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Asana (ASAN) has registered shares in a direct listing of its Class A common stock, according to an amended registration statement.

San Francisco, California-based Asana was founded to develop business collaboration tools to enable users to more effectively work across geographies and throughout the organization.

Management is headed by co-founder, president and CEO Dustin Moskovitz, who was previously co-founder of Facebook (FB).

Below is a brief overview video of the firm's vision of the future of work:

Source: Asana

The company’s primary use cases include:

  • Project management
  • Workflow management
  • Calendar
  • Remote teams
  • Productivity
  • Agile & Scrum

Asana has received at least $250 million from investors including Benchmark Capital, Generation IM Climate Solutions and The Founders Fund.

The firm acquires smaller customers through a self-serve website that provides them with the option of a free trial.

Asana has a direct sales force for middle-market and larger enterprise prospects.

Sales and Marketing expenses as a percentage of total revenue have been rising as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, dropped to 0.5x in the most recent reporting period.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. ASAN’s most recent calculation was 10% as of the six months ended July 31, 2020, so the firm needs improvement in this regard.

Asana’s dollar-based net revenue retention rate was 120% for the fiscal year ended January 31, 2020, rising from 110% for the previous fiscal year.

A retention rate figure of greater than 100% indicates the firm is increasing its revenue from the same customer cohort over time, showing that it has achieved strong product market fit and sales & marketing efficiency, so Asana is performing quite well in this regard and actually improving markedly in the most recent full-year period.

According to a 2019 market research report by MarketsAndMarkets, the global market for enterprise collaboration was an estimated $31 billion in 2019 and is expected to reach $48.1 billion by 2024.

This represents a forecast CAGR of 9.2% from 2019 to 2024.

The main drivers for this expected growth are expected to include increased usage of mobile devices by mobile workforces, growing use of social networking websites and, more recently, the lingering effects of distributed workforces due to the Covid-19 pandemic.

Also, the managed services segment is forecast to produce the highest CAGR due to their ability to reduce operational costs, required infrastructure and IT department constraints.North America is expected to account for the largest demand through 2024, as the chart below shows:

asanamkt

Major competitive or other industry participants include:

Asana’s recent financial results can be summarized as follows:

  • Sharply increased topline revenue
  • Growing gross profit and gross margin
  • Increased operating losses but reduced negative operating margin
  • Sharply growing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

asanapl2

As of July 31, 2020, ASAN had $455.9 million in cash and equivalents and $589.7 million in total liabilities.

Free cash flow from the twelve months ended July 31, 2020 was negative ($85.7 million).

ASAN intends to list its Class A shares in a direct listing on the NYSE. The firm is not raising capital as a result of the transaction.

A reference price of $28.00 per share is being used as it is the last private transaction recorded price.

Class A stockholders will be entitled to one vote per share. Class B shareholders will have ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful direct listing at the reference price, the company’s enterprise value at first trade would approximate $5.1 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.23%.

The firm will receive no proceeds from the direct listing, only registered shareholders of its Class A common stock who choose to sell in open trading will receive proceeds from the sale of their shares.

Management’s presentation is available here.

Listed advisors of the direct listing are Morgan Stanley, J.P. Morgan, Credit Suisse and Jefferies.

Commentary

Asana is going public through the same direct listing process that direct competitor Slack used in 2019.

ASAN’s financials show strong topline revenue growth and gross profit growth, but also increasing operating losses and operating cash burn in the most recent six-month period.

Sales and marketing expenses have risen slightly against revenues and its sales and marketing efficiency rate has dropped slightly.

The market opportunity for providing business communication and collaboration software as a service is large and expected to grow substantially, especially in a post-Covid-19 business environment where more work will likely be done remotely.

In fact, a major California metropolitan transportation district has proposed a 60% remote work requirement on companies above a certain size, as it stands to reduce traffic, cost and environmental impact.

As a comparable-based valuation, Slack is likely the most direct comparable and shows significantly lower major multiple valuations, at least on revenue.

However, ASAN is growing at a faster rate than Slack, albeit from a lower base. Asana is also producing lower losses per share and a better EV/EBITDA multiple.

Given the strong industry dynamics for business collaboration software, it is likely both firms will perform well in the years ahead.

While the direct listing wouldn’t be cheap at $28.00, the reference price would appear to be reasonable for a patient investor as the firm has weathered the Covid-19 pandemic well and has strong growth prospects ahead of it.

My opinion is a BUY at up to the reference price of $28.00.

Expected List Trading Date: September 30, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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