What happened
Shares of work-management software company Asana (ASAN 1.77%) fell on Friday after the company reported financial results for the first quarter of its fiscal year 2023. While results were better than expected, investors are presently avoiding cash-burning businesses, which is what Asana is right now. For this reason, Asana stock is down 10% as of noon ET.
So what
Previously, Asana management had guided for Q1 revenue of about $115 million. The company exceeded these expectations by generating revenue of $120.6 million in Q1. And with this outperformance, management modestly raised the expected range for full-year revenue to between $536 million and $540 million.
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Unfortunately for shareholders, Asana's strength in Q1 didn't impress the market or Wall Street. Analysts lowered their price targets across the board. For example, Baird analyst Rob Oliver lowered Asana's price target by a whopping 52% to $31 per share, according to The Fly. Oliver was impressed with important customer growth but worries about ongoing losses.
Asana had a $96.2 million operating loss in Q1 alone. In the tech sector, investors seem to be favoring companies with positive cash flow right now and that seems to be hurting Asana today.
Now what
Why does Asana have such a large operating loss? One of the biggest reasons is it spent an eye-popping 80% of revenue on sales and marketing in Q1. Simply put, the company isn't shooting for profits. It's shooting for customer growth.
For this reason, shareholders should at least be encouraged about ongoing progress on this front. It ended Q1 with over 126,000 paying customers, up from 119,000 at the end of last quarter. Over time, these customers can increase their spending, which is what's happening. Customers who spend at least $50,000 were up 102% year over year in Q1. And the dollar-based net retention rate among this customer cohort was 145%, which is quite good.
In summary, Asana is spending money to acquire customers and the market isn't a big fan of this right now. But at least the company is seeing a return on investment on this expense and it's something that could keep paying off down the road as those customers deepen their business relationship with Asana.
