We Initiate Coverage of Smartsheet With a $53 Fair Value Estimate and a Narrow Moat Rating 

Equity Analyst

Emma Williams

Smartsheet is a leading provider of collaborative work management, or CWM, SaaS solutions. The emerging SaaS niche aims to improve the efficiency and productivity of project and process management by displacing widely deployed but suboptimal incumbent tools of email and spreadsheets. Smartsheet’s platform allows nontechnical users to configure, automate, and visualize custom workflows and notifications, dynamically assign tasks and permission data access, and build centralized dashboards for real-time visibility, accountability, and consistency across projects. The platform leverages integrations to adjacent business applications and productivity tools to centralize data, reduce error-prone manual data entry, and improve process efficiency. 

Smartsheet has leveraged a freemium go-to-market motion and heavy investment in product innovation and platform infrastructure to secure a solid footing in the sticky enterprise market. While multiple CWM vendors will likely capture share of the expansive addressable market for purpose-built project management tools, we believe Smartsheet is well placed to rapidly expand within existing clients and become the enterprise, IT-certified vendor of choice. At present, sprawling enterprises likely engage multiple CWM solutions concurrently for siloed projects; however, we expect efforts to standardize internal processes and optimize project management will lead to provider consolidation over the long term. This dynamic will benefit providers like Smartsheet with the security, scalability, and compliance features enterprise clients demand.

We expect Smartsheet to win new clients and take greater share through free user conversion and module adoption, while embedding the platform further into mission-critical operations. We anticipate Smartsheet will continue with a successful playbook of growing seat expansion through the organic or assisted identification of new cases, and uptake of higher-margin capabilities. While over 30% of 2023 revenue was derived from add-on capabilities, less than 10% of the customer base had adopted these solutions, providing ample scope for further penetration.

Business Strategy & Outlook

We assign Smartsheet a narrow moat rating underpinned by high customer switching costs evidenced by strong retention metrics. While Smartsheet’s returns on invested capital have deteriorated in recent years following heavy investment in product functionality, platform infrastructure, and sales and marketing, we expect these investments to bear fruit as the firm expands within the sticky enterprise market and moves further along the growth curve. 

Smartsheet has executed well on a land and expand strategy, with a presence in over 90% of Fortune 100 companies, and has grown the total user base to about 12 million as of fiscal 2023, representing a five-year CAGR of 27%. Over the same period, we estimate Smartsheet has grown the paid user base at a CAGR of 22% to 1.8 million licensed users or 15% of the total base, and average revenue per licensed user at a CAGR of 20%. While Smartsheet faces fierce competitive pressures in a crowded CWM market, we believe the firm’s success to date within the enterprise market reflects superior execution and attractive product functionality. We expect the firm can continue to fend off competitive threats and expand within existing clients in a cost-effective manner while rapidly scaling operations and eventually earning consistent economic profits, underpinning our confidence in a narrow moat rating. 

Among CWM competitors, we believe Smartsheet’s platform stands out as a flexible, sector agnostic tool with the scalability and security to support deployments ranging from individual task tracking to managing thousands of concurrent projects. The Smartsheet platform is adaptable to countless use cases ranging from sales pipeline management to software migration planning, product launches, talent acquisition management, and patent application tracking. We believe the platform’s intuitive user interface, emulating familiar spreadsheet tools, and no code configuration capabilities allow quick user adoption with minimal training. In addition, unlike major competitors, Smartsheet has received the FedRamp security certification, allowing the firm to pursue expansion in the underpenetrated U.S. government sector. 

The primary competing solutions for Smartsheet’s offering are incumbent email and spreadsheet productivity tools from the likes of Google and Microsoft, followed by numerous purpose built collaborative and project management solutions from providers including Asana, Monday.com, Planview, Atlassian, Adobe, Intuit’s Quickbase, and Microsoft Project. These competing solutions vary by product functionality, target market and sector niche, with certain solutions catering better for the SMB market, while others like Microsoft Project require heavier IT configuration and implementation relative to Smartsheet’s offering. While we do not perceive immediate threats, it is plausible that powerhouses like Google and Microsoft could expand upon existing productivity and collaboration tools to target the CWM market more aggressively and upsell to substantial installed bases. However, encouragingly Microsoft has favored a partnership approach to date with a focus on optimizing and extending the Microsoft 365 suite through integrations with Smartsheet, rather than trying to displace the solution. 

Smartsheet has established a solid footing in the sticky enterprise market underpinned by a freemium go-to-market motion. Historically this model centered on securing a small paid license servicing a single team or one-off project and seeding widespread, viral adoption via free, invitation-only collaborator access for internal and external stakeholders. In 2023, the firm extended this motion to include free, stand-alone plans not contingent on an invitation from a licensed user, fueling accelerated user growth, and creating an expanded pipeline for future conversion. Once Smartsheet establishes a presence, the firm seeks to convert free users from basic productivity use cases to more functionality-rich paid plans, as well as sell additional capabilities to support more complex projects and embed the platform into the client’s mission-critical operations. The firm incentivizes plan upgrades by offering premium features in tiered bundles including data integration tools, reporting dashboards, business process automation, and generative artificial intelligence-powered tools. Customers can also augment their solutions via the purchase of additional subscriptions to adjacent resource management and digital asset management solution.

We believe Smartsheet and fellow CWM providers benefit from high customer switching costs due to deep integrations with related business applications and the entwined nature of project management solutions with customer’s workflows. Software, in general, tends to have high switching costs as software system installations are time consuming and meticulous processes that generally require thorough upfront verification, have many touchpoints throughout an organization, are linked to various business applications, and often have new processes built upon them. We think the shift to the cloud has likely reduced implementation costs somewhat, but this is offset by the ability to provide a much larger range of bundled products through the cloud, such as analytics and AI. 

Alongside monetary costs, switching CWM providers could lead to operational disruptions and inefficiencies including potential delays to project completion and loss of critical data, and having to reintegrate with existing business applications. These switching costs are illustrated by Smartsheet’s strong gross client retention around 96%, and dollar-based net retention averaging around 125%-135% in recent years, driven by year-on-year seat expansion per client and greater module attachment. Further, Smartsheet continues to shift upmarket to stickier enterprise customers with more complex project management needs, growing customers with over $100,000 annualized contact volume from 65 in 2018, to nearly 1,500 in 2023, representing a CAGR of 87%. This compares with growth in customers with over $5,000 ACV at a CAGR of 37% over the same period. As of 2023, over 50% of annual recurring revenue is derived from enterprises with over 2,000 employees, and less than 25% is from the SMB market, and there are over 50 customers with $1 million plus ARR. 

This sticky customer base allows Smartsheet to earn incremental revenue from seat expansion and upselling capabilities at a lower marginal cost, supporting attractive economics and improving margins over the long term.

Narrow

Economic Moat

Smartsheet

Smartsheet, Inc. engages in the design and development of cloud-based platform for work management. It offers ways for customers to plan and manage their work using grids, projects, cards, and calendars. The company was founded by W. Eric Browne, Maria Colacurcio, John D. Creason, and Brent R. Frei in 2005 and is headquartered in Bellevue, WA.

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Smartsheet, Inc. engages in the design and development of a cloud-based platform for work management. It offers ways for customers to plan and manage their work using tables, plans, projects, cards, Gantt charts, and calendars, and users can easily toggle between views to support their team's preferred way of working. The company was founded by W. Eric Browne, Maria Colacurcio, John D. Creason, and Brent R. Frei in 2005 and is headquartered in Bellevue, WA.

BELLEVUE, Wash.--(BUSINESS WIRE)--Smartsheet Inc. (NYSE: SMAR), the enterprise work management platform, today announced that it will release its financial results for its third quarter of fiscal year 2024, which ended October 31, 2023, after the close of U.S. financial markets on December 7, 2023. Smartsheet executives will host a conference call and webcast that day at 4:30 p.m. ET (1:30 p.m. PT) to discuss the results. The dial-in number to access the call will be (888) 440-6385 or (646) 960.

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Smartsheet Inc. (NYSE:SMAR ) Q2 2024 Earnings Conference Call September 7, 2024 4:30 PM ET Company Participants Aaron Turner - Head, Investor Relations Mark Mader - Chief Executive Officer Pete Godbole - Chief Financial Officer Conference Call Participants Terry Tillman - Truist Securities Josh Baer - Morgan Stanley Jacob Roberge - William Blair Tamjid Chowdhury - Guggenheim Securities Pinjalim Bora - JPMorgan Ethan Bruck - Wolfe Research Brent Thill - Jefferies & Company Scott Berg - Needham Keith Bachman - BMO Capital Markets Michael Berg - Wells Fargo Jackson Ader - MoffettNathanson Jason Celino - KeyBanc Capital Markets Robert Simmons - D.A. Davidson Pete Newton - Barclays Operator Good afternoon.

Smartsheet Inc. (SMAR) Q2 2024 Earnings Call Transcript

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BELLEVUE, Wash.--(BUSINESS WIRE)--Smartsheet Inc. (NYSE: SMAR), the enterprise work management platform, today announced that it will release its financial results for its second quarter of fiscal year 2024, which ended July 31, 2023, after the close of U.S. financial markets on September 7, 2023. Smartsheet executives will host a conference call and webcast that day at 4:30 p.m. ET (1:30 p.m. PT) to discuss the results. The dial-in number to access the call will be (888) 440-6385 or (646) 960-.

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