Despite having been largely ignored since its IPO, SurveyMonkey (SVMK) finally broke out of its shell after reporting Q2 results, soaring more than 20% on a surprise revenue acceleration and achieving one of the best one-day stock performances since its public debut. The survey software company continues to prove that despite the presence of rivals such as Medallia (MDLA) and Qualtrics, SurveyMonkey's long-established brand in the customer experience space has given it plenty of impetus to keep growing and selling on tuck-in products such as SurveyMonkey Teams, which is one of the biggest catalysts driving growth in the quarter.
Now at an all-time high since its IPO last September at just $12 per share, I believe there's still plenty of upside left in SurveyMonkey. The company turned in rather lackluster performance in FY18, but a spate of new products as well as enterprise adoption have really given SurveyMonkey a lot of momentum in the first half of FY19, as evidenced by the company's accelerated revenue growth. As I wrote in a prior article, I believe SurveyMonkey is one of the few value names in the SaaS sector that most investors have overlooked, despite clear growth catalysts.
Recall that the company has a Western Europe datacenter rollout that's expected to bring in more clients in the region starting in the back half of 2019. In addition, SurveyMonkey has noted that it has seen success converting many of its clients from monthly to annual plans, increasing their lifetime value. Annual customers are now an 80% mix of SurveyMonkey's overall customer base, up five points versus 75% in 2Q18.
The statement below, written out in SurveyMonkey's 2Q18 investor letter, captures its three major growth drivers ad the key points underpinning its bullish thesis:
We continue to execute well against our primary growth strategies: (1) selling SurveyMonkey’s portfolio of enterprise-grade solutions directly to enterprises via our sales channel, (2) driving adoption of our collaborative self-serve Teams plans, and (3) expanding our business in key international markets. Our results continue to demonstrate that our strategy is working."
SurveyMonkey's stellar Q2 performance as well as upbeat guidance (the company raised its full-year revenue outlook by about 1% this quarter, in true "beat-and-raise" fashion") suggests strong progress on all three fronts. Note that the high end of SurveyMonkey's Q3 and FY19 growth captures a continuation of the strong 20% y/y growth rate we saw this quarter - and also stronger than any quarterly growth rate we've seen since SurveyMonkey went public.
Figure 1. SurveyMonkey guidance updateSource: SurveyMonkey 2Q19 shareholder letter
The bottom line on SurveyMonkey: strong new product traction, geographic expansion and continued enterprise success have materially lifted SurveyMonkey's growth rates this year, and its stock has only begun to benefit from the re-energization in the company's sales. Stay long here and ride SurveyMonkey's upward momentum.
Here's a look at SurveyMonkey's second-quarter results:
Figure 2. SurveyMonkey 2Q19 earningsSource: SurveyMonkey 2Q19 shareholder letter
Revenues grew 20% y/y to $75.1 million, surpassing the high end of SurveyMonkey's original guidance range of $72-$73 million (+15-16% y/y, implying one point of deceleration) as well as Wall Street's mark of $72.7 million (+16% y/y). This was both a record revenue quarter for SurveyMonkey as well as the strongest quarter of growth since 2Q18, when the company had managed a 21% y/y growth rate.
Underneath the hood, SurveyMonkey also managed to grow its paying users by 12% y/y to 692.5k - also the strongest growth rate all year, adding a net 22k paying users in the quarter. In addition, average revenue per user (ARPU) grew 8% y/y to $442, driven by upsell activity in SurveyMonkey's add-on products as well as stronger pricing.
But perhaps the most important driver underpinning SurveyMonkey's success is its traction within enterprise. SurveyMonkey's direct sales efforts into blue-chip customers are still rather new, but have produced tremendous results thus far. As seen in the chart below, enterprise revenues as a portion of total sales is now up to 20%, up four points sequentially and nearly double from 2Q18. The company also signed on nearly 900 new enterprise customers in the quarter, up 60% y/y (note, however, that 400 of these customers came with a recently-acquired target):
Figure 3. SurveyMonkey enterprise tractionSource: SurveyMonkey 2Q19 shareholder letter
Here's some useful earnings call commentary from CEO Zander Lurie on how SurveyMonkey has used technical product partnerships with the likes of Salesforce.com (CRM) and Microsoft (MSFT) in order to drive greater enterprise sales:
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.
On the downside, SurveyMonkey's investments in growth have cut into its margins. Investments in the company's sales force have had the most impact on SurveyMonkey's bottom line, as sales and marketing expenses as a percentage of total revenues grew to 34% on a pro forma basis, up five points y/y. R&D costs also rose one point, while general and administrative costs rose four points - offsetting a four-point increase in pro forma gross margins:
Figure 4. SurveyMonkey margin trendsSource: SurveyMonkey 2Q19 shareholder letter
Despite these margin headwinds, SurveyMonkey's pro forma EPS of -$0.01 still beat Wall Street's estimates of -$0.05 by a wide mile, and the company is still retaining its full-year unlevered free cash flow guidance of $50-$53 million at a ~17% FCF margin.
Full steam ahead for SurveyMonkey. Despite rising competition from faster-growing companies like Medallia and Qualtrics, SurveyMonkey still has an edge in the CX market, and its relative underpenetration in the enterprise space gives it plenty of momentum and opportunity to win market share. Keep banking on this company as it finds its stride.
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Disclosure: I am/we are long SVMK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.