Business Breakdowns
· Ben Hensman
Given that they're generating so much cash over recent years, we've seen them start to include free cash flow in guidance as well. And so we've got a very clear view of how those margins are evolving, how that profile is evolving. They've also really effectively managed dilution in recent years. So while GAAP operating income has only recently turned positive, and there is a significant delta between GAAP operating income and non-GAAP operating income being stock compensation, that has for the last couple of years been about 13, 14% of revenue. But looking at net dilution itself, it's actually averaged about 1.8% over the last couple of years. And given the level of growth, given the level of value creation, this is a reasonably manageable level for the company to be. Incentivizing staff using stock to round all of that out. What this flows through to is the Rule of 40 or Rule of X, which while being a bit of an arbitrary term and combining two different metrics together, it does give you a sense of just how efficiently this business is growing and how fast it is growing. In the last two years it has been a rule of 60 company. So there have only been a couple of companies that have been sitting at that level. In 2024, that was at 64%. In 2023 it was at 69%, combining free cash flow, margin and top line growth. So it's an extraordinary story in terms of not just the top line growth and the drivers of that. The move to multi-product, the move to a platform, the scaling of those go-to-market functions, but the efficiency with which they've been able to do all of that and then how that's flowed through to the bottom line and free cash flow generation has been really impressive.
· Matt Reustle
[00:00:00] S0: Rule of 60 is a whole different territory, but I've seen the charts and where they show up in that upper right corner on capital allocation. One of the things that I meant to ask earlier is with a business like Salesforce, M&A became a key piece of the strategy there in terms of deepening their roots within different businesses and different offerings. Have they done anything from an M&A perspective and is that something that you would expect them to explore in the future?
· Ben Hensman
[00:00:00] S1: They haven't. So today the business has 1.4 billion on the balance sheet, no debt and that gives them a lot of optionality and to date hasn't burned a hole in their pocket in terms of their uses of cash. They've been very disciplined. It's obviously generating a lot of interest revenue right now, which is helpful. But in terms of what they can do with that cash, they really highlight three areas, none of which they've executed on in terms of uses of that cash. Their first priority of course is always investing in organic growth and that's continued to be the focus, but they haven't required additional cash for that given they're generating so much of it. The other two options are inorganic M&A and share repurchases. And on the M&A front, they haven't acquired a business to date, but they have been looking at businesses in areas that really complement the workflows and allow them to build depth in specific areas of product. And so I'll give a really specific example. We've talked about marketing ops quite a bit. This has been a really fruitful area for them to start in businesses. It's one of the verticals that they created and focused on in the early years when they were a really broad and horizontal platform and needed to help customers understand what the value prop was. Marketing ops has been an area, and so there are a number of small businesses and startups around the world that have gone in and filled different parts of specific workflows. So really niche operations. That's an example of where you might do a tuck-in acquisition to bring that capability into that specific part of the platform for marketing ops customers. They haven't chosen to do that yet, but that's where they'll focus. The other area is acqui-hires where there are businesses with really impressive talent, fantastic ideas and capabilities that they want to bring into the business. Share repurchases are the other option and that's something that they can definitely take advantage of at points when the business is not valued particularly highly.
· Matt Reustle, Ben Hensman
[00:00:00] S0: Have they ever done share repurchases in the past? [00:00:00] S1: No. [00:00:00] S0: Yeah. Pay the employees in the stock, wait for it to come back to buy back. There's some interesting options, particularly when you mentioned the dilution versus the percentage of revenue. It's an interesting delta between the two. And then I guess when I think about the business, I am sure they have high aspirations and a long runway ahead. Have they ever been targeted in M&A talks? Is that ever something that gets floated around?
· Ben Hensman
[00:00:00] S1: They have been targeted in their early years in particular. I mean, they're a $14.5 billion company now, so it's a much bigger undertaking for a large company. But we have seen that happen in this space before. Salesforce bought Slack for 27 billion to plug a hole on their product portfolio. I think what stands out about Roy and Eran from the very early days, this is something that we often talk to early-stage companies about when they're in the early years and are doing incredibly well and growing fast: what happens when an offer comes? And I think what we've seen with them is their hunger and their ambition to build something really significant in the next generation of software and willing to take material risks to get there. They've talked about this before, publicly, in interviews, that they really feel, and certainly felt back in 2016 and 2017 and '18 that they were building the next Salesforce or Microsoft. And that's a big statement. But they genuinely felt that Monday's underlying vision and that platform capability really had that potential. And we do as well. And they've said very clearly they don't see any reason to sell the company and they're having the time of their lives and that's been a very consistent feature for them. If you look at some of the things that indicate the level of ambition, one really good example is when they changed their name from daPulse to Monday.com. There are always going to be lots of views on whether name changes are a good idea. They had to pay a lot for the domain name, but it's been an incredible shift for the business to do that. It's really opened up the way that they go-to-market and the way they talk about the brand. At the time they had 15,000 paying customers. They were material scale and that was a really big bet. And focusing on the upside and being bold and going after that. I think it's a really good show of force from them on what they're trying to achieve. So I think it's pretty unlikely that we'll ever see them sell.
· Matt Reustle
[00:00:00] S0: Yeah, I have to mention Wiz was in the same category of no reason to sell, and the price just got higher and higher and I think that turned out well. But I think the ambition is clear. I think one of the things that I usually bring up earlier and when we were discussing the episode beforehand, you mentioned TAM is a difficult thing to measure here, and I think you've laid out exactly why. But when you think about the market opportunity, they're, let's say, billion dollars in revenue right now run rate. How big do you even categorize this market as? It seems incredibly huge. But how do you just think about that market opportunity and if it's them taking advantage of a growing wave, if it's them capturing more market share, just some of those more competitive dynamics.