Here’s what I liked about the report.
(1) DOING MORE WITH LESS
I had previously highlighted how management swiftly shifted its tone from “growth at all costs” to “balancing investing with improving efficiency.”
The plan seems to be going well so far. Monday actually finished the quarter with less FTEs than they had the previous quarter! Importantly, the key metrics don’t show that the business was impaired much with less resources. Also, notice he trend in S&M as a percent of revenue:
Q1’22: 107%
Q2’22: 78%
Q3’22: 66%
Q4’22: 59%
Obviously Monday could be generating a higher revenue growth rate with more S&M spend. However, I’m pleased about management’s prioritization of profits, as dollars today are worth much more than dollars tomorrow given inflation. Also, it shows that the business can scale, and their business is not just about “buying growth.”
(2) COMPETITION RESILIENCY
There was a lot of talk about the collaboration tooling being highly competitive; but, Monday seems to be fairing well. Mentions of Monday in job openings are up 12% YoY (and rising) while Asana’s are -28% YoY (and declining).
Even though paying customers are not rising as fast as during the pandemic, adding >30k customers in a year is no small feat (e.g., >8k more than Cloudflare). And while some of these customers may be very small, I view the 151 quarterly enterprise customer adds as positive.
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Now, here’s what I don’t like:
(1) STALLING REVENUE ON A SMALL BASE
Notice the net new revenue added over the past few quarters:
Q2’21: $11.6
Q3’21: $12.4
Q4’21: $12.5
Q1’22: $13.0
Q2’22: $15.2 (promising)
Q3’22: $13.2
Q4’22: $13.0
That is as linear as a deceleration gets. So assuming nothing drastically changes over the next year, it will mean that Monday will go from being a 91% YoY grower to a ~40% grower in two years.
Now, I’m not saying growing at 40% is bad, but what I’m saying is that if the ‘alpha’ that can surprise the market would have to break a trend of +$12-$13M growth each quarter that has been going on for almost 2 years already.
(2) CUSTOMER EXPANSION
We know that large customers are an extremely important part of Monday’s thesis (76% ARR comes from customers with 10+ users). But with enterprises focused on cost cutting, Monday seems to be really suffering here. Adding the post-Covid office return, and the slowdown seems even more dramatic.
NDR dropped for customers with >$50k ARR for the second consecutive quarter. Management expects the decline to continue due to the lagging effect NDR has, “we anticipate that it might go down in the larger accounts, between 5% to 10% more this year. There’s a lagging effect every month due to the trailing 12 months, and we’re accounting at weighted average.”
Side note – I don’t think they should be doing a weighted average of that metric, as a handful of super large customers would create upward distortions.
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So, where to go from here? Even with the ~10% share price appreciation, Monday is valued at 10x NTM Revenue, with solid growth, while committing to generate free cash flow all of this year. I see an opportunity for upside there.
However, with the linear deceleration and drop of enterprise expansion, I’m struggling to clarify why I’m holding, other than “I see good value from here…”
-RMTZP