Smartsheet IPO | S-1 Breakdown

Alex Clayton
Mar 29, 2018 · 8 min read

Company Overview

Smartsheet, a leading provider of collaboration and communication software, filed for a $100M IPO. The company plans to trade on the NYSE under the ticker “SMAR”. Smartsheet is the now the 5th software/cloud IPO this year after Pivotal, Dropbox, Zscaler and Zuora. Smartsheet says they “enable teams to get work done fast and efficiently.” The company operates in the broad project management space and calls themselves a “platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes.” Smartsheet offers a pliable software platform that business users can configure to automate tasks and/or make them more efficient — they typically replace a combination of manual processes and things like email, spreadsheets, whiteboards, phone calls, and in-person meetings. Smartsheet not only creates more efficiency but enables companies to be data-driven in their processes. All of this is done without IT and/or writing code, making it easy to use for non-technical knowledge workers and the product requires little to no training. Smartsheet was founded in 2005 and started with the original name of Navigo Technologies. The company has 787 FTEs (full-time-employees) and is based in Bellevue, WA.

Summary Metrics and GTM

Smartsheet discloses a lot of useful data about their metrics in the S-1. The company did $111.3M of total revenue in FY’18 (ending January 31), up 66% YoY. Smartsheet accelerated slightly from the year before which grew 64% YoY. 90% of total revenue is subscription-based and ended FY’18 at $119M of implied ARR (annual recurring revenue), which is up 62% YoY. Like many other high-growth SaaS companies at IPO, they are still losing money and their losses actually expanded this past year. The company had a (44)% operating margin in FY’18, down from (23)% in FY’17. Their free cash flow margin was also (30)% last quarter. Few relevant stats below;

  • Smartsheet has over 92,000 total customers and 74,000 domain-based customers (business account emails). They also have 90 companies in the Fortune 100 and 2/3 of the companies in the Fortune 500 as customers at some level.
  • Average ACV (annual contract value) was $1,640 last quarter.
  • Net dollar retention was 130% in aggregate and 149% for customers over $5,000 in ACV over the past 12 months.
  • $5K+ customers represent 54% of total ACV.
  • Smartsheet has ~3.6M total users (650K paid) and ~3M free additional users called collaborators (limited functionality but can review).
  • The average paying user pays $15.26 per month.
  • The company has generated 100K+ new trials each month for the past 12 months.
  • No single customer represented more than 3% of total revenue for any of the past 3 years and their 10 largest customers comprised less than 10% of total revenue during the same period.
  • The enterprise business is growing rapidly — customers who pay $5K+ in ACV grew 82% last year and customers paying $50K+ grew 149%. Their largest customer pays more than $2M in ACV.
  • The ACV for the cohort of all customers with $5K+ ACV as of FY’16 was $13,171, grew to $19,809 in FY’17 and $29,694 as of FY’18, up 2.25x in 3 years.
  • Most of their revenue is generated from annual contracts and the majority of customers pay annually in advance.
  • A commissioned report by Forrester Research demonstrated that organizations using Smartsheet could achieve a return on investment of over 480% over a three- year period.

Many of their paying users initially started as free users. Smartsheet offers self-serve through their website and provides a fully-featured 30-day trial. They don’t talk about conversion from free to paid over time but the product is viral — there are paid users and “collaborators” who can use the product with limited functionality i.e. reviewing and over time many of those convert to paid. Smartsheet has an inside sales team that reaches out to relevant leads and a field-sales team that focuses on larger, enterprise-wide deals (for example if someone has a salesforce.com domain name they will likely call/try meet them). Most of the revenue comes from self-serve and inside sales though. The company offers 4 subscription tiers — Individual, Team, Business, and Enterprise and over half of their ACV comes from Business and Enterprise subscriptions. Smartsheet also charges for “Connectors” which are integrations into popular applications like Salesforce and Atlassian.

Website Pricing

Source: Company website

Product

Source: S-1

Given the flexibility of the Smartsheet product, the use-cases are very broad — the company has over 2,000 documented use-cases for the product. Customers usually start with a single project or initiative, then expand. Smartsheet has an array of various products which include 1) Smartdashboards; real-time visibility and data presentation layer 2) Smartportals; landing pages for project and IT resources 3) Smartcards; visualization tool for workflow organization like Trello 4) Smartgrids; unified Excel-type view that tracks projects and workflow 5) Smartprojects; single repository for project-related information 6) Smartcalendars; calender view to manage timelines 7) Smartforms; form-building tool 8) Smartautomation; automation tool for repetitive tasks.

They also offer “Smartintegrations” and “Connectors” to integrate Smartsheet into other workflow applications and a “Control Center”, that tracks all projects at an organization.

  • Use cases include software migration planning, vendor and contract management, brand launches, compliance reporting, event planning, customer onboarding, budget approvals, patent application processing, talent acquisition, benefit and retirement tracking, sales enablement, pipeline management, sales operations, commissions calculations, marketing programs management, investor relations tracking, and website management.
  • Smartsheet has customers across all sectors — aerospace, automotive, biotechnology, consumer, eCommerce, education, finance, government, healthcare, IT services, marketing, media, non- profit, publishing, software, technology, and travel.

Market Opportunity

Smartsheet serves both the collaborative application and project and portfolio management application markets. IDC estimates these two markets would be a combined $21.4B market opportunity in 2017 and grow to $31.6 billion in 2021. The company is also targeting the 865M knowledge workers globally. International represented 27% of revenue and they have no sales presence outside the U.S., so moving to other geographies is certainly another opportunity for the company.

Competition

Smartsheet’s market is highly competitive — not only do they compete with companies sticking with manual tasks like Excel or using more lightweight tools like from Google’s suite, but other robust project management solutions from companies like Asana, Atlassian’s suite including Trello, Planview, Workfront. There are also upstarts like Airtable and Monday.com.

Investors and Ownership

Smartsheet has raised $112.7M to date from investors including Summit, Sutter Hill, Madrona, Insight, and Top Tier Capital. 5%+ pre-offering VC shareholders include Insight (32.1%), Madrona (28.4%) and Sutter Hill (5.4%).

Mark Mader, President and CEO, is at a 2.3% pre-offering stake. According to Pitchbook, their last round was a $52M series F led by Insight at a $800M pre-money valuation.

Financials and other Metrics Outputs.

Smartsheet is growing ARR quickly and last quarter grew ARR 62% YoY, with billings growing 74% YoY. The company has $58M on their balance sheet, implying they burned through ~$55M to get to almost $120M in ARR, which is very impressive. While they have ramped up sales and marketing spend over the past few quarters, their gross margin-burdened implied payback periods haven’t increased too much; they had a 23-month payback period last quarter and an average of 21 months over the past 7 quarters. Smartsheet has made moving up market a focus with the drastic increase in customers over $5K and $50K in ACV and increased spend in sales and marketing. Given the attractive net dollar retention of customers $5K+ in ACV (149%), it makes sense they focus on larger enterprise-wide deals, many of which already have paying users. Outputs of other financials and metrics are below.

Annual Historical P&L & Metrics (000's)

Source: S-1

Quarterly Subscription Revenue ($M)

Source: S-1

Implied Ending ARR ($M)

Smartsheet has shown consistent ARR growth and the company has added $45.5M of net new ARR in the last 12 months.

Source: S-1

Customers and Average ACV

While Smartsheet is adding fewer net new logos on quarterly-basis than in FY’16, their average ACV has been increasing significantly and is up 48% over the past 4 quarters to $1,640. Customers $50K+ in ACV grew 149% YoY to 189 and customers $5K+ in ACV grew 82% to 3,790.

Source: S-1

Dollar-Based Net Retention Rate

Source: S-1

% Gross Margin Mix

Source: S-1

Operating and Free Cash Flow Margins

Source: S-1

Subscription vs Professional Services Revenue Mix

Source: S-1

Implied Payback Periods in Months

Source: S-1

Annual Cash Flows (000's)

Source: S-1

Quarterly P&L / Metrics (000's)

Source: S-1

Valuation

Smartsheet is likely to be valued on a forward revenue multiple like other high-growth SaaS companies that are losing money. The table below uses NTM (next-twelve-months) revenue as a proxy based on a range of growth rates. Additionally, below is an ARR multiple range based on other high-growth public SaaS companies as a frame of reference. While they’re growing revenue at 66% YoY, the company is still losing a lot of money. Even so, I think they’ll get a premium multiple.

Note: Enterprise value ranges and growth rates are illustrative

Smartsheet is an impressive story and another SaaS company that has created a large business by selling to end-users and not through IT, even though the focus of the business is on the enterprise side. Software is permeating through every business process/workflow and we recently saw Dropbox have a very successful IPO with a similar, freemium or bottoms-up approach. This user-focused-GTM has enabled Smartsheet to create pockets of many thousands of users at 90 of the Fortune 100 companies where they can upsell large, enterprise-wide deals. The growth and net dollar retention characteristics are best-in-class and they’re operating in a very large (although competitive) market. While they don’t plan to be profitable anytime soon, if they can sustain their growth and unit economics, they’re bound to trade well as a public company.

Lastly, Smartsheet has built a great company culture and they disclose in the S-1 their overall Glassdoor employee rating of 4.4 out of 5.0, a recommend to a friend rating of 92%, and a CEO approval rating of 100% as of January 31, 2018. Congrats to the team on the company as well as the culture.

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Alex Clayton

Written by

General Partner at Meritech Capital

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