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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-38464
Smartsheet Inc.
(Exact name of Registrant as specified in its charter)
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Washington | | 20-2954357 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
500 108th Ave NE, Suite 200 | | |
Bellevue, | WA | | 98004 |
(Address of principal executive offices) | | (Zip Code) |
| | | | | | | | | | | |
| (844) | 324-2360 | |
| Registrant’s telephone number, including area code | |
| | | | | |
| |
|
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A common stock, no par value per share | SMAR | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act: | | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 1, 2023, there were 135,132,764 shares of the registrant’s Class A common stock outstanding.
SMARTSHEET INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended July 31, 2023
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including but not limited to, statements regarding our future operating results and financial position, our business plan and strategy, and market positioning, are forward-looking statements. We based these forward-looking statements on current expectations, estimates, forecasts, and projections as well as the beliefs and assumptions of management. Words including, but not limited to, “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and variations of these terms or the negative of these terms and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II, Item 1A, “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or will occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.
Part I. Financial Information
Item 1. Financial Statements
SMARTSHEET INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenue | | | | | | | |
Subscription | $ | 221,522 | | | $ | 173,533 | | | $ | 427,523 | | | $ | 328,809 | |
Professional services | 14,063 | | | 13,158 | | | 27,948 | | | 26,192 | |
Total revenue | 235,585 | | | 186,691 | | | 455,471 | | | 355,001 | |
Cost of revenue | | | | | | | |
Subscription | 33,584 | | | 27,722 | | | 66,751 | | | 52,860 | |
Professional services | 13,454 | | | 12,829 | | | 26,168 | | | 24,849 | |
Total cost of revenue | 47,038 | | | 40,551 | | | 92,919 | | | 77,709 | |
Gross profit | 188,547 | | | 146,140 | | | 362,552 | | | 277,292 | |
Operating expenses | | | | | | | |
Research and development | 58,358 | | | 53,784 | | | 114,548 | | | 106,303 | |
Sales and marketing | 129,813 | | | 124,015 | | | 244,765 | | | 239,406 | |
General and administrative | 36,523 | | | 33,200 | | | 71,501 | | | 66,244 | |
Total operating expenses | 224,694 | | | 210,999 | | | 430,814 | | | 411,953 | |
Loss from operations | (36,147) | | | (64,859) | | | (68,262) | | | (134,661) | |
Interest income | 5,847 | | | 1,281 | | | 11,064 | | | 1,669 | |
Other income (expense), net | (55) | | | 1,624 | | | (591) | | | 796 | |
Loss before income tax provision | (30,355) | | | (61,954) | | | (57,789) | | | (132,196) | |
Income tax provision | 3,002 | | | 359 | | | 5,438 | | | 574 | |
Net loss | $ | (33,357) | | | $ | (62,313) | | | $ | (63,227) | | | $ | (132,770) | |
Net loss per share, basic and diluted | $ | (0.25) | | | $ | (0.48) | | | $ | (0.47) | | | $ | (1.03) | |
Weighted-average shares outstanding used to compute net loss per share, basic and diluted | 133,829 | | | 129,645 | | | 133,196 | | | 129,091 | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net loss | $ | (33,357) | | | $ | (62,313) | | | $ | (63,227) | | | $ | (132,770) | |
Other comprehensive loss | | | | | | | |
Net unrealized loss on available-for-sale securities | (209) | | | (61) | | | (20) | | | (403) | |
Foreign currency translation adjustments | 136 | | | — | | | (510) | | | — | |
Other comprehensive loss | (73) | | | (61) | | | $ | (530) | | | $ | (403) | |
Comprehensive loss | $ | (33,430) | | | $ | (62,374) | | | $ | (63,757) | | | $ | (133,173) | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| July 31, 2023 | | January 31, 2023 | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | $ | 237,278 | | | $ | 223,156 | | | | | | | | | | |
Short-term investments | 311,707 | | | 233,225 | | | | | | | | | | |
Accounts receivable, net of allowances of $5,248 and $6,285, respectively | 156,492 | | | 198,643 | | | | | | | | | | |
Prepaid expenses and other current assets | 54,904 | | | 55,063 | | | | | | | | | | |
Total current assets | 760,381 | | | 710,087 | | | | | | | | | | |
Restricted cash | 193 | | | 197 | | | | | | | | | | |
Deferred commissions | 136,248 | | | 121,785 | | | | | | | | | | |
Property and equipment, net | 40,262 | | | 39,395 | | | | | | | | | | |
Operating lease right-of-use assets | 46,922 | | | 54,278 | | | | | | | | | | |
Intangible assets, net | 33,442 | | | 39,069 | | | | | | | | | | |
Goodwill | 141,723 | | | 142,415 | | | | | | | | | | |
Other long-term assets | 3,595 | | | 2,983 | | | | | | | | | | |
Total assets | $ | 1,162,766 | | | $ | 1,110,209 | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | |
Accounts payable | $ | 1,502 | | | $ | 2,125 | | | | | | | | | | |
Accrued compensation and related benefits | 66,181 | | | 68,347 | | | | | | | | | | |
Other accrued liabilities | 35,135 | | | 27,437 | | | | | | | | | | |
Operating lease liabilities, current | 17,597 | | | 19,220 | | | | | | | | | | |
Deferred revenue | 461,239 | | | 457,534 | | | | | | | | | | |
Total current liabilities | 581,654 | | | 574,663 | | | | | | | | | | |
Operating lease liabilities, non-current | 40,068 | | | 47,564 | | | | | | | | | | |
Deferred revenue, non-current | 1,679 | | | 2,195 | | | | | | | | | | |
Other long-term liabilities | 343 | | | 129 | | | | | | | | | | |
Total liabilities | 623,744 | | | 624,551 | | | | | | | | | | |
Commitments and Contingencies (Note 13) | | | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | | |
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding as of July 31, 2023 and January 31, 2023 | — | | | — | | | | | | | | | | |
Class A common stock, no par value; 500,000,000 shares authorized, 134,499,892 shares issued and outstanding as of July 31, 2023; 500,000,000 shares authorized, 131,845,028 shares issued and outstanding as of January 31, 2023 | — | | | — | | | | | | | | | | |
Class B common stock, no par value; 500,000,000 shares authorized, no shares issued and outstanding as of July 31, 2023; 500,000,000 shares authorized, no shares issued and outstanding as of January 31, 2023 | — | | | — | | | | | | | | | | |
Additional paid-in capital | 1,360,851 | | | 1,243,730 | | | | | | | | | | |
Accumulated other comprehensive income (loss) | (429) | | | 101 | | | | | | | | | | |
Accumulated deficit | (821,400) | | | (758,173) | | | | | | | | | | |
Total shareholders’ equity | 539,022 | | | 485,658 | | | | | | | | | | |
Total liabilities and shareholders’ equity | $ | 1,162,766 | | | $ | 1,110,209 | | | | | | | | | | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, 2023 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances as of April 30, 2023 | 132,912,458 | | | $ | — | | | $ | 1,296,364 | | | $ | (788,043) | | | $ | (356) | | | $ | 507,965 | |
Issuance of common stock under employee stock plans | 1,587,434 | | | — | | | 11,642 | | | — | | | — | | | 11,642 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (529) | | | — | | | — | | | (529) | |
Share-based compensation expense | — | | | — | | | 53,374 | | | — | | | — | | | 53,374 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (73) | | | (73) | |
Net loss | — | | | — | | | — | | | (33,357) | | | — | | | (33,357) | |
Balances as of July 31, 2023 | 134,499,892 | | | $ | — | | | $ | 1,360,851 | | | $ | (821,400) | | | $ | (429) | | | $ | 539,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, 2022 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances as of April 30, 2022 | 128,867,149 | | | $ | — | | | $ | 1,094,309 | | | $ | (612,991) | | | $ | (342) | | | $ | 480,976 | |
Issuance of common stock under employee stock plans | 1,287,858 | | | — | | | 10,762 | | | — | | | — | | | 10,762 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (1,147) | | | — | | | — | | | (1,147) | |
Share-based compensation expense | — | | | — | | | 46,486 | | | — | | | — | | | 46,486 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (61) | | | (61) | |
Net loss | — | | | — | | | — | | | (62,313) | | | — | | | (62,313) | |
Balances as of July 31, 2022 | 130,155,007 | | | $ | — | | | $ | 1,150,410 | | | $ | (675,304) | | | $ | (403) | | | $ | 474,703 | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, 2023 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances as of January 31, 2023 | 131,845,028 | | | $ | — | | | $ | 1,243,730 | | | $ | (758,173) | | | $ | 101 | | | $ | 485,658 | |
Issuance of common stock under employee stock plans | 2,654,864 | | | — | | | 12,231 | | | — | | | — | | | 12,231 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (1,150) | | | — | | | — | | | (1,150) | |
Share-based compensation expense | — | | | — | | | 106,040 | | | — | | | — | | | 106,040 | |
Other comprehensive loss | — | | | — | | | — | | | — | | OCI | (530) | | | (530) | |
Net loss | — | | | — | | | — | | | (63,227) | | | | | (63,227) | |
Balances as of July 31, 2023 | 134,499,892 | | | $ | — | | | $ | 1,360,851 | | | $ | (821,400) | | | $ | (429) | | | $ | 539,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 31, 2022 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances as of January 31, 2022 | 127,809,525 | | | $ | — | | | $ | 1,047,313 | | | $ | (542,534) | | | $ | — | | | $ | 504,779 | |
Issuance of common stock under employee stock plans | 2,345,482 | | | — | | | 14,476 | | | — | | | — | | | 14,476 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (2,513) | | | — | | | — | | | (2,513) | |
Share-based compensation expense | — | | | — | | | 91,134 | | | — | | | — | | | 91,134 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (403) | | | (403) | |
Net loss | — | | | — | | | — | | | (132,770) | | | — | | | (132,770) | |
Balances as of July 31, 2022 | 130,155,007 | | | $ | — | | | $ | 1,150,410 | | | $ | (675,304) | | | $ | (403) | | | $ | 474,703 | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
| | | | | | | | | | | |
| Six Months Ended July 31, |
| 2023 | | 2022 |
Cash flows from operating activities | | | |
Net loss | $ | (63,227) | | | $ | (132,770) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Share-based compensation expense | 103,802 | | | 89,388 | |
Depreciation and amortization | 13,191 | | | 12,239 | |
Net amortization of premiums (discounts) on investments | (4,845) | | | (402) | |
Amortization of deferred commission costs | 24,378 | | | 27,567 | |
Unrealized foreign currency loss | 483 | | | 423 | |
Non-cash operating lease costs | 6,322 | | | 7,905 | |
Other, net | 1,674 | | | (1,587) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 40,433 | | | 20,357 | |
Prepaid expenses and other current assets | 49 | | | (3,804) | |
Other long-term assets | (798) | | | (131) | |
Accounts payable | (602) | | | 2,002 | |
Other accrued liabilities | 8,000 | | | 6,965 | |
Accrued compensation and related benefits | (2,337) | | | (8,773) | |
Deferred commissions | (38,840) | | | (36,994) | |
Deferred revenue | 3,183 | | | 30,653 | |
Other long-term liabilities | 216 | | | — | |
Operating lease liabilities | (8,052) | | | (7,870) | |
Net cash provided by operating activities | 83,030 | | | 5,168 | |
Cash flows from investing activities | | | |
Purchases of short-term investments | (248,480) | | | (297,844) | |
Maturities of short-term investments | 174,900 | | | 69,548 | |
Proceeds from liquidation of a long-term investment | — | | | 622 | |
Purchases of property and equipment | (1,395) | | | (3,007) | |
Proceeds from sale of property and equipment | 27 | | | 94 | |
Capitalized internal-use software development costs | (4,815) | | | (4,121) | |
Net cash used in investing activities | (79,763) | | | (234,708) | |
Cash flows from financing activities | | | |
Proceeds from exercise of stock options | 1,070 | | | 3,649 | |
Taxes paid related to net share settlement of restricted stock units | (1,150) | | | (2,513) | |
Proceeds from contributions to Employee Stock Purchase Plan | 10,846 | | | 7,836 | |
Net cash provided by financing activities | 10,766 | | | 8,972 | |
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash | 6 | | | (1,225) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 14,039 | | | (221,793) | |
Cash, cash equivalents, and restricted cash at beginning of period | 223,757 | | | 449,680 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 237,796 | | | $ | 227,887 | |
| | | | | | | | | | | | | |
Supplemental disclosures | | | | | |
Cash paid for income tax | $ | 6,186 | | | $ | 191 | | | |
Accrued purchases of property and equipment, including internal-use software | 1,255 | | | 939 | | | |
Share-based compensation expense capitalized in internal-use software development costs | 2,065 | | | 1,747 | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | — | | | 4,464 | | | |
Right-of-use asset reductions related to operating leases | 1,033 | | | 110 | | | |
| | | | | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Overview and Basis of Presentation
Description of business
Smartsheet Inc. (the “Company,” “we,” “our”) was incorporated in the State of Washington in 2005, and is headquartered in Bellevue, Washington. Smartsheet, the enterprise work management platform, empowers organizations to innovate and achieve results faster, securely, and at scale through effective collaboration and streamlined workflows. By uniting people, content, and work, Smartsheet provides powerful capabilities that revolutionize the way teams operate. Smartsheet makes outcomes reliable, keeps customer data safe, and ensures users are on the same page, making it ideal for organizations seeking efficient, impactful collaborative work management. Customers access their accounts via a web-based interface or a mobile application. The Company also offers professional services, which primarily consist of consulting and training services.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, 2023 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2023, filed with the SEC on March 22, 2023.
The condensed consolidated financial statements include the results of Smartsheet Inc. and its wholly owned subsidiaries, including those located in the United States, the United Kingdom, Germany, Australia, Japan, and Costa Rica. All intercompany balances and transactions have been eliminated upon consolidation.
In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of our condensed consolidated financial statements. All such adjustments are of a normal, recurring nature. The results of operations for the three and six months ended July 31, 2023 are not necessarily indicative of results to be expected for the full year ending January 31, 2024, or for any other interim period, or for any future year.
Use of estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates and judgments involve the measurement of fair values of share-based compensation award grants; determination of the amortization period for capitalized sales commission costs; and revenue recognition with respect to the allocation of transaction consideration for the Company’s offerings, among others.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company completed an assessment of the amortization period for deferred sales commission costs and determined that it should increase the period over which we amortize deferred commissions from three years to four years. This change in accounting estimate was effective August 1, 2022 and is being accounted for prospectively in the condensed consolidated financial statements. For the three months ended July 31, 2023, the change in amortization period resulted in a benefit to both sales and marketing expense and net loss of approximately 2% of total revenue or $0.04 per basic and diluted share. For the six months ended July 31, 2023, the change in amortization period resulted in a benefit to both sales and marketing expense and net loss of approximately 2% of total revenue or $0.07 per basic and diluted share. The effect of this change in estimate is based on the carrying value of deferred commissions included in the Company’s consolidated balance sheets as of July 31, 2022 and those deferred during subsequent periods.
2. Summary of Significant Accounting Policies
For a summary of the Company’s significant accounting policies refer to Note 2, Summary of Significant Accounting Policies, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2023.
Segment information
The Company operates as one operating segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information for purposes of making operating decisions, assessing financial performance, and allocating resources.
Concentrations of risk and significant customers
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company maintains its cash accounts with financial institutions where deposits, at times, exceed the Federal Deposit Insurance Corporation (“FDIC”) limits.
No individual customer represented more than 10% of accounts receivable as of July 31, 2023 or January 31, 2023. No individual customer represented more than 10% of revenue for the three and six months ended July 31, 2023 or 2022.
Recent accounting pronouncements
There have been no recent accounting pronouncements, changes in accounting pronouncements, or recently adopted accounting guidance during the six months ended July 31, 2023 that have had a material impact on our condensed consolidated financial statements.
3. Revenue from Contracts with Customers
During the three months ended July 31, 2023 and 2022, the Company recognized $191.4 million and $144.7 million of subscription revenue, respectively, and $5.4 million and $4.2 million of professional services revenue, respectively, which were included in the deferred revenue balance as of April 30, 2023 and 2022, respectively.
During the six months ended July 31, 2023 and 2022, the Company recognized $315.5 million and $230.8 million of subscription revenue, respectively, and $7.0 million and $4.2 million of professional services revenue, respectively, which were included in the deferred revenue balance as of January 31, 2023 and 2022, respectively.
As of July 31, 2023, approximately $553.6 million of revenue, including amounts already invoiced and amounts contracted but not yet invoiced, was expected to be recognized from remaining performance obligations, of which $546.7 million related to subscription services and $6.8 million related to professional services. Approximately 88% of revenue related to remaining performance obligations is expected to be recognized in the next 12 months.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
4. Deferred Commissions
Deferred commissions were $136.2 million as of July 31, 2023 and $121.8 million as of January 31, 2023.
Amortization expense for deferred commissions was $12.9 million and $14.5 million for the three months ended July 31, 2023 and 2022, respectively, and $24.4 million and $27.6 million for the six months ended July 31, 2023 and 2022, respectively. Prior to August 1, 2022, deferred commissions were amortized over a period of three years. Effective as of August 1, 2022, deferred commissions are amortized over a period of four years. The amortization expense is recorded in sales and marketing on the Company’s condensed consolidated statements of operations.
5. Net Loss Per Share
The following table presents calculations for basic and diluted net loss per share (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net loss | $ | (33,357) | | | $ | (62,313) | | | $ | (63,227) | | | $ | (132,770) | |
Denominator: | | | | | | | |
Weighted-average shares outstanding | 133,829 | | | 129,645 | | | 133,196 | | | 129,091 | |
Net loss per share, basic and diluted | $ | (0.25) | | | $ | (0.48) | | | $ | (0.47) | | | $ | (1.03) | |
The following outstanding shares of common stock equivalents as of the periods presented were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive (in thousands): | | | | | | | | | | | |
| July 31, |
2023 | | 2022 |
Shares subject to outstanding common stock awards | 12,861 | | | 11,799 | |
Shares issuable pursuant to the 2018 Employee Stock Purchase Plan | 326 | | | 53 | |
Total potentially dilutive shares | 13,187 | | | 11,852 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Investments
All cash equivalents and short-term investments were designated as available-for-sale securities as of July 31, 2023. The following tables present the amortized costs, unrealized gains and losses, and estimated fair values of the Company’s cash equivalents and short-term investments (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2023 |
| Amortized Cost* | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 71,387 | | | $ | — | | | $ | — | | | $ | 71,387 | |
U.S. Treasury securities | 23,361 | | | — | | | — | | | 23,361 | |
Commercial paper | 2,636 | | | — | | | — | | | 2,636 | |
Total cash equivalents | 97,384 | | | — | | | — | | | 97,384 | |
Short-term investments: | | | | | | | |
Corporate bonds | 65,200 | | | 16 | | | (101) | | | 65,115 | |
U.S. Treasury securities | 124,559 | | | — | | | (46) | | | 124,513 | |
Commercial paper | 84,467 | | | — | | | — | | | 84,467 | |
Agency securities | 37,670 | | | — | | | (58) | | | 37,612 | |
Total short-term investments | 311,896 | | | 16 | | | (205) | | | 311,707 | |
Total | $ | 409,280 | | | $ | 16 | | | $ | (205) | | | $ | 409,091 | |
*Excludes interest receivable of $0.8 million, which is included in Prepaid expenses and other current assets on the condensed consolidated balance sheets. |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2023 |
| Amortized Cost* | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 137,490 | | | $ | — | | | $ | — | | | $ | 137,490 | |
Agency securities | 3,497 | | | — | | | — | | | 3,497 | |
Total cash equivalents | 140,987 | | | — | | | — | | | 140,987 | |
Short-term investments: | | | | | | | |
Corporate bonds | 66,051 | | | 46 | | | (79) | | | 66,018 | |
U.S. Treasury securities | 62,520 | | | 2 | | | (144) | | | 62,378 | |
Commercial paper | 78,454 | | | — | | | — | | | 78,454 | |
Agency securities | 26,369 | | | 12 | | | (6) | | | 26,375 | |
Total short-term investments | 233,394 | | | 60 | | | (229) | | | 233,225 | |
Total | $ | 374,381 | | | $ | 60 | | | $ | (229) | | | $ | 374,212 | |
*Excludes interest receivable of $1.1 million, which is included in Prepaid expenses and other current assets on the condensed consolidated balance sheets. |
The Company does not intend to sell, nor is it more likely than not that we will be required to sell, any investments in unrealized loss positions before recovery of their amortized cost basis. We did not recognize any credit losses related to our investments during the three and six months ended July 31, 2023 and 2022. The unrealized losses on our short-term investments were primarily due to unfavorable changes in interest rates subsequent to initial purchase. There were no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income (loss) during the three and six months ended July 31, 2023 and 2022. None of the short-term investments held as of July 31, 2023 or January 31, 2023 were in a continuous unrealized loss position for greater than 12 months.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables present the contractual maturities of the Company’s short-term investments (in thousands): | | | | | | | | | | | |
| July 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due within one year | $ | 289,409 | | | $ | 289,255 | |
Due between one to five years | 22,487 | | | 22,452 | |
Total | $ | 311,896 | | | $ | 311,707 | |
| | | | | | | | | | | |
| January 31, 2023 |
| Amortized Cost | | Estimated Fair Value |
Due within one year | $ | 207,487 | | | $ | 207,325 | |
Due between one to five years | 25,907 | | | 25,900 | |
Total | $ | 233,394 | | | $ | 233,225 | |
7. Fair Value Measurements
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The lowest level of significant input determines the placement of the fair value measurement within the following hierarchical levels:
•Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity.
Assets and liabilities measured at fair value on a recurring basis
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2023 |
Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 71,387 | | | $ | — | | | $ | — | | | $ | 71,387 | |
U.S. Treasury securities | — | | | 23,361 | | | — | | | 23,361 |
Commercial Paper | — | | | 2,636 | | | — | | | 2,636 |
Total cash equivalents | 71,387 | | | 25,997 | | | — | | | 97,384 | |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 65,115 | | | — | | | 65,115 | |
U.S. Treasury securities | — | | | 124,513 | | | — | | | 124,513 | |
Commercial paper | — | | | 84,467 | | | — | | | 84,467 | |
Agency securities | — | | | 37,612 | | | — | | | 37,612 | |
Total short-term investments | — | | | 311,707 | | | — | | | 311,707 | |
Total assets | $ | 71,387 | | | $ | 337,704 | | | $ | — | | | $ | 409,091 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 137,490 | | | $ | — | | | $ | — | | | $ | 137,490 | |
Agency securities | — | | | 3,497 | | — | | | 3,497 |
Total cash equivalents | 137,490 | | 3,497 | | — | | | 140,987 |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 66,018 | | — | | | 66,018 |
U.S. Treasury securities | — | | | 62,378 | | — | | | 62,378 |
Commercial paper | — | | | 78,454 | | — | | | 78,454 |
Agency securities | — | | | 26,375 | | | — | | | 26,375 |
Total short-term investments | — | | | 233,225 | | | — | | | 233,225 | |
Total assets | $ | 137,490 | | | $ | 236,722 | | | $ | — | | | $ | 374,212 | |
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until observable inputs become available and reliable. There were no transfers between fair value measurement levels during the three and six months ended July 31, 2023 or 2022.
Assets and liabilities measured at fair value on a non-recurring basis
See Note 8, Business Combinations, and Note 9, Goodwill and Net Intangible Assets, of these notes to our condensed consolidated financial statements for fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Business Combinations
Outfit
On September 1, 2022, the Company acquired 100% of the outstanding equity of On Brand Holdings, Inc. and its subsidiaries, collectively doing business as Outfit, pursuant to an Agreement and Plan of Merger. The Company acquired Outfit to enhance Brandfolder’s templating and creative automation solution. We incurred acquisition costs of $0.6 million during the year ended January 31, 2023. The total purchase consideration for the acquisition of Outfit was $20.6 million in cash, net of customary purchase price adjustments.
The transaction was accounted for as a business combination and accordingly, the total fair value of purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Fair values were determined using income and cost approaches. The fair value measurements of the intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement. The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): | | | | | |
| September 1, 2022 |
Cash and restricted cash | $ | 266 | |
Intangible assets | 5,190 | |
Goodwill | 16,434 | |
Other net tangible assets and liabilities assumed | (1,283) | |
Total | $ | 20,607 | |
The excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expected synergies with Brandfolder’s product offerings. The goodwill is not deductible for income tax purposes.
We engaged a third-party valuation specialist to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party.
The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands): | | | | | | | | | | | | | | | | | |
| Fair Value | | Expected Useful Life | | Discount Rate |
Software technology | $ | 3,200 | | | 5 years | | 14.7 | % |
Customer relationships | 1,990 | | | 7 years | | 14.7 | % |
Total intangible assets | $ | 5,190 | | | | | |
The identified intangible assets, software technology and customer relationships, were valued as follows:
Software technology - we valued the finite-lived software technology using the relief-from-royalty method under the income approach. This method estimates fair value by forecasting avoided royalties, reducing them by maintenance-related research and development expenses and taxes, and discounting the resulting net cash flows to a present value using an appropriate discount rate. We applied judgment which involved the use of assumptions with respect to the future revenue forecast, technology life, royalty rate, and the discount rate.
Customer relationships - we valued the finite-lived customer relationships using the multi-period excess-earnings method. This method involves forecasting the net earnings expected to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net cash flows to a present value using an appropriate discount rate. We applied judgment which involved the use of assumptions with respect to the future cash flows forecast, base year annual recurring revenue, customer churn rate, and the discount rate.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The related software technology amortization expense is recognized over its useful life within cost of revenue in the condensed consolidated statements of operations. The amortization expense related to the customer relationship intangible asset is recognized over its useful life within sales and marketing in the condensed consolidated statements of operations. The weighted-average amortization period of the acquired intangible assets is 5.8 years.
We have included the financial results of Outfit in our condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Outfit have not been presented as the effect of this acquisition was not significant to our financial results.
9. Goodwill and Net Intangible Assets
Changes in the carrying amount of goodwill or measurement period adjustments during the six months ended July 31, 2023 were as follows (in thousands): | | | | | |
| |
Goodwill balance as of January 31, 2023 | $ | 142,415 | |
Effects of foreign currency translation | (692) | |
Goodwill balance as of July 31, 2023 | $ | 141,723 | |
The following table presents the components of net intangible assets (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2023 | | January 31, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Acquired software technology | $ | 28,539 | | | $ | (17,390) | | | $ | 11,149 | | | $ | 28,673 | | | $ | (14,547) | | | $ | 14,126 | |
Acquired customer relationships | 34,102 | | | (14,604) | | | 19,498 | | | 34,186 | | | (12,265) | | | 21,921 | |
Trade names | 4,100 | | | (1,379) | | | 2,721 | | | 4,100 | | | (1,157) | | | 2,943 | |
Patents | 170 | | | (140) | | | 30 | | | 170 | | | (135) | | | 35 | |
Domain name | 44 | | | — | | | 44 | | | 44 | | | — | | | 44 | |
Total | $ | 66,955 | | | $ | (33,513) | | | $ | 33,442 | | | $ | 67,173 | | | $ | (28,104) | | | $ | 39,069 | |
The following table presents the components of acquired intangible assets (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2023 | | January 31, 2023 |
| Net Carrying Amount | | Weighted Average Life (Years) | | Net Carrying Amount | | Weighted Average Life (Years) |
Acquired software technology | $ | 11,149 | | | 2.4 | | $ | 14,126 | | | 2.8 |
Acquired customer relationships | 19,498 | | | 4.2 | | 21,921 | | | 4.7 |
Trade names | 2,721 | | | 6.1 | | 2,943 | | | 6.6 |
Total | $ | 33,368 | | | 3.8 | | $ | 38,990 | | | 4.2 |
Amortization expense related to intangible assets was $2.7 million and $2.5 million for the three months ended July 31, 2023 and 2022, respectively, and $5.4 million and $5.0 million for the six months ended July 31, 2023 and 2022, respectively. As of July 31, 2023, estimated remaining amortization expense for the finite-lived intangible assets by fiscal year is as follows (in thousands): | | | | | |
| |
Remainder of Fiscal 2024 | $ | 5,424 | |
Fiscal 2025 | 9,647 | |
Fiscal 2026 | 7,930 | |
Fiscal 2027 | 5,764 | |
Fiscal 2028 | 3,464 | |
Thereafter | 1,169 | |
Total | $ | 33,398 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Share-Based Compensation
The Company has issued incentive and non-qualifying stock options to employees and non-employee directors under the 2005 Stock Option/Restricted Stock Plan, the 2015 Equity Incentive Plan (the “2015 Plan”), and the 2018 Equity Incentive Plan (the “2018 Plan”). Employee stock options are granted with exercise prices at the fair value of the underlying common stock on the grant date, generally vest based on continuous employment over three or four years, and expire 10 years from the date of grant.
The Company has also issued restricted stock units (“RSUs”) to employees and non-employee directors pursuant to the 2015 Plan and the 2018 Plan. Employee RSUs are measured based on the grant date fair value of the awards and generally vest based on continuous employment over three or four years.
The Company has issued restricted stock awards (“RSAs”) to certain Brandfolder employees subject to vesting conditions. These shares were issued in a private placement transaction. As vesting of these RSAs is dependent on continuous employment, these were not considered part of the purchase price in accounting for the September 2020 acquisition. The RSAs are measured based on the grant date fair value of the awards and vest based on continuous employment over three years.
The Company issued market-based performance share units (“PSUs”) to certain executives pursuant to the 2018 Plan during the year ended January 31, 2023. The target number of market-based PSUs granted was 251,027. The number of shares that can be earned range from 0% to 200% of the target number of shares, based on the relative growth of the Company’s total shareholder return as compared to the total shareholder return of the S&P Software and Services Select Index. These awards have two separate performance periods. The first tranche of awards has a one year performance period starting on the date of grant and ending on the first anniversary of the date of grant. The second tranche of awards has a two year performance period starting on the date of grant and ending on the second anniversary of the date of grant. These awards also include a service condition and vest on a graded vesting schedule, subject to continuous employment, over a three year period. The fair value of the PSUs granted was determined using a Monte Carlo simulation approach.
Stock options
The following table includes a summary of the option activity during the six months ended July 31, 2023: | | | | | | | | | | | |
| Options Outstanding | | Weighted-Average Exercise Price |
Outstanding at January 31, 2023 | 3,819,288 | | | $ | 23.42 | |
Granted | — | | | — | |
Exercised | (145,724) | | | 7.32 | |
Forfeited or canceled | (10,125) | | | 67.00 | |
Outstanding at July 31, 2023 | 3,663,439 | | | 23.94 | |
Exercisable at July 31, 2023 | 3,031,579 | | | 17.76 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Restricted stock units
The following table includes a summary of the RSU activity during the six months ended July 31, 2023: | | | | | | | | | | | |
| Number of Shares Underlying Outstanding RSUs | | Weighted-Average Grant-Date Fair Value per RSU |
Outstanding at January 31, 2023 | 10,975,157 | | | $ | 46.56 | |
Granted | 836,732 | | | 45.09 | |
Vested | (2,193,483) | | | 46.63 | |
Forfeited or canceled | (671,460) | | | 47.08 | |
Outstanding at July 31, 2023 | 8,946,946 | | | 46.37 | |
Performance Share Units
The following table includes a summary of the PSU activity during the six months ended July 31, 2023: | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant-Date Fair Value per PSU |
Outstanding at January 31, 2023 | 251,027 | | | $ | 53.34 | |
Granted | — | | | — | |
Vested | — | | | — | |
Forfeited or canceled | — | | | — | |
Outstanding at July 31, 2023 | 251,027 | | | 53.34 | |
Restricted stock awards
The following table includes a summary of the RSA activity during the six months ended July 31, 2023: | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant-Date Fair Value per Share |
Outstanding at January 31, 2023 | 19,895 | | | $ | 46.93 | |
Granted | — | | | — | |
Vested | — | | | — | |
Forfeited or canceled | — | | | — | |
Outstanding at July 31, 2023 | 19,895 | | | 46.93 | |
2018 Employee Stock Purchase Plan
In April 2018, we adopted our 2018 Employee Stock Purchase Plan (“ESPP”). The ESPP became effective on April 26, 2018, with the effective date of our initial public offering.
Under our ESPP, eligible employees are able to acquire shares of Class A common stock by accumulating funds through payroll deductions of up to 15% of their compensation, subject to plan limitations. Purchases are accomplished through participation in discrete offering periods. Each offering period is six months (commencing each January 1 and July 1), with a purchase date following the end of the period, unless otherwise determined by our board of directors or our compensation committee. The purchase price for shares of our common stock purchased under our ESPP is 85% of the lesser of the fair market value of common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the purchase period in the applicable offering period.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Shares available for issuance
The following table includes a summary of the Company’s shares available for issuance activity under our 2018 Plan and our ESPP during the six months ended July 31, 2023: | | | | | | | | | | | |
| 2018 Plan | | 2018 ESPP |
Balance at January 31, 2023 | 14,594,290 | | | 4,850,775 | |
Authorized | 6,592,251 | | | 1,318,450 | |
Granted | (836,732) | | | (343,252) | |
Forfeited or canceled | 681,585 | | | — | |
Balance at July 31, 2023 | 21,031,394 | | | 5,825,973 | |
The aggregate number of shares reserved for issuance under our ESPP will increase automatically on February 1 of each of the first 10 calendar years after the first offering date. The increase of shares is equal to 1% of the total outstanding shares of our Class A and Class B common stock as of the immediately preceding January 31 (rounded to the nearest whole share) or such lesser number of shares as may be determined by our board of directors. The aggregate number of shares issued over the term of our ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 20,400,000 shares of our Class A common stock.
As of July 31, 2023, $2.4 million has been withheld on behalf of our employees for a future purchase under the ESPP and is recorded in accrued compensation and related benefits in the condensed consolidated balance sheets.
Share-based compensation expense
Share-based compensation expense included in the condensed consolidated statements of operations was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Cost of subscription revenue | $ | 3,357 | | | $ | 2,849 | | | $ | 6,816 | | | $ | 5,460 | |
Cost of professional services revenue | 1,915 | | | 1,756 | | | 3,825 | | | 3,233 | |
Research and development | 17,611 | | | 15,974 | | | 35,043 | | | 31,589 | |
Sales and marketing | 18,989 | | | 16,707 | | | 38,043 | | | 31,452 | |
General and administrative | 10,151 | | | 8,202 | | | 20,075 | | | 17,654 | |
Total share-based compensation expense | $ | 52,023 | | | $ | 45,488 | | | $ | 103,802 | | | $ | 89,388 | |
We have excluded $1.4 million and $1.0 million of capitalized software development costs from share-based compensation expense in the three months ended July 31, 2023 and 2022, respectively, and $2.2 million and $1.7 million for the six months ended July 31, 2023 and 2022, respectively.
11. Income Taxes
The provision for income taxes for interim tax periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances, and adjusted for discrete tax items in the period. Each quarter the Company updates its estimate of the annual effective tax rate and makes a cumulative adjustment if the estimated annual tax rate has changed.
The Company’s effective tax rate generally differs from the U.S. federal statutory tax rate primarily due to valuation allowances on deferred tax assets, U.S. Base Erosion and Anti-Abuse Tax (“BEAT”), state taxes, and non-deductible share-based compensation offset by tax credits and Foreign Derived Intangible Income (“FDII”) deductions.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company recorded a provision for income taxes of $3.0 million and $0.4 million for the three months ended July 31, 2023 and 2022, respectively, and $5.4 million and $0.6 million for the six months ended July 31, 2023 and 2022, respectively. The provision is primarily attributable to BEAT, income taxes in foreign jurisdictions, and state income taxes.
In August 2022, the Inflation Reduction Act (the “IRA”) was signed into law. The IRA contains a number of tax related provisions including a 15% minimum corporate income tax on certain large corporations as well as an excise tax on stock repurchases. The IRA did not have a material impact on the Company’s condensed consolidated financial statements.
12. Leases
The Company has operating leases related to corporate offices. Our leases have remaining lease terms of less than one year to six years, some of which include options to extend the leases for up to five years.
The components of lease expense recorded in the condensed consolidated statements of operations were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Operating lease cost | $ | 3,948 | | | $ | 4,887 | | | $ | 7,929 | | | $ | 9,766 | |
Short-term lease cost | 141 | | | 127 | | | 321 | | | 256 | |
Variable lease cost | 822 | | | 792 | | | 1,673 | | | 1,359 | |
Sublease income | (547) | | | — | | | (1,094) | | | — | |
Total lease costs | $ | 4,364 | | | $ | 5,806 | | | $ | 8,829 | | | $ | 11,381 | |
Other information related to operating leases was as follows (dollars in thousands): | | | | | | | | | | | |
| Six Months Ended July 31, |
| 2023 | | 2022 |
Supplemental cash flow information: | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 9,667 | | | $ | 9,729 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | — | | | 4,464 | |
| | | |
Right-of-use assets reductions related to operating leases | 1,033 | | | 110 | |
Other supplemental information: | | | |
Weighted-average remaining lease term (in years) | 4.2 | | 4.8 |
Weighted-average discount rate | 5.4 | % | | 4.9 | % |
As of July 31, 2023, remaining maturities of lease liabilities were as follows (in thousands): | | | | | |
| Operating Leases |
Remainder of Fiscal 2024 | $ | 9,704 | |
Fiscal 2025 | 16,355 | |
Fiscal 2026 | 14,547 | |
Fiscal 2027 | 10,855 | |
Fiscal 2028 | 6,063 | |
Thereafter | 6,235 | |
Total lease payments | 63,759 | |
Less: imputed interest | (6,094) | |
Total | $ | 57,665 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of July 31, 2023, we had an operating lease that had not yet commenced with future non-cancelable lease payments of approximately $3.6 million. This operating lease will commence in the third quarter of fiscal year 2024 with a lease term of five years. Additionally, as of July 31, 2023, we also had a finance lease that had not yet commenced with future non-cancelable lease payments of approximately $0.8 million. This finance lease will commence in the third quarter of fiscal year 2024 with a lease term of three years.
As of July 31, 2023, the future total minimum sublease payments to be received were as follows (in thousands): | | | | | |
| Sublease Receipts |
Remainder of Fiscal 2024 | $ | 1,173 | |
Fiscal 2025 | 2,396 | |
Fiscal 2026 | 1,986 | |
Fiscal 2027 | 700 | |
Thereafter | — | |
Total | $ | 6,255 | |
13. Commitments and Contingencies
Legal matters
An indemnification claim was made against the Company by a former director, Ryan Hinkle, and Insight Venture Partners VII, L.P. and certain affiliated entities that are former shareholders of the Company (together with Hinkle, the “IVP Parties”), relating to a purported class action litigation in which the IVP Parties are defendants. On January 29, 2021, the IVP Parties filed a complaint against the Company in the Superior Court of Washington, King County, for the advancement of legal fees, costs, and expenses incurred in defending the purported class action claim. In December 2021, we paid $10.0 million as part of an overall settlement of these matters. During the year ended January 31, 2023, we recovered $4.5 million related to insurance coverage of this claim. In February 2023, we settled an additional insurance reimbursement claim related to this case. As a result of this settlement, we recorded an insurance reimbursement receivable of $3.9 million in prepaid and other current assets in our condensed consolidated balance sheet and related general and administrative expense in our condensed consolidated statement of operations as of, and for the year ended, January 31, 2023. The $3.9 million was collected during the three months ended April 30, 2023. We do not expect any additional activity related to this that would have a material impact on our financial position, results of operations, or cash flows.
From time-to-time, in the normal course of business, the Company may be subject to various other legal matters such as threatened or pending claims or proceedings. Although management currently believes that resolution of such matters, individually and in the aggregate, will not have a material impact on our financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties, and management’s view of these matters may change in the future.
14. Geographic Information
Revenue
Revenue by geographic location is determined by the location of the Company’s customers. The following table sets forth revenue by geographic area (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Six Months Ended July 31, |
2023 | | 2022 | | 2023 | | 2022 |
United States | $ | 199,222 | | | $ | 155,912 | | | $ | 384,817 | | | $ | 295,606 | |
EMEA | 18,758 | | | 16,180 | | | 36,482 | | | 31,465 | |
Asia Pacific | 8,666 | | | 7,032 | | | 16,873 | | | 13,566 | |
Americas other than the United States | 8,939 | | | 7,567 | | | 17,299 | | | 14,364 | |
Total | $ | 235,585 | | | $ | 186,691 | | | $ | 455,471 | | | $ | 355,001 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
No individual country other than the United States contributed more than 10% of total revenue during any of the periods presented.
Long-lived assets
Long-lived assets by geographic location is based on the location of the legal entity that owns the asset. The following table sets forth long-lived assets by geographic area (in thousands): | | | | | | | | | | | |
| July 31, 2023 | | January 31, 2023 |
United States | $ | 53,377 | | | $ | 60,246 | |
EMEA | 3,319 | | | 5,583 | |
Asia Pacific | 4,072 | | | 4,510 | |
Americas other than the United States | 580 | | | 274 | |
Total | $ | 61,348 | | | $ | 70,613 | |
The table above includes property and equipment and operating lease right-of-use assets and excludes capitalized internal-use software costs and intangible assets.
15. Supplemental Consolidated Financial Statement Information
Prepaid and other current assets
Prepaid expenses and other current assets consisted of the following (in thousands): | | | | | | | | | | | |
| July 31, 2023 | | January 31, 2023 |
Prepaid expenses | $ | 50,348 | | | $ | 45,877 | |
Other current assets | 4,556 | | | 9,186 | |
Total prepaid expense and other current assets | $ | 54,904 | | | $ | 55,063 | |
Restricted cash
Restricted cash was $0.5 million and $0.6 million as of July 31, 2023 and January 31, 2023, respectively, primarily related to Australian employee contributions to the Company’s 2018 Employee Stock Purchase Plan.
Cash as reported on the condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash as shown on the condensed consolidated balance sheets. Cash as reported on the condensed consolidated statements of cash flows consisted of the following (in thousands): | | | | | | | | | | | |
| July 31, |
| 2023 | | 2022 |
Cash and cash equivalents | $ | 237,278 | | | $ | 227,370 | |
Restricted cash included in prepaid expenses and other current assets | 325 | | | 500 | |
Restricted cash | 193 | | | 17 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 237,796 | | | $ | 227,887 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended January 31, 2023. In addition to historical financial information, the following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. These statements are often identified by the use of words including, but not limited to, “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends January 31.
Overview
Smartsheet, the enterprise work management platform, empowers organizations to innovate and achieve results faster, securely, and at scale through effective collaboration and streamlined workflows. By uniting people, content, and work, Smartsheet provides powerful capabilities that revolutionize the way teams operate. Smartsheet makes outcomes reliable, keeps customer data safe, and ensures users are on the same page, making it ideal for organizations seeking efficient, impactful collaborative work management.
We generate revenue primarily from the sale of subscriptions to our cloud-based platform for work management. For subscriptions, customers select the plan that meets their needs and can begin using Smartsheet within minutes. We offer three paid subscription levels to new customers: Pro, Business, and Enterprise, the pricing for which varies by the capabilities provided. Customers can also purchase Smartsheet Advance with Enterprise subscriptions, which provides capabilities that, in combination, enable customers to implement solutions for a specific use case or for large scale projects, initiatives, or processes. These capabilities include Control Center, Dynamic View, Data Shuttle, Connectors, and Bridge. Additional subscriptions that can be integrated with our cloud-based platform include Resource Management, a resource planning solution that helps businesses plan and allocate resources across their programs, track and manage time, and forecast hiring needs; and Brandfolder, a digital asset management platform that enables users to easily organize, discover, control, distribute, and share digital assets. Professional services are offered to help customers create and administer work management solutions for specific use cases and for training purposes.
Customers can begin using our platform by purchasing a subscription directly from our website, through our sales force, starting a free trial, or working as a collaborator on a project. Smartsheet also offers a free subscription plan for new customers looking to get started with task and project management.
Macroeconomic Conditions and Other Factors
Our results of operations may be significantly influenced by general macroeconomic conditions, including, but not limited to, the impact of the current Russia/Ukraine conflict, interest rates, inflation, instability in the global banking sector, and foreign currency exchange rate fluctuations. Inflationary factors, such as increases in our operating expenses, may adversely affect our results of operations, as our customers primarily purchase services from us on a subscription basis over a period of time. We monitor the direct and indirect impacts of these circumstances on our business and financial results. The implications of these macroeconomic events on our business, results of operations and overall financial outlook remain uncertain over the long term and may have an adverse impact in future periods. Refer to Part II, Item 1A, “Risk Factors” for further discussion of the potential impact of these general macroeconomic factors and other risks on our business.
Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. | | | | | | | | | | | |
| July 31, |
2023 | | 2022 |
Average annualized contract value per domain-based customer | $ | 8,863 | | | $ | 7,557 |
Dollar-based net retention rate for all customers (trailing 12 months) | 121 | % | | 131 | % |
Customers with annualized contract values (“ACV”) of $100 thousand or more | 1,665 | | | 1,220 |
Customers with ACV of $50 thousand or more | 3,552 | | | 2,738 |
Customers with ACV of $5 thousand or more | 19,031 | | | 16,682 |
Average ACV per domain-based customer
We use average annualized contract value (“ACV”) per domain-based customer to measure customer commitment to our platform and sales force productivity. We define average ACV per domain-based customer as total outstanding ACV for domain-based subscriptions as of the end of the reporting period divided by the number of domain-based customers as of the same date. We define domain-based customers as organizations with a unique email domain name.
Dollar-based net retention rate
We calculate dollar-based net retention rate as of a period end by starting with the ACV from the cohort of all customers as of the 12 months prior to such period end (“prior period ACV”). We then calculate the ACV from these same customers as of the current period end (“current period ACV”). Current period ACV includes any upsells and is net of contraction or attrition over the trailing 12 months, but excludes subscription revenue from new customers in the current period. We then divide the total current period ACV by the total prior period ACV to arrive at the dollar-based net retention rate. Any ACV obtained through merger and acquisition transactions does not affect the dollar-based net retention rate until one year from the date on which the transaction closed.
The dollar-based net retention rate is used by us to evaluate the long-term value of our customer relationships and is driven by our ability to retain and expand the subscription revenue generated from our existing customers.
Components of Results of Operations
Revenue
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to our cloud-based platform. We recognize subscription revenue ratably over the subscription contract term beginning on the date access to our platform is provided, as no implementation work is required, assuming all other revenue recognition criteria have been met.
Professional services revenue