Description

SVMK, Inc. (SVMK) / SurveyMonkey

Summary

For 20 years, SurveyMonkey (“SVMK” or the “Company”) has long been synonymous with online surveys.  Everybody knows the brand, and most everybody has used it at one point in time.  Surveys are an inherently viral product which has allowed the Company to quietly amass a 17+ million user base today.  However, many still believe SVMK is the same low-tech, consumer-oriented internet business that we all first used a decade ago.  Under new leadership, the Company has emerged as an enterprise SaaS leader in the burgeoning experience management software market with an enterprise business growing 100%+ y/y that’s ripping & replacing their closest competitor Qualtrics.

In fact, SurveyMonkey’s business model is most similar to other self-serve success stories Slack (WORK) and Zoom Video (ZM).  Like Slack and Zoom, the product is inherently viral and drives tremendous inbound demand (self-serve).  Over 80% of SurveyMonkey’s users are acquired for free and over 80% are using the product for work purposes. The Company spent the past few years focused heavily on R&D to build out a suite of enterprise products.  And now like Slack and Zoom, SVMK has an enterprise-focused sales force that targets the top 10% heaviest users on the platform and converts them to lucrative enterprise-wide paid plans.  Armed with a feature-rich yet extremely affordable product portfolio, the Company has put this enterprise sales effort into overdrive.

Due to this massive acceleration upmarket, buoyed by a significant self-serve foundation, we expect overall growth to accelerate to a sustainable 25-30% CAGR starting in 2020, well above the street’s 20% CAGR forecast for the next several years.  This is all while delivering ~20%+ FCF margins given the business model’s hyper-efficiency, which is precisely what appeals to us as value investors and helps justify a meaningful revenue multiple re-rating.  By our estimates, we view SVMK as a $30+ stock vs. $17 today, or ~80-100% upside, on a PV basis.  Over two or three years we can envision 200-300%+ upside.

Company Background

SurveyMonkey was founded in 1999 by Ryan Finley who remains on the Board today.  It was a 12-person, highly profitable operation until Spectrum Equity took a majority ownership stake in 2009.  They installed Dave Goldberg (who was Sheryl Sandberg’s husband) as CEO who scaled the Company from <$30 million in revenue to nearly $200 million and 500+ employees.  This was largely through fueling user growth and pushing self-serve paid plans; however, the Company aspired to move upmarket into the enterprise space and started building out a sales force to target larger customers with organization-wide paid plans.  But in 2015, Dave Goldberg tragically passed away which left the Company in an understandably difficult transition.

In 2016, board member Zander Lurie stepped into the CEO role.  Coming from a Board perspective, he realized that SVMK’s team and product portfolio weren’t enterprise ready.  In fact, the enterprise selling effort at the time was simply uneconomical given the lack of product-market fit.  From 2016-17, he initiated a major restructuring by turning over 80% of the management team to become more enterprise focused (President Tom Hale joined in late 2016 and Chief Sales Officer Josh Schoenstein joined in 2017).  He also drastically cut the sales force by upwards of 100 people and reallocated significant resources to R&D.  The Company also raised pricing to help drive incremental near-term revenue growth in 2018 to fund the R&D needed to build an enterprise platform.

After focusing heavily on R&D and ensuring their products were truly enterprise ready, only then did Zander & Co. feel it was appropriate to re-ramp the sales force to go after the enterprise opportunity.  This initiative started in late 2018 in conjunction with SVMK’s IPO and they are currently ahead of plan to double the sales force in 2019.  In fact, we’ve heard that many of the former salespeople who left have now returned to the Company and have never been happier.  Given the heavy investment in S&M to build up the sales force, margins deteriorated in the quarters subsequent to the Sept. 2018 IPO (specifically Q4’18 and Q1’19) as investors awaited sales productivity to ramp.  In Q2’19 we finally witnessed material topline acceleration to ~20% growth as well as a return to positive operating margins.  The Q2’19 print was a massive beat across the board and sent the stock up 18% that day, indicative of a clear inflection.

The Sept. 2018 IPO itself was a boom and bust.  Like many SaaS IPOs, it was met with quick fervor and swiftly rallied, but as investors digested the news of ramped S&M investment, the stock quickly retreated to its IPO price of $12.  In addition, the CFO at the time randomly decided to retire just months after going public which certainly did not help with sentiment.  However, with the inflection on the Q2’19 print, SVMK announced the hiring of Debbie Clifford as their new CFO.  She was previously the #2 finance executive at Autodesk (ADSK) which any SaaS investor knows is a successful software behemoth.  In our view, this appears to be a major upgrade and a significant vote of confidence in the SVMK strategy by a seasoned enterprise SaaS expert who was the internal successor candidate as CFO at ADSK (to the extent there was a change there).

After Spectrum Equity’s initial investment in 2009, SVMK raised additional private capital from several institutional and strategic investors.  Spectrum is now selling down as part of a natural distribution to their LPs (it’s been 10 years and they’ve made an enormous profit).  Tiger Global first invested in 2012 and eventually amassed ~25% ownership but has been selling down recently as their head of private investing left the firm.  They remain a top SVMK customer.  Google (Capital G) also invested.  And Salesforce invested at the time of IPO.  Salesforce also rolled over their stake in a company that SVMK recently acquired (GetFeedback) into incremental SVMK equity.  We thought this was another positive indication that potentially Salesforce might like to acquire SVMK (more on this later).  The IPO proceeds helped pay down debt and enabled a refinancing of the capital structure to lower interest expense.  The Company has $62m in net debt today.

Lastly, we wanted to draw attention to the Company’s accomplished Board of Directors which is quite unusual for a company this size:

• Dave Ebersman (Chair) – former CFO of Facebook

• Sheryl Sandberg – COO of Facebook (was married to former SVMK CEO Dave Goldberg)

• Susan Decker – former EVP/CFO/President of Yahoo! and Board Director at Berkshire Hathaway

• Brad Smith – CEO of Intuit and Chairman of Nordstrom

• Serena Williams – private/philanthropic investor and tennis superstar

• Dana Evan – Partner at Icon Ventures (venture capital) and former CFO of VeriSign

• Erika James – Dean of Emory University’s Business School

• Benjamin Spero – Partner at Spectrum Equity (growth equity)

• Ryan Finley – SVMK Founder

• Zander Lurie – SVMK CEO

The Self-Serve (“Freemium”) Business Model (skip this section if you’re already familiar)

Prominent venture capital firm Sequoia Capital called it “The Most Important Business Idea You’ve Never Heard Of” (Source) – that is, the self-serve business model in software.  Put simply, we agree with Sequoia, and will quote their words to describe what it is:

One of the best kept secrets in tech is a business model most people have never heard of: self-serve (or product-driven) sales. The idea at the heart of self-serve is that customers help themselves to the products they want to purchase, rather than going through a salesperson. Self-serve is responsible for the success of companies like Google, Facebook, LinkedIn and Atlassian… Self-serve is the holy grail of efficient business models. But if product-driven sales is so great, why doesn’t every company pursue it? Because it requires two key ingredients that are hard to find in combination. 1) An intuitive product capable of self-service, and 2) Enormous inbound demand.

Two modern software companies that held sensational public offerings this year both aptly demonstrate the virtues of the self-serve business model: Slack (Ticker: WORK) and Zoom Video (Ticker: ZM).  In both cases, the companies developed very easy-to-use products that drive substantial organic growth through user virality.

For Slack, a workplace communications tool, any office worker that starts using the platform must recruit her colleagues – it is a chat application after all.  As more and more employees adopt Slack, it quickly becomes the de facto communication tool within the entire enterprise.  Similarly for Zoom, a video conferencing tool – sending an invite to “join a Zoom Meeting” to a group of people exposes all recipients to video conferencing software that works extraordinarily well across all devices and requires minimal installation/configuration of new software.

Slack and Zoom are free to use, yet both companies are well on their way to generating $1 billion in revenues soon, all while generating significant, positive free cash flow.  How?  While the entry-level tier is completely free, these companies offer paid plans with enhanced collaboration features, centralized management, and enterprise-grade security.  Again, users can sign up for these paid plans all on their own without ever interacting with a sales rep.  In fact, Slack and Zoom encourage free users to upgrade to paid plans through automated notifications that highlight the benefits of paid plans or by limiting product usage (i.e. free Zoom meetings for groups can only last 40 minutes).

But where the real money is made is by targeting the heaviest users on the platform and encouraging the entire organization to adopt an enterprise plan.  This is critical for mid-to-large enterprises as it brings work communications and account management under the watchful eye of their in-house IT and security teams.  Given the higher quality feature set, these plans typically carry far better long-term economics, including higher ARPU and lower churn.  It also makes it easier to cross-sell additional products down the line.  Therefore, this enterprise effort is typically carried out by a real, focused sales force but given the higher unit economics, it is well worth the sales & marketing expenditure.

To sum up the self-serve business model:

1. Most new users are acquired for free due to the inherent virality of the product

2. These users are eventually upsold to paid plans, a process also automated

3. And the heaviest users on the platform are targeted by a focused sales force to convert entire organizations to lucrative enterprise plans

The efficiency of this sales motion is unmatched – where else do companies attract users for free, and then focus all their effort on monetizing its most active users that already love the product?  The self-serve business model enables high growth despite low sales & marketing spend, and therefore robust profit margins.  The low sales & marketing spend also allows these companies to focus on developing world-class software offered at highly disruptive prices, thereby feeding the flywheel of virality and competitive moat.  Given the combination of hypergrowth and high margins, Slack and Zoom trade at approximately 20-30x+ forward EV / Revenue following their splashy debuts on the public markets.

Like Slack and Zoom, SurveyMonkey is set up for success in self-serve, but unlike those companies, you get to buy the stock closer to ~6x EV / Revenue.  Surveys are an inherently viral product – a survey is sent out to hundreds or even thousands of recipients, all of which are immediately exposed to the brand/product.  A small percentage become users themselves and start creating and sending out surveys to more recipients.  For 20 years, this network effect has helped build a user base of over 17 million people and maintain an extremely low customer acquisition cost (CAC) – again, over 80% of SVMK customers arrive at the platform for free.  In addition, self-serve companies usually have automated mechanisms in place to encourage their free users to upgrade to a paid account (expanded usage, advanced features, better security, etc.).

This self-serve business is effectively the non-enterprise “base” or “foundation” for the enterprise side.  Since 80% of SVMK’s users utilize the product for work purposes, the Company has built up a sales force to go after the top 10% heaviest users.  SVMK has developed in-house sales targeting software called Customer 360 that figures out which users are likely working together at the same company and using the product heavily.  They will then deploy sales people to those users and convince them to upgrade to an enterprise plan.  This is also an extremely efficient go-to-market motion as you are targeting all your enterprise sales efforts on people who already love your product.

Enterprise plans offer centralized management, advanced collaboration features and a greater degree of security.  They also carry better long-term economics as enterprise accounts have far lower churn and it becomes easy for companies to add new users and adopt incremental products.  To put this into context, the average enterprise annual spend is ~$10K today, but SVMK just landed their first $1m+ enterprise customer.  We believe there is significant room to move upmarket and increase pricing over time.  Altogether the enterprise business has accelerated to 110% y/y growth in Q2’19 and we believe will drive overall revenue acceleration into the 25-30% range, all while maintaining ~20%+ FCF margins.  While we are still witnessing the initial ramp of the enterprise effort and overall acceleration, this is precisely why the stock trades at a massive discount to peers as many in the market are simply unaware of SVMK’s transformation and accelerating profile.

Market Overview

First, what is “experience management”?  In today’s experience economy, it is critical to go beyond an assessment of what is happening within organizations to an understanding of why trends are emerging in the moment.  SVMK calls this “people powered data” and it helps distill and quantify the quality of an experience on top of traditional CRM, ERP, HCM and marketing automation data.

Experience management software is becoming critical for business success in today’s experience economy.  Some select stats from the Qualtrics S-1:

• According to a 2017 study by the Temkin Group, customer experience leaders enjoy a net promoter score, or NPS, over 18 points higher than customer experience laggards… 

• According to the Gallup Organization, organizations with a high level of employee engagement report 21% higher productivity…

• PricewaterhouseCoopers LLP reported that 32% of all customers say they will walk away from a brand they loved after just one bad experience…

• Deloitte found that the cost of losing an employee can cost up to 1.5 to 2.0 times the employee’s annual salary…

• According to academic research and industry studies, failing to meet customer expectations has been shown to have twice the negative economic impact as delighting customers has a positive impact…

We believe SurveyMonkey is capitalizing on a theme that every company needs to focus on.  Smart enterprises are realizing that in order to drive growth, it is critical to focus on delivering a high-quality experience.  Today, it’s not enough to know that revenue went up or down; you have to understand why.  If you’re able to understand why, you can better predict market appetite, root out issues, or identify meaningful opportunities sooner.  It can also provide direction for how to impress customers and win new ones, improve employee engagement and attract talent.  As the broader experience management theme and market grow, SurveyMonkey has emerged as one of the leaders given their advanced surveying technology and analytics tools that address this very theme.

One of the best case studies we came across is featured in their Q4’18 shareholder letter, Celadon Trucking (emphasis ours):

Celadon, one of the 10 largest truckload carriers in North America, had a significant number of drivers leaving within their first 90 days of employment in an industry where turnover is around 100% annually. Using SurveyMonkey Enterprise, they automated driver feedback collection during onboarding, then followed up with surveys at 30, 60, and 90-day intervals to stay on top of issues once their drivers were on the road. Celadon realized that driver feedback would be more accessible and valuable if it could be integrated into Salesforce. They used our Salesforce integration to give driver facing departments access to driver feedback and workflows that automatically create cases and notifies the right department if a survey response requires follow up. By listening to their drivers and making significant improvements to their recruiting and retention process, Celadon was able to improve driver retention by 68% from 2017 to 2018. 

As for the TAM, SVMK claims it is $27bn, Qualtrics claims $44bn and Medallia claims $68bn (per their S-1 filings). There are many ways to cut the TAM, but in general we believe it’s pretty significant.  This is certainly not a highly specialized / verticalized SaaS play with a sub-$10bn TAM.  Part of the challenge is that it’s a relatively new category, yet one that applies to nearly all companies.  Here is the TAM page from SVMK’s investor presentation:

Product Portfolio and Pricing Overview

SVMK offers a suite of survey / experience management / voice-of-the-customer products that help individuals and enterprises:

• Engage customers

• Engage employees

• Conduct market research (using own data or SVMK panel data)

• Apply for scholarships / grants (non-profit / education)

• Collect feedback on digital assets (web, mobile, etc.)

• Automatically generate customer testimonials, case studies, etc.

We won’t dwell on product details – it’s a fairly simple product and you should go to their website and use it yourself to get a good feel for it.

Overall, pricing is insanely cheap.  In fact, this is commonly cited by customers as a key reason driving adoption – the ROI is tremendous.  As a small investment firm, we would balk at the $50,000 price tag that consultants charge to conduct a consumer survey.  Instead, we use SVMK’s Audience product to generate a comparable survey ourselves for less than $5,000.  No wonder Tiger Global has been a customer for many years (~$2m annual spend per 10-K and S-1).  Below is a pricing chart from the S-1 – note that now 80% of paying users are on annual plans and 20% of total revenue is now coming from Enterprise clients.  With an overall ARPU of $442 (paying users), we believe there is significant room to move pricing up, as well as cross-sell additional products.

One important fact is that SurveyMonkey has its own in-house panel of 2.5+ million people which they’ve built up over time – this allows them to provide market research survey capabilities at an extremely low cost.  SVMK has built up this panel database over time by asking survey recipients at the end of each survey whether they’d like to opt-in.  The incentive for completing a survey is straightforward: either 1) ~35 cents of Amazon credit or 2) SurveyMonkey donates ~70 cents to a charity of your choosing.  Most choose the charity donation given the low amount, which is also tax efficient for SVMK.  We believe this recruitment process results in a much higher quality panel than others given recipients are not being paid much for participation (or rather doing it to benefit a charity).

As SVMK matures into the enterprise space, many of their products not only require a seat license (annual subscription) but charge on a usage basis.  For example, for our diligence on new investments we may launch a consumer survey to reach 1,000 people by using SVMK’s Audience product.  This requires signing up for a paid annual plan, but they will also charge per response for that survey (anywhere from $1-10 per response, depending on the specificity of the target demo criteria).  This is how we ended up spending upwards $5,000 on SurveyMonkey for one survey despite the $442 ARPU.

SurveyMonkey’s Moat

We can summarize SVMK’s moat into three categories:

1. Pricing.  The efficiency of the self-serve model enables extremely low CAC, thus allowing the Company to focus on delivering great products at a really low price.  With a superior product and low price, usage should continue to flourish, driving viral user growth.  Thus, a self-serve “flywheel” effect takes place which perpetually extends SVMK’s scale, product quality and price leadership.  This is why new upstarts have struggled to compete with SVMK at the bottom end of the market as they need to either spend more on CAC and/or charge higher prices; otherwise, it will likely take them a very long time to reach any sort of scale

2. Deployment / Integrations.  It is incredibly easy to set up and start using SurveyMonkey.  Whereas Qualtrics/Medallia can take months or even years to deploy (with the help of pricey professional services that drag overall gross margins), SVMK enterprise products can take less than a month.  This is largely because SVMK integrates its data into existing tech platforms via integrations.  Many organizations want their customer data within their existing CRM or ERP system – not in a separate system of record.  SVMK offers this type of integration and many more, while others operate as a standalone system of record, thus requiring more complex, lengthier and costlier set ups.  See below Company slide on integration ecosystem

3. Data.  With a long history and significant scale, SVMK processes a tremendous amount of survey data per day.  This data is then utilized by SVMK’s AI/ML-based features such as SurveyMonkey Genius which helps users write better surveys through text / answer prediction.  The scale and treasure trove of data helps fuel product development while enabling a low-friction experience

Competitive Landscape

The Company faces limited competitors at scale.  Qualtrics, now owned by SAP, has similar product features yet historically focused on only mid-market and enterprise customers.  Implementation takes roughly 6-12 months and the average annual enterprise spend is about $40,000.  Medallia (Ticker: MDLA), which recently went public, focuses on very large, global enterprises.  And frankly, Medallia’s product is a far more advanced “voice-of-the-customer” platform that aggregates real-time data from various “signals” (online reviews, social media, real-time communications with customers, etc.) that enable organizations to react quickly to remedy issues.  As such, they rarely run into SVMK in the field but are still worth mentioning.  In addition, Medallia’s implementation can take upwards of two years and the average annual enterprise spend is roughly $500,000, yet another reason why they do not cross paths.

Both are a stark contrast to SurveyMonkey where the average annual spend is ~$10,000 and enterprise implementation can take less than a month.  SurveyMonkey offers drastically lower prices and quick implementation due to the self-serve foundation and the ability to store data into existing systems of record (i.e. Salesforce, Oracle, Microsoft databases) – the others require you to set up a new database, resulting in lengthy and costly implementations.  Nonetheless, we believe the success witnessed by Qualtrics and Medallia is indicative of a healthy overall market and validates the opportunity for SurveyMonkey’s ability to move upmarket and take pricing over time.  We strongly prefer SurveyMonkey’s position as one moving upmarket as a price disruptor, versus a position of needing to move down market to smaller clients for incremental growth despite similar customer acquisition costs.  In fact, SVMK CEO announced on the latest earnings call (Q2’19) that they are now displacing competitors (emphasis ours):

Our strategy of leveraging our massive customer footprint and strong brand recognition to upsell our Enterprise platform directly to organizations is working. Enterprise customers are embracing our open ecosystem approach of integrating SurveyMonkey into their existing systems of record such as Salesforce, Microsoft, Google, Oracle and Tableau. We have a growing list of new clients who have ripped out more expensive and less agile software tools in favor of SurveyMonkey. (Q2’19 Earnings Call, 8/1/19)

We held recent conversations with management and left fairly confident that they were referring to Qualtrics.

Despite the fact that it’s super sticky once you have SurveyMonkey up and running with integrations, where are users going to switch if they wanted to?  SVMK is the best provider at the lowest price.  There are not that many other players with true enterprise offerings except for Qualtrics, and now that they’re under SAP, they will be super focused on driving sales from SAP customers.  This leaves Microsoft, Salesforce, Oracle, Google and Adobe shops as keen to explore SVMK.

In terms of the low-end survey tool market, there are certainly numerous competitors that we would classify as “ankle biters.”  One example is Typeform based out of Barcelona (we estimate SVMK is 10x the size).  Due to their lack of scale / organic inbound demand, any upstart must spend money on CAC (S&M).  This means less money for R&D and/or higher pricing to compensate.  Either way, this acts as a key long-term competitive barrier for SVMK.  Lastly, Google Forms is far simpler than a survey tool as there is no advanced survey logic (despite having seemingly ample time and resources to build this out if they really wanted to).  In fact, SVMK has an integration with Google that allows end users to port their projects over to the SurveyMonkey platform when they need to “graduate” to a real survey solution.  In a way, Google Forms acts as a funnel to SVMK.

Could Google or another tech behemoth eventually want to enter this space?  Possibly, but we believe an acquisition of SVMK is more likely due to the data advantage we described above.  Over 2.5mm SurveyMonkey surveys are answered every day which provides SVMK an immense amount of data that feeds their AI/ML product development efforts.  Without this data, it would be very difficult for anybody, including a Google, to replicate their ability to assist with survey creation and/or predict/analyze survey results, thus resulting in a far less helpful product experience. 

Financial Model

The core thesis on SVMK is that the move upmarket to enterprises will accelerate overall revenue growth through paid user growth, ARPU growth (cross-selling and pricing), and lower churn.  The outperformance on revenue will flow through to margin outperformance as well.  Before diving into detail, here are several quotes from SVMK CEO Zander Lurie on their prospects for acceleration: 

And so we're really just doubling down on getting folks hired, enabled and then trained up to capitalize on what is this proprietary opportunity to sell into enterprises where we already have a large installed base. So I think you'll see both revenue growth accelerate in 2020 above '19, and the opportunity for EBIT margins to expand. I can't make any promises there. I just know we're going to have a lot more productive salespeople reaching full quotas in fourth quarter this year. (Q4’18 Earnings Call, 2/13/19)

So if you look at our Board of Directors, who is on our Audit Committee, we don't make guidance unless it goes through kind of vetted channels. So we guided to 20% growth at the midpoint of our guidance for the second half. And the 3, 4-year doubling by application takes up into 20-plus percent north revenue growth in 2020 and beyond. (JP Morgan Tech Conference, 5/14/19)

So we've guided to 20% midpoint second half growth for this year. And if we do our job right, I think you're going to expect guidance to continue along that trend. And we're on pace to doubling this business in 3 to 4 years.  I anticipate us getting in the 20-plus percent revenue growth rate starting in the second half this year and beyond.  (BAML Tech Conference, 6/4/19)

Below is an output of our estimated revenue build up that parses out non-enterprise vs. enterprise users and related metrics (ARPU, churn, etc.).  There is a lot more math that goes into parsing this out (this is only a summary) but at a high level, the key here is knowing that SVMK witnesses a 4x ARR uplift when converting a non-enterprise paid user to an enterprise plan.  Although enterprise seats may receive a discount due to higher volume, we believe the overall spend of a typical enterprise user is higher than non-enterprise given higher utilization of SVMK’s purpose-built solutions that are priced on a usage basis.  Since SVMK breaks out non-enterprise revenue vs. enterprise revenue (20% in Q2’19), we take the $ amount of each and divide by the estimated ARPU of each segment to estimate the number of users for each segment.  Based on their S-1 amendment filings, we discovered that during 2018 non-enterprise net retention rates were 80%+ (thus implying actual gross churn of 20%+) and enterprise net retention rates were 95%+ (thus implying actual gross churn of 5%+).  The enterprise net retention rate has since improved to 100%+ (reported quarterly).  These figures helped us triangulate historical and forecasted churn assumptions for each segment.

At a high level, we’ve taken commentary from mgmt. and applied it to a 5-year outlook.  SVMK CEO says he wants to “double the business in 3 to 4 years, hopefully closer to 3” (compared to 2018 revenue of ~$254m).  We arrive at just above $500m in year 3 (2021E) and eventually surpass $1bn in year 5 (2024E).

Management has said the enterprise sales force is targeting the “top 10% organizations on the platform” – today they have 335,000 and we believe they can reach roughly 10% of that figure in 5 years (we are modeling ~7%).  Mind you, this only implies a penetration of <6% by that time as we assume organizations on the platform grow, thus providing a continued runway for growth beyond our forecast.  Today, the average paying enterprise spends about ~$10K/year (enterprise revenue and # of paying enterprises are both disclosed).  Given Qualtrics’ comparable figure is closer to $40K, we do not think it unreasonable to see SVMK’s figure grow closer to Qualtrics over 5 years to ~$35K (2024E).  This is supported by our estimate that the average # of seats per paying enterprise is currently ~20, but incremental paying organizations added in recent quarters are averaging closer to ~35-40 seats. This isn’t crazy as some of their latest customers include clients like Accenture and Wells Fargo.  We believe the average # of seats per paying enterprise can grow to 45 over time.  Combined with modest ARPU growth driven by pricing and cross-selling, as well as modest churn improvement, this would yield an extremely healthy enterprise revenue growth rate for years to come.  With the sales force ramp reaching far higher productivity levels by the end of 2019, we expect 2020 enterprise revenue growth to remain robust, even over 2019 which faced fairly easy comps when the enterprise effort was in its infancy.

The enterprise growth forecast may appear very robust, but please note that in the most recent qtr (Q2’19), it grew 110% y/y.  Going forward, we are assuming an increase in CAC across the board despite theoretically higher sales productivity.  Therefore, we believe our growth assumptions are achievable.  The growth rate is helped by improving churn as they continue to move upmarket.  However, we are only modeling a very modest improvement in the enterprise net retention rate (100% today as reported to 101% over five years) despite management’s belief that the figure could be 110%+ in the future.

All of this culminates in a double-digit LTV/CAC for the enterprise side (again, similar to Slack and Zoom estimates we’ve seen).  We are assuming that practically all incremental S&M dollars are allocated to the enterprise effort and that the dollar amount for non-enterprise S&M is roughly flat over our forecast.

As for the non-enterprise side, management has said this is a “low double-digit growth business” on its own with little ongoing investment required.  We are assuming 8% growth in 2019 and an ~6% CAGR thereafter to be very conservative.  We realize that some non-enterprise growth may be offset by the growth in enterprise as many new paid users will convert or join as enterprise users off the bat.  This is precisely why we’ve modeled a dip in non-enterprise net additions in 2019 given the ramp up of the enterprise effort.  We are assuming very modest ARPU growth in our forecast of 3% beyond 2020 as well as a steady improvement in churn (although this remains significantly higher vs. the enterprise side).  Altogether this segment still produces a commendable LTV/CAC in the mid to high single digits by our estimates.

Lastly, the other tell that revenue is set to accelerate is the substantial acceleration in billings growth to 32% y/y in the most recent qtr (Q2’19).  This is a leading indicator for revenue growth which should accelerate to be in line with billings growth.  We have SVMK accelerating to mid-to-high 20s in our forecast and are comfortable with a 25-30% growth range (vs. the street at ~20%).

Forecasting gross margin and operating expenses is admittedly much easier. Management has stated a long-term non-GAAP gross margin goal of 80%, which should be achieved fairly soon since they just reported 78% in Q2’19.  Given Slack operates at 86%, we are hopeful that there is incremental upside here, but are modeling to 80% in our forecast.

We expect S&M as a % of revenue to peak next year given the continued ramp in the enterprise sales force to fuel our high growth expectations.  We then expect S&M operating leverage beyond 2020 albeit still seeing enterprise CAC grow over the forecast.

R&D as a % of revenue is above 20% currently which appears high, but due to the S&M efficiency of the self-serve model, these businesses can afford to spend healthily on R&D to maintain their technology moat.  We’re modeling modest operating leverage here.  For reference, Slack’s R&D as % of revenue is north of 35%.  As for G&A, it is quite high now given their current size, but we expect this to scale very well over our forecast and reach the standard <10% level at the ~$1 billion revenue mark similar to most SaaS companies.  Similar thinking for capex – this should scale to a low-single-digit as % of revenue figure over time.

Below is the income statement output and at the bottom are FCF and operating efficiency metrics.  SVMK is already producing close to ~20% FCF margins and we expect these to scale very well over time as opex scales.  On a Rule of 40 basis, whether using EBITDA margins or FCF, SVMK should return to the 40 level in 2020 and continue to expand over time.  This is reflective of the high efficiency of self-serve models relative to traditional enterprise SaaS businesses.

Valuation

Our 5-year DCF produces a $34 PV utilizing a 26x EV / EBITDA or 7.5x EV / Revenue LTM terminal multiple on our forecast and a 10% discount rate.  Also, the DCF factors in the $120m+ worth of acquisitions conducted in 2019 YTD.  But otherwise, the Company is FCF positive given the SaaS nature of deferred revenue inflows. 

We utilize a public enterprise SaaS comp set of over 60 names.  Those growing topline mid-20s and above are currently trading at 10-20x 2020E EV / Revenue.  Utilizing 10x on our 2020E revenue estimate for SVMK yields a $30 stock price (we are forecasting 29% y/y growth in 2020E).

Lastly, one could value the non-enterprise self-serve business and enterprise segment separately.  For a low growth yet highly profitable and stable self-serve business, 7-8x EV / Revenue feels appropriate (given the higher than average profitability).  For the hypergrowth enterprise segment that’s currently doubling y/y, we could utilize a 16x EV / Revenue in line with the median of high growth self-serve comparable peers (TEAM, WORK, ZM, TWLO, SMAR, DBX, ADBE).  Over time as growth decelerates, the forward multiple should be taken down.  On a consolidated basis, this implies ~10-11x consolidated EV / Revenue ($30 PV), which again is at the low end of the peer range.  Below is our SOTP valuation and share price forecast:

Note that we are assuming share repurchases of $100m, $200m and $300m in 2022E, 2023E, and 2024E, respectively.  Hence the declining share count in the outer years.  The Company should pay down its debt by 2023E and we feel the next best use of cash is share repurchases (save M&A) given the immense upside potential in SVMK shares.

Lastly, we realize posting a “growth” pitch on VIC may not initially appeal to everybody, but the FCF support is what really attracts us as value investors.  Theoretically, if the Company were to “turn off” its S&M spend, it could produce 40% FCF margins immediately.  At normalized profitability levels for what would still be a ~10-15% topline grower, you are paying close to ~20x EV / FCF for a very high-quality asset that’s growing nearly 3x faster than the market yet at a similar, normalized valuation multiple.  At the very least, this asset deserves a premium to the market, which is what makes this a great value play too. 

Potential Acquirers

There are numerous datapoints that indicate large strategic players like Google, Salesforce, Microsoft, Adobe and Oracle would possibly be interested in acquiring SurveyMonkey.  The most likely, in our view, is Salesforce.  Salesforce CEO Marc Benioff constantly talks about delivering a “Customer 360” vision for their customers – we imagine customer experience data that SVMK provides would be a key part of that.  At the time of SVMK’s IPO, Salesforce took a stake – this is potentially the result of SVMK’s investment bankers running a dual-track process of IPO vs. selling the company.  Ultimately, they decided on an IPO, but we believe Salesforce was able to invest at the IPO price given their interest in the asset, but likely wanted to see the growth strategy play out first.  Benioff has been very public in only wanting to acquire companies that are accretive to Salesforce’s organic growth (low 20s). If SVMK accelerates to above these levels, we believe they’ll become an actionable target, which could be as early as next qtr (Q3’19).  In addition, SurveyMonkey recently acquired GetFeedback, a private company also backed by Salesforce.  Salesforce opted to roll over their stake into SVMK equity instead of taking cash in the deal, thus increasing their SVMK ownership.  Today they own roughly ~3% of SVMK shares.

Beyond Salesforce, Google is also a prior investor and Microsoft is a very close integration partner.  Microsoft featured SVMK onstage as one of three key partners at their recent BUILD developers conference.  Adobe is also moving closer to marketing cloud solutions in direct competition with Salesforce and could also be interested in SVMK, particularly for the Audience product.  Lastly, the Company’s closest peer, Qualtrics, was acquired by SAP last year for $8bn in cash, or 14x forward EV / Revenue – this development is one we believe Oracle is closely watching. 

Where Could We Be Wrong?

• ARPU assumptions could turn out too aggressive as the enterprise conversion process does happen but at a discounted price.  Our assumption is that wider adoption amongst enterprise clients more than offsets the initial discount to seat price due to cross-selling and usage-based revenue (i.e. using the Audience product to conduct a mass survey where you’re charged on a per response basis).  If this doesn’t happen, enterprise ARPU growth could be much lower

• The move upmarket assumes landing bigger and bigger clients, hence the rise in average # of seats per paying enterprise in our model.  If they cannot continue to penetrate upmarket for whatever reason, the typical client size could stagnate at ~25-30 seats per paying enterprise.  This would also mute enterprise revenue growth

• Medallia is acquired first which may delay a potential acquisition of SVMK (in case you were counting on that).  Medallia is also a great company, just different.  While we prefer SVMK stock, market position, business model, relative valuation and profitability, we recognize that Medallia has a compelling technology platform that’s geared towards global enterprises.   At the same time, an acquisition of Medallia wouldn’t prevent an eventual acquisition of SVMK by the same acquirer.  In fact, a competing strategic may feel more compelled to act after witnessing another major tech player make an acquisition in the space – in other words, a Medallia buyout, just like a Qualtrics buyout, could notably raise the M&A interest level for SVMK as they’d be the only scaled player left to buy in the burgeoning experience management space

Recommended Reading (Ranked Order)

• Q3’18, Q4’18, Q1’19 and Q2’19 shareholder letters and earnings call transcripts

• JPM and BAML conference transcripts

• BAML Initiation and recent notes (this sellside analyst is good)

• Recent UBS upgrade to Buy (also a good sellside analyst)

• SVMK Investor Pres (August 2019)

• S-1 and 10-K

Catalyst

• Q3 2019 Earnings - focus on revenue growth and operating margins
• Curiosity Conference - September 18th and 19th (virtual event)
• More analyst coverage and focus on self-serve business model economics
• M&A target