SMARTSHEET INC. 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 endedJanuary 31, 2021 . This 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 Quarterly Report on Form 10-Q. Our fiscal year endsJanuary 31 . OverviewSmartsheet 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 four subscription levels: Individual, Business, Enterprise, and Premier, the pricing for which varies by the capabilities provided. Customers can also purchase Connectors, which provide data integration and automation to third-party applications. We also offer Dynamic View, Data Uploader, Control Center and Accelerators, which enable customers to implement solutions for a specific use case or for large scale projects, initiatives, or processes. We acquired 10,000ft inMay 2019 which augmented our product portfolio by providing resource allocation and planning. We acquiredBrandfolder, Inc. ("Brandfolder") inSeptember 2020 , which provides a centralized platform to organize, discover, control, distribute, and measure all forms of digital content. Combining Brandfolder capabilities withSmartsheet will create dynamic solutions that manage workflows around content and collaboration. 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 InDecember 2019 , a novel coronavirus ("COVID-19") was first reported. InJanuary 2020 , theWorld Health Organization ("WHO") declared COVID-19 a Public Health Emergency of International Concern, and inMarch 2020 , theWHO characterized it as a pandemic. 20 -------------------------------------------------------------------------------- Table of Contents In response to reports of COVID-19, our executive leadership team and the human resources leadership team began an ongoing monitoring of the COVID-19 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 moved all in-person customer-facing events to be virtual. As ofApril 30, 2021 , all of our offices remain subject to restrictions which limit levels of allowed in-person contact, with restrictions aligned with guidance relevant to the office's specific geographic location. During the three months endedApril 30, 2021 , 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 COVID-19, our existing customers may be hesitant to expand their use ofSmartsheet and in certain industries may be more likely to churn. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our partners and employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. As we continue to operate in the current environment, modifications to our usual circumstances include modifications to employee travel, employee work locations, and marketing events, among others. We expect that our customers and potential customers may take actions to reduce operating expenses and moderate cash flows, including by delaying some purchase decisions and requesting extended billing and payment terms. We will continue to actively monitor the 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. 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.
As of
2021 2020
Average annualized contract value per domain-based customer
125 % 132 %
Customers with annualized contract values ("ACV") of
12,655 9,576
Customers with ACV of $50 thousand or more 1,674 1,040
Customers with ACV of $100 thousand or more 661 391
Average ACV per domain-based customer
We use 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
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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 term of
the subscription period 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
Professional services revenue primarily includes 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,
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, amortization of
acquisition-related intangibles, allocated overhead, software-related costs,
payment processing fees, costs of outside services to supplement our internal
teams, costs of Connectors between Smartsheet and third-party applications, and
travel-related expenses.
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 expenses, 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 invest in technology innovation, we expect our gross margin to
moderately decline.
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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, costs
of general marketing and promotional activities, allocated overhead,
software-related costs, travel-related expenses, amortization of
acquisition-related intangibles, and costs of outside services used to
supplement our internal staff. 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 and
expect more of our future revenue to come from our inside and direct sales
models, rather than through digital self-service sales. We expect sales and
marketing costs to gradually decrease over the long-term as a percentage of
total revenue due to economies of scale.
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
allocated overhead, software-related costs, costs of outside services to
supplement our internal staff, certain tax, license and insurance-related
expenses, accounting and legal fees, bad debt expense, bank charges, and
travel-related expenses. 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, consistent with the three
months ended April 30, 2021 , we expect our interest income in the near term to
remain insignificant.
Other income (expense), net
Other income (expense), net primarily consists of foreign exchange gains and
losses, interest expense, and other non-operating income and expenses.
Income tax provision
The income tax provision consists primarily of income taxes in foreign
jurisdictions and state income taxes. We maintain a valuation allowance on our
U.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.
Results of Operations
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Table of Contents The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods:
Three Months Ended April 30,
2021 2020
(in thousands)
Revenue
Subscription $ 108,013 $ 77,163
Professional services 9,069 8,324
Total revenue 117,082 85,487
Cost of revenue
Subscription(1) 18,563 11,781
Professional services(1) 8,009 6,660
Total cost of revenue 26,572 18,441
Gross profit 90,510 67,046
Operating expenses
Research and development(1) 36,474 25,991
Sales and marketing(1) 71,379 54,783
General and administrative(1) 21,018 15,096
Total operating expenses 128,871 95,870
Loss from operations (38,361) (28,824)
Interest income 11 1,327
Other income (expense), net 1,327 (214)
Loss before income tax provision (37,023) (27,711)
Income tax provision 49
73
Net loss and comprehensive loss$ (37,072) $
(27,784)
(1) Amounts include share-based compensation expense as follows:
Three Months Ended April 30,
2021 2020
(in thousands)
Cost of subscription revenue $ 1,495 $ 895
Cost of professional services revenue 673 433
Research and development 8,307 5,128
Sales and marketing 8,656 5,105
General and administrative 4,728 2,856
Total share-based compensation expense* $ 23,859 $ 14,417
*Includes amortization related to share-based compensation that was capitalized in internal-use
software and other assets in previous periods.
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Three Months Ended April 30,
2021 2020
Revenue
Subscription 92 % 90 %
Professional services 8 10
Total revenue 100 100
Cost of revenue
Subscription 16 14
Professional services 7 8
Total cost of revenue 23 22
Gross profit 77 78
Operating expenses
Research and development 31 30
Sales and marketing 61 64
General and administrative 18 18
Total operating expenses 110 112
Loss from operations (33) (34)
Interest income - 2
Other income (expense), net 1 -
Loss before income tax provision (32) (32)
Income tax provision - -
Net loss and comprehensive loss (32) % (33) %
Note: Certain amounts may not sum due to rounding
Comparison of the three months endedApril 30, 2021 and 2020 Revenue Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) Revenue Subscription$ 108,013 $ 77,163 $ 30,850 40 % Professional services 9,069 8,324 745 9 % Total revenue$ 117,082 $ 85,487 $ 31,595 37 % Percentage of total revenue Subscription revenue 92 % 90 % Professional services revenue 8 % 10 % During the three months endedApril 30, 2021 , as compared to the three months endedApril 30, 2020 , total subscription revenue increased by$30.9 million , or 40%. The increase in revenue between periods was driven by increased sales of user-based subscription plans, which contributed$18.3 million of the increase, followed by sales of pre-configured capabilities, which contributed$12.6 million of the increase. The increase in professional services revenue was primarily driven by increasing demand for our consulting and training services. 25 -------------------------------------------------------------------------------- Table of Contents Cost of revenue, gross profit, and gross margin Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) Cost of revenue Subscription$ 18,563 $ 11,781 $ 6,782 58 % Professional services 8,009 6,660 1,349 20 % Total cost of revenue$ 26,572 $ 18,441 $ 8,131 44 % Gross profit$ 90,510 $ 67,046 $ 23,464 35 % Gross margin Subscription 83 % 85 % Professional services 12 % 20 % Total gross margin 77 % 78 % Cost of subscription revenue increased$6.8 million , or 58%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an increase of$2.3 million in employee-related expenses due to increased headcount, of which$0.5 million was related to share-based compensation expense, an increase of$1.6 million in hosting fees, an increase of$0.8 million in costs of outside services to supplement our internal staff, an increase of$0.7 million in amortization of acquisition-related intangibles, an increase of$0.4 million each in software-related costs, allocated overhead, and costs of Connectors with third-party applications, and an increase of$0.3 million in credit card processing fees. This was partially offset by a decrease of$0.1 million in travel-related costs. Our gross margin for subscription revenue was 83% and 85% for the three months endedApril 30, 2021 and 2020, respectively. The decrease in gross margin during the three months endedApril 30, 2021 , was driven primarily by increases in costs related to technical support services, an increase in the amortization of intangible assets due to the Brandfolder acquisition, and costs related to hosting our platform. Cost of professional services increased$1.3 million , or 20%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an increase of$1.2 million in employee-related expenses, of which$0.2 million was related to share-based compensation expense, and an increase of$0.3 million in costs of outside services to supplement our internal staff. This was partially offset by a decrease of$0.1 million in both billable expenses and travel-related costs. Our gross margin for professional services was 12% and 20% for the three months endedApril 30, 2021 and 2020, respectively. The decrease in gross margin during the three months endedApril 30, 2021 was driven primarily by increases in personnel expenses and costs of outside personnel to supplement our staff, partially offset by decreases in billable expenses and travel-related costs. Research and development expenses Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) Research and development$ 36,474 $ 25,991 $ 10,483 40 % Percentage of total revenue 31 % 30 % Research and development expenses increased$10.5 million , or 40%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an increase of$10.3 million in employee-related expenses due to increased headcount, of which$3.2 million was related to share-based compensation expense, and an increase of$1.0 million in software-related costs. This was partially offset by a decrease of$0.8 million in costs of outside services to supplement our internal staff. 26 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) Sales and marketing$ 71,379 $ 54,783 $ 16,596 30 % Percentage of total revenue 61 % 64 % Sales and marketing expenses increased$16.6 million , or 30%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an increase of$16.0 million in employee-related expenses due to increased headcount, of which$3.5 million related to increased share-based compensation expense, an increase of$1.0 million in amortization of acquisition-related intangibles, an increase of$0.4 million in allocated overhead costs, an increase of$0.4 million in software-related costs, and an increase of$0.2 million in costs of outside services used to supplement our internal staff. This was partially offset by a decrease of$1.2 million in travel-related costs and a decrease of$0.2 million in costs related to general marketing and advertising costs. General and administrative expenses Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) General and administrative$ 21,018 $ 15,096 $ 5,922 39 % Percentage of total revenue 18 % 18 % General and administrative expenses increased$5.9 million , or 39%, for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 . The increase was primarily due to an increase of$5.7 million in employee-related expenses due to increased headcount, of which$1.9 million related to increased share-based compensation expense, an increase of$0.7 million in taxes, licenses and insurance, an increase of$0.5 million in bad debt expense, an increase of$0.3 million in allocated overhead, and an increase of$0.2 million in costs of other outside services used to supplement our internal staff. This was partially offset by a decrease of$1.0 million in accounting, internal control, and tax related costs, a decrease of$0.3 million in legal fees, and a decrease of$0.1 million in bank charges. Interest income Three Months Ended April 30, Change 2021 2020 Amount % (dollars in thousands) Interest income$ 11 $ 1,327 $ (1,316) (99) % Percentage of total revenue - % 2 % For the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 , the decrease in interest income of$1.3 million was driven by a lower monetary value of cash and cash equivalents held in interest-bearing accounts and instruments. 27 --------------------------------------------------------------------------------
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Other income (expense), net
Three Months Ended April 30, Change
2021 2020 Amount %
(dollars in thousands)
Other income (expense), net $ 1,327 $ (214) $ 1,541 *N/M
Percentage of total revenue 1 % - %
*N/M = Not meaningful
For the three months ended April 30, 2021 compared to the three months ended
April 30, 2020 , the change in other income (expense), net was driven by an
increase in other income of $1.0 million due to an acquisition-related gain
contingency that was resolved during the three months ended April 30, 2021 . In
addition, $0.4 million of the increase was due to a change from unrealized
foreign currency loss recorded during the three months ended April 30, 2020 to
unrealized foreign currency gain recorded during the three months ended
April 30, 2021 . The remaining $0.1 million was related to a decrease in interest
expense.
Non-GAAP Financial Measures
In addition to our results determined in accordance with generally accepted
accounting principles in the 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.
Non-GAAP gross profit and non-GAAP gross margin
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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.
Three Months Ended April 30,
2021 2020
(dollars in thousands)
Gross profit $ 90,510 $ 67,046 Add:
Share-based compensation expense* 2,168 1,328 Amortization of acquisition-related intangible assets 1,270 555 Non-GAAP gross profit$ 93,948 $ 68,929 Gross margin 77 % 78 % Non-GAAP gross margin 80 % 81 %
*Includes amortization related to share-based compensation that was capitalized in internal-use software and other assets in previous periods.
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, and one-time acquisition costs. Non-GAAP operating margin represents
non-GAAP operating loss as a percentage of total revenue.
Three Months Ended April 30,
2021 2020
(dollars in thousands)
Loss from operations $ (38,361) $ (28,824) Add:
Share-based compensation expense* 23,859 14,417 Amortization of acquisition-related intangible assets 2,517 845 One-time acquisition costs 17 8 Non-GAAP operating loss$ (11,968) $ (13,554) Operating margin (33) % (34) % Non-GAAP operating margin (10) % (16) %
*Includes amortization related to share-based compensation that was capitalized in internal-use software and other assets in previous periods.
Non-GAAP net loss
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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, and non-recurring income tax adjustments associated with
mergers and acquisitions.
Three Months Ended April 30,
2021 2020
(in thousands)
Net loss $ (37,072) $ (27,784)
Add:
Share-based compensation expense* 23,859 14,417
Amortization of acquisition-related intangible assets 2,517 845
One-time acquisition costs 17 8
Non-GAAP net loss $ (10,679) $ (12,514)
*Includes amortization related to share-based compensation that was capitalized in internal-use software
and other assets in previous periods.
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 the overall assessment of our liquidity, including the
preparation of our annual operating budget and quarterly forecasts, to evaluate
the effectiveness of the Company's business strategies, and to communicate with
our board of directors concerning our liquidity.
Three Months Ended April 30,
2021 2020
(in thousands)
Net cash used in operating activities $ (2,961) $ (24,285)
Less:
Purchases of property and equipment (3,220) (1,018)
Capitalized internal-use software development costs (2,017) (2,244)
Payments on principal of finance leases - (680)
Free cash flow $ (8,198) $ (28,227)
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.
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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 $2.5 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
inclusive of those related to COVID-19, and other factors.
Three Months Ended April 30,
2021 2020
(in thousands)
Total revenue $ 117,082 $ 85,487
Add:
Deferred revenue (end of period) 239,667 163,214
Less:
Deferred revenue (beginning of period) 223,997 158,809 Calculated billings$ 132,752 $ 89,892 Liquidity and Capital Resources As ofApril 30, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$439.7 million , which were held for working capital purposes. Our cash equivalents were comprised primarily of money market funds. We have historically generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. We have financed our operations primarily through payments received from customers for subscriptions and professional services, net proceeds received through sales of equity securities, option exercises, contributions from our 2018 Employee Stock Purchase Plan ("ESPP"), finance leases, and interest income. We believe our existing cash and 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 timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our product. 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 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. 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 balance sheet as a liability. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As ofApril 30, 2021 , we had deferred revenue of$239.7 million , of which$238.7 million was recorded as a current liability and was expected to be recognized as revenue in the subsequent 12 months, provided all recognition criteria are met. 31 -------------------------------------------------------------------------------- Table of Contents Cash flows The following table summarizes our cash flows for the periods indicated: Three Months Ended April 30, 2021 2020 Net cash used in operating activities$ (2,961) $ (24,285) Net cash provided by (used in) investing activities (5,237) 47,270 Net cash provided by financing activities 5,327 5,373
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
447 (249)
Net increase (decrease) in cash, cash equivalents, and restricted
cash $ (2,424) $ 28,109
Operating activities
Our largest sources of operating cash are cash collections from our customers
for sales of subscriptions 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 three months ended April 30, 2021 , net cash used in operating
activities was $3.0 million , driven by our net loss of $37.1 million , adjusted
for non-cash charges of $40.9 million , and net cash outflows of $6.8 million due
to changes in our operating assets and liabilities. Non-cash charges primarily
consisted of share-based compensation, amortization of deferred commission
costs, non-cash operating lease costs, amortization of intangible assets, and
depreciation of property and equipment. Fluctuations in operating assets and
liabilities included an increase in deferred revenue of $15.7 million , an
increase in deferred commissions of $15.3 million , a decrease in accounts
payable and accrued expenses of $14.0 million , a decrease in accounts receivable
of $13.4 million , an increase in prepaid expenses and other current assets of
$3.6 million , a decrease in operating lease liabilities of $3.0 million , and a
decrease in other long-term assets of $0.2 million .
During the three months ended April 30, 2020 , net cash used in operating
activities was $24.3 million , driven by our net loss of $27.8 million , adjusted
for non-cash charges of $27.8 million , and net cash outflows of $24.3 million
due to changes in our operating assets and liabilities. Non-cash charges
primarily consisted of share-based compensation, amortization of deferred
commission costs, depreciation of property and equipment, non-cash operating
lease costs, and amortization of intangible assets. Fluctuations in operating
assets and liabilities included a decrease in accounts payable and accrued
expenses of $23.7 million , an increase in deferred commissions of $8.3 million ,
a decrease in accounts receivable of $7.4 million , an increase in deferred
revenue of $4.4 million , a decrease in operating lease liabilities of $2.6
million , a net increase in prepaid expenses and other current assets of $2.2
million , an increase of $1.5 million in long-term liabilities, and an increase
in other long-term assets of $0.8 million .
Investing activities
Net cash used in investing activities during the three months ended April 30,
2021 of $5.2 million consisted of purchases of property and equipment of $3.2
million and spend on capitalized internal-use software development of $2.0
million .
Net cash provided from investing activities during the three months ended April
30, 2020 of $47.3 million consisted of $50.5 million in proceeds from the early
termination of short-term investments, partially offset by spend on capitalized
internal-use software development of $2.2 million , and purchases of property and
equipment of $1.0 million .
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Financing activities
Net cash provided by financing activities during the three months ended
April 30, 2021 of $5.3 million was primarily due to $4.7 million in proceeds
from our ESPP and $3.4 million in proceeds from the exercise of stock options.
These proceeds were partially offset by taxes paid related to net share
settlement of restricted stock units of $2.8 million .
Net cash provided by financing activities during the three months ended April
30, 2020 of $5.4 million was primarily due to $3.6 million in proceeds from our
ESPP, and $3.5 million in proceeds from the exercise of stock options. These
proceeds were partially offset by taxes paid related to net share settlement of
restricted stock units of $1.0 million , payments of principal on finance leases
of $0.7 million , and payments of deferred follow-on offering costs of $0.1
million .
Obligations and Other Commitments
As of April 30, 2021 , our principal obligations consisted of obligations
outstanding under non-cancelable operating leases that expire at various dates
through fiscal year 2030. See Note 11, Leases, to the condensed consolidated
financial statements contained within this Quarterly Report on Form 10-Q for
additional information on our operating leases, including changes to our
principal lease commitments compared to those discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the fiscal year ended January 31,
2021 .
Our non-lease contractual commitments consist of obligations under our
commitment with a cloud-based hosting service provider and non-cancelable
purchase commitments. There have been no material changes to our non-lease
contractual commitments compared to those discussed in Note 13 Commitments and
Contingencies, of our Annual Report on Form 10-K for the fiscal year
ended January 31, 2021 .
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. On January
29, 2021 , Ryan Hinkle and Insight Venture Partners VII, L.P. and certain
affiliates filed a complaint against Smartsheet Inc. in the Superior Court of
Washington , King County, for the advancement of legal fees, costs, and expenses
incurred related to this indemnification claim. At this time, the Company cannot
reasonably estimate the probability or magnitude of any alleged indemnification
claim.
Off-Balance Sheet Arrangements
As of April 30, 2021 , we did not have any relationships with organizations or
financial partnerships, such as structured finance or special purpose entities
that would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with
GAAP. In the preparation of these condensed consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, expenses, and related disclosures. To
the extent that there are material differences between these estimates and
actual results, our financial condition or results of operations would be
affected. We base our estimates on past experience and other assumptions that we
believe are reasonable under the circumstances, and we evaluate these estimates
on an ongoing basis. We refer to accounting estimates of this type as critical
accounting policies and estimates.
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The Company's significant accounting policies are discussed in Note 2, Summary
of Significant Accounting Policies, in our Annual Report on Form 10-K for the
year ended January 31, 2021 . There have been no significant changes to these
policies during the three months ended April 30, 2021 except as described in
Note 2, Summary of Significant Accounting Policies, in this Quarterly Report on
Form 10-Q.
Recent Accounting Pronouncements
For further information on our recently adopted accounting pronouncements, refer
to Note 2, Summary of Significant Accounting Policies, in the condensed
consolidated financial statements contained within this Quarterly Report on Form
10-Q.
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