Business Breakdowns
· Ben Hensman
[00:00:00] S1: Yeah, absolutely. So I think the starting point for Monday is its original home project management, which today is defined by IDC as about a $45 billion addressable market, but growing really healthily. What we've seen over the years is Monday has expanded into more and more use cases, some defined use cases like CRM and service management and product development, but also a whole lot of other use cases that are really just labor and internal processes and workflows. So the defined size of their market IDC has that growing to about 150 billion by 2026. And these are very large numbers. That's growing about 14%, 14%, 15%. And so at a pace of two times that or a little bit more, Monday's clearly taking meaningful share within that defined market. But we don't think of that set of definitions across those core categories of functional software as the bounds of what they can achieve. They can sell to effectively or be bought by any business in the world, and so perform and help drive most processes for those businesses. And so long as they're core workflows and they retain those customers and expand them meaningfully over time, this is a business that has no upper limit on its scale. Its ability to get there will be tied to the value it creates for customers and then how it's able to capture a share of that value, a fair share of that value, as it unlocks productivity and capability within those customers. In terms of the competitive dynamics, I think at first glance this is a very competitive market and we shouldn't be surprised because it's so large, it's always going to have a significant number of competitors vying for that large, large opportunity set. And you also see a lot of different approaches. There's room for a number of winners. You also see a lot of different opinions. So people like different tools, they like using them for different reasons. And I think of competition really in three main buckets. One is that original category of project management companies like Asana, Trello, ClickUp and others. There are many in that space. I think the second group of competitors are functional software players. So Salesforce, ServiceNow, at the enterprise end, HubSpot, Atlassian, Microsoft, these are all businesses that are in those defined software categories.
· Ben Hensman
And then you have a third category with more flexible players that have a similar philosophy but very different form factors to Monday.com, companies like Notion or Airtable. And those companies are solving some of the same problems. There's definitely overlap, but we think the power of what Monday.com has built and the flexibility of it cascades across those three different buckets and beyond and makes them a very different competitor. It's probably one of the most impressive things, if you look across their whole history, is that the entire time that we've known them since 2015 through to today, this has looked like a red ocean. But they have consistently been able to innovate and have really high product velocity and have that cut through to customers, which is something that many others, a couple of those names have obviously done incredibly well, particularly at the enterprise end and companies like HubSpot. But it hasn't been as easy for others to continually cut through, particularly after Covid and a lot of the capital came out of the sector and the ability to grow came out of the sector. We saw that be an incredibly strong period for Monday where they were able to actually lean in and invest more in performance marketing and take market share really significantly during that period because of the quality of the product, but also the quality of their execution against these competitors and the capability that they built in house.
· Matt Reustle
[00:00:00] S0: Yeah, Asana being a very interesting counterexample or different example to look at in terms of how everyone has tried to navigate and some more successfully than others, to put it lightly. When you do try to approach the valuation for this type of business coming out of the IPO, incredibly high valuation levels to be attached to an incredibly high revenue growth rate. But when you think about trading and how to evaluate this, what is your methodology or approach? Factoring in so many different dynamics going on with the business, but having a very optimistic view of the runway.
· Ben Hensman
[00:00:00] S1: So I think 2021 was a very strange period for software valuations at all. Valuations of high growth businesses. Putting it lightly, Monday was no exception. I think it reached incredible highs at a very comparatively to today, very early stage of the business, which didn't make much sense as we all found out in early 2022, which is when we invested in the business. But Monday's characteristics align. We talked about the rule of 60 as a very blunt measure of how it sits against some of these other businesses. Monday has a lot of the characteristics of the best software businesses. So very high gross margins, high NDR, really healthy gross retention has a different profile to many of the absolute best who are in the enterprise in terms of gross retention because of its small business long-tail. So it probably sits somewhere in the mid to high 80s on gross retention, but net retention right up above 110%. Within that base, of course, you've got enterprise customers that have really low churn and are at similar levels to the ServiceNows of the world, between 95 and 97%. What we see is a company that has all the financial characteristics of the best companies, but it has this anchor in small business from its history and that'll always be important to Monday. If you hear the founders talk about small business, they think maintaining those roots both from a product velocity perspective, an experimentation perspective, but also just the flexibility of their platform. So long as they can have the right level of focus on how they go to market, they can maintain it. And so we do expect though that large customers will move that gross dollar retention up over time and consequently help move the net dollar retention up over time. And more and more large customers means more and more core workflows and really sticky product with an ecosystem around it and this incredible platform. And so you're starting to look a lot more like a ServiceNow or a Salesforce or a CrowdStrike. And so in terms of the comparables for those businesses, Monday trades at a discount to those highest quality enterprise software businesses. But we think over time that will start to close. The way that we price this business is on a revenue multiple, but it is a business that's generating significant EBITDA and free cash flow.
· Ben Hensman
And so we look at what that implies for EBITDA and free cash flow, and we look at that over a three to five year period and we think that in five years Monday can still be growing north of 20%. We think they can be delivering meaningfully higher margin structures. And the companies articulated what they think they will be. They're at a free cash flow margin of 25% today, excluding the net interest that they generate. And they think that over the next couple of years that will be similar. But over time that can move up into the mid-30s. And the operating margin, while being lower because of that upfront billing dynamic, will also move up. There's no reason why that can't be closer to 30% over time as well. So these characteristics mean that Monday should deserve a premium multiple. And today that would be defined as around 10 or 11 times revenue. If you look at Monday's stage today, with that growth at the top-line, around 30% guiding to around 26% at the midpoint in 2025, depending on foreign exchange, we think that's sustainable for the next three years. And of course there's a lot of uncertainty at the moment, so there may be some near-term noise there. But all of those levers of growth, we think can persist over a much longer period. And at the same time, you've got EBITDA compounding at 40 to 50% as margins expand. And so today you've got a free cash flow multiple in the high 30s and an EBITDA multiple that's materially higher than that and a revenue multiple around 10 times. We think that effectively means that the business can deliver returns at a similar rate of growth to the top-line, which is a really exciting prospect if that's how it plays out. If you look at other businesses over the last 10 to 15 years, we actually don't have a long history of software businesses besides the ones like Microsoft. We don't have a long history of businesses going from high growth and being valued on revenue multiples to being valued on earnings multiples. But the efficiency and the quality of the financial model of Monday means that at least on our projections, it's possible for the business to have an EBITDA multiple in the 20s even when it's trading on 10 times revenue in three to five years time.
· Matt Reustle
[00:00:00] S0: Yeah, I'm of the belief that revenue multiple for a business that has a gross margin of 90% and a free cash flow margin of 25, potentially 30%, it's all shortcutting back from those numbers at the end. And it makes way more sense for this type of business than for some others that it can be applied to. And interesting to hear the framework. I think it's very helpful to hear how you outlined it and attached all of those moving parts in particular. This has been fascinating, spelled out a lot of things where I am very much a tourist in the software market. But I think it is clear where execution has differentiated this business. If you're just to step back and think about the lessons that you can take away from Monday.com, it's our closing question, what would those lessons be that really stand out to you?