks within the tool interface, but also provides integrations with many third-party apps. They emphasize data privacy and granular access controls, as well as high system availability. They have built a deep integration and partnership with Adobe to enable marketing teams to update their Workfront tasks and track digital asset approvals from within the Adobe Cloud tool interface. A deep Adobe integration is a competitive feature that Smartsheet emphasizes.

Workfront also offers a separate product called Fusion that provides a sophisticated drag-and-drop interface with custom, logic-based rules to model workflows across teams and other enterprise systems. This is sold as an add-on to the core Workfront product in their various pricing plans.

Workfront was founded in 2001 and is based in Utah. They are private and have raised $375M to date. Gartner estimates they had 981 employees in 2019. Workfront appears to be enterprise focused, claiming more than 3,000 customers, including all 10 of the world’s top brands. Their published customer stories include testimonials from Nordstrom, T-Mobile, Home Depot and Under Armor.

Low-Code / No-Code Development Platforms

Another area where competitive offerings have been advancing rapidly is in adding programmability to the core work management platform. As mentioned above, Monday.com provides developers with an SDK for customization through its Apps framework and Airtable supports custom React components through its Blocks SDK. While these advanced customization capabilities will not be necessary for many customers, there will be a set that value this programmability, even if they don’t ever use it.

Smartsheet currently supports basic conditional logic to route steps in a workflow or to dynamically control element display on a form. This is configured through the UI with a fixed set of logic operators. They also provide a robust API that developers can use to access all forms of data that drive a typical Smartsheet installation. The API is targeted at enabling integrations and stand-alone apps. Smartsheet hasn’t yet extended the core platform to allow developers to build custom widgets within the customer experience, like Monday.com and Airtable. They have hinted that this capability is coming later in the year.

As citizen developers are starting to assimilate basic coding abilities in formatting languages like HTML/CSS and logic processing like Javascript, they will increasingly look for more advanced capabilities to model their unique workflows. I think Smartsheet will need to evolve their capabilities around programmability support. While I think the Accelerators are useful add-ons for common business tracks, full customization would enable Smartsheet customers to build Accelerators themselves (and potentially share these back into the user community). Given that Monday.com and Airtable already support this ability, Smartsheet risks losing ground in this area.

When I initiated coverage on Smartsheet, I thought that these customization capabilities represented a growth opportunity and were actively on the roadmap. The addressable market for the Smartsheet platform would expand and adoption would be easier as more vertical-specific solutions are available. Smartsheet provides vertical and use case specific workflows through their Accelerators offering, but these are currently built and maintained by Smartsheet. My hope was that by adding a full-featured SDK for customers to use, they could “accelerate” the Accelerators. This may be in the works.

Another vector of potential competition is from the low-code development platforms that are rapidly gaining acceptance as a mechanism to deliver simple online experiences without encumbering developer resources. Providers represent both stand-alone companies with a dedicated low code offering, as well as large software/cloud providers adding low code as a product extension. The risk to Smartsheet is that some customers that need to model a more complex workflow would choose to build it on a low code platform rather than trying to configure it on Smartsheet’s platform or rely on an Accelerator that needs some tweaks.

Low-code development platforms allow enterprises to build, test and deploy apps that encapsulate common business functions. The platforms provide a basic set of UI elements, a data store and a mechanism to define the sequence and logic of steps in a workflow. The argument for low-code development platforms is that many business apps are simple combinations of data input and formatted displays (CRUD interfaces). By allowing less expensive, non-developers (citizen developers) to produce and host these kinds of business applications themselves, burden is removed from the enterprise’s IT department, resulting is lower cost and faster turn-around. Where the line should be drawn between low-code apps and custom development is debatable, but low-code apps can be applied to repeatable work processes that essentially involve gathering and displaying data. These would mimic the higher end Accelerators provided by Smartsheet.

Here is a short list of popular low-code platforms, representing both stand-alone companies and offerings from large software/cloud providers. The low-code development space is expanding rapidly, so we can assume more players will emerge over time.

Appian (APPN) is probably the most well-known independent low-code platform. Appian was founded in 1999 and went public in 2017. They have 1,400 employees and are based in Northern Virginia. Appian offers a full-suite of low-code solutions, with focus on business process management and automation. Apps built on Appian’s platform can be automatically deployed to multiple devices, across both mobile and web. They have an extensive set of customers, spanning multiple industries and countries.

Retool is a low-code platform for building internal enterprise apps. They provide an extensive UI component library with tables, drop-down selectors, buttons, forms, etc. They provide a data store that users can easily structure with the ability to connect to a separate database. Logic is coded in JavaScript and can be stored in GitHub. They are a private company based in San Francisco.

Other leading low-code platforms include Microsoft Power Apps, the Salesforce Lightning Platform and the Now Platform from ServiceNow. Not to be outdone, Amazon just launched their own no-code app platform called Amazon Honeycode in June. Honeycode resembles the capabilities of Smartsheet in many ways. It is based on a spreadsheet view as the standard data interface. Data can be manipulated with basic formulas. Users can set up reminders, notifications and approval workflows. The service comes with a number of pre-built templates for common collaborative business functions like customer trackers, surveys, budget approvals, event sign-up and inventory management. Apps are hosted on AWS and automatically run on both web and mobile interfaces.

While not a direct overlap with all facets of Smartsheet, these low-code alternatives risk peeling off more tech-savvy teams that want to assemble their own apps for simple business workflows.

Investor Take-aways

• Smartsheet’s Q1 revenue and EPS were strong, reflecting momentum coming into the quarter.  However, billings growth in the quarter and looking forward reflects lower demand.  Leadership attributes this to the macro environment and impact on SMBs from COVID-19.  This is likely.  However, as these companies come back online and resume their spend, some may revisit their workforce tooling choices, as they have more options now for collaborative work management (CWM) solutions.   
• Operating margin increased from -25% a year ago to -16% in Q1.  Q4 operating margin was -22%.  So, we are seeing improving profitability along with revenue growth. For the full year, as well, operating margin is projected to be -16%, versus -23% in FY2020.
• Gross margins are still high, at 81%.  Leadership confirmed their long term target of 78-80%. These gross margins are favorable as compared to other SaaS companies.
• Customer growth metrics were strong coming into Q1.  The number of customers with spend over $50k and $100k grew over 100% year/year.  They have 6 customers with ARR over $1M.  79% of the Fortune 500 are now Smartsheet customers.  As noted above, though, competitive solutions include references to a number of large customer organizations as well.
• Product development progress in Q1 was a little underwhelming.  The team spent a lot of time building COVID-19 templates, which isn’t a long-term business.  The other enhancements to the product were incremental.  I would like to see a more rapid pace of Accelerator delivery and expansion of the platform capabilities to enable developers at enterprise customers to build more complex workflows.  This would bring Smartsheet’s programmability capabilities inline with competitive offerings.

Risks and Items to Watch

• The impact of COVID-19 is likely accounted for in Smartsheet’s forward guidance. Assuming they can exceed these targets, the stock’s performance should stabilize and appreciate somewhat through the year. However, the COVID-19 impact could persist and extend the subdued demand from SMB customers.
• Competition is a bigger concern. As discussed above, the competitive landscape has evolved significantly in the last year. I think the emergence of collaborative work management as the coalescing of traditional project management tools with team communication has attracted attention from many players in the enterprise software space. There is likely some existential threat insecurity occurring within the larger software vendors. The competitive landscape is now cluttered with many offerings, which I think gives customers more choice and even confusion about how to best transform their workforces. Given this, it will be difficult to predict how Smartsheet’s offerings will perform in the market until these dynamics settle.
• Smartsheet’s product development pace seems to have slowed. Additions to the core platform delivered in Q1 were incremental. Granted, capitalizing on the COVID-19 situation built some market share with government entities, but the core platform capabilities need to continue to rapidly expand in order to keep up with competitors. As mentioned above, I think programmability will be an important differentiator. Monday.com and Airtable offer this now, as well as the low-code alternatives.

Investment Plan

Primarily due to the competitive concerns, I am sidelining my bullish bias on Smartsheet (SMAR). I would like to see how 2020 plays out, both in terms of execution on their revised guidance, and more importantly, the evolving collaborative work management (CWM) category. With CWM spanning both traditional project management and team communications, a super category has emerged and has attracted the attention of many software providers. Over time, sub-categories will form, with clear product feature groupings and vendor rankings. In the meantime, there is a lot of risk that other CWM providers will encroach on Smartsheet’s strong penetration within the Fortune 500 and offer alternatives for SMB customers, when they are ready to restart their businesses.

In terms of my 5 year price target of $140, I will leave that in place for now. Smartsheet leadership is still bullish on hitting their $1B revenue target with 20% operating margins in 3-5 years (established in late 2019, so let’s say 2024). At a 15 P/S ratio, this would effectively triple the current market cap to $15B. I would like to see how 2020 plays out before making any changes. However, I will move SMAR to a neutral status in my coverage for now and won’t consider an entry until the competitive picture becomes clear.

For my personal portfolio, I exited my position in SMAR after earnings.  I sold for around $48, with a cost basis of $42, generating a reasonable gain.  I re-invested those proceeds into FSLY.  I will continue to monitor Smartsheet’s performance over the next couple of quarters and provide investors with updates.