|Shares Out. (in M):||133||P/E||0||0|
|Market Cap (in $M):||2,228||P/FCF||0||0|
|Net Debt (in $M):||62||EBIT||0||0|
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SVMK, Inc. (SVMK) / SurveyMonkey
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.
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:
Most new users are acquired for free due to the inherent virality of the product
These users are eventually upsold to paid plans, a process also automated
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.
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:
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.