UserTesting (NYSE:USER) Exceeds Q3 Expectations, Agrees To Be Acquired By Thoma Bravo


Full Report / October 27, 2022

Product testing and feedback platform UserTesting (NYSE:USER) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 27.8% year on year to $49.4 million. UserTesting made a GAAP loss of $15.1 million, down on its loss of $9.63 million, in the same quarter last year.

UserTesting (USER) Q3 FY2022 Highlights:

  • Revenue: $49.4 million vs analyst estimates of $48 million (2.91% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.09
  • Free cash flow was negative $505 thousand, compared to negative free cash flow of $1.64 million in previous quarter
  • Gross Margin (GAAP): 77.9%, up from 75.3% same quarter last year
  • UserTesting also announced today that it had entered into a definitive agreement to be acquired by Thoma Bravo, a leading software investment firm, and significant minority owner Sunstone Partners, for $7.50 per share, in an all-cash transaction valued at approximately $1.3 billion

Founded in 1999 and staying private for 22 years before a 2021 IPO, UserTesting (NYSE:USER) enables companies to receive feedback from users so they can improve their customer experience.

As technology increasingly changes the way customers interact with companies, the interface between businesses and customers has drastically changed. Today, most businesses cannot see their customers using their products and miss out on the crucial feedback they need.

For example, a pizza delivery company previously would speak to every customer on the phone to take their order. Through speaking with their customers they could discover that many customers ask about delivery time. The pizza delivery company could then incorporate telling customers delivery time into their standard order process to improve the customer experience.

As more and more pizzas are ordered online, companies never get to speak with their customers and are unable to use direct or indirect feedback to improve their customer experience. UserTesting helps companies get feedback from their customers in an online world.

UserTesting hires regular people in every demographic to test products. The tests consist of a tester using a product or service while screen recording and talking through their thought process. The transcripts of each test along with the videos are then shared with the company so that they can use the insights to improve their user experience.

The Internet has given customers more choice on whom to conduct business with and has also given them the power to easily share their experiences with other customers. These twin dynamics effectively have increased pressure on companies to both improve their customer service and also monitor their brand reputation online, driving the need for customer experience software offerings.

Other providers of tools to help companies develop their products, GitLab (NASDAQ:GTLB), JFrog (NASDAQ:FROG), Agora (NASDAQ:API), Akamai (NASDAQ: AKAM).

Sales Growth

As you can see below, UserTesting's revenue growth has been very strong over the last two years, growing from quarterly revenue of $26.3 million in Q3 FY2020, to $49.4 million.

UserTesting Total Revenue

This quarter, UserTesting's quarterly revenue was once again up a very solid 27.8% year on year. On top of that, revenue increased $1.84 million quarter on quarter, a solid improvement on the $1.71 million increase in Q2 2022. Happily, that's a slight acceleration of growth.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 16.6% over the next twelve months.

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. UserTesting'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 77.9% in Q3.

UserTesting Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like UserTesting 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. UserTesting burned through $505 thousand in Q3,

UserTesting Free Cash Flow

UserTesting has burned through $33.7 million in cash over the last twelve months, a negative 18.2% free cash flow margin. This low FCF margin is a result of UserTesting's need to still heavily invest in the business.

Key Takeaways from UserTesting's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on UserTesting’s balance sheet, but we note that with a market capitalization of $555.7 million and more than $164.6 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see UserTesting outperform Wall St’s revenue expectations this quarter. And we were also glad to see good revenue growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 92.7% on acquisition announcement at $7.5 per share.

Is Now The Time?

When considering UserTesting, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of UserTesting we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its impressive gross margins are indicative of excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies and its growth is coming at a cost of significant cash burn.

UserTesting also announced today that it had entered into a definitive agreement to be acquired by Thoma Bravo, a leading software investment firm, and significant minority owner Sunstone Partners, for $7.50 per share, in an all-cash transaction valued at approximately $1.3 billion.

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