What happened

Shares of cloud-based technology company Smartsheet (NYSE:SMAR) are getting crushed today, after the company reporting earnings for the first quarter of fiscal 2021. The results actually beat expectations for both the top and bottom lines, but its guidance for the upcoming second quarter wasn't what Wall Street had hoped for.

As of 11:30 a.m. EDT on Thursday, Smartsheet stock was down 22%. With today's loss, the stock sits just marginally higher than where it started 2020.

SMAR Chart

SMAR data by YCharts.

So what

Smartsheet reported results for full-year fiscal 2020 back in March. At the time, the company guided for Q1 revenue of $82 million to $83 million. It also guided for an adjusted operating loss of $24 million to $26 million. But Q1 results were better than that. Revenue came in at $85.5 million, up 52% year over year. And its adjusted operating loss was $13.6 million.

So the stock isn't going down because of Q1 results. Rather, it's getting crushed because of guidance. It expects Q2 revenue of $86 million to $87 million. That's only 33% to 35% year-over-year growth, a deceleration from the current rate. And for the year, it sees revenue of $360 million to $370 million. That would be 35% growth at the midpoint, markedly slower than its 55% growth in fiscal 2020.

Lastly, while Smartsheet provided certain guidance for the rest of the year, it withdrew forecasts for both billings and free cash flow. Originally the company said free cash flow should be between negative $11 million and breakeven. It withdraw that guidance, but management said its negative free cash flow should be worse than the low end of the previous guidance.

An exasperated man puts his hands on his face with a down stock chart in the background.

Image source: Getty Images.

Now what

Smartsheet's billing results and guidance were also troubling. Q1 billings came in at $90 million, compared with previous guidance of $97 million to $98 million. Furthermore, forward billings guidance was weak as management expects existing customers to spend less next quarter. Its net dollar retention rate, an important metric for technology companies like Smartsheet, is expected to dip below 130% in Q2. That's still really good, but is below the 132% retention rate in Q1.

The adjustment Smartsheet made to its free cash flow guidance reflects spending to capture its market opportunity. These two things together are worth monitoring in coming quarters. If billings continue decelerating while the company spends on growth, that would be a bad combo for shareholders.

There's no doubt Smartsheet is well positioned to capitalize on the work-from-home movement. Its services allow for collaboration from diverse locations. Perhaps this partly explains why this growth stock commands such a premium valuation. It can't be measured with net income or free cash flow, since both of these metrics are negative. But even after today's fall, the stock trades at more than 18 times trailing sales. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.