The work management platform Asana (NYSE:ASAN) began selling stock on the public markets on Sept. 30. Although it's been operating as a company for more than a decade, it is only just beginning to operate as a public company and getting used to all the changes such a distinction requires.

This change has investors wondering how the company will perform under the spotlight and pressures of public scrutiny and quarterly earnings reports. Here are three key questions that investors interested in this company are hoping will be answered over the coming year.

1. Can the platform continue to win new customers?

Asana provides clients with web and mobile applications designed to help teams organize, track, and manage their work. Not long before going public, company management released the transcript of its conference call regarding the fiscal 2021 second quarter (ending July 31, 2020). In that call, Asana management said the company had over 82,000 paying customers, up about 5,000 sequentially from the first quarter. This was an acceleration from the roughly 2,000 customers it added the previous quarter. This most recent quarter's outperformance was aided by an introduction of pricing for small teams. Given the coronavirus and recessionary headwinds, this rate of customer adds was impressive. 

Blocks showing the year 2020 with a hand turning the last two digits to a 21.

Image source: Getty images.

Most paying customers start by trying the software for free and upgrade as teams realize the benefits of the platform. Its free-to-paid upgrade rate has improved from 3.6% in fiscal year 2018 to 4.7% in the most recent quarter. Over the coming year, it will be looking to move many of its 3.5 million free-activated accounts to its paid service. Since many customers are getting introduced to work management software for the first time, the effectiveness of this land-and-expand model is critical to growing the number of paying customers.

Once customers join the platform, they naturally expand their footprint over time. Net dollar retention in the most recent quarter hit 115% and is even higher for larger customers. CFO Tim Wan explained that he will be sharing many of these customer metrics quarterly in the company's earnings releases, which will allow investors to keep tabs on how well the company is growing its customer base. Since we'll be able to track the all-important customer growth metrics, it brings us to the second question investors are asking.

2. Can it continue to grow revenue?

Revenue growth has slowed over the past several quarters (see table below). Management is projecting third-quarter growth at a 40% to 43% year-over-year gain, and a 30%-plus rate for fiscal year 2022. Although 30% to 40% growth is impressive in a difficult economic environment, it certainly is a far cry from the 86% year-over-year growth it achieved for all of fiscal year 2020. Let's look at its growth levers to better understand what's going on.

 

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Revenue

$33.1 million

$38.1 million

$43.5 million

$47.7 million

$52.0 million

Year-over-year growth

88%

85%

79%

71%

57%

Customers

N/A N/A

75,000

77,000

82,000

Dollar-based net retention

N/A N/A 120%

N/A

115%

Data source: Company SEC filings. N/A = data not available.

The market for collaborative applications and project and portfolio management is expected to be a massive $32 billion by 2023. This large market has attracted numerous competitors, but Asana's leadership team is focused on the large number of organizations that haven't adopted work management tools yet. The opportunity is huge, but the execution is even more important. Winning new customers is critical to the long-term growth of the platform.

In addition to new customers, there's a large opportunity to grow within existing accounts. Co-founder and CEO Dustin Moskovitz said he believes Asana only has about a 3% penetration rate of employees using its software tools in its current addressable customer base. Not only can it expand the number of users, but as a larger portion of the organization adopts its tools, the higher-level business and enterprise tiered plans could play a role in growth. Today these feature-rich plans represent 46% of its revenue for the first half of fiscal 2021 (up from 24% over the same time period a year ago), and more importantly bring in more revenue from every user.

Investors should keep an eye on the headline revenue growth rate, but also on how it's executing to achieve its growth. But success for this start-up isn't just tied to top-line growth.

3. Can it scale its costs?

Like many young software companies, Asana is posting quarterly losses. Its most recent quarter's operational loss was a hefty $33.6 million (or 65% of revenue). With $456 million in cash and marketable securities, the company has plenty of runway to operate at a loss for years. But investors (even growth-oriented ones), want to see operational efficiencies improving over time.

Asana's long-term model

Percentage of revenue (non-GAAP) Fiscal 2020 Growth Phase Long term
Gross margin 86% 86%-plus 87%-88%
Research and development 45% 30%-33% 22%-25%
Sales and marketing 67% 47%-50% 30%-33%
General and administrative 22% 10%-13% 8%-9%
Operating margin (49%) (0%-10%) 20%-plus
Free-cash-flow margin (31%) 0%-plus 30%-plus

Source: Asana Investor Day webcast.

The chart above from Asana's investor day presentation shows Asana has plans to scale its costs over time. While the company is in its current growth phase, it will be investing heavily in growth efforts, especially sales and marketing. As the company executes on its growth plans, it's targeting to be able to reduce costs gradually and move into its "long-term" business model in the last column. This probably won't happen over the next 12 months, but investors should keep an eye on whether its operational costs are coming in line with its strategic plans.

The bottom line for investors

Asana doesn't have a proven track record for executing on its goals (at least in the public view), so a bet on this growth stock is a speculative one. Over the next four quarters, investors will get a better understanding of whether it can continue to attract customers, expand its footprint with existing clients, grow revenue at a healthy rate, and eventually scale its costs as the company gets bigger.

A year from now, investors will be able to better answer whether this work management software platform is able to "walk the talk."