Business Breakdowns
· 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?
· Ben Hensman
[00:00:00] S1: Yeah, I think there are two that stand out when we reflect on the history of software businesses and not just the journey of Monday. First, the largest businesses in software have been able to broaden the problems that they solve for customers and become really important to them over time, generating the majority of growth from their existing customers as well as scaling new business. But also the most valuable and defensible software businesses have not just built out a multi-product portfolio, they've built a commercial platform around them with services, partners, with developers, with an ecosystem that thrives around the customer, helping to fuel the customer. We've seen that with Microsoft, we've seen that with ServiceNow, we've seen that with Atlassian. Extraordinary businesses that have been through that process. They've all looked slightly different, but they've all had similar traits and we think Monday.com has those traits and is executing really well in balancing the movement through solving those different problems, the movement upmarket into larger and more complex workflows with large customers and then surrounding them with the support and the ecosystem to drive growth over time. The lesson there is that very few companies have been able to make that journey work, been able to execute consistently over that long period of time. And I think that one of the other things that's consistent is taking time to achieve that in the right path, in the right order and not rushing that. We've seen in small business, we've seen businesses like Datadog and Cloudflare make a really impressive jump from again serving small customers in particular with a self-serve approach, moving through to solving those enterprise problems but doing so in a really concerted way. We think Monday's following a similar journey and that it can end up as one of the most exciting and largest opportunities in software over time.
· Matt Reustle, Ben Hensman
[00:00:00] S0: Well Ben, this has been excellent. Very long, detailed and informative discussion. Thank you very much for sharing some of the evolution and getting more into the history as well. It was a pleasure. [00:00:00] S1: Thanks Matt, really appreciate you having me on.