Can you lend us your thoughts on the “moat” for Monday?
Peter,
I’m not nearly as savvy as Muji is, but let me add my POV. Before the pandemic, approximately 0.5% of job openings mentioned either Asana, Monday, Airtable or Smartsheet in a job description. Today, the number is closer to 2.5% with no signs of slowing [0]. I won’t go into the repetitive tangent on how “the pandemic changed everything” but worklife DID change a lot, and its impossible to operate a business with a distributed workforce with one of these tools (or Microsoft Teams for that matter). To Bear’s point, the more contentious point is how sustainable will these growth rates be. But I do think that the demand for these tools is much more inelastic than some folks make them out to be; and it’s certainly not a “winner takes all” market.
So my questions are…
1) why the enormous sandbag in op loss guidance for Q2?
2) what happened w/ the plans for that $17-19M+ in expected spend, between guide (-35-33M) and actual (-15.4M)?
3) why no mention of this adj in CC? or any questions on it at all?
Muji,
I too, wish analysts dug into this more during the call, but we do now the following:
(1) Hiring slowdown
In November 2021, Monday had ~270 job openings [1]; today they have 187 [2]. That’s a VERY dramatic decrease. This was addressed on the call several times, “we’re going to hire in a slower pace the adoption of salespeople”…“we are going to slow down the hiring and focus on positions that we know help us to complete the supporting functions to scale the company” (Glazer, CFO).
(2) Lower S&M spend
While this point might not be mutually exclusive than (1), we know that S&M ticked down from 79% of revenue in Q2’21 to 70% of revenue in Q2’22. Glazer mentioned, “When we continue in Q2 going forward, it’s going to be a more modest investment in performance marketing. We believe this is an important tool for us driving and generating leads…but…we are looking at the return of investment that we are doing on performance marketing.” It’s worth noting that R&D and G&A as a percentage of revenue ticked up compared to Q2 last year, making the S&M decrease seem more pronounced.
(3) Fiscal responsibility
I noticed a modest yet significant change in how management closed their prepared remarks over the past few quarters:
Q4’21: “We are committed to investing aggressively in our company. We will continue to prioritize growth, which we believe is the best interest of our shareholders, employees, and customers.”
Q1’22: “Looking ahead, we’ll continue to invest in growth with a strong focus on driving business efficiency.”
Q2’22: “Our strategic focus remains on balancing healthy investment in the business with improving efficiency and profitability. We’ll continue to measure and monitor our returns and adjust investment levels as needed.
Notice the change in priorities between “growth at all costs” versus “responsible growth”? Frankly, this is reassuring to see. The world looks very different than it did this time last year, and good to see management adjusting accordingly.
My Take
For transparency, my conviction in Monday lays somewhere in the middle. On the one hand, I never got comfortable enough with the high-allocations that some folks had earlier in the year; but on the other hand, I think some of the fears of competition were exacerbated by the deep share price decrease that influenced the narrative. That said, I’m waiting for some of my other holdings to report before I reassess my conviction. While the improved operational efficiency and raised guidance are encouraging – I do see some trees (to Saul’s analogy [3]) that definitely bother me.
The first being its linear deceleration. Using “trailing twelve months” (TTM) revenue to reduce any noise between quarters, Monday grew at an annualized rate of 74%. Sure, that seems very rosy – but only in isolation. This quarter last year, it’s TTM revenue was growing at an annualized rate of 95%. Let’s compare that to some of our other companies [4].
TTMgrowth Q2’21 TTMgrowth Q2’22 Growth Endurance
Mongo 40% 57% 1.43
Gitlab 67% 81% 1.20
Datadog 69% 72% 1.05
ZScaler 59% 62% 1.05
Cloudflare 52% 53% 1.02
Sentinel 114% 107% 0.94
Crowdstrike 70% 62% 0.88
Monday 95% 74% 0.78
Snowflake 109% 66% 0.61
I know what some of you may be thinking – of course it’s harder to maintain a higher growth rate! It’s not fair to compare companies like that! But no matter how you slice and dice the data, the “net new ARR” that Monday is generating every quarter is pretty flat. Over the past 4 quarters, they have added $11.6M → $12.4M → $12.5M → $13.0M → $15.2M. In other words, they added 31% more ARR last quarter, than this time last year. Compare that with Cloudflare’s 56%, or another high grower (Crowdstrike’s) 50%.
The other issue is their declining sales efficiency. Their magic number trended downwards for the third consecutive quarter, going from 0.22 to 0.14 last quarter. This tells us that every incremental dollar of S&M is bringing in less and less revenue. No wonder they reduced their spend here – it would have looked even worse! I don’t want to read into this too much, because perhaps this is happening across SaaS in today’s environment, but this seems to be a notable decline.
The bar was really really low before the report, with its valuation at 9x NTM Sales, so I’m not terribly surprised to see its share price surge. I still think the risk/reward is attractive at a market cap of $6B with enviable metrics. We’ll see how much that changes over the next few weeks!
-RMTZP
[0] https://twitter.com/aznweng/status/1496133609660555272
[1] https://twitter.com/AznWeng/status/1458080779980922885
[2] https://monday.com/careers
[3] https://discussion.fool.com/how-i-see-monday-35152629.aspx?sort=…
[4] Note that this might look drastically different once all companies report Q2’22