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monday.com (NASDAQ:MNDY) Reports Bullish Q1


Full Report / May 16, 2022
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Project management software maker Monday.com (NASDAQ:MNDY) beat analyst expectations in Q1 FY2022 quarter, with revenue up 83.9% year on year to $108.4 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $118 million at the midpoint, 6.42% above what analysts were expecting. monday.com made a GAAP loss of $66.6 million, down on its loss of $38.9 million, in the same quarter last year.

monday.com (MNDY) Q1 FY2022 Highlights:

  • Revenue: $108.4 million vs analyst estimates of $101.3 million (7.09% beat)
  • EPS (non-GAAP): -$0.96 vs analyst estimates of -$1.01
  • Revenue guidance for Q2 2022 is $118 million at the midpoint, above analyst estimates of $110.8 million
  • The company lifted revenue guidance for the full year, from $472.5 million to $490 million at the midpoint, a 3.7% increase
  • Free cash flow was negative $16.1 million, down from positive free cash flow of $10.1 million in previous quarter
  • Net Revenue Retention Rate: 135%, in line with previous quarter
  • Customers: 960 customers paying more than $50,000 annually
  • Gross Margin (GAAP): 86.5%, in line with same quarter last year

Founded in Israel in 2014, and named after the dreaded first day of the work week, Monday.com (NASDAQ:MNDY) 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. Project management software is both driving this change and benefiting from it. While the trend of collaborative work management has been strong for a while, the Covid pandemic has definitively 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 $58.9 million, to $108.4 million.

monday.com Total Revenue

This was another standout quarter with the revenue up a splendid 83.9% year on year. Quarter on quarter the revenue increased by $12.9 million in Q1, which was roughly in line with the Q4 2021 increase. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates monday.com is expecting revenue to grow 67.1% year on year to $118 million, slowing down from the 93.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 46.4% over the next twelve months.

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 135% in Q1. That means even if they didn't win any new customers, monday.com would have grown its revenue 35% year on year. Trending up over the last year, this is a great retention rate and a clear proof of a great product. We can see that monday.com's customers are very satisfied with their software and are using it more and more over time.

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, licenses, technical support and other necessary running expenses was at 86.5% in Q1.

monday.com Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.86 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop that is still 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. monday.com burned through $16.1 million in Q1, increasing the cash burn by 207% year on year.

monday.com Free Cash Flow

monday.com has burned through $7.38 million in cash over the last twelve months, resulting in a negative 2.06% free cash flow margin. This below average FCF margin is a result of monday.com's need to invest in the business to continue penetrating its market.

Key Takeaways from monday.com's Q1 Results

With a market capitalization of $4.95 billion monday.com is among smaller companies, but its more than $849.5 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We were impressed by the very optimistic revenue guidance monday.com provided for the next quarter. And we were also excited to see the really strong revenue growth. On the other hand, there was a deterioration in gross margin. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $104.61 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. There are a number of reasons why we think monday.com is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, 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.

monday.com's price to sales ratio based on the next twelve months is 9.6x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. Looking at the tech landscape today, monday.com's qualities really stand out. We'd argue more mature tech businesses are sometimes underestimated because they aren't growing quite as quickly as the hottest stocks, and we really like the stock at this price.

The Wall St analysts covering the company had a one year price target of $386.1 per share right before these results, implying that they saw upside in buying monday.com even in the short term.

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