Smartsheet : First Quarter Fiscal 2025 Earnings Transcript

Smartsheet Inc. NYSE:SMAR

Earnings Call

Wednesday, June 5, 2024 9:30 PM GMT

CALL PARTICIPANTS	2
PRESENTATION	3
QUESTION AND ANSWER	8

SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

Call Participants

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EXECUTIVES

Aaron Turner

Vice President of Investor

Relations & Treasury

Mark P. Mader

President, CEO & Director

Pete Godbole

CFO & Treasurer

ANALYSTS

Aleksandr J. Zukin

Wolfe Research, LLC

Brent John Thill

Jefferies LLC, Research Division

David E. Hynes

Canaccord Genuity Corp.,

Research Division

George Michael Iwanyc

Oppenheimer & Co. Inc., Research

Division

George Michael Kurosawa

Citigroup Inc., Research Division

John Stephen DiFucci

Guggenheim Securities, LLC,

Research Division

Joshua Phillip Baer

Morgan Stanley, Research Division

Kyle Edward Diehl

KeyBanc Capital Markets Inc.,

Research Division

Michael H. Berg

Wells Fargo Securities, LLC, Research Division

Pinjalim Bora

JPMorgan Chase & Co, Research Division

Rishi Nitya Jaluria

RBC Capital Markets, Research Division

Scott Randolph Berg

Needham & Company, LLC,

Research Division

Taylor Anne McGinnis

UBS Investment Bank, Research Division

Terrell Frederick Tillman

Truist Securities, Inc., Research

Division

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

Presentation

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Operator

Ladies and gentlemen, good afternoon, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smartsheet First Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions]

Thank you. And I would now like to turn the conference over to Aaron Turner, Head of Investor Relations. You may begin.

Aaron Turner

Vice President of Investor Relations & Treasury

Great. Thank you, Abby. Good afternoon, and welcome, everyone, to Smartsheet's First Quarter of Fiscal Year 2025 Earnings Call. We will be discussing the results announced in our press release issued after the market close 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 is a slide presentation that accompanies Pete'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/or 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 a 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 P. Mader

President, CEO & Director

Thank you, Aaron, and good afternoon, everyone. Welcome to our first quarter earnings call for fiscal year 2025.

Q1 finished strong and reflected steady improvement as we move through the quarter. In the quarter, 53 customers expanded their Smartsheet ARR by more than $100,000. We now have 72 customers with ARR over $1 million, up 50% from Q1 last year. We ended the quarter with annualized recurring revenue of $1.056 billion and more than 14.7 million Smartsheet users.

In Q1, we expanded with customers, including Nestlé Purina, Ross Stores and Sephora, among others. We saw a significant expansion with the global media and entertainment company that has experienced growing demand for Smartsheet within its employee base.

This expansion is across multiple dimensions: the number of users, geographically from their core U.S. group to teams in Hong Kong, Singapore and other international markets; and usage across our breadth of premium capabilities. Over the last year, in order to manage the expanding scale of their workloads

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

on Smartsheet, the company's use of Data Shuttle has doubled, and the use of Dynamic View to manage confidential information within the organization has tripled.

In EMEA, the technology and consumer electronics company signed a large 3-year enterprise deal. They were in need of a high-scale data asset management solution to replace a tool built by their agency partners that couldn't meet the growing demands of their business. They saw the value of Brandfolder within Smartsheet's workflows and the security flexibility and power of this integrated content platform. The company will store millions of brand assets for distribution to their subsidiaries around the world.

Going forward, they plan to build out a larger marketing and creative management ecosystem using Smartsheet. This past quarter, we saw a significant expansion that included an upgrade to Advanced Platinum at a major business process service provider. Because much of their work involves providing support to government agencies, our advanced security offering, Smartsheet Safeguard, was key to the deal.

Furthermore, Data Shuttle and DataMesh are crucial to maintaining consistency and standardization of data across their client projects, showcasing the power of Smartsheet's enterprise interoperability. The company sees their IT portfolio management solutions, which are built on Smartsheet, as a competitive advantage and are driving value by leveraging our premium capabilities.

In Q1, we also entered into a collaboration with KPMG, a long-standing Smartsheet customer, who wanted to leverage Smartsheet to enhance their client delivery experience. To support this objective, we teamed with KPMG to develop a globally available, standardized service delivery solution to track and manage value realization on strategic business transformation projects.

As businesses today are under more and more pressure than ever to deliver better, lasting results for stakeholders, Smartsheet enables KPMG and its clients to efficiently track and capture value with real- time collaboration and communication on complex projects. This solution enables Smartsheet to establish deeper engagement within new and existing enterprises as our platform is utilized by the customer going forward.

To unlock greater value for our customers and Smartsheet, I am pleased to share that on June 24, we will be rolling out a new pricing and packaging model. We anticipate it being modestly accretive in the near term and meaningfully accretive in the longer term. The new model provides broader access to Smartsheet features to more users and organizations who will be able to access the entire feature set offered by a plan while providing increased control and greater transparency to administrators.

In aggregate, the new model pairs a greater number of licensed users with a lower price per user on business and enterprise plans. New customers will onboard with this model starting on June 24, while existing annual customers will transition in calendar year 2025. We anticipate this new pricing and packaging model will be foundational for our long-term durable growth.

A key highlight of this change is shifting from a paid creator and free collaborator model in which editors, referred to as members, are licensed. Users external to an organization, referred to as guests, and internal viewers will continue to access Smartsheet at no cost.

The first to do so in the category, Smartsheet will launch provisional member access, which enables people within an organization for a limited time to create and contribute to workflows prior to being added to the subscription. This will drive increased virality by enabling organizations to make available to employees the full breadth of the platform in a low-friction manner while allowing system admins to manage their users more effectively.

While existing customers will transition to the new subscription model with their renewal dates in 2025, we anticipate demand from some organizations wanting to benefit from the new subscription model sooner, and we will accommodate them as appropriate. More information on the near- and long-term financial benefit to incremental bookings will be shared as we onboard new customers and as existing customers convert to the new model.

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

We continue to see meaningful adoption of our AI tools as they empower teams to unlock actionable insights from the data stored in the platforms. Since Smartsheet AI's GA launch in February, nearly half of our enterprise customer plans have used Smartsheet AI to generate business logic and content with simple, plain language prompts. In May, we released the next element of Smartsheet AI, analyze data, an AI tool that enables users to inquire and get insights from their data more quickly.

Rather than creating customer reports and dashboards, users can get results in seconds, reducing manual work associated with complex data analysis. This type of data analysis is a common need for customers, and Gen AI is significantly reducing complexity. Teams can easily track KPIs, make data-driven decisions and unblock work.

Our vision to bring applied AI to every business worker within the enterprise extends these capabilities to unlock insight across portfolios and align the right people with the right work. A Gen AI-powered build assistant will co-create powerful solutions to business challenges so any user can be a power user. FY '25 marks a pivotal year for our platform as we unveil our comprehensive modernization of Smartsheet's look and feel. This has been a multiyear investment.

In April 2024, we launched our Timeline View, which is generally available to all users on business and enterprise plans. Timeline View offers a modern approach to visualizing and interacting with information stored in Smartsheet. Users can organize work on a horizontal time line to track progress, communicate status and collaborate in real time with stakeholders in a highly visual way.

We're pleased to announce that in July, we will launch Board View, our all-new solution for agile work management. Board View is a Kanban solution that provides teams with superior visibility into the progress of work and organization of assets.

Looking further ahead, we'll launch our new table view by the fall of 2024. This user-friendly experience is designed to be the new hub for project, task and data management. Both Board and Table Views are the modern successors to our existing views. With an innovative, more intuitive UI and category-leading scalability and performance, we believe that time line, Board and Table Views will represent a huge win for customers.

On the client engagement front, 3 weeks ago, we hosted our inaugural EMEA ENGAGE Customer Conference in London, during which 2 customers played a very visible role in our keynote, the International Olympic Committee and Bayer Crop Sciences. As the International Olympic Committee shared in ENGAGE London, they are using Smartsheet to organize the 2024 Paris Summer Olympics, one of the world's most significant live events.

Smartsheet has become their single source of truth, streamlining workflows and enabling deeper connection between their teams. Cross-functional sharing is allowing them to onboard their suppliers to Smartsheet so they can use our platform to drive key work efforts.

Bayer Crop Sciences adopted Smartsheet to help unify global teams to one centralized work management platform. Smartsheet has enabled Bayer to enhance collaboration and break down silos by giving everyone real-time visibility into the data they need. We're proud to help enable Bayer's stated cultural shift towards shared ownership.

And in our ENGAGE press release, we highlighted Amazon as a customer. For over a decade, teams across Amazon have been using Smartsheet to manage their work at scale. For example, the AWS worldwide public sector team uses Smartsheet's business PMO capabilities to standardize processes and create a central source of information.

Previously, their data had been spread across several tools, making it difficult to measure the impact of the team's work. Team members now enter data in one place, and it automatically rolls up to Smartsheet dashboards that leaders have visibility into. Smartsheet is helping drive consistency, productivity and collaboration across the team. It's also creating better visibility into team members' workloads.

In closing, the continued evidence of success within the enterprise, with the convergence of new product innovations, the upcoming launch of our next-gen pricing and packaging model and a reinvigorated go-to-

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

market strategy, solidifies our conviction around our capacity for long-term durable growth. Now let me turn the call over to Pete.

Pete Godbole

CFO & Treasurer

Thank you, Mark. Our enterprise segment continues to be the fastest-growing segment of our business and generated significant number of large transactions in the quarter. Regarding the change to our pricing structure that Mark mentioned, we expect a modest contribution this year given the timing of the launch and new customers being relatively small part of our quarterly bookings.

Earlier in the quarter, we also announced that we received board authorization for an initial $150 million share buyback. We expect to commence this buyback within the next few days and expect to significantly complete the share repurchases by the end of Q4 of fiscal year '25.

I will now go through our financial results for the first quarter. Unless otherwise stated, all references to our expenses and operating results on a non-GAAP basis and are reconciled to our GAAP results in the earnings release and presentation that was posted before the call.

Turning now to our quarterly results. First quarter revenue came in at $263 million, up 20% year-over- year. Subscription revenue was $249.1 million, representing year-over-year growth of 21%. Services revenue was $13.9 million. Revenue from capabilities made up 35% of subscription revenue. Annualized recurring revenue, or ARR, grew 19% year-over-year in the first quarter to $1.056 billion.

Moving on to our reported metrics. The number of customers with ARR over $50,000 grew 20% year-over- year to 4,028. And the number of customers with ARR over $100,000 grew 26% year-over-year to 1,970. These customer segments now represent 67% and 54%, respectively, of total ARR. The percentage of our ARR coming from customers with ARR over $5,000 is at 92%.

Next, our domain average ARR grew 16% year-over-year to $9,906. We ended the quarter with a dollar- based net retention rate, inclusive of all our customers, of 114%. The full churn rate increased slightly due to the elevated churn rates in our smaller customer segments and rounds down to 4%.

Now turning back to the financials. Our total gross margin was 84%. Our Q1 subscription gross margin was 88%. Overall operating income in the quarter was $42.1 million or 16% of revenue. Free cash flow in the quarter was $45.7 million. We run the business with an efficiency mindset, managing capital deployment to functions, managing spans and levels and location of talent. This will be reflected in our updated profitability outlook.

Now let me move on to guidance. For the second quarter of FY '25, we expect revenue to be in the range of $273 million to $275 million, and non-GAAP operating income to be in the range of $38 million to $40 million. We expect non-GAAP net income per share to be $0.28 to $0.29 based on diluted weighted average shares outstanding of 141 million.

For the full fiscal year '25, we expect revenue of $1.116 billion to $1.121 billion, representing growth of 16% to 17%. We expect services to be around 5% of total revenue. We expect our non-GAAP operating income to be in the range of $157 million to $167 million, representing an operating margin of 14% to 15%, and non-GAAP net income per share to be $1.22 to $1.29 for the year based on 141 million diluted weighted average shares outstanding. We are raising our FY '25 ARR growth to be 14% to 14.5%.

Regarding seasonality, we continue to expect quarterly ARR growth rates to follow a similar trend as last year with higher growth rates at the beginning of the year. We also expect our FY '25 free cash flow to be $220 million, representing a free cash flow margin of 20%.

In closing, our Q1 performance and updated guidance show the power of our business model. This model is highly accretive, and we are rigorous in how we are managing the business, allowing us to significantly increase our margin guidance from what we guided just 3 months ago.

Supporting this profitability improvement is our continued strength in the enterprise. Our $1 million ARR customer segment is our fastest-growing segment. These customer engagements are highly sticky, given

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

the criticality of the workloads we are attaching to and reinforce Smartsheet's position as the enterprise work management leader.

Now let me turn the call over to the operator. Operator?

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

Question and Answer

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Operator

[Operator Instructions] And your first question comes from the line of John DiFucci with Guggenheim Securities.

John Stephen DiFucci

Guggenheim Securities, LLC, Research Division

So Mark and Pete, you put up better-than-expected numbers than you guided up, which kind of, normally, for software, that would be great, but that makes you stand out this quarter. So congrats on that. But when we try to tease out the new business signed in the quarter, the new ARR, it looks like the growth was about the same as last quarter relative to an easier comp, which, again, this is better than most of our coverage universe.

But how are you thinking about -- how should we think about the different parts of the market that you primarily sell into for the rest of this year? So Pete, you talked a little bit about large enterprise. You didn't mention much about -- said a little thing about this. The small business that you've talked about a little more about that in the past, and maybe even public sector, if you can throw that in there, that would be great.

Pete Godbole

CFO & Treasurer

John, this is Pete. In terms of your question, I'll talk about the segments and sort of how they performed. That's the genesis of your question. When I think of enterprise, enterprise were consistent and remains strong for us in Q1. So it kind of did well for us. On the SMB side of it, our performance followed a consistent sort of trend to prior quarters and played out consistent to what we had said in prior quarters as well. So we saw that as a carryforward in terms of the trends we have seen from the past.

John Stephen DiFucci

Guggenheim Securities, LLC, Research Division

Okay. Okay. And I know you've talked about -- well, this would be my second question, I guess. You talked in the past -- no, I'm not going to ask that. Let me ask this one. I'm sorry. Is the new pricing model, which sounds really interesting. Does that allow -- or is there sort of a skew in there that allows users

to sort of access whatever you sell? Or is it still like à la carte, given some of the different offerings you have?

Mark P. Mader

President, CEO & Director

John, Mark here. So someone who is licensed in the new model has access to the full kit and caboodle. So they get every single AI component. They get every single content generation component. They can create dashboards, reports, what have you. And that's a really big difference from the previous model, which was you have the haves, the creators, the licensees and the editors who were limited.

And when I think about the maturity of our model, it really had to mature alongside to how our platform is maturing. I mean we have some really big things that customers like, which had been relegated to a minority of their user population. So this is a great leveling of capabilities, which should drive to higher virality, more people creating work on our platform. So we're really encouraged by that.

I think it also is quite interesting with a moderately lower price point, it should spell good performance in the SMB realm as well. So we see this lower price per user, combined with a higher user count, we believe will result in a higher average revenue per customer, but I think it will help the leading edge quite a bit.

John Stephen DiFucci

Guggenheim Securities, LLC, Research Division

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

That sounds really interesting. We'll see how that goes, but it sounds great.

Mark P. Mader

President, CEO & Director

John, the one piece also that you asked about in terms of the capabilities, while we are also refining and simplifying how capabilities are purchased, the notion of à la carte premium offerings as well as bundled premium offerings persist. So the heart of this new model is in our core licensing. Our portfolio and our suite and our cross-selling, that remains alive and well.

Operator

And your next question comes from the line of Scott Berg with Needham.

Scott Randolph Berg

Needham & Company, LLC, Research Division

I guess my first one is kind of a 2-parter. It's about the new pricing impact of packaging. Mark, I'm going to kind of quote you, you talked about being meaningfully accretive over time. How do we frame that, whether it's a time frame or magnitude?

And then, Pete, when you think about the pricing improvements that can start here in the back half of the year, was any of that contemplated in your prior guidance? Or is that contribution a new update to the guidance year-to-date?

Pete Godbole

CFO & Treasurer

I'll start, John, I'll let Mark on the other part of it. So first of all, our previous guidance did not contemplate this pricing model change. And the change we made in the ARR, which we lifted, was in part due to the fact that we're launching this for new customers, and we expect this to make a modest contribution this year. So that's kind of what's baked in.

Mark P. Mader

President, CEO & Director

And Scott, I think from a moderately or a meaningful accretive position on the new model, when I look at what we can do for our customers, and we've actually transitioned a number of our bigger customers to this new model already, so we have some sense of what the behavior is in this new frame. We're looking for things like what can we do as a business to deliver more value to customers and to what can we do that could double our licensed user base as quickly as possible.

And I think until you start to move those customers over, you will get -- you won't be able to position to say it will happen within 18 or 24 or 36 or 4 months. But what I can say is we have very high confidence that this will lead to much larger user communities that are licensed within our customers. So I feel very confident that this new model is more conforming also to what IT groups at large organizations expect.

And the pairing of the lower price per user, I think, will be only helpful.

Scott Randolph Berg

Needham & Company, LLC, Research Division

Got it. Very helpful. And then from a follow-up perspective, Mark, you also talked about improvements throughout the quarter. So it's kind of a nice follow-up to John's question just a moment ago about kind of the demand of the business through different segments. If the SMB behavior is staying kind of consistent quarter-to-quarter. How should we view that comments on the improvement throughout the quarter?

Mark P. Mader

President, CEO & Director

Yes. I think the improvement stem from a couple of things. One, we had Max join us mid-quarter. I think his presence and his immediate impact on the team was favorable. So that was a benefit to us partially in

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SMARTSHEET INC. FQ1 2025 EARNINGS CALL JUN 05, 2024

March and then in April. On the SMB side, as Pete said, we saw pretty consistent performance quarter-to- quarter.

I'm really looking forward to later this quarter when we get to introduce our new offering, and we get almost immediate signal on what happens at the leading edge. Now that's not going to result in a huge amount of bookings out of the gate, but we will have very, very quick feedback on whether the new model can draw more significantly with that lower segment.

Operator

And your next question comes from the line of Josh Baer with Morgan Stanley.

Joshua Phillip Baer

Morgan Stanley, Research Division

Congrats on the quarter. I wanted to stick on the new pricing and packaging. And just wondering what gives you confidence that the slightly lower or lower pricing, higher user count equation results in accretive nature. Any signals from as far as customer behavior or key assumptions that's aligned to that optimistic commentary? And then I have a follow-up.

Mark P. Mader

President, CEO & Director

Yes. I think some of the proof points come directly from customers who have already moved to the new model. So it's not a research project. It's actually what's happened in real life with some of these firms. Interestingly, as we test both at the super large organizations as well as the SMB, there has been a favorable reaction to both.

And when I think about sales productivity, one of the things that I'm very eager to do this year is how do you delete complexity from the business. And when I think about how someone responds when you say, Mark, what is the cost to license Smartsheet.

The first 2 things that I'm a house can't be, it depends. So the clarity in this new model is super, super high. And I think oftentimes, smaller organizations are actually less patient to learn, and they actually want a more clear model to immediately act on. So large organizations have sometimes longer decision cycles, where they can learn and understand more deeply. So I think this will be quite favorable at both ends of the spectrum.

Joshua Phillip Baer

Morgan Stanley, Research Division

Very clear. And then I just wanted to ask if you expect any changes to gross margins from these changes to pricing and packaging?

Pete Godbole

CFO & Treasurer

Josh, we do not We think we are going to maintain the gross margin levels we have because gross margins are a function of the total revenue at the top line, and we view that over time to be meaningfully accretive.

Operator

And your next question comes from the line of Terry Tillman with Truist Securities.

Terrell Frederick Tillman

Truist Securities, Inc., Research Division

Maybe the first question for you, Mark. I've actually asked this repeatedly over the years as the business has grown in scale. If we take a step back, there was a Magic Quadrant that came out. That seemed like an important milestone. You're talking about KPMG, which seems like a GSI partner potentially going

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