Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector
of the stock market every day. It's Friday, October 5th, and we're talking about a .com
tech stock gone public. I'm your host, Dylan Lewis, and I'm joined on Skype by senior tech specialist,
Evan Niu. Evan, what's going on? Evan Niu: Not much. It's getting cold in Colorado?
Lewis: What were you doing in 1999?
Niu: I was in high school. Must have been a sophomore, something like that.
Lewis: I was playing baseball and hanging out at pool parties, because I was a middle
schooler at the time. The company that we are talking about today, SurveyMonkey,
was founded in 1999 and has enjoyed quite a lengthy lifetime as a private company, kind of an
under-the-radar unicorn. Niu: Right. The brand's been around forever.
I recognize it from high school. This was right when everyone was going on the internet
and you'd take these random little online surveys and polls. Yeah, they've been around forever.
Lewis: Shares hit the market last week.
The company IPO-ed under the ticker SVMK. In case anyone is not familiar, it is a software as
a service company that allows people to design and distribute surveys. They have some partnerships
and integrations that work with a lot of the other major tech platforms out there.
I'm sure that a lot of our listeners have probably taken a SurveyMonkey survey before and maybe
not even realized it. Niu: Lots of people use this service,
because it's free and very easy to use, anytime they want to go out and collect some data or feedback
about their business, how they're doing, all sorts of purposes.
Lewis: They have that free tier. That offers some limited functionality. They have some
response limits, things like that. Then, they have several individual tiers. Those go from
$37 a month, or just about $370 annually, to over $1,000 per year. It scales with different
functionality, branding, data exports, all that kind of stuff. They also have a negotiated
pricing on their enterprise segment. They have a B2B side of their business.
But I think that really, they start out with consumers directly.
Niu: Right. They said the vast majority of their accounts are individual accounts.
They estimated that roughly 12% of revenue comes from customers with organizational-level accounts,
those enterprise negotiated ones. They have about 3,000 organizational customers out of
about 615,000 total paying users. That's a pretty small proportion.
But that being said, I think that a lot of these accounts are still using these individual
accounts for business purposes, even if they're technically registered as an individual account.
SurveyMonkey says that about 80% of accounts, they estimate, are still using these for some
type of business purpose. It makes sense, if you think about it. This isn't the type
of service where you need everyone in your organization to have an account. Anecdotally,
my wife actually has one at work. She was telling me, she works for the state of Colorado,
she actually shares an account with another department. That's kind of an exact situation
example here, where you have one account, it's probably registered as individual.
I'm not sure how that one's registered. But, you have lots of people across departments using
this one account. Lewis: If this sounds at all familiar,
this idea of a free service that people come into, they tend to deal primarily on the consumer side,
and then build their way into businesses, it's because it is. We talked about a company
that has a very similar model maybe a month or two ago with Dropbox.
Niu: Right. Like Dropbox, they have this huge mass of free users, and their challenge is
to try to convert those over. But you can see in the numbers that their conversion rate
isn't super high. That's also similar to Dropbox. Dropbox isn't really super aggressive with sales.
They rely more on word of mouth marketing. Same story here.
Lewis: The drilldown on that, since inception, the service has 60 million registered users.
They count 16 million active users, people that have used it in the last year, and 600,000
paying users. Roughly 4% of active users are paying users. To your point, not a huge majority
of them paying for the service. Looking at the books, there's a lot going on.
You think, okay, this company's going public, they must be showing some pretty gaudy
growth rates. Not necessarily the case. You have to take a step back and remember,
this business has been around for 19 years. Niu: [laughs] Right. Last year, in 2017,
revenue only grew about 5-6%, somewhere around $220 million. One thing that stands out to me is
that while growth is slowing, their costs are rising even faster. For example,
if you ignore some of these restructuring costs they had over the past few years, a lot of their
operating expenses are jumping. R&D was up 40% last year. Sales and marketing about flat,
but general & administrative was up 30%. When you compare that against 6% revenue growth, obviously,
you're getting pinched on the bottom line. In this case, they're posting net losses still.
And it's like, what are you spending $50 million in R&D on? How complicated
should the platform be? I mean, I just don't know what they're spending the money on.
Lewis: Yeah. For a company that posts 70% gross margins, they post operating losses
because their costs are currently outstripping their revenue growth. There was some slight
revenue acceleration that we saw with this business. In the first half of 2018,
they put up 14% year over year growth over the first half of 2017. That's still not very
blistering, though. This company is losing money, it looks like it's going to continue
to lose money for quite some time. A big part of that is the fact that they have some pretty
hefty interest payments, as well. Niu: That's another thing that jumped out at me, too.
This company is very deep in debt. For example, before the IPO, at the end of
the second quarter, they had about $40 million in cash on hand, and they had $320 million
in net debt. Most of that would be in these credit facilities, like a term loan, as well
as revolvers, with some of these big banks who, interestingly, were also underwriters
into the IPO. They did say they're going to put $100 million
of the IPO proceeds towards paying down some of this debt. After the IPO, now they have
about $125 million or so in cash, and $220 million in net debt. That certainly improves
their financial condition. But if that's the reason why they went public, that's not really
inspiring to me as an investor. I mean, I understand if you want to swap out some of
this debt capital for equity capital. You do save a lot of money, because these interest
payments and the interest expense is huge. Interest expense is over 10% of revenue every quarter.
They're already operating at a loss, and then on top of that, having to pay out
tens of millions of dollars of interest every quarter, it's just a tough position to be in.
Lewis: All told, looking at the numbers,
there isn't really a lot for me to like here. I think the growth rate is relatively low,
given that this is not a profitable business and it's been around for such a long time.
Right now, the company trades at roughly a $1.8 billion valuation, which puts them at somewhere
between 7-8X sales. That feels a little pricey for the current state of this company.
Niu: Yeah, I don't really see anything that's really inspired me, either. Another risk that's
on the horizon there, too, is that SurveyMonkey does name Google specifically as another provider
of online surveys. We use Google surveys at The Fool internally. I think that's another
risk factor. They also mentioned that 80% of their new paying users come either to the
site or through organic search. They don't break that down even further,
but there's some portion of their new business coming from organic search that could be at risk
if Google, which is obviously a competitor, ever tweaks their search algorithms. I think
that's something to keep an eye on, too. Lewis: There's also the risk of, if you're
using the free side of this as your acquisition funnel, and you have someone who does a
"good enough" version of what you do as a feature, as part of a larger business, that could really
limit the number of people that are coming in at the top of that funnel for you.
Niu: Right, exactly. That might also explain why their growth rates aren't that great.
I just don't see where they go from here. It's hard to imagine, what is exciting about
this business in 10 years? Lewis: We're going to try to solve for that.
Evan, on Twitter, I mentioned that we were going to be talking about SurveyMonkey and
this new IPO, and I asked if people had any questions. As always, the internet disappointed.
[laughs] We have Market Foolery host Chris Hill immediately chiming in. This is a five-parter,
so get ready. "1) Why'd they pick Monkey for the company name? 2) Aren't dolphins the most
intelligent animal on earth? 3) Did Survey Dolphin even make it through the first round
of voting? 4) The company's HQ is in San Mateo, California. Not a question. 5) What?
They don't have dolphins in the Pacific Ocean?" [laughs] So, I think Chris is having some
fun here, but it does beg the question, why are they called SurveyMonkey? So, why don't
we briefly touch on this? CEO Zander Lurie has mentioned this actually publicly in Quora,
this great platform for asking people questions. Do you want to take this one, Evan?
Niu: Lurie answered on Quora, he was talking about how, in the .com bubble, everyone had
these weird internet names. I mean, these names sound normal today, because they've
been around forever. Like Yahoo, eBay, Amazon, he even mentioned Amazon. They had all these
different names. Again, this company is 20 years old. He says they were looking for something
fresh that also described the product, an online survey tool. What is curious and uses tools?
Monkeys. So, SurveyMonkey is what they came up with. I think that's kind of a silly
justification or story or whatever. But it is what it is.
Lewis: You know what, Evan? I think in 20 years, a lot of people are going to be looking at companies
like Shopify and Spotify, and be like, "How come every company was ending
in -ify, and putting all these weird names, like Lift with a Y for Lyft?" Well, it's because
domain names were bought up at that point. People had to start getting creative with
how they were naming their companies because they needed domains that fit whatever they
were going to name the business. Niu: Or throw an R at the end of something.
That's popular now. [laughs] Lewis: Of course! Right! So, I think it's
the same thing. It's just a bygone era in tech, if you will.
Niu: A sign of the times. Lewis: A sign of the times.
We did have one helpful listener question, though. I want to praise Austin Lieberman for asking this
because I appreciate it when people reach out with real, legitimate questions, Chris Hill.
Austin asks, "Do they have a moat? Seems like
there are many other free options. Also, are they mostly B2B or mostly B2C?" His question
here really hits on something that we touched on earlier, this idea that they named Google
in their risks. Probably the other surveying tool that people are most familiar with is
Google Forms, to your point earlier, Evan. Niu: Right. I think that's the thing that's
really at the crux of it. I don't see them having this really strong competitive advantage.
As far as B2B vs. B2C, as we were talking about with some of these numbers before, they
fall in somewhere in the middle. They have a lot of people that use it for business purposes,
but they don't have that much of a need for all these high-end options. They just get
these individual accounts, and that's perfectly fine. That's all they need to do. But they're
still using it for business. It's a weird mix them all of the above. They're in the
middle of the spectrum of business customers or individual consumers.
Lewis: Yeah. When I look at this business, I see what is, I think, really a feature or
a very limited use case tool for a lot of the people that are using it. On the low end,
you see that Google Forms could easily come in. It's just a feature that they've built
into all of the other Google account functionality that they have. Granted, it's much more limited
in what it can do than some of the more advanced features on SurveyMonkey, but still.
Then, you go to the high end, and where I think SurveyMonkey wants to be on the enterprise side.
If they're doing stuff that's a little bit more about employee engagement or market research,
well, there's a lot of HR companies that are in that space, and are probably building
some form of surveying into a tool that also does payroll, also does accounts receivable,
does all these other things for a business. I worry with them that they are squished at
both ends of that market. Niu: Right, and it's not really possible
for them to expand into the deep HR software space or CRM space. Those companies are much
more likely to tack on this free survey stuff as an add-on to their platforms, which are
much more important than a survey platform trying to expand into these other critical
functions of a business. Lewis: Yeah, absolutely. To Austin's question
about B2B vs. B2C, you hit on this a little bit, this is very much the land and expand
model that they are using. We saw it with Dropbox, it's similar here. They are
using individuals with personal accounts to get in the door. Then, the idea is, when these
needs come about with a business, that individual, that user, will be the advocate for this service,
because they've used it, they know it, the functionality is great. So, they are this hybrid,
like you mentioned. It makes it hard to put them into an individual box.
It also makes it a little tougher to know where their most desirable market is.
Niu: I mean, if anything, what it tells me is that the individual plans that are
more affordable are perfectly good enough for most of these business use cases that they envision
trying to upsell people to. Clearly, given these numbers I mentioned earlier,
they don't have a strong value proposition for these enterprise organizational accounts.
These individual features are perfectly fine. So, I think they do face an uphill battle with
these upsells. Lewis: Is that to say, Evan, that you
are not particularly excited about the SurveyMonkey IPO?
Niu: I'm excited to sit on the sidelines and watch it, but I'm not going to touch it myself.
Lewis: I am right there with you.
Thanks for hopping on this episode, Evan! Niu: Thanks for having me!
Lewis: Alright, listeners, that does it for this episode of Industry Focus.
If you have any questions, or if you just want to reach out and say hey, you can shoot us an e-mail
at industryfocus@fool.com, or you can tweet us @MFIndustryFocus. If you want more of our stuff,
subscribe on iTunes, or check out The Fool's family of shows over at fool.com/podcasts.
As always, people on the program may own companies discussed on the show, and The Motley Fool
may have formal recommendations for or against stocks mentioned, so don't buy or sell anything
based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today.
For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!