SMARTSHEET INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 such as "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 Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . A discussion and analysis of our financial condition, results of operations, and cash flows for the year endedJanuary 31, 2021 compared to the year endedJanuary 31, 2020 is included in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 filed with theSEC onMarch 25, 2021 .
Overview
Smartsheet is the enterprise platform for dynamic work. We empower anyone to drive meaningful change. Our leading cloud-based platform enables teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. We were founded in 2005 with a vision to build a universal application for work management that does not require coding capabilities. Unstructured or dynamic work is work that has historically been managed using a combination of email, spreadsheets, whiteboards, phone calls, and in-person meetings to communicate with team members and complete projects and processes. It is frequently changing, often ad-hoc, and highly reactive to new information. Our platform helps manage this kind of unstructured work and serves as a single source of truth across work processes, fostering accountability and engagement within teams, leading to more efficient decision-making and better business outcomes. We generate revenue primarily from the sale of subscriptions to our cloud-based platform. For subscriptions, customers select the plan that meets their needs and can begin usingSmartsheet within minutes. We offer three subscription levels to new customers: Pro, Business, and Enterprise, the pricing for which varies by the capabilities provided. Customers can also purchaseSmartsheet Advance, which provides components that, in combination, enable customers to implement solutions for a specific use case or for large scale projects, initiatives, or processes. Some components are available for standalone purchase, including Connectors, which provide data integration and automation to third-party applications, and premium applications such as Dynamic View, Data Shuttle, Control Center, and Bridge. Additional subscriptions that can be integrated with our cloud-based platform includeResource Management , a resource planning solution that helps businesses find and schedule appropriate project teams, track and manage time, and forecast hiring needs; and Brandfolder, a digital asset management platform that enables workers to intuitively store, customize, and share creative assets. Professional services are offered to help customers create and administer solutions for specific use cases and for training purposes. Customers can begin using our platform by purchasing a subscription directly from our website or through our sales force, starting a free trial, or working as a collaborator on a project.
Impact of COVID-19
In response to the COVID-19 pandemic, our executive leadership team and human resources leadership team began an ongoing monitoring of the situation. Beginning in earlyFebruary 2020 , and aligning with guidance provided by government agencies and international organizations, we took measures to restrict travel, institute a broad work-from-home policy, and limit visitors and office services. Bymid-March 2020 , and again aligning with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, fully closed our offices to all visitors and services, and migrated all customer-facing activities to virtual formats. As ofJanuary 31, 2022 , our offices have reopened in accordance with applicable regional guidance. We continue to prioritize employee and community health and safety. 54
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During the year endedJanuary 31, 2022 , purchasing decisions of certain customers continued to be impacted and sometimes deferred due to uncertainties around COVID-19. As long as the global economic environment is influenced by the COVID-19 pandemic, our existing customers may be hesitant to expand their use ofSmartsheet and, in certain industries, may be more likely to churn. We will continue to actively monitor the COVID-19 situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. Refer to Part I, Item 1A, Risk Factors for further discussion of the impact and possible future impacts of the COVID-19 pandemic 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.
2022 2021 2020
Average annualized contract value per domain-based customer
$ 6,977 $ 5,103 $ 3,643 Dollar -based net retention rate for all customers (trailing 12 months) 134 % 123 % 135 % Customers with annualized contract values of$100 thousand or more 1,026 588 350
Customers with annualized contract values of
2,354 1,515 961
Customers with annualized contract values of
15,150 11,874 9,079
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.
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.
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Professional services revenue
Professional services revenue primarily includes fees for consulting and training services. Our consulting services typically consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, with some smaller engagements being provided for a fixed fee. We recognize revenue for our consulting services as those services are delivered. Our training services are delivered either remotely or at the customer site. Training services are charged for on a fixed-fee basis and we recognize revenue as the training program is delivered. Our consulting and training services are generally considered to be distinct, for accounting purposes, and we recognize revenue as services are performed or upon completion of work.
Cost of revenue and gross margin
Cost of subscription revenue
Cost of subscription revenue primarily consists of expenses related to hosting our services and providing support, including employee-related costs such as salaries, wages, and related benefits, third-party hosting fees, software-related costs, amortization of acquisition-related intangibles, amortization of capitalized software, payment processing fees, costs of outside services to supplement our internal teams, allocated overhead, costs of Connectors betweenSmartsheet and third-party applications, and costs related to technical support services.
Cost of professional services revenue
Cost of professional services revenue consists primarily of employee-related costs for our consulting and training teams, costs of outside services to supplement our internal teams, allocated overhead, software-related costs, travel-related costs, and billable expenses.
Gross margin
Gross margin is calculated as gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue mix fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued building of application support and professional services teams, and increased share-based compensation expense. As we continue to build our technology to expand to newer markets and geographies, we expect our gross margin to decline moderately.
Operating expenses
Research and development
Research and development expenses consist primarily of employee-related costs, software-related costs, allocated overhead, and costs of outside services used to supplement our internal staff. We consider continued investment in our development talent and our platform to be important for our growth. We expect our research and development expenses to increase in absolute dollars as our business grows and to gradually decrease over the long-term as a percentage of total revenue due to economies of scale.
Sales and marketing
Sales and marketing expenses consist primarily of employee-related costs, brand
awareness and demand generation costs, allocated overhead, software-related
costs, costs of outside services used to supplement our internal staff,
amortization of acquisition-related intangibles, and travel-related expenses.
Commissions earned by our sales force that are incremental to each customer
contract, along with related fringe benefits and taxes, are capitalized and
amortized over an estimated useful life of three years. We expect that sales and
marketing expenses will increase in absolute dollars as we continue to invest in
advertising and marketing initiatives. We expect sales and marketing costs to
gradually decrease as a percentage of total revenue over the long-term due to
economies of scale.
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General and administrative
General and administrative expenses consist primarily of employee-related costs for accounting, finance, legal, IT, and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as accounting and legal costs, costs of outside services to supplement our internal staff, software-related costs, allocated overhead, certain tax, license, and insurance-related expenses, bad debt expense, and bank charges. We expect our general and administrative expenses to increase in absolute dollars as our business grows, and to gradually decrease over the long-term as a percentage of total revenue due to economies of scale.
Interest income
Interest income consists of interest income from our investment holdings. Due to the current near-zero interest rate environment, we expect our interest income in the near term to remain insignificant.
Other income (expense), net
Other income (expense), net consists of foreign exchange gains and losses, interest expense, and other non-operating income and expenses.
Income tax provision (benefit)
Our income tax provision (benefit) consists primarily of income taxes in foreign jurisdictions and state income taxes. We maintain a valuation allowance on ourU.S. federal, state, and certain foreign deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be realized. 57
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Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods:
Year Ended January 31,
2022 2021
(in thousands)
Revenue
Subscription $ 507,375 $ 352,782
Professional services 43,457 32,731
Total revenue 550,832 385,513
Cost of revenue
Subscription(1) 77,460 59,374
Professional services(1) 39,013 26,165
Total cost of revenue 116,473 85,539
Gross profit 434,359 299,974
Operating expenses
Research and development(1) 165,440 118,722
Sales and marketing(1) 329,751 230,281
General and administrative(1) 109,204 71,443
Total operating expenses 604,395 420,446
Loss from operations (170,036) (120,472)
Interest income 48 1,444
Other income (expense), net (813) 296Net loss before income tax provision (benefit) (170,801) (118,732) Income tax provision (benefit)
296 (3,753)
Net loss $ (171,097) $ (114,979) (1) Amounts include share-based compensation expense as follows:
Year Ended January 31,
2022 2021
(in thousands)
Cost of subscription revenue $ 6,274 $ 4,385
Cost of professional services revenue 3,788 2,146
Research and development 41,218 25,072
Sales and marketing 40,632 25,921
General and administrative 22,988 14,498
Total share-based compensation expense $ 114,900 $ 72,022
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The following table sets forth the components of our results of operations, for each of the periods presented, as a percentage of total revenue.
Year Ended January 31,
2022 2021
Revenue
Subscription 92 % 92 %
Professional services 8 8
Total revenue 100 100
Cost of revenue
Subscription 14 15
Professional services 7 7
Total cost of revenue 21 22
Gross profit 79 78
Operating expenses
Research and development 30 31
Sales and marketing 60 60
General and administrative 20 19
Total operating expenses 110 109
Loss from operations (31) (31)
Interest income - -
Other income (expense), net - -
Net loss before income tax provision (benefit) (31) (31)
Income tax provision (benefit) -
(1)
Net loss (31) % (30) % Note: Certain amounts may not sum due to rounding
Comparison of the years ended
Revenue
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Revenue
Subscription $ 507,375 $ 352,782 $ 154,593 44 %
Professional services 43,457 32,731 10,726 33 %
Total revenue $ 550,832 $ 385,513 $ 165,319 43 %
Percentage of total revenue
Subscription revenue 92 % 92 %
Professional services revenue 8 % 8 %
Subscription revenue increased $154.6 million , or 44%, for the year ended
January 31, 2022 compared to the year ended January 31, 2021 . The increase in
revenue between periods was driven by increased sales of user-based subscription
plans, which contributed $93.4 million of the increase, followed by sales of
pre-configured capabilities, which contributed $61.2 million of the increase.
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The increase in professional services revenue was primarily driven by an increase in demand for our consulting and training services.
Cost of revenue, gross profit, and gross margin
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue
Subscription $ 77,460 $ 59,374 $ 18,086 30 %
Professional services 39,013 26,165 12,848 49 %
Total cost of revenue $ 116,473 $ 85,539 $ 30,934 36 %
Gross profit $ 434,359 $ 299,974 $ 134,385 45 %
Gross margin
Subscription 85 % 83 %
Professional services 10 % 20 %
Total gross margin 79 % 78 %
Cost of subscription revenue increased $18.1 million , or 30%, for the year ended
January 31, 2022 compared to the year ended January 31, 2021 . The increase was
primarily due to an increase of $6.0 million in employee-related expenses due to
increased headcount, of which $2.1 million was related to share-based
compensation expense, an increase of $3.0 million in hosting fees, an increase
of $2.7 million in amortization of capitalized software, an increase of $1.8
million in costs of outside services to supplement our internal staff, an
increase of $1.4 million in amortization of acquisition-related intangibles, an
increase of $1.2 million in software-related costs, an increase of $1.0 million
in credit card processing fees, an increase of $0.8 million in costs of
Connectors with third-party applications, and an increase of $0.2 million in
allocated overhead costs.
Our gross margin for subscription revenue was 85% and 83% for the years ended
January 31, 2022 and 2021, respectively. The increase in gross margin during the
year ended January 31, 2022 was driven primarily by an increase in subscription
revenue that outpaced the related increase in personnel expenses. This was
partially offset by an increase in costs related to hosting our platform and
allocated overhead costs.
Cost of professional services revenue increased $12.8 million , or 49%, for the
year ended January 31, 2022 compared to the year ended January 31, 2021 . The
increase was primarily due to an increase of $8.6 million in employee-related
expenses, of which $1.7 million was related to share-based compensation expense,
an increase of $3.6 million in costs of outside services to supplement our
internal staff, and an increase of $0.3 million in both allocated overhead costs
and software-related costs.
Our gross margin for professional services revenue was 10% and 20% for the year
ended January 31, 2022 and 2021, respectively. The decrease in gross margin
during the year ended January 31, 2022 was primarily driven by increases in
personnel expenses and expenses related to third-party service providers to
supplement our internal staff that outpaced the related increase in professional
services revenue.
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Operating expenses
Research and development expenses
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Research and development $ 165,440 $ 118,722 $ 46,718 39 %
Percentage of total revenue 30 % 31 %
Research and development expenses increased $46.7 million , or 39%, for the year
ended January 31, 2022 compared to the year ended January 31, 2021 . The increase
was primarily due to an increase of $41.3 million in employee-related expenses
due to increased headcount, of which $16.1 million was related to share-based
compensation expense, and an increase of $5.7 million in software-related costs.
This was partially offset by a decrease of $0.1 million in both allocated
overhead costs and costs of outside services to supplement our internal staff.
Sales and marketing expenses
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Sales and marketing $ 329,751 $ 230,281 $ 99,470 43 %
Percentage of total revenue 60 % 60 %
Sales and marketing expenses increased $99.5 million , or 43%, for the year ended
January 31, 2022 compared to the year ended January 31, 2021 . The increase was
primarily due to an increase of $64.6 million in employee-related expenses due
to increased headcount, of which $14.4 million related to increased share-based
compensation expense, an increase of $24.1 million in brand awareness and demand
generation costs, an increase of $3.8 million in costs of outside services used
to supplement our internal staff, an increase of $2.9 million in
software-related costs, an increase of $2.4 million in amortization of
acquisition-related intangibles, and an increase of $2.2 million in allocated
overhead costs. This was partially offset by a decrease of $0.5 million in
amortization of capitalized software.
General and administrative expenses
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
General and administrative $ 109,204 $ 71,443 $ 37,761 53 %
Percentage of total revenue 20 % 19 %
General and administrative expenses increased $37.8 million , or 53%, for the
year ended January 31, 2022 compared to the year ended January 31, 2021 . The
increase was primarily due to an increase of $22.5 million in employee-related
expenses due to increased headcount, of which $8.5 million related to increased
share-based compensation expense, an increase of $9.4 million in legal fees,
which primarily related to a $10.0 million settlement for an indemnification
claim, an increase of $2.8 million in taxes, licenses, and insurance, an
increase of $2.2 million in costs of outside services used to supplement our
internal staff, an increase of $1.7 million in software-related costs, an
increase of $0.8 million in allocated overhead costs, an increase of $0.5
million in bad debt expense, and an increase of $0.2 million in amortization of
capitalized software. This was partially offset by a decrease of $2.2 million in
accounting, internal control, and tax-related costs, and a decrease of $0.1
million in bank charges.
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Interest income
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Interest income $ 48 $ 1,444 $ (1,396) (97) %
Percentage of total revenue - % - %
For the year ended January 31, 2022 compared to the year ended January 31, 2021 ,
the decrease in interest income of $1.4 million was driven by a lower monetary
value of cash and cash equivalents held in interest-bearing accounts and
instruments and the decline in interest rates year over year.
Other income (expense), net
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Other income (expense), net $ (813) $ 296 $ (1,109) *N/M
Percentage of total revenue - % - %
*N/M = Not meaningful
For the year ended January 31, 2022 compared to the year ended January 31, 2021 ,
the change in other income (expense), net was driven by a net increase of $1.8
million in other expense primarily due to a $1.2 million increase in unrealized
foreign currency loss and an impairment of an investment of $0.5 million . These
were offset by a net increase of $0.7 million in other income due to an
acquisition-related gain contingency that was resolved during the year ended
January 31, 2022 .
Income tax provision (benefit)
Year Ended January 31, Change
2022 2021 Amount %
(dollars in thousands)
Income tax provision (benefit) $ 296 $ (3,753) $ 4,049 N/M*
Percentage of total revenue - % (1) %
*N/M = Not meaningful
The income tax provision changed to an expense of
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Non-GAAP Financial Measures
In addition to our results determined in accordance with generally accepted accounting principles inthe United States ("GAAP"), we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial measures, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial measures, when taken collectively, may be helpful to investors because they provide consistency and comparability with past financial performance, and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results. The non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial measures presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Limitations of non-GAAP financial measures
Our non-GAAP financial measures have limitations as analytical tools and you
should not consider them in isolation or as a substitute for an analysis of our
results under GAAP. There are a number of limitations related to the use of
these non-GAAP financial measures versus their nearest GAAP equivalents. First,
free cash flow and calculated billings are not substitutes for net cash used in
operating activities and total revenue, respectively. Similarly, non-GAAP gross
profit and non-GAAP operating loss are not substitutes for gross profit and
operating loss, respectively. Second, other companies may calculate similar
non-GAAP financial measures differently or may use other measures as tools for
comparison. Additionally, the utility of free cash flow as a measure of our
financial performance and liquidity is further limited as it does not represent
the total increase or decrease in our cash balance for a given period.
Furthermore, as calculated billings are affected by a combination of factors,
including the timing of sales, the mix of monthly and annual subscriptions sold,
and the relative duration of subscriptions sold, and each of these elements has
unique characteristics in the relationship between calculated billings and total
revenue, our calculated billings activity is not closely correlated to revenue
except over longer periods of time.
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Non-GAAP gross profit and non-GAAP gross margin
We define non-GAAP gross profit as gross profit adjusted for share-based compensation expense, amortization of acquisition-related intangible assets, and one-time acquisition costs. Non-GAAP gross margin represents non-GAAP gross profit as a percentage of total revenue.
Year Ended
2022 2021 2020
(dollars in thousands)
Gross profit $ 434,359 $ 299,974 $ 217,982
Add:
Share-based compensation expense(1) 10,776 6,531 2,651
Amortization of acquisition-related intangible assets(2) 5,080
3,656 1,831
One-time acquisition costs - - 69
Non-GAAP gross profit $ 450,215 Gross margin 79 % 78 % 80 % Non-GAAP gross margin 82 % 80 % 82 % (1) Includes amortization related to share-based compensation expense that was capitalized in internal-use software and other assets in previous periods. (2) Consists entirely of amortization of intangible assets that were recorded as part of purchase accounting and contribute to revenue generation. The amortization of intangible assets related to acquisitions will recur in future periods until such intangible assets have been fully amortized.
Non-GAAP operating loss and non-GAAP operating margin
We define non-GAAP operating loss as loss from operations adjusted for
share-based compensation expense, amortization of acquisition-related intangible
assets, one-time acquisition costs, and litigation expenses and settlements
related to matters that are outside the ordinary course of business. Non-GAAP
operating margin represents non-GAAP operating loss as a percentage of total
revenue.
Year Ended January 31,
2022 2021 2020
(dollars in thousands)
Loss from operations $ (170,036) $ (120,472) $ (103,774)
Add:
Share-based compensation expense(1) 115,704 72,022 37,564
Amortization of acquisition-related intangible assets(2) 10,059
6,266 2,734
One-time acquisition costs 27 977 686
Litigation expenses and settlements(3) 10,000 - -
Non-GAAP operating loss $ (34,246)
Operating margin (31) % (31) % (38) %
Non-GAAP operating margin (6) % (11) % (23) %
(1) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software and other assets in previous periods.
(2) Consists entirely of amortization of intangible assets that were recorded
as part of purchase accounting and contribute to revenue generation. The
amortization of intangible assets related to acquisitions will recur in future
periods until such intangible assets have been fully amortized.
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(3) Relates to matters that are outside the ordinary course of our business.
Non-GAAP net loss
We define non-GAAP net loss as net loss adjusted for share-based compensation
expense, amortization of acquisition-related intangible assets, one-time
acquisition costs, litigation expenses and settlements related to matters that
are outside the ordinary course of our business, and non-recurring income tax
adjustments associated with mergers and acquisitions.
Year Ended January 31,
2022 2021 2020
(in thousands)
Net loss $ (171,097) $ (114,979) $ (95,940)
Add:
Share-based compensation expense(1) 115,704 72,022 37,564
Amortization of acquisition-related intangible assets(2) 10,059
6,266 2,734
One-time acquisition costs 27 977 686
Litigation expenses and settlements(3) 10,000 - -
Release of valuation allowance(4) - (4,014) -
Non-GAAP net loss $ (35,307) $ (39,728) $ (54,956)
(1) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software and other assets in previous periods.
(2) Consists entirely of amortization of intangible assets that were recorded
as part of purchase accounting and contribute to revenue generation. The
amortization of intangible assets related to acquisitions will recur in future
periods until such intangible assets have been fully amortized.
(3) Relates to matters that are outside the ordinary course of our business.
(4) Relates to a non-recurring income tax adjustment associated with the
Brandfolder acquisition.
Free cash flow
We define free cash flow as net cash provided by (used in) operating activities
less cash used for purchases of property and equipment, capitalized internal-use
software, and payments on finance lease obligations. We believe free cash flow
facilitates period-to-period comparisons of liquidity. We consider free cash
flow to be a key performance metric because it measures the amount of cash we
generate from our operations after our capital expenditures and payments on
finance lease obligations. We use free cash flow in conjunction with traditional
GAAP measures as part of our overall assessment of our liquidity, including the
preparation of our annual operating budget and quarterly forecasts, to evaluate
the effectiveness of our business strategies, and to communicate with our board
of directors concerning our liquidity.
Year Ended January 31,
2022 2021 2020
(in thousands)
Net cash used in operating activities $ (3,512) $ (15,648) $ (10,870)
Less:
Purchases of property and equipment (10,563) (4,176) (5,153)
Capitalized internal-use software (6,706) (7,608) (6,699)
Payments on principal of finance leases - (4,129) (4,167) Free cash flow$ (20,781) $ (31,561) $ (26,889) 65
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Calculated billings
We define calculated billings as total revenue plus the change in deferred revenue in the period. Because we recognize subscription revenue ratably over the subscription term, calculated billings can be used to measure our subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as an indicator of future subscription revenue. Because we generate most of our revenue from customers who are invoiced on an annual basis, and because we have a wide range of customers, from those who pay us less than$200 per year to those who pay us more than$3.0 million per year, we experience seasonality and variability that is tied to typical enterprise buying patterns and contract renewal dates of our largest customers. We expect that our billings trends will continue to vary in future periods based on the timing and size of new and renewal bookings, changes to the economic environment, and other factors. Year Ended January 31, 2022 2021 2020 (in thousands) Total revenue$ 550,832 $ 385,513 $ 270,882 Add: Deferred revenue (end of period) 334,662 223,997
158,809
Less:
Deferred revenue (beginning of period) 223,997 158,809 96,133 Calculated billings
$ 661,497 $ 450,701 $ 333,558
Liquidity and Capital Resources
As ofJanuary 31, 2022 , our principal sources of liquidity were cash and cash equivalents totaling$449.1 million , which were held for working capital purposes and were comprised primarily of money market funds. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and consolidated statements of cash flows. We expect to continue to incur operating losses and may incur negative cash flows from operations for the foreseeable future. We finance our operations primarily through payments received from customers for subscriptions and professional services, net proceeds received through sales of equity securities, option exercises, and contributions from our 2018 Employee Stock Purchase Plan ("ESPP"). A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of customer billings and payments in advance of revenue being recognized from the Company's contracts. As ofJanuary 31, 2022 , we had deferred revenue of$334.7 million , of which$332.3 million was recorded as a current liability and was expected to be recognized as revenue in the subsequent 12 months, provided all recognition criteria are met.
Our material cash requirements from known contractual and other obligations consist of the following:
Leases
We have non-cancelable operating leases that expire at various dates through 2029. As ofJanuary 31, 2022 , we had fixed minimum lease payments of$86.3 million , of which$18.4 million is due in the next twelve months. Refer to Note 12, Leases, to the consolidated financial statements contained within this Annual Report on Form 10-K for additional information on our operating leases.
Other contractual obligations
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In the ordinary course of business we enter into contracts with vendors for goods and services, some of which are non-cancelable. As ofJanuary 31, 2022 , we had contractual obligations of$179 million , of which$27.7 million is due in the next twelve months. These contractual obligations primarily consist of purchase commitments with our cloud-based hosting service providers. See Note 13, Commitments and Contingencies, to the consolidated financial statements contained within this Annual Report on Form 10-K for additional information on our commitments with our cloud-based hosting service providers. We believe our existing cash, cash equivalents, and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the introduction of new and enhanced product offerings, the continued market adoption of our product, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, and employee-related expenditures from expansion of our headcount. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, our ability to compete successfully could be reduced, and this could harm our results of operations.
Cash flows
The following table summarizes our cash flows for the periods indicated:
Year Ended January 31,
2022 2021
(in thousands)
Net cash used in operating activities $ (3,512) $ (15,648)
Net cash used in investing activities (18,300) (85,057)
Net cash provided by financing activities 30,341 25,793
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
(1,197) 471
Net increase (decrease) in cash, cash equivalents, and restricted
cash $ 7,332 $ (74,441)
Operating activities
Our largest sources of operating cash are cash collections from our customers
for subscription and professional services. Our primary uses of cash from
operating activities are for employee-related expenditures and sales and
marketing expenses. Historically, we have generated negative cash flows from
operating activities during most fiscal years, and have supplemented working
capital requirements through net proceeds from the sale of equity securities.
During the year ended January 31, 2022 , net cash used in operating activities
was $3.5 million , driven by our net loss of $171.1 million , adjusted for
non-cash charges of $196.3 million , and net cash outflows of $28.7 million
provided by changes in our operating assets and liabilities. Non-cash charges
primarily consisted of share-based compensation expense, amortization of
deferred commissions, depreciation and amortization, and non-cash operating
lease costs. Fluctuations in operating assets and liabilities included an
increase in deferred revenue of $110.7 million and an increase in accounts
receivable of $48.6 million , both due to an increase in billings. Additionally,
there was an increase in deferred commissions of $74.5 million , an increase in
accounts payable and accrued expenses of $20.5 million primarily due to the
timing of employee-related payments, an increase in prepaid expenses and other
current assets of $19.9 million , a decrease in operating lease liabilities of
$13.5 million , a decrease in other long-term liabilities of $3.9 million , and a
decrease in other long-term assets of $0.5 million .
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During the year endedJanuary 31, 2021 , net cash used in operating activities was$15.6 million , driven by our net loss of$115.0 million , adjusted for non-cash charges of$131.7 million , and net cash outflows of$32.4 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of share-based compensation expense, amortization of deferred commissions, depreciation and amortization, and non-cash operating lease costs. Fluctuations in operating assets and liabilities included an increase in deferred revenue of$60.5 million and an increase in accounts receivable of$43.1 million , both due to an increase in billings. Additionally, there was an increase in deferred commissions of$43.0 million due to increased customer sales, a decrease in operating lease liabilities of$7.7 million driven by lease payments and offset by slower office expansions due to COVID-19, an increase in accounts payable and accrued expenses of$6.4 million due to increase in overall purchasing activity and timing of when vendor invoices are received and paid, an increase in other long-term assets of$5.8 million , an increase in other long-term liabilities of$3.9 million , and an increase in prepaid expenses and other current assets of$3.7 million .
Investing activities
Net cash used in investing activities during the year endedJanuary 31, 2022 of$18.3 million consisted of purchases of property and equipment of$10.6 million , spend on capitalized internal-use software development of$6.7 million , and purchases of long-term investments of$1.0 million . Net cash used in investing activities during the year endedJanuary 31, 2021 of$85.1 million consisted of$125.1 million in payments for business acquisitions net of cash acquired for the purchase of Brandfolder and the release of the$1.0 million holdback related to theJanuary 2019 acquisition ofTernPro, Inc. , spend on capitalized internal-use software development of$7.6 million , and purchases of property and equipment of$4.2 million . This was offset by proceeds from early termination of short-term investments of$50.5 million and proceeds from the sale of property and equipment of$1.3 million .
Financing activities
Net cash provided by financing activities during the year endedJanuary 31, 2022 of$30.3 million was primarily due to$19.1 million in proceeds from the exercise of stock options and$17.4 million in proceeds from our ESPP, partially offset by taxes paid related to net share settlement of restricted stock units of$6.2 million . Net cash provided by financing activities during the year endedJanuary 31, 2021 of$25.8 million was primarily due to$17.4 million in proceeds from the exercise of stock options, and$14.8 million in proceeds from our ESPP, partially offset by principal payments on finance leases of$4.1 million , taxes paid related to net share settlement of restricted stock units of$2.2 million , and payments of deferred follow-on offering costs of$0.1 million .
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. An indemnification claim has been made to the Company related to litigation in which a former director and shareholder are parties. OnJanuary 29, 2021 ,Ryan Hinkle andInsight Venture Partners VII, L.P. and certain affiliates filed a complaint againstSmartsheet Inc. in theSuperior Court of Washington , King County, for the advancement of legal fees, costs, and expenses incurred related to this indemnification claim. During the three months endedJanuary 31, 2022 , we paid$10.0 million as part of an overall settlement of these matters, as described in Note 13, Commitments and Contingencies, in this Annual Report on Form 10-K. 68
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and operating expenses, and related disclosures. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations would be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Revenue recognition
We derive our revenue primarily from subscription services and professional services. Revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services, net of any sales taxes.
We determine revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to our cloud-based platform and involves a significant volume of transactions. The Company uses automated systems to process and record these transactions. Subscription revenue is recognized on a ratable basis over the subscription contract term, beginning on the date the access to our platform is provided, as no implementation work is required, if consideration we are entitled to receive is considered probable of collection. Subscription contracts generally have terms of one year or one month, are billed in advance, and are non-cancelable. The subscription arrangements do not allow the customer the contractual right to take possession of the platform; as such, the arrangements are considered to be service contracts.
Certain of our subscription contracts contain performance guarantees related to service continuity. To date, refunds related to such guarantees have been immaterial in all periods presented.
On occasion, we sell our subscriptions to third-party resellers. The price at
which we sell to the reseller is typically discounted, as compared to the price
at which we would sell to an end customer, in order to enable the reseller to
realize a margin on the eventual sale to the end customer. As our pricing to the
reseller is fixed, and we do not have visibility into the pricing provided by
the reseller to the end customer, the revenue is recorded net of any reseller
margin.
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Professional services revenue
Professional services revenue primarily includes revenue recognized from fees for consulting and training services. Our consulting services consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, monthly in arrears. Services revenue is recognized over time, as service hours are delivered. Smaller consulting engagements are on occasion provided for a fixed fee. These smaller consulting arrangements are typically of short duration (less than three months). In these cases, revenue is recognized over time, based on the proportion of hours of work performed, compared to the total hours expected to complete the engagement. Configuration and use case optimization services do not result in significant customization or modification of the software platform or user interface.
Training services are billed in advance, on a fixed-fee basis, and revenue is recognized after the training program is delivered, or after the customer's right to receive training services expires.
Associated out-of-pocket travel expenses related to the delivery of professional services are typically reimbursed by the customer. Out-of-pocket expense reimbursements are recognized as revenue at the point in time, or as, the distinct performance obligation to which they relate is delivered. Out-of-pocket expenses are recognized as cost of professional services as incurred.
Contracts with multiple performance obligations
Some of our contracts with customers contain multiple performance obligations. We account for individual performance obligations separately, as they have been determined to be distinct, i.e., the services are separately identifiable from other items in the arrangement and the customer can benefit from them on their own or with other resources that are readily available to the customer. The transaction price is allocated to the distinct performance obligations on a relative stand-alone selling price basis. Stand-alone selling prices are determined based on the prices at which we separately sell subscription, consulting, and training services, and based on our overall pricing objectives, taking into consideration market conditions, value of our contracts, the types of offerings sold, customer demographics, and other factors.
Deferred commissions
The majority of sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commission are paid on initial contracts and on any upsell contracts with a customer. No sales commissions are paid on customer renewals. Sales commissions and related payroll taxes and fringe benefits are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our customer contracts, expected customer life, the expected life of our technology and other factors. Amortization expense is included in sales and marketing expense in the accompanying statements of operations and comprehensive loss. We evaluate the period of benefit and test for impairment on a quarterly basis and whenever events or changes in circumstances occur that could impact the recoverability of these assets. While we do not anticipate any significant changes to the period of benefit, if a significant change did occur, it may result in a material impact to our amortization expense in a given year. Deferred commissions were$91.3 million and$60.5 million as ofJanuary 31, 2022 and 2021, respectively. Amortization expense for deferred commissions was$43.7 million ,$30.7 million , and$19.8 million for the years endedJanuary 31, 2022 , 2021, and 2020, respectively. No significant impairments of commissions assets were recorded during the years endedJanuary 31, 2022 , 2021, or 2020.
Share-based compensation
We measure and recognize compensation expense for all share-based awards granted
to employees and directors, based on the estimated fair value of the award on
the date of grant. Expense is recognized on a straight-line basis over the
vesting period of the award based on the estimated portion of the award that is
expected to vest.
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We use the Black-Scholes option pricing model to measure the fair value of stock option awards when they are granted. We make several estimates in determining share-based compensation expense and these estimates generally require significant analysis and judgment to develop. These assumptions and estimates are as follows: Expected term. The expected term of options represents the period that share-based awards are expected to be outstanding. We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company. Risk-free interest rate. The risk-free interest rate is based on the implied yield available at the time of the option grant in theU.S. Treasury securities at maturity with a term equivalent to the expected term of the option. Expected volatility. Expected volatility is based on an average volatility of stock prices for a group of publicly traded peer companies. In considering peer companies, we assess characteristics such as industry, state of development, size, and financial leverage. Dividend yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.
If any assumptions used in the Black-Scholes option pricing model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.
In addition to the assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for awards. Our forfeiture rate is derived from historical employee termination behavior. If the actual number of forfeitures differs from these estimates, additional adjustments to compensation expense will be required. Total share-based compensation expense was$114.9 million ,$72.0 million , and$37.6 million for the years endedJanuary 31, 2022 , 2021, and 2020, respectively. As ofJanuary 31, 2022 , there was a total of$419.0 million of unrecognized share-based compensation expense, which is expected to be recognized over a weighted-average period of 3.2 years.
Recent accounting pronouncements
For further information on recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included in this Annual Report on Form 10-K.
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