Smartsheet Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

A collaborative work management platform, Smartsheet enables teams to plan, track, automate, and report on work, bringing together different functions and people in an organization.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Smartsheet Inc. (SMAR) operates a software-as-a-service (SaaS) platform designed for work management. The company’s platform allows organizations to plan, capture, manage, automate, and report on work, effectively streamlining a variety of business processes. Smartsheet’s value proposition is built around facilitating collaboration and improving project visibility, workflow automation, and resource management for teams across various departments.

Revenue Distribution:

Smartsheet primarily earns revenue from subscriptions to its cloud-based platform. These subscriptions are recurring in nature and provide a predictable revenue stream. The company segments revenues into two parts: subscription services (platform access) and professional services (implementation, training, and other services).

Subscription revenue accounts for the majority of SMAR’s revenue, signifying the platform’s value as a core service. Professional services revenue is a much smaller portion, although, critical for implementation in a more complex environment.

Industry Trends:

Remote Work & Digital Transformation: The shift towards remote work and digital transformation is accelerating the demand for cloud-based collaborative work management tools. Smartsheet is well-positioned to benefit from this trend as companies seek to manage distributed teams and projects efficiently.
Process Automation: Companies are increasingly focused on automating workflows to boost efficiency, reduce errors, and free up resources for more strategic activities. Smartsheet’s capabilities in workflow automation are therefore highly sought after.
Integration and Scalability: Customers require platforms that integrate seamlessly with existing enterprise systems and that can scale with their growing business. Vendors that offer these capabilities are gaining traction.
Data Analytics: The demand for data-driven decision making also requires modern work management platforms to provide insights into team performance and project progression. Smartsheet’s analytics features help customers visualize progress and identify areas for improvement.

Margins:

Smartsheet’s gross margin is above 75% - which is a typical value for a software company. However, margins are not improving substantially. Research and development expenses are also a large portion of revenues for SMAR (roughly 45%)

Competitive Landscape:

The work management software market is highly competitive, with a mix of large players and niche startups vying for market share. Microsoft, Asana, Monday.com, and Atlassian are major competitors with well-established products. Competition can also be present in smaller software products from other companies and custom solutions from internal groups. Many of the companies in this industry are offering a suite of capabilities with a growing list of integrations, which poses a threat for Smartsheet.

What Makes Smartsheet Different:

Smartsheet attempts to differentiate itself through its platform’s flexibility, focus on collaboration, and integration capabilities. The platform’s ability to be customizable is an important selling point. It is often described as a “no code” platform that gives its end users the ability to make changes themselves and does not require engineering talent to tailor the software to their needs.

Financials Deep Dive:

Revenues: Smartsheet’s subscription revenues continue to see growth. This is an important factor, as recurring revenues from its subscription model allow more predictability in the company’s business. There are strong revenue increase for the most recent quarters from both large customers and new customers.
Profitability: Smartsheet is not profitable yet, but continues to show a reduction in its operating losses. The company is still heavily spending on sales, marketing, and R&D efforts to expand its platform and customer base. As well, amortization and write-off costs, mainly from software and related development costs have a substantial effect on the financials.
Customer Growth: Smartsheet has seen a consistent increase in both its number of customers and its dollar-based net retention rate. Larger enterprises are adopting the Smartsheet platform, indicating that the company is starting to make more inroads into large companies. Management has called out significant growth in international customers as well.
Liquidity & Capital Resources: Smartsheet has cash on hand and is expected to have enough free cash flow to maintain current operations. No significant capital raising is expected.
Current Quarter: Net loss was $28.5 million compared to a net loss of $54.4 million in same quarter a year ago. Revenue was $241.1 million versus $195.7 million a year ago.
Full Year Guidance: The company is projecting total revenue of approximately $931 million to $934 million. They are also projecting continued expansion in customer acquisition and retention.

Recent Concerns/Controversies & Management’s Take:

Competition Intensification: While management acknowledges a competitive landscape, they remain confident they are differentiated in the market by their emphasis on integration, security, and the wide variety of use cases.
Uncertainty and Risk in Market: In general the management does not believe that they are being affected by the overall macro-economic situation in the world. They report that they continue to have growth across all aspects of the business.
Acquisitions: Smartsheet acquired many smaller software companies to augment its own capabilities, as well as to bolster its workforce. However, there may be increased integration risks, and potentially increased SG&A expenses.

Moat Analysis: 3/5

Smartsheet has a narrow moat based on switching costs and a relatively large scale advantage among its smaller peers. While the platform itself may not be that differentiated, the integration that it provides to its customers and the effort to transition to new software give a significant barrier to switching. This is further supported by management calling out a high 124% retention rate. However, given the highly competitive nature of the market (with competitors offering comparable products) and the fact that high growth rates cannot continue indefinitely, a wide moat cannot be assigned. The narrow moat is also not necessarily as strong in all areas. While integration with large enterprise partners is impressive and adds considerable switching costs for some customers, customers that only use the platform for a few functions are more likely to switch. It is therefore hard to label the moat as wide, as it relies on what kind of customer is choosing the company’s platform.

Intangible Assets: Brand recognition and trust are solid in their chosen space. However, the moat can be eroded by new features that competitors can produce.
Switching Costs: The platform’s deep integration into an enterprise’s processes creates high switching costs due to data dependency and process management, but this can also be done to the same effect through the utilization of other products.
Network Effects: While not present in all aspects of Smartsheet’s platform, collaborations within the platform, as well as other integrations, can cause network effects and make the business more attractive.
Cost Advantages: While they do not have a cost advantage by way of geographical or production based scale advantages, its software business is naturally scalable and can expand quickly without many additional costs. This is also not a major driver of returns.

Risks to the Moat & Business Resilience:

Increased Competition: The competitive landscape in work management platforms is dynamic, with large players offering comprehensive solutions. Small players that are cheaper and just as capable could disrupt Smartsheet.
Disruptive Technology: New technologies and AI could shift the market towards entirely different solutions, making the current platform obsolete.
Product Obsolescence: Failure to innovate or adapt its platform to changing customer needs or market demands could erode its market position.
Security Breaches: If a data breach or privacy violation occurs, it can significantly impact the company’s reputation and customer base.

Understandability Rating: 2/5 The fundamental idea of SMAR is easy to grasp, as its product is easy to understand and conceptualize. However, the large amounts of moving pieces of the company’s financials, as well as the complexities in valuation and competitive dynamics make it complex. The number of business lines is not extremely large, but the business is not very simple to understand for the average investor.

Balance Sheet Health Rating: 4/5

Smartsheet has a healthy balance sheet. While not currently profitable, it has no significant debt and enough liquidity to fund operations, and growth for the next couple of years. However, with no profitability, it is important to monitor these trends in order to accurately value the company.

Solid liquidity position, with no large debt and a considerable amount of short-term liquid assets.
Currently generating losses, but the company expects growth will cover for this in the future.
No foreseeable capital raises are expected.