Though Smartsheet (SMAR) hasn't been spared during the recent selloff in high-growth, high-multiple, software stocks, its shares are still up 166% from their $15 2018 IPO price.
Smartsheet provides a subscription-based software platform that's used by many different types of office workers to automate business processes and workflows, and which integrates and connects with numerous third-party business apps. The company claims more than 82,000 customers, including more than 75% of the Fortune 500.
Though Smartsheet has been around since 2005, its business has hit an inflection point during the past couple of years, particularly among large enterprises. Billings rose 60% annually in fiscal 2019 (it ended in January), and Smartsheet guided in September for billings to rise by 48% to 50% in fiscal 2020, to within a range of $320 million to $324 million. Given Smartsheet's history of guiding conservatively, it wouldn't be shocking if this guidance was topped.
I recently had a chance to talk with Mark Mader, who has been Smartsheet's CEO since 2006. Here are some notable takeaways from the discussion.
How Smartsheet's Platform Is UsedThough often described as a workflow automation software firm, Mader argued that the first step that users of its software are generally taking is the integrating and organizing of information from different sources. After that step is taken, users can move on to automating workflows that involve the movement of this information.
While Smartsheet supports many different apps, a large portion of Smartsheet usage is still tied to Microsoft (MSFT) and Alphabet/Google's (GOOGL) respective document and spreadsheet apps. "Those four are really the bellwethers" for the programs, processes and projects Smartsheet aims to automate, he said.
At the same time, Mader added that messaging apps such as Microsoft Teams and Slack (WORK) are increasingly playing "complementary" roles within a workflow, acting as alternatives to e-mail for doing things such as sending notifications and approval requests to workers. And with regards to automating back-office functions, Mader indicated that Smartsheet often integrated with CRM software apps (for example, Salesforce.com's (CRM) ) as well as some of Atlassian's (TEAM) collaboration apps such as Jira.
Displacing 'The Ways of the Past'
Mader asserts that in the "vast majority" of Smartsheet's customer wins, the company isn't beating out or displacing a rival workflow automation solution, but replacing manual processes that rely on apps such as Word and Excel. Microsoft Office docs are the existing solution that Smartsheet is most likely to replace "by a factor of 10," Mader said, and the company's incident rate for hearing of a rival "work management" product when competing for a new deal or trying to expand an existing one is said to be "less than 5%."
Even now, most people are still using docs to manage business workflows, Mader added. And that, he argues, indicates "it's still very early in our category."
R&D InvestmentsWhen asked about Smartsheet's R&D priorities, Mader said the company's product investments tend to fall into one of three areas: New capabilities and improvements for its software platform; helping IT departments better manage issues such as security, governance and scale when deploying Smartsheet's software; and addressing the needs of "business leaders" who might not be using Smartsheet's products to handle day-to-day tasks, but are trying to understand "the state of something."
Mader also noted Smartsheet continues investing in machine learning to make proactive recommendations to users on how to automate a process, after identifying a worker's patterns.
"When we think about software and how much software is being introduced to people today, how do we actually get them to understand what is available with that software?," he said, while adding that Smartsheet saw more than a seven-fold increase in utilization after rolling out its first recommendation solution. "People have a maximum capacity to learn new concepts."
The Adoption of Smartsheet 'Accelerators'
In July 2018, Smartsheet rolled out its first off "accelerators" -- off-the-shelf solutions for using Smartsheet's software to handle specific business workflows and processes. Mader noted the accelerators are generally meant to help a company "very quickly deploy Smartsheet for something of significance."
When asked about accelerators adoption, Mader indicated it's still early, with roughly 700 clients having thus far purchased an add-on "capability" such as an accelerator. He said the most popular accelerators to date include one for IT project management offices (PMOs), and one for handling M&A transactions. An accelerator meant to help companies address compliance with the EU's GDPR regulations is in the pipeline.
International Sales Goals
In its July quarter, Smartsheet obtained just 21% of its revenue from international markets. However, Mader insists that over the long run, "there's no reason why international couldn't be 50% of [Smartsheet's] business or more."
With Smartsheet's customer base including many multinationals, the company's software is now used in 190 countries on a paid base. To date, the company has set up overseas offices in the U.K. and Australia.
Long-Term Cash Flow Goals
During its Oct. 1 analyst day, Smartsheet, which has been investing heavily in both sales and R&D, forecast it aims to reach breakeven free cash flow (FCF) next year. When asked about Smartsheet's long-term FCF goals, Mader said his company wants to be "moving toward" a 20%-plus FCF margin as its revenue approaches $1 billion, while adding that Smartsheet has given itself a 3-to-5 year time frame to get there.
"We're making a number of investments to fall within that window," he said.