Business Breakdowns
· Ben Hensman
On Monday the 3rd, and I think this is where the greatest potential is and where they will need to run really hard and be competitive, is the AI digital workforce. And that's really just agents, but based on specific functions inside Monday, depending on the use case of the customer. The first of these to launch is Monday Expert that identifies areas of overlap and use cases and different boards. It allows you to use natural language to customize the board, build workflows, automations, and then adjust them purely through a chat interface. And then it can go away and create entirely new use cases for customers and helping with that discoverability and smoothing expansion. What we're going to see in the coming months are sales and service agents that are actually members of your team executing on your behalf to close out a ticket or progress deals through a pipeline in a really trusted way and in a way that you can control. And it's really accessible to customers. So there's clear opportunity there to accelerate all of the factors we've talked about and the flexibility of the platform in solving more problems for customers which can flow through to the financials and success. There's a piece in here about change management and trust which we've written about recently and that's incredibly important, particularly for non-technical customers to really feel that they can trust their use cases for AI. And that's going to be a process to go through. We think Monday is very well placed. Their approach to account management allows them to be very well placed in navigating that. On the risk side, I mentioned the fact that they're a seat-based model today. This means that the value of the product is tied to how many individuals are actually using it as opposed to the specific value. Even though a lot of their pricing and a lot of their pitches to customers are ROI-based. And so there'll be a process to go through over the next five to 10 years depending on how much AI is flowing through the product and how it interfaces with customers. They'll need to move to more of a hybrid model of seats or organization-level pricing and consumption and ROI-based pricing, and that's something that they will have to navigate, as will all existing software players.
· Ben Hensman
One thing that we're excited about is that they're not sitting on a fixed and rigid software model where they are building software to serve an existing and very, very successful business model and product. They're building products on top of a platform of primitives. And Monday Service is a great example of this. It's effectively an AI-native product built with a proactive-first approach to handling internal and external service, rather than an existing service product built in a certain way where they're having to layer in AI in an artificial way. So we're really excited about what that can achieve in terms of cost internally. Monday's always been a very efficient business and a very lean business. I mentioned their approach to development earlier and ensuring that they aren't over-resourcing and getting to feedback really quickly. You see that flow through in other teams. So their starting point is already very efficient and very commercial. But it has been incredible to see the pace that they've executed internally. And their democratization of data over their entire history means that all teams have access to the beating heart of Monday, whatever part of it is relevant to them, whether it's the marketing team, how they interface with external parties, how they interface with other external teams, how customers are using the product. And so their ability to see ROI and test is really enhanced by having that level of data transparency within the organization. So very early days on both the demand side and on how they use it internally. And that's the same for the entire industry. But we think they're making really good progress and we're excited about what's possible.
· Matt Reustle
[00:00:00] S0: Just from the management team, obviously they're making a lot of moves to go along with the wave when you hear them speak. Is AI taking up 50% of the remarks at this point? Or how would you frame it in that regard? In terms of the most extreme, everything is going to be AI-driven versus more prudent and take it one quarter at a time.
· Ben Hensman
[00:00:00] S1: It's an interesting way to frame it. I would frame it slightly differently, which is when Roy and Eran are speaking publicly, especially when they're speaking to customers, they speak very much like their sales teams do, which is talking about solutions and solving customer problems. And so I think where we've seen a lot of success for companies utilizing AI or building products on top of AI is it's still rooted in the customer problem. And I think that's very, very clear for Roy and Eran. It's a real strength of theirs, but at the same time they acknowledge that this will change everything. We haven't had a change in form factor and software for 25 years and AI will potentially enable that to change relatively soon and improve and become far more effective for customers. That's something that we have to lean into and not shy away from, and they're very conscious of that and that flows through to the organization and the way that they use tooling internally, the urgency with which they build product. So that's something that's clearly very front of mind for them and has been in the conversations we've had with them as well. And I think any business that doesn't see how product, customer interactions, customer usage, and internal operations of a company will change over the next five years is going to be really challenged.
· Matt Reustle
[00:00:00] S0: Yeah, it's interesting to hear for such a thematic thing to see how different companies and investor bases are approaching it. I derailed us a bit from the financial discussion. I will have to ask about the gross margin of this business, but because it's a software business, I'm sure it's absolutely outrageous. So if you could just touch quickly on gross margin, operating margin, the beautiful software model is really a miracle from a financial regard. But can you outline a bit about that and any trend lines or dynamics that you think are interesting there?
· Ben Hensman
[00:00:00] S1: Yeah. So Monday has been at scale for some time in terms of incremental costs. For a number of years they've been sitting around 90% gross margin. That's been very consistent and I think the main variable there over time will likely be AI costs and just how those input costs change versus customer usage. That may end up changing where their gross margin profile lands at a much larger scale. But at the moment both the company and in our view, there's no reason why that needs to change materially. If you look at the business over time, over the last six years or so, it's had a fairly consistent cost profile around R&D and around general administrative costs. Where the leverage has really come through in this business enabling it to be significantly profitable, particularly in cash flow terms, is in sales and marketing. So I mentioned back in 2019 this business was performance marketing driven primarily as well as product-led growth. So they were spending a very significant amount on sales and marketing. In 2019 it was 115 million US that was 150% of revenue that year. But one really interesting thing about Monday is it's always been a very cash-focused business. And so from a free cash flow perspective, I mentioned earlier, the business has been incredibly cash efficient and really focused on cash collection versus spend, as opposed to accounting revenue versus spend. And that's because they can fund that customer acquisition cost, the headcount within sales and marketing and partner solutions, and all of those folks primarily with customers paying upfront. If you cycle through the P&L today at a billion dollars or so of revenue, that's generating nearly $900 million in gross profit and about $145 million of EBITDA on a free cash flow basis, they're generating about $300 million of free cash flow. That includes some interest revenue. So without interest, it's about a 25% free cash flow margin. And that's been similar for the last couple of years and prior to that, broadly free cash flow neutral. The reason for that free cash flow dynamic is that 80% upfront billing I mentioned. And when the company is continuing to grow so fast and fairly evenly throughout the year, free cash flow is always sitting meaningfully ahead of that smooth EBITDA profile. And that gives the company a lot of valuation support.