Story Stocks^®

Lifted by sustained growth within the enterprise software industry, Smartsheet (SMAR +6%) registered healthy numbers in Q2 (Jul), delivering another earnings beat in what has become commonplace for the cloud-based work management software developer. As has been the case for several periods, enterprise software spending has been lumpy. For instance, Salesforce (CRM) issued soft quarterly revenue guidance recently, as did Asana (ASAN), reflecting the wobbly spending environment. On the flip side, Monday.com (MNDY) recorded a solid beat-and-raise in Q2 (Jun), pointing to continuous growth from enterprises.

This mixed climate added to the uncertainty ahead of SMAR's Q2 report yesterday after the close, leading to a huge sigh of relief following its energetic results, pushing shares to fresh 52-week highs today.

• Robust enterprise demand manifested in healthy large customer expansion in Q2, touting a 50% jump yr/yr in customers with annualized recurring revenue (ARR) over $1.0 mln to 77, SMAR's largest quarterly expansion ever. In total, ARR jumped 17% higher yr/yr to $1.093 bln. On the backs of sustained enterprise spending, SMAR delivered adjusted EPS of $0.44, a 175% improvement yr/yr, and revs of $276.41 mln, a 17% increase.
• During the quarter, SMAR instituted its new pricing and packaging model. Since launching it in June, SMAR has observed thousands of new customers transacting on the model, driving high engagement and additional provisional members. SMAR remains on track to migrate its existing customer base to the new model in January, which it expects will ultimately bring more users and greater ARR.
• SMAR is also extracting gains from generative AI, commenting that the technology has provided a key differentiator for its business. During Q2, SMAR enjoyed a nearly 50% bump qtr/qtr in the number of users utilizing its AI tools. The healthy adoption rates are already benefiting SMAR's customer base, noting that around 47,000 users have saved an estimated 1.0 mln hours due to AI automation. The company anticipates this momentum will persist, projecting a meaningful uptick in customer adoption as it expands its assortment of AI tools.
• With the wind at its back, SMAR felt comfortable increasing its FY25 (Jan) adjusted EPS guidance to $1.36-1.39 from $1.22-1.29. However, it kept its FY25 revenue guidance unchanged at $1.116-1.121 bln. The root cause was throttled service revenue growth. Management noted that with a higher percentage of services delivered by its partners, it projected FY25 services to comprise 4.5% of total revs, down from its previous forecast of 5.0%.

SMAR kept the good times rolling in Q2, maintaining excellent enterprise growth despite operating in a shaky spending climate. Gen AI continues to resonate with customers and may remain SMAR's ticket to return to accelerating revenue growth over the long term. While the heightened uncertainty embedded in the macroeconomic environment can create turbulence, SMAR's consistency over the past couple of quarters showcases a competitive edge and the capacity to remain a winner in the enterprise software market.