Investment thesis
Trustpilot (OTCPK:TRTPF) has established a growing franchise in Europe as an open review platform, but is set to struggle in the competitive US market. Its focus on small and medium sized businesses will limit returns. We are neutral on the shares trading on Price to sales 9.6x for FY12/2021 implying 30% topline growth YoY.
Quick primer
Trustpilot is a global review platform founded in Denmark in 2007 by CEO Peter Holten Mühlmann. The open platform offers a free service for consumers to leave feedback on websites for actionable opinions, and for businesses to engage with consumers and gain insight from data analytics and access to marketing contents. The IPO was on 23rd March 2021 on the London Stock Exchange at 265 pence.
The revenue model is a SaaS subscription where businesses operating websites can pay for value-add functions for greater consumer engagement. The objective is to increase trust between consumers and businesses, using Trustpilot as a 'trust standard' encouraging openness and transparency in ecommerce.
The business operates in 12 verticals - retail, finance & insurance, consumer services, automotive, travel & accommodation, wholesale, B2B services, health, education, utilities & telecom, professional services and IT. It had over 19,500 subscribing customers from over 100 countries in FY12/2020.
The estimated market size today is around $200 million (implying around 50% market share in its geographies), with a strategic addressable market size of $6.3 billion (for the UK, US and rest of Europe).
Geographic sales split FY12/2020
Source: Company, created by author
Key historic financials
Source: Company, created by author
Our objectives
In this piece, we want to assess the following:
- look at the historic SaaS key performance indicators and the outlook going forwards.
- the competitive environment and potential for global expansion.
We will take each one in turn.
Highlights from SaaS metrics
We focus on two SaaS performance metrics for our analysis - revenue retention and bookings.
Revenue retention annual trends
Source: Company, created by author
We kick off with gross retention rate (GRR) which measures the annual revenue lost from a company's customer base excluding any benefits from expansion revenue or price hikes. A figure of 83% for FY12/2020 tells us that Trustpilot has are relatively successful at keeping existing customers happy, but there is a visible amount of user churn. We read this as some customers cancelling as the return on investment was seen to be low and relatively low switching costs to other providers. The aim is to be as close to 100% as possible, and the current level shows that Trustpilot is yet to establish itself fully as the industry standard.
The net retention rate (NRR) measures total revenue minus any revenue churn (caused by departing customers or who have downgraded) and revenue expansion from upgrades, cross-sells or upsells. At 91% the company is seeing some success over landing and expanding its revenues at its existing client base. With no listed peer as comparisons, it is difficult to say whether Trustpilot is performing well, but clearly there has been less success in revenue expansion in FY12/2020 versus FY12/2019. Also, successful SaaS businesses catering to enterprises tend to aim for NRR at around 120% plus - this includes Zoom (ZM) that has booked NRR of 130%+ for 11 consecutive quarters in Q4 FY21, and IDaaS player Okta (OKTA) with 121% NRR in Q4 FY1/2021. This may mean that the majority of Trustpilot's customers are small and medium-sized businesses (SMBs), where a respectable NRR is benchmarked at around 90%. There appears to be no disclosure over the type of customer mix, but we believe the majority of the 19,500 plus subscribing customers are indeed SMBs where returns will have limitations.
Subscriber customer growth
Source: Company, created by author
Next we look at bookings, which is the annual contract value of business signed in a given period. This provides a leading indicator for future revenues, and disclosure is available per region.
Bookings growth trend
Source: Company, created by author
We see that FY12/2020 bookings grew 18% YoY, which was a notable slowdown from FY12/2019. Although growth in the UK and rest of the world appear relatively robust, the US saw a major deceleration YoY. We wonder whether this has to do with customer acquisition costs which saw a visible cut YoY into FY12/2020, presumably to become free cash flow positive in preparation for the IPO. Performance in the US market will be an area to watch, as although it offers the largest commercial opportunity there is clearly difficulty in winning business due to intense competition.
Customer acquisition costs
Source: Company, created by author
From the metrics above we give Trustpilot a 7 out of 10 rating. NRR and GRR metrics point to a satisfactory level of customer success. Booking growth is less attractive at 17% YoY for FY12/2020, and the clear weakness in the business is Trustpilot's presence in the US.
Next we look at the global competition.
Better to stick with Europe
Trustpilot has high brand awareness in the UK, and has seen some success expanding elsewhere. Barriers to entry to establish a review website is not particularly high in our view, and there are multiple competitors in the UK and Europe. However, these alternative sites tend to be quite niche - a key peer is unlisted Feefo offering a similar service, and more niche operators such as Bazaarvoice, Yotpo and Yext.
In the US there are more obvious competitors with the likes of Google My Business, Amazon and its in-house reviews, social comments on Facebook, Yelp, BBB (Better Business Bureau) and Foursquare for restaurants. It will be a difficult and costly endeavor to become a trust standard in the US, but at the moment the company looks to place its growth prospects primarily on global expansion with a US focus (Asia has been excluded).
Potentially Trustpilot has the ability to scale and to operate as a global standard, but we think it is more probable that it becomes a European leader. In the future there may be a global consolidation effort by the largest players in the market (of which Trustpilot may be one). Growth to date has been organic, but the company has mentioned making selective acquisitions as an avenue for long-term growth which will help it scale, gain market share and also become more of an attractive target.
From this we surmise that Trustpilot has most strategic growth potential in Europe which is its strongest home market. Although attractive in terms of size, the US is best avoided given intense competition. For competitive positioning we give Trustpilot 5 out of 10 globally, but to be fair in Europe it would be 7 out of 10.
Valuation
There are currently no consensus forecasts available, but management has indicated its intention to grow annual revenues by approximately 30% YoY under constant currency (page 82 of prospectus). This would imply a Price to sales multiple of 9.6x for FY12/2021. However, bearing in mind FY12/2020 bookings only grew 17% YoY, there will have to be significant marketing push to acquire new customers to drive revenues that fast.
The company generated positive free cash flow in FY12/2020 resulting in a historic free cash flow yield of 0.2%. Although it is positive to see that the company can generate free cash flow, we do not think the company can do this sustainably. If the company is aiming for 30% revenue growth YoY for FY12/2021, we believe cash burn will be likely as more is spent on customer acquisition costs.
Overall, the sales growth outlook does not look that strong. Consequently, we do not see a compelling reason for the price to sales multiple to be trading higher.
Risks
Upside risk comes from Trustpilot making tangible gains in the US market, as it becomes adopted by the ecommerce industry as the de facto trust standard. We feel this will take time to achieve, but the US is a large market and the company may stick with this plan for the longer term. Another positive scenario is that the company becomes an attractive takeover target for its reach in European markets by a larger peer.
Downside risk comes from overspending on sales and marketing to grow in the US market. With high competition and limited resources, Trustpilot may end up continually burning cash until it is forced to exit.
Conclusion
Trustpilot has established a growing franchise in Europe as an open review platform, and its listing should help in increasing its presence and winning more business. However, it has also highlighted its relative weakness in growing its US presence and its focus on SMBs. The overall growth outlook on management's target of 30% sales growth YoY is a fair profile as opposed to exciting. The resultant FY12/2021 price to sales multiple of 9.7x does not indicate a major discount in our view. We are neutral on the shares.
