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OFFON

SMARTSHEET INC.

(SMAR)
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SMARTSHEET : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

09/08/2021 | 04:10pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the year ended
January 31, 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 ends January 31.
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 using Smartsheet within minutes. We offer four subscription levels
to new customers: 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 premium applications such as Dynamic View, Data
Shuttle, Control Center, WorkApps, and Bridge, among others, which enable
customers to implement solutions for a specific use case or for large scale
projects, initiatives, or processes. These capability-based products can also be
purchased in bundles called Smartsheet Advance. We acquired 10,000ft in May 2019
which augmented our product portfolio by providing resource allocation and
planning. We acquired Brandfolder, Inc. ("Brandfolder") in September 2020, which
provides a centralized platform to organize, discover, control, distribute, and
measure all forms of digital content. Combining Brandfolder capabilities with
Smartsheet 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
In December 2019, a novel coronavirus ("COVID-19") was first reported. In
January 2020, the World Health Organization ("WHO") declared COVID-19 a Public
Health Emergency of International Concern, and in March 2020, the WHO
characterized it as a pandemic.
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In response to reports of COVID-19, our executive leadership team and human
resources leadership team began an ongoing monitoring of the COVID-19 situation.
Beginning in early February 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. By mid-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 of July 31, 2021, our offices and global
workforce remain subject to restrictions which limit levels of allowed in-person
contact, with restrictions aligned with guidance relevant to each office's
specific geographic location.
During the six months ended July 31, 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 the
COVID-19 pandemic, our existing customers may be hesitant to expand their use of
Smartsheet and in certain industries may be more likely to churn.
The broader implications of the COVID-19 pandemic on our business, operating
results, and overall financial performance remain uncertain and depend on
various indicators, including vaccine availability and distribution, emergence
and prevalence of variants (including the ongoing impact of the Delta variant),
duration and severity of spread in global communities, 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. We expect that our customers and potential customers in
some verticals 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 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.
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 July 31,

                                                                        2021              2020

Average annualized contract value per domain-based customer $ 5,915$ 4,156 Dollar-based net retention rate for all customers (trailing 12 months)

                                                                   128  %            128  %

Customers with annualized contract values ("ACV") of $5 thousand or more

                                                                   13,420            10,049
Customers with ACV of $50 thousand or more                              1,856             1,131
Customers with ACV of $100 thousand or more                               748               433


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
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, 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 costs, 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 and
six months ended July 31, 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 July 31,                 Six Months Ended July 31,
                                                         2021                  2020                 2021                  2020

                                                                                   (in thousands)
Revenue
Subscription                                       $      121,110$  83,622$      229,123$ 160,785
Professional services                                      10,626              7,600                  19,695             15,924
Total revenue                                             131,736             91,222                 248,818            176,709
Cost of revenue
Subscription(1)                                            18,339             12,696                  36,902             24,477
Professional services(1)                                    9,127              6,322                  17,136             12,982
Total cost of revenue                                      27,466             19,018                  54,038             37,459
Gross profit                                              104,270             72,204                 194,780            139,250
Operating expenses
Research and development(1)                                39,079             28,089                  75,553             54,080
Sales and marketing(1)                                     77,120             53,779                 148,499            108,562
General and administrative(1)                              31,621             17,046                  52,639             32,142
Total operating expenses                                  147,820             98,914                 276,691            194,784
Loss from operations                                      (43,550)           (26,710)                (81,911)           (55,534)
Interest income                                                12                 92                      23              1,419
Other income (expense), net                                  (564)               134                     763                (80)
Loss before income tax provision                          (44,102)           (26,484)                (81,125)           (54,195)
Income tax provision                                           66                 75                     115                148
Net loss and comprehensive loss                    $      (44,168)

$ (26,559)$ (81,240)$ (54,343)

(1) Amounts include share-based compensation expense as follows:

                                                Three Months Ended July 31,              Six Months Ended July 31,
                                                  2021                2020                 2021                2020

                                                                           (in thousands)
Cost of subscription revenue                 $     1,602$   1,113$       3,097$  2,008
Cost of professional services revenue                941                566                  1,614               999
Research and development                          10,024              6,199                 18,331            11,327
Sales and marketing                               10,315              6,738                 18,971            11,844
General and administrative                         5,751              3,544                 10,479             6,400

Total share-based compensation expense* $ 28,633$ 18,160

          $      52,492$ 32,578
*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 July 31,                 Six Months Ended July 31,
                                                  2021                  2020                 2021                 2020
Revenue
Subscription                                           92  %                92  %                92  %                91  %
Professional services                                   8                    8                    8                    9
Total revenue                                         100                  100                  100                  100
Cost of revenue
Subscription                                           14                   14                   15                   14
Professional services                                   7                    7                    7                    7
Total cost of revenue                                  21                   21                   22                   21
Gross profit                                           79                   79                   78                   79
Operating expenses
Research and development                               30                   31                   30                   31
Sales and marketing                                    59                   59                   60                   61
General and administrative                             24                   19                   21                   18
Total operating expenses                              112                  108                  111                  110
Loss from operations                                  (33)                 (29)                 (33)                 (31)
Interest income                                         -                    -                    -                    1
Other income (expense), net                             -                    -                    -                    -
Loss before income tax provision                      (33)                 (29)                 (33)                 (31)
Income tax provision                                    -                    -                    -                    -
Net loss and comprehensive loss                       (34) %               (29) %               (33) %               (31) %

Note: Certain amounts may not sum due to rounding



Comparison of the three months ended July 31, 2021 and 2020
Revenue
                                       Three Months Ended July 31,                  Change
                                       2021                      2020          Amount         %

                                                      (dollars in thousands)
Revenue
Subscription                    $      121,110$ 83,622$ 37,488        45  %
Professional services                   10,626                   7,600          3,026        40  %
Total revenue                   $      131,736$ 91,222$ 40,514        44  %
Percentage of total revenue
Subscription revenue                        92   %                  92  %
Professional services revenue                8   %                   8  %


During the three months ended July 31, 2021, as compared to the three months
ended July 31, 2020, total subscription revenue increased by $37.5 million, or
45%. The increase in revenue between periods was driven by increased sales of
user-based subscription plans, which contributed $22.6 million of the increase,
followed by sales of pre-configured capabilities, which contributed $14.9
million of the increase.
The increase in professional services revenue was primarily driven by increasing
demand for our consulting and training services.
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Cost of revenue, gross profit, and gross margin
                               Three Months Ended July 31,                  Change
                               2021                      2020          Amount         %

                                              (dollars in thousands)
Cost of revenue
Subscription            $       18,339$ 12,696$  5,643        44  %
Professional services            9,127                   6,322          2,805        44  %
Total cost of revenue   $       27,466$ 19,018$  8,448        44  %
Gross profit            $      104,270$ 72,204$ 32,066        44  %
Gross margin
Subscription                        85   %                  85  %
Professional services               14   %                  17  %
Total gross margin                  79   %                  79  %


Cost of subscription revenue increased $5.6 million, or 44%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase of $1.9 million in hosting fees, an
increase of $1.2 million in employee-related expenses due to increased
headcount, of which $0.4 million was related to share-based compensation
expense, an increase of $0.7 million in amortization of acquisition-related
intangibles, an increase of $0.5 million in costs of outside services to
supplement our internal staff, an increase of $0.4 million in software-related
costs, an increase of $0.3 million in allocated overhead, and an increase of
$0.2 million each in costs of Connectors with third-party applications, costs
related to technical support services, and credit card processing fees.
Our gross margin for subscription revenue remained consistent for the three
months ended July 31, 2021 and 2020 at 85%. This was primarily due to increases
in costs related to hosting our platform, personnel expenses, and costs related
to technical support services, which were offset by a decrease in costs related
to the depreciation of data center equipment and an increase in subscription
revenue.
Cost of professional services increased $2.8 million, or 44%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase of $2.0 million in employee-related
expenses, of which $0.4 million was related to share-based compensation expense,
an increase of $0.6 million in costs of outside services to supplement our
internal staff, and an increase of $0.1 million each in allocated overhead and
software-related costs.
Our gross margin for professional services was 14% and 17% for the three months
ended July 31, 2021 and 2020, respectively. The decrease in gross margin during
the three months ended July 31, 2021 was driven primarily by an increased
utilization of third-party service providers to supplement our internal staff in
delivering revenue-generating consulting arrangements.
Research and development expenses
                                     Three Months Ended July 31,                  Change
                                    2021                       2020          Amount         %

                                                    (dollars in thousands)
Research and development      $      39,079$ 28,089$ 10,990        39  %
Percentage of total revenue              30   %                   31  %


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Research and development expenses increased $11.0 million, or 39%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase of $9.7 million in employee-related
expenses due to increased headcount, of which $3.8 million was related to
share-based compensation expense, and an increase of $1.5 million in
software-related costs. This was partially offset by a decrease of $0.1 million
each in costs of outside services to supplement our internal staff and allocated
overhead costs.
Sales and marketing expenses
                                     Three Months Ended July 31,                  Change
                                    2021                       2020          Amount         %

                                                    (dollars in thousands)
Sales and marketing           $      77,120$ 53,779$ 23,341        43  %
Percentage of total revenue              59   %                   59  %


Sales and marketing expenses increased $23.3 million, or 43%, for the three
months ended July 31, 2021 compared to the three months ended July 31, 2020. The
increase was primarily due to an increase of $14.1 million in employee-related
expenses due to increased headcount, of which $3.4 million related to increased
share-based compensation expense, an increase of $6.6 million in costs related
to general marketing and advertising costs, an increase of $1.0 million in
amortization of acquisition-related intangibles, an increase of $0.7 million in
software-related costs, and an increase of $0.3 million each in allocated
overhead costs, costs of outside services used to supplement our internal staff,
and travel-related costs.
General and administrative expenses
                                     Three Months Ended July 31,                  Change
                                    2021                       2020          Amount         %

                                                    (dollars in thousands)
General and administrative    $      31,621$ 17,046$ 14,575        86  %
Percentage of total revenue              24   %                   19  %


General and administrative expenses increased $14.6 million, or 86%, for the
three months ended July 31, 2021 compared to the three months ended July 31,
2020. This was driven by a $7.8 million increase in legal costs, which primarily
related to a $7.3 million accrual for an indemnification claim, an increase of
$5.4 million in employee-related expenses due to increased headcount, of which
$2.2 million related to increased share-based compensation expense, an increase
of $0.6 million each in software-related costs and costs of outside services to
supplement our internal staff, an increase of $0.3 million in allocated overhead
costs, an increase of $0.2 million in bad debt expense, and an increase of $0.2
million in taxes, licenses and insurance. This was partially offset by a
decrease of $0.6 million in accounting, internal control, and tax-related costs.
Interest income
                                       Three Months Ended July 31,                   Change
                                    2021                             2020       Amount        %

                                                     (dollars in thousands)
Interest income               $         12                          $ 92$  (80)      (87) %
Percentage of total revenue              -    %                        -  %

For the three months ended July 31, 2021 compared to the three months ended July 31, 2020, the decrease in interest income of $0.1 million was driven by a lower monetary value of cash and cash equivalents held in interest-bearing accounts and instruments.

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Other income (expense), net
                                       Three Months Ended July 31,                   Change
                                     2021                            2020       Amount       %

                                                    (dollars in thousands)
Other income (expense), net   $         (564)                      $ 134$ (698)       *N/M
Percentage of total revenue                -    %                      -  %
*N/M = Not meaningful


For the three months ended July 31, 2021 compared to the three months ended
July 31, 2020, the change in other income (expense), net was driven by $0.7
million decrease due to a change from unrealized foreign currency gain recorded
during the three months ended July 31, 2020 to unrealized foreign currency loss
recorded during the three months ended July 31, 2021.
Comparison of the six months ended July 31, 2021 and 2020
Revenue
                                      Six Months Ended July 31,                 Change
                                      2021                   2020          Amount         %

                                                    (dollars in thousands)
Revenue
Subscription                    $    229,123$ 160,785$ 68,338        43  %
Professional services                 19,695                15,924          3,771        24  %
Total revenue                   $    248,818$ 176,709$ 72,109        41  %
Percentage of total revenue
Subscription revenue                      92   %                91  %
Professional services revenue              8   %                 9  %


During the six months ended July 31, 2021, as compared to the six months ended
July 31, 2020, total subscription revenue increased by $68.3 million, or 43%.
The increase in revenue between periods was driven by increased sales of
user-based subscription plans, which contributed $40.8 million of the increase,
followed by sales of pre-configured capabilities, which contributed $27.5
million of the increase.
The increase in professional services revenue was primarily driven by increasing
demand for our consulting and training services.
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Cost of revenue, gross profit, and gross margin
                              Six Months Ended July 31,                 Change
                              2021                   2020          Amount         %

                                            (dollars in thousands)
Cost of revenue
Subscription            $     36,902$  24,477$ 12,425        51  %
Professional services         17,136                12,982          4,154        32  %
Total cost of revenue   $     54,038$  37,459$ 16,579        44  %
Gross profit            $    194,780$ 139,250$ 55,530        40  %
Gross margin
Subscription                      84   %                85  %
Professional services             13   %                18  %
Total gross margin                78   %                79  %


Cost of subscription revenue increased $12.4 million, or 51%, for the six months
ended July 31, 2021 compared to the six months ended July 31, 2020. The increase
was primarily due to an increase of $3.5 million each in hosting fees and
employee-related expenses due to increased headcount, of which $0.9 million was
related to share-based compensation expense, an increase of $1.4 million in
amortization of acquisition-related intangibles, an increase of $1.3 million in
costs of outside services to supplement our internal staff, an increase of $0.8
million each in software-related costs and allocated overhead costs, an increase
of $0.6 million in costs of Connectors with third-party applications, an
increase of $0.4 million in credit card processing fees, and an increase of $0.1
million in costs related to technical support services.
Our gross margin for subscription revenue was 84% and 85% for the six months
ended July 31, 2021 and 2020, respectively. The decrease in gross margin during
the six months ended July 31, 2021 was driven primarily by increases in costs
related to hosting our platform, costs related to technical support services,
and the amortization of intangible assets due to the Brandfolder acquisition.
Cost of professional services increased $4.2 million, or 32%, for the six months
ended July 31, 2021 compared to the six months ended July 31, 2020. The increase
was primarily due to an increase of $3.2 million in employee-related expenses,
of which $0.6 million was related to share-based compensation expense, an
increase of $0.9 million in costs of outside services to supplement our internal
staff, and an increase of $0.1 million each in software-related costs and
allocated overhead costs. This was partially offset by a decrease of $0.1
million in billable expenses.
Our gross margin for professional services revenue was 13% and 18% for the six
months ended July 31, 2021 and 2020, respectively. The decrease in gross margin
during the six months ended July 31, 2021 was driven primarily by an increase in
personnel expenses that outpaced the related increase in professional services
revenue for the first fiscal quarter and increased utilization of third-party
service providers to supplement our internal staff in delivering
revenue-generating consulting arrangements.
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Research and development expenses
                                    Six Months Ended July 31,                  Change
                                    2021                    2020          Amount         %

                                                  (dollars in thousands)
Research and development      $     75,553$ 54,080$ 21,473        40  %
Percentage of total revenue             30   %                 31  %


Research and development expenses increased $21.5 million, or 40%, for the six
months ended July 31, 2021 compared to the six months ended July 31, 2020. The
increase was primarily due to an increase of $20.1 million in employee-related
expenses due to increased headcount, of which $7.0 million was related to
share-based compensation expense, and an increase of $2.4 million in
software-related costs. This was partially offset by a decrease of $0.9 million
in costs of outside services to supplement our internal staff and a decrease of
$0.2 million in allocated overhead costs.
Sales and marketing expenses
                                    Six Months Ended July 31,                 Change
                                    2021                   2020          Amount         %

                                                  (dollars in thousands)
Sales and marketing           $    148,499$ 108,562$ 39,937        37  %
Percentage of total revenue             60   %                61  %


Sales and marketing expenses increased $39.9 million, or 37%, for the six months
ended July 31, 2021 compared to the six months ended July 31, 2020. The increase
was primarily due to an increase of $30.1 million in employee-related expenses
due to increased headcount, of which $6.9 million related to increased
share-based compensation expense, an increase of $6.4 million in marketing costs
related to our brand advertising campaign and other marketing initiatives, an
increase of $1.9 million in amortization of acquisition-related intangibles, an
increase of $1.1 million in software-related costs, an increase of $0.8 million
in allocated overhead costs, and an increase of $0.5 million in costs of outside
services used to supplement our internal staff. This was partially offset by a
decrease of $0.9 million in travel-related costs.
General and administrative expenses
                                    Six Months Ended July 31,                  Change
                                    2021                    2020          Amount         %

                                                  (dollars in thousands)
General and administrative    $     52,639$ 32,142$ 20,497        64  %
Percentage of total revenue             21   %                 18  %


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General and administrative expenses increased $20.5 million, or 64%, for the six
months ended July 31, 2021 compared to the six months ended July 31, 2020. The
increase was primarily due to an increase of $11.0 million in employee-related
expenses due to increased headcount, of which $4.0 million related to increased
share-based compensation expense, an increase of $7.5 million in legal costs,
which primarily related to a $7.3 million accrual for an indemnification claim,
an increase of $0.9 million in taxes, licenses, and insurance, an increase of
$0.8 million in costs of other outside services used to supplement our internal
staff, an increase of $0.7 million each in software-related costs and bad debt
expense, and an increase of $0.6 million in allocated overhead costs. This was
partially offset by a decrease of $1.6 million in accounting, internal control,
and tax-related costs.
Interest income
                                    Six Months Ended July 31,                  Change
                                  2021                       2020         Amount         %

                                                  (dollars in thousands)
Interest income               $     23$ 1,419$ (1,396)      (98) %
Percentage of total revenue          -   %                      1  %


For the six months ended July 31, 2021 compared to the six months ended July 31,
2020, 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
                                      Six Months Ended July 31,                   Change
                                    2021                          2020       Amount       %

                                                   (dollars in thousands)
Other income (expense), net   $        763$ (80)$  843        *N/M
Percentage of total revenue              -    %                     -  %
*N/M = Not meaningful


For the six months ended July 31, 2021 compared to the six months ended July 31,
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 six months ended July 31, 2021. This was partially
offset by an increase of $0.2 million in unrealized foreign currency loss.

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.
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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
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 July 31,                  Six Months Ended July 31,
                                                      2021                 2020                 2021                     2020

                                                                             (dollars in thousands)
Gross profit                                    $   104,270$  72,204$    194,780$ 139,250
Add:
Share-based compensation expense*                     2,543                1,679                 4,711                   3,007
Amortization of acquisition-related intangible
assets                                                1,270                  555                 2,540                   1,111
Non-GAAP gross profit                           $   108,083$  74,438$    202,031$ 143,368

Gross margin                                             79    %              79  %                 78   %                  79  %
Non-GAAP gross margin                                    82    %              82  %                 81   %                  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, one-time acquisition costs, and litigation expenses and settlements
related to matters that are outside the ordinary course of our business.
Non-GAAP operating margin represents non-GAAP operating loss as a percentage of
total revenue.
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                                                    Three Months Ended July 31,                  Six Months Ended July 31,
                                                      2021                 2020                 2021                     2020

                                                                             (dollars in thousands)
Loss from operations                            $   (43,550)$ (26,710)$    (81,911)$ (55,534)

Add:

Share-based compensation expense*                    28,633               18,160                52,492                  32,578
Amortization of acquisition-related intangible
assets                                                2,517                  845                 5,034                   1,689
One-time acquisition costs                                -                  334                    17                     342
Litigation expenses and settlements**                 7,250                    -                 7,250                       -
Non-GAAP operating loss                         $    (5,150)$  (7,371)$    (17,118)$ (20,925)

Operating margin                                        (33)   %             (29) %                (33)  %                 (31) %
Non-GAAP operating margin                                (4)   %              (8) %                 (7)  %                 (12) %

*Includes amortization related to share-based compensation that was capitalized in internal-use software and other assets in previous periods. **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.
                                                Three Months Ended July 31,               Six Months Ended July 31,
                                                  2021                2020                 2021                  2020

                                                                            (in thousands)
Net loss                                     $   (44,168)         $ 

(26,559) $ (81,240)$ (54,343) Add: Share-based compensation expense*

                 28,633             18,160                  52,492             32,578
Amortization of acquisition-related
intangible assets                                  2,517                845                   5,034              1,689
One-time acquisition costs                             -                334                      17                342
Litigation expenses and settlements**              7,250                  -                   7,250                  -
Non-GAAP net loss                            $    (5,768)         $  

(7,220) $ (16,447)$ (19,734) *Includes amortization related to share-based compensation that was capitalized in internal-use software and other assets in previous periods. **Relates to matters that are outside the ordinary course of our business.

Free cash flow

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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 July 31,                 Six Months Ended July 31,
                                                2021                  2020                 2021                  2020

                                                                          (in thousands)
Net cash provided by (used in) operating
activities                                $        1,762          $  

(1,318) $ (1,199)$ (25,603) Less: Purchases of property and equipment

               (3,755)              (971)                 (6,975)            (1,989)
Capitalized internal-use software
development costs                                 (1,539)            (1,467)                 (3,556)            (3,711)
Payments on principal of finance leases                -               (667)                      -             (1,347)
Free cash flow                            $       (3,532)$  (4,423)$      (11,730)$ (32,650)



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
inclusive of those related to COVID-19, and other factors.
                                               Three Months Ended July 31,                 Six Months Ended July 31,
                                                 2021                  2020                 2021                  2020

                                                                           (in thousands)
Total revenue                             $       131,736$  91,222$      248,818$ 176,709
Add:
Deferred revenue (end of period)                  250,826            169,258                 250,826            169,258

Less:

Deferred revenue (beginning of period)            239,667            163,214                 223,997            158,809
Calculated billings                       $       142,895$  97,266$      275,647$ 187,158



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Liquidity and Capital Resources
As of July 31, 2021, our principal sources of liquidity were cash and cash
equivalents totaling $442.8 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 condensed consolidated 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 of July 31, 2021, we had deferred revenue of
$250.8 million, of which $249.9 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.
Cash flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
                                                                          Six Months Ended July 31,
                                                                           2021                 2020

Net cash used in operating activities                                $      (1,199)$ (25,603)
Net cash provided by (used in) investing activities                        (10,531)            43,876
Net cash provided by financing activities                                   12,809             11,638

Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash

                                              (185)                45

Net increase in cash, cash equivalents, and restricted cash $

894 $ 29,956



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.
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During the six months ended July 31, 2021, net cash used in operating activities
was $1.2 million, driven by our net loss of $81.2 million, adjusted for non-cash
charges of $89.4 million, and net cash outflows of $9.3 million due to changes
in our operating assets and liabilities. Non-cash charges primarily consisted of
share-based compensation, amortization of deferred commission costs, 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 commissions of $33.3 million, an increase in
deferred revenue of $26.8 million, an increase in prepaid expenses and other
current assets of $11.6 million, a decrease in accounts receivable of $11.5
million, a decrease in operating lease liabilities of $6.4 million, an increase
in accounts payable and accrued expenses of $3.6 million, and a decrease in
other long-term assets of $0.1 million.
During the six months ended July 31, 2020, net cash used in operating activities
was $25.6 million, driven by our net loss of $54.3 million, adjusted for
non-cash charges of $59.8 million, and net cash outflows of $31.0 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
$21.6 million, an increase in deferred commissions of $17.6 million, an increase
in deferred revenue of $10.4 million, a decrease in operating lease liabilities
of $5.0 million, an increase of $4.7 million in long-term liabilities, an
increase in prepaid expenses and other current assets of $2.3 million, a
decrease in accounts receivable of $2.3 million, and an increase in other
long-term assets of $2.0 million.
Investing activities
Net cash used in investing activities during the six months ended July 31, 2021
of $10.5 million consisted of purchases of property and equipment of $7.0
million and spend on capitalized internal-use software development of $3.6
million.
Net cash provided from investing activities during the six months ended July 31,
2020 of $43.9 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 $3.7 million, purchases of property and
equipment of $2.0 million, and the release of $1.0 million of the holdback
related to the acquisition of TernPro, Inc. in January 2019.
Financing activities
Net cash provided by financing activities during the six months ended July 31,
2021 of $12.8 million was primarily due to $9.2 million in proceeds from our
ESPP and $7.1 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 $3.5 million.
Net cash provided by financing activities during the six months ended July 31,
2020 of $11.6 million was primarily due to $7.5 million in proceeds from the
exercise of stock options and $7.0 million in proceeds from our ESPP. These
proceeds were partially offset by taxes paid related to net share settlement of
restricted stock units of $1.5 million, payments of principal on finance leases
of $1.3 million, and payments of deferred follow-on offering costs of $0.1
million.
Obligations and Other Commitments
As of July 31, 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.
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Our non-lease contractual commitments consist of obligations under our
commitment with a cloud-based hosting service provider and non-cancelable
purchase commitments. See Note 12, Commitments and Contingencies, to the
condensed consolidated financial statements contained within this Quarterly
Report on Form 10-Q for additional information on our non-lease contractual
commitments, including changes 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. As of July 31, 2021, we have
recorded an estimated liability related to these lawsuits as described in Note
12, Commitments and Contingencies, in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of July 31, 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.
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 six months ended July 31, 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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