Asana and Monday.com were both penalized by the market in Q4 likely due to a rise in costs and concerns that the WFH trend may be waning as employees return to the office. We believe that these concerns are largely overblown, but we decided to reduce our exposure to the space until the dust settles.
Nevertheless, Asana is a much stronger company today than it was a year ago, yet trades at a steep 30% discount relative to its valuation last year. For instance, annual sales growth has accelerated, and the company’s forecasted growth rate is higher than it was last year. Gross margin continues to improve and enterprise customer growth has outpaced sales growth. The market may be concerned about rising competition in the work productivity space, but Asana’s strength with enterprise customers should lead to long-term sustainable growth. We believe that the market is fixated on near-term headwinds from rising costs and is overlooking the long-term strength in Asana’s performance.
Q4 results and outlook
In Q4, Asana’s sales increased 64% YoY to $112 million, which beat estimates by 6%. For the year, Asana’s 2021 sales increased 67% YoY to $378 million. Looking forward, sales growth is expected to slow to 50% YoY growth in Q1, yet this was still 4% higher than initial estimates, and total sales for FY2023 are expected to grow 40% for the year. Despite guiding for 40% growth, which is very strong, it is likely that Asana’s guide is conservative. For example, last year, Asana guided for FY2022 sales to grow 37%, which was well below the actual growth rate of 67%.
Even if Asana’s 40% guide is conservative, it is still a top-ranking cloud stock in terms of growth. Asana also trades at a relatively steep discount compared to its valuation one year ago, which is odd considering Asana is much stronger than it was a year ago. For instance, FY2022 sales grew 8% faster than in FY2021 and management’s guide for FY2023 sales growth was 3% faster than this year’s guide for FY2022 (shown below). Despite the improvement in Asana’s growth, Asana’s forward P/S multiple has declined 29% YoY from 17x down to 12x. This may be due to a few reasons, such as rising competition and lower operating margins in a rising rate environment. I discuss these trends in more detail below.
Continuing down the income statement, Q4 gross profit increased 67% YoY to $100 million and gross margin improved 200 bps YoY to 90%, leading most cloud stocks and above Monday’s gross margin of 87%, its closest competitor. There are also signs of leverage, as sales and marketing (S&M) expense increased 66% YoY, or slightly slower than the YoY rise in gross profit. In fact, S&M expense relative to gross profit declined 40 bps YoY, marking the fourth consecutive quarter of improvement in sales leverage. On a TTM basis, S&M expense declined to 83% of gross profit. The chart below highlights the downward trend in this metric, which means that for each dollar of S&M expense that Asana spends, it leads to relatively more gross profits dollars, highlighting the sustainability in Asana’s sales growth. However, S&M expense did rise on a sequential basis, which appears to be a seasonal trend.
The above trend is important, as investors are likely concerned about rising competition in the work management space. It is notable that Monday.com’s TTM S&M expense-to-gross profit metric was 100%, meaning that all of Monday.com’s gross profit was recycled into S&M expense over the last twelve months. We believe that Asana’s S&M expense leverage relative to peers points to the company’s success with enterprise customers, which are stickier and have larger budgets. I discuss this trend in more detail below.
R&D expense increased 53% YoY to $61 million, G&A expense increased 112% YoY to $38 million. We need the 10K to fully understand the outsized increase in G&A, but note that the growth in the account will likely normalize in the near term, benefitting future earnings growth.
Operating loss was $87 million during the quarter, or -78% of sales, which was down from -75% of sales in the year-ago quarter. Non-GAAP operating loss improved YoY from -51% to -39%, but the difference was driven by stock-based compensation which is still a cost to shareholders.
GAAP loss per share was -$0.48, which missed estimates of -$0.40 and non-GAAP loss per share was -$0.25 which beat estimates of -$0.27. Looking forward, Q1 loss per share is expected to be -$0.35, which was steeper than the -$0.26 loss per share that analyst had originally expected. Investors were likely spooked by the unexpected rise in expenses, a trend I discuss in more detail next.
Rising expenses spooks investors
As mentioned above, Asana beat on the top and bottom-line, its sales guide came in above expectations, but its guidance for earnings disappointed. The rising expenses was top of mind during the Q4 call and when asked about what the company is investing in, CEO-founder Dustin Moskovitz explained that the company is focusing on two key areas: R&D and go-to-market.
The focus of Asana’s R&D investments are building out its work graph product, which helps it stay competitive with enterprises. Beth discussed Asana’s products in more depth here. CEO Moskovitz added that the company’s R&D investments are focused on “improving on and expanding functionality required by the largest and the most complex organizations” he explained further that “we're also investing in all the other things important for large enterprises, such things like making Asana accessible to all employees, improving our compliance capabilities and adding integrations for data loss prevention and e-discovery and scalability to really be able to serve these very large deployments with tens of thousands of people working together in one instance”.
Asana is investing heavily in R&D to land enterprise customers, a trend that we believe supports sustainable, long-term growth. Asana’s R&D investments are also paying off, evident in the strength with enterprise customers. For instance, customers paying >$50,000 increased 125% YoY to 894, outpacing the 64% YoY rise in sales and higher than the 92% YoY growth rate reported in the year-ago quarter. Furthermore, dollar-based net retention rate (DBNRR) for >$50,000 customers was 145% for the third consecutive quarter and was up YoY from 140%. Enterprise customers are growing faster than they were a year ago and they are spending more.
On the call, management added that there were 340 customers spending $100,000 or more on the platform and the company has been closing seven-figure deals recently, highlighting how not all >$50,000 customers are the same. As shown below, sales are increasingly being driven by business and enterprise customers (>$5k), highlighting Asana’s focus on larger customers, which requires more investments in product R&D.
The company’s billings were also strong, which are driven primarily by enterprise customers paying upfront. Billings increased 56% YoY to $131 million, or 117% of three-month sales. This was an improvement from the prior-quarter metric of 115% of sales and suggests that there is relatively more cash support for sales. However, the metric did decline YoY from 123% of sales. Nevertheless, a billings-to-sales metric above 100% signals that future sales will increase, a favorable trend.
The other area of investment is the company’s go-to-market strategy. Asana is ramping hiring to build its sales pipeline and increasing account marketing and customer engagement programs. The company added that they are also investing in customer success programs post-sales, which helps improve its retention metric, which was at a high of 145% in the current quarter for enterprise customers. Given the company’s strength in enterprise, investments in S&M are likely sustainable since enterprise customers are stickier, leading to better ROI relative to smaller customers.
As mentioned above, Asana has demonstrated it has leverage with S&M expense, which has improved relative to gross profit dollars over the last twelve months. Another measure of sales efficiency is the SaaS magic number, which looks at the annualized sequential change in revenue divided by the prior quarter S&M expense. The metric averaged .71 throughout FY2022, up from 0.63 during FY2021. The improvement in this metric suggests that the payback on Asana’s S&M spending is improving, albeit there is still room for continued improvement as the metric declined in the most recent quarter.
Despite the improvements in sales leverage and signs that R&D is leading to stronger enterprise lands, the market has favored companies with rising earnings today, and is discounting earnings growth in the future more heavilytoday, and is discounting earnings growth in the future more heavily. While this has likely contributed to the pressure in Asana’s valuation recently, the company is focused on long-term growth rather than near-term profitability, which we believe is the best strategy given the relatively early stages in the work productivity trend (shown below).
Thoughts on valuation, risks and conclusion
As mentioned above, Asana reported accelerating growth in FY2022 and is also guiding for stronger growth going forward than it did last year, yet the company’s forward sales multiple is down 29% YoY. Looking forward, Asana trades at 12x FY2023 sales or 29% below its 17x forward P/S multiple last year. Asana is guiding for 40% topline growth, which is robust and ranks in the top 10 of all leading cloud stocks. Importantly, this growth is entirely organic. Asana’s gross margin was 90%, which ranks top for cloud and highlights the premium that Asana’s products are priced at.
While the topline and gross profit metrics appear healthy, the company’s bottom-line may have spooked investors. Losses are expected to rise in the near term, and competition has been rising. For instance, both Monday and Asana reported that S&M expense had increased QoQ as a percentage of sales, potentially signaling that work productivity growth is getting more expensive. This is a trend we will be monitoring, but note that both companies are operating in a largely unpenetrated market (Monday stated on its Q4 call that 70% of sales had no competition). We reduced our exposure to both Asana and Monday largely due to this near term headwind, but believe that work productivity and WFH is a secular tailwind and we expect that growth will remain robust for the foreseeable future. In other words, we are likely early.
Another risk to Asana is the trend of workers returning to the office, which has led to a sentiment shift away from companies that benefitted from the WFH trend. However, we believe that hybrid work is here to stay and that there has been a fundamental change in how corporations operate as enterprises have increasingly become more digital. Even if employees return to the office, management explained that they do not expect a change in engagement.
CEO-founder Moskovitz explained on the Q4 call that “I wouldn't expect to see a change [as employees return to the office] because work management was something that was a rising category even before remote work hits. And we really see Asana as an essential platform to use, whether you're working in a distributed way or from an office. And even when you're working from an office, you're often also working in a distributed way because a lot of our customers work across many offices”
We expect the work productivity trend to continue to grow, benefitting from the structural change of an increasingly digital world. However, we have reduced exposure to this space following signs of rising competition and expenses but we may increase our exposure as sentiment improves. Importantly, we expect that the hybrid work trend will persist and that growth will remain robust for the category. We like both Asana and Monday.com, but believe that Asana is better positioned with Enterprise customers which is why we have kept exposure here.