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Monday.com (NASDAQ:MNDY) Reports Bullish Q2, Provides Optimistic Guidance For Next Quarter


Full Report / August 17, 2021
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Project management software maker Monday.com (NASDAQ:MNDY) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 93.6% year on year to $70.6 million. Monday.com made a GAAP loss of $32.4 million, down on its loss of $28.4 million, in the same quarter last year.

Monday.com (MNDY) Q2 FY2021 Highlights:

  • Revenue: $70.6 million vs analyst estimates of $62.1 million (13.6% beat)
  • EPS (non-GAAP): -$0.26 vs analyst estimates of -$1 ($0.74 beat)
  • Revenue guidance for Q3 2021 is $74.5 million at the midpoint, above analyst estimates of $65.9 million
  • Free cash flow was negative -$1.48 million, compared to negative free cash flow of -$5.27 million in previous quarter
  • Net Revenue Retention Rate: 125%, up from 107% previous quarter
  • Gross Margin (GAAP): 87.1%, in line with previous quarter

Founded in Israel in 2014, and named after the dreaded first day of the work week, Monday.com makes software as a service platforms that helps teams plan and track work efficiently.

A lot of project planning and management work is still done with a mixture of emails, spreadsheets that only exist on one person’s computer, hand written notes and in-person meetings. As a result, a lot of time is lost tracking down who does what, when, and how, with team managers organizing multiple meetings to get accurate updates on the progress of a project.

To help companies better plan their work, Monday.com provides them with a centralized online dashboard where tasks can be created, assigned and tracked. The platform integrates with other applications such as email, calendar or online document storage and is able to automate basic workflows such as sending emails when a task is due or importing information from a document. The key point is that the project management software becomes a system of record for the whole team, a central place where the information is always available and up to date. To make project managers even more efficient, Monday.com also provides them with a number of reusable templates that make it easy for them to create marketing dashboards, budget calculators and manage approval flows.

For example when developing a video game, the project manager can set up all the tasks in Monday.com including cost estimates and ask the client for approval on each of them. Once the work begins, the company management can see what the engineering team is working on in real time, and using the cost vs time tracking can easily tell if there’s a chance the cost might be higher than what was initially calculated.

The future of work requires teams to collaborate across departments and remote offices. While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitely accelerated the demand for tools that allow work to be done remotely.

Other competitors in the project management space include Smartsheet (NYSE:SMAR), Asana (NYSE:ASAN), and Trello which is owned by Atlassian (NASDAQ:TEAM).

Sales Growth

As you can see below, Monday.com's revenue growth has been incredible over the last year, growing from quarterly revenue of $36.4 million, to $70.6 million.

Monday.com Total Revenue

This was another standout quarter with the revenue up a splendid 93.6% year on year. On top of that, revenue increased $11.6 million quarter on quarter, a very strong improvement on the $8.83 million increase in Q1 2021, and a sign of re-acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 40.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Monday.com Net Revenue Retention Rate

Monday.com's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 125% in Q2. That means even if they didn't win any new customers, Monday.com would have grown its revenue 25% year on year. Significantly up from the last quarter, this a good retention rate and a proof that Monday.com's customers are satisfied with their software and are getting more value from it over time. That is good to see.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Monday.com's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 87.1% in Q2.

Monday.com Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.87 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Monday.com to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Monday.com is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Monday.com's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Monday.com’s balance sheet, but we note that with market capitalisation of $10.8 billion and more than $875.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly Monday.com outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a great quarter and we have no doubt shareholders will feel excited about the results. The company is flat on the results and currently trades at $246 per share.

Is Now The Time?

When considering Monday.com, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Monday.com is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its cash burn means its business isn't yet sustainable, the good news is its impressive gross margins are indicative of excellent business economics, and its customers are increasing their spending quite quickly, suggesting that they love the product.

The market is certainly expecting long term growth from Monday.com given its price to sales ratio based on the next twelve months is 15.4. There is definitely a lot of things to like about Monday.com and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $263.3 per share right before these results, implying that they saw upside in buying Monday.com even in short term.