Shares of cloud-based work management platform Smartsheet (SMAR) rallied by 17% in a single session last Thursday after the company's results for the first quarter smashed expectations. Founded in 2005 and based out of Bellevue, Washington, SMAR stock is still down by about 7.4% on a YTD basis, and trades roughly 10% below its 52-week highs.
Now valued at over $6 billion, will those upbeat earnings results act as a base for the company's stock to move higher in the weeks and months ahead? Here's a closer look at what's working with the company's business model, and the latest analyst notes after Smartsheet's forecast-crushing earnings report.
Strong Q1 Showing
For the first quarter ended April 30, Smartsheet's revenue and earnings exceeded Wall Street's expectations, and displayed healthy growth on a YoY basis. In Q1, Smartsheet reported revenues of $262.98 million, denoting a yearly increase of 19.6%. A notable annual rise of 21% in subscription revenues to $249.09 million aided the overall revenue growth. Impressively, over the past five years, the company has clocked a revenue CAGR of 40.1%.
Also during the quarter, adjusted EPS shot up by 77.8% over the same period to $0.32, topping the consensus estimate for $0.27. The company's EPS has surpassed expectations in each of the past five quarters.
Smartsheet's cash-generation activities in the quarter were also noteworthy. While net cash from operating activities shot up by 45% from the previous year to $50.08 million, free cash flow rose by 46% over the same period to $45.68 million. Overall, the company ended the quarter with a cash balance of $333.5 million, up from $282.09 million at the start of the fiscal year. This solid increase in cash flow points to the strength of the company's operations and efficient cash management capabilities.
Annualized recurring revenue (ARR), a key metric for platform companies like Smartsheet, jumped by 19% from the prior year to $1.056 billion. Other key operating metrics, such as the number of customers with ARR of more than $100,000, $50,000 and $5,000, increased by 26%, 20%, and 8%, respectively, over the past year.
Finally, the company also announced its first-ever share repurchase program of $150 million, which should act as another boost for the shares.
Strategic Drivers
Smartsheet is revamping its pricing strategy to encourage more users within organizations, offering lower per-user rates. This aligns with its "land and expand" approach, targeting power users and departments initially, with the aim of broader company-wide adoption.
CEO Mark Mader explained in the latest earnings call, “The new model provides broader access to Smartsheet features to more users and organizations, enabling access to the entire feature set offered by a plan, while giving administrators increased control and transparency. This model combines a higher number of licensed users with a lower price per user on business and enterprise plans.”
Further, as evidenced above, the company is slowly decreasing its reliance on its core small business segment and steadily increasing the count of customers with a higher ARR rate. With gross margins of 80% and above already, the addition of high-value customers will only enhance its margins, providing a positive effect on the bottom line.
Smartsheet's premium features, Dynamic View and Data Shuttle, have seen rapid adoption recently. Dynamic View allows personalized views for different user groups, while Data Shuttle automates data import and export from other software systems. The introduction of a self-discovery service in Q2 FY24 has also boosted these features' adoption, allowing customers to experiment without direct sales rep contact.
Additionally, Smartsheet has expanded its generative AI capabilities, launching AI-based solutions last year that assist customers in creating solutions via natural language queries. These features are exclusive to paid Enterprise plan users, incentivizing upgrades from free plans.
What Do Analysts Expect for Smartsheet Stock?
Analysts are quite optimistic about Smartsheet stock, which has an average rating of “Strong Buy” from the 18 analysts in coverage. Thirteen have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 3 have a “Hold” rating, and 1 has a “Moderate Sell” rating.
Following the company's blowout earnings report, analysts at Canaccord Genuity, RBC Capital, and Morgan Stanley all raised their price targets on SMAR stock. The mean price target is $50.12, implying expected upside of 13.2%, while the Street-high target of $63 suggests the stock could rise 42.2% from current levels.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.