monday.com Ltd. (MNDY) Earnings Call Transcript & Summary

All right. We'll get started here. We're very lucky to kick off the conference with Roy Mann, Co-Founder, Co-CEO of Monday.com; Eliran Glazer, CFO; and Daniel Lereya, VP of R&D and Product. My name is Josh Baer, software analyst at Morgan Stanley cover future of work apps among other things. I need to start with some research disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So I think most investors in the room know monday.com story, but I wanted to kick it off with the intro question. Can you tell us a little bit about your company, the market that you're in and your competitive landscape?

So we're happy to be here. And Daniel's first time in Investor Conference. So -- we track them. So cool. So Monday, -- so like it's a long question to wrap up all the history of the company. So we started monday with the goal to give customers the ability to build their own software, to give them the power to do it. And I think that's what we're seeing now. We have like over 186,000 paying customers across like 190 countries and on over 200 different business verticals. And we succeed like in places where a lot in the non-tech segments, like not tech companies. So we have manufacturing plants. People do clinical trial research on us. And I think the space we're in is exciting because we have -- we are riding on 2 major trends. One is digitization and adoption of software has changed. So digitization is obviously the world is digitizing, everyone wants to be more productive and to make things smarter and that's where we come in for all those industries. And also people adopt software in a different way today, like bottom-up, and that's where we succeed. We do a lot of like people know-hows. We do a lot of [indiscernible] boards. We do a lot of like online campaigns, and we see adoption from the grassroots. People actually adopted from the bottom-up, and we scale within enterprises.

Great. That's a perfect introduction and a lot to dig in there. I did want to ask -- just jump to macro, and your recent results, really strong Q4, and you guided to, I think, low to mid-30s growth for 2023. At the same time, you did see a step-down in the net dollar retention rate, especially for the larger customer cohort. So what demand trends are you seeing across your customer segments and what macro assumptions are embedded in that outlook for this year?

So great question, Josh. From our perspective, we are consistent with what we said last year. We see the demand, obviously, because of the macro economy headwinds have kind of -- was more balanced, but we started to see that in Q1 of this year, we're actually starting to see a positive pickup. The result for us, as we always look at efficient growth rather than just growth, is really important for our also to invest, but to make sure that we are delivering improvement in free cash flow and operating profit. We assume that the current macro economy headwinds will persist by the end of the year. Therefore, they are embedded in the guidance. And in addition to that, with regards to the NDR, so we see a very healthy top of farming activity coming from SMBs and even mid-market. We called out some reduction in NDR for large accounts. Overall, we do expect between 5% to 10% reduction by the end of the year. Again, it's already embedded in the guidance. But we're also keeping the opportunity for us to continue to invest as we see efficiency and return on our investment. Overall, we are very positive that even with current macroeconomy headwind, we're going to continue to see good returns.

And Roy, you mentioned the nontech industry. How is your tech customers and nontech customers? Are they performing differently? And what's the exposure between the 2?

Yes. So we have like about slightly over 30% of tech companies and the remainder, like the majority is nontech. Yes. And what we see is that basically all the trends we see are across the board, like when we look at the enterprise customers and talk about the MDR, we feel like the demand for upgrades and people are hiring less so they upgrade less to that effect. When we see the top of fund meaning new customers, that's very healthy. And that's like across the board, like both segments very healthy, and we see a lot of growth there.

On the top of funnel, I want to think about sales and marketing expense. A few quarters ago, I think it was 100% of revenue, and we're down -- we're almost cut that in half, down to 54% this last quarter. So 2 questions there. Is there room for that to move even lower? And are you seeing any immediate or delayed impact on the top line from that pullback in spend. And I also want to ask about just the increased efficiency from the acquisition cost just relating to some of your competitors needing to pull back even more.

As a reminder, our sales and marketing expense is a combination of an hybrid kind of spend. It's 1/3 of our S&M spend is performance marketing. The other 2/3 are what we call sales-led growth, which is sales partners, customer success. Because of the system that we have internally, the BI system called BigBrain. We are very efficient or in our performance marketing spend. And we have very KPIs, we have a few KPIs that in accordance with these KPIs, we are investing in performance marketing. So overall, very healthy and ability to measure everything that we invest on that front. We expect -- when we went to the IPO, we said that we are going to maintain on the growth phase, S&M, around 60% of total revenue and continued to decline. And overall percentage, it can be a few percentage down. But overall, we would like to continue to invest and make sure that if we see the opportunity, when demand is coming back across the board or macroeconomy are getting better, we do keep the opportunity to invest more. And with regards to profitability, our original plan was to be profitable buyer before 2025. Obviously, periodically, we are going to see some fluctuations in which like in Q4 last year, we were profitable, but still the goal is to get their buyer before 2025. On the free cash flow front, however, we said that we are going to be free cash flow in 2023 across the Board.

Yes. If I follow up on the competition part on the performance marketing. So we did see a massive decline in competition on -- like compared to what we saw last year, obviously, and I think now it's picking a little bit back up like to be more moderate, but still it's like nowhere where it has been and like it's very efficient for us and will continue to be like an even said, with big brain and all. So we're really happy to gain more market share at this time than others because we're just like spending always within what we see returns and where we see return.

I wanted to spend some time on the platform and differentiation? How would you characterize the key differentiation between monday.com and other players in the market? And where, what segments of the market do you win? What are your win rates? Where might someone choose another vendor?

Yes. So I can start and then so like... The key differentiation for Monday is the flexibility of the platform, the work OS platform we built. Essentially, you can build so many different tools on monday and use it for a wide variety of things within your company. And like a good example for that would be the fact that we are also work management, but we're also CRM. And will talk about the CRM, my bet is well, I hope. So that is the key for us, like giving others the power to build whatever they want and our ability to package it as new products. And yes, you can share some more like...

Yes, like the fact that we are so flexible and low any kind of use case we see that people use Monday in other kind of ways. And as we continue our motion going upmarket and expanding for more use cases, we just said that the potential is going and the platform is built to serve that from day 1 in terms of its unique architecture.

And then that's why we win. Like when we are on deals like customers see that they're never going to hit a wall with the platform, whatever they want to do, it's open, they can build it, hire someone to build it or we already have it. So like that's why we win.

How do you think about Microsoft's position in the space? Are they a current or potential competitive threat?

So we're playing amazingly well with them and also with sales force, by the way, like we believe in a very open platform that you can connect it to anything. We have a really good integration with MS teams. And Microsoft, like historically, has like so many different products to cater so many different needs, and we are connecting to most of them or a lot of them. And I think this is the future for us. Like when we look at larger enterprise, we want to -- we see like a huge vacuum like 90% of the things you can digitize is not digitized yet. People don't capture the work. Tools are separated in silos. And I think we are like an amazing glue for larger companies, and that's why we're really good building things around Salesforce and also around Microsoft, and that's the strategy. And we just released a new integration with the newest release of the integration with Salesforce. It's like seeing very high demand and also Microsoft products.

Josh, I just want to add one thing about the differentiation. When we went public 2 years ago, almost, the question was, how are you different from your peers? Because we -- this is the crowded space. shows that you can make money, sorted you can generate free cash flow, short that you can improve like what we call sustainable growth rather than rates. And at first, people and I understand, investors, analysts and banks would have said, we are not sure yet. I think 2 years post IPO, almost 2 years sports IPO. We are becoming one of the market leaders. I don't know if it's a winner takes it all market, but it's a market that we are taking a leadership position in terms of unit economics, in terms of our sales efficiency. You mentioned earlier self-efficiency. Yes, there are going to be times when we blended return on investment might take time. But in the end of the day, I think we demonstrated that overall, together with the platform that I'm sure we're going to address further, we are creating a differentiation for Monday, not only on the product side or on the platform side, but also on the unit economics and our ability -- we didn't burn any cash since the IPO. We have more than $885 million in cash. So for us, this is a trajectory and we're going to continue to do this.

Do you talk about win rates or segments of the market that are your sweet spot?

So like we see that we win the majority of the deals in work management, which is one of our products, the leading one, but also on CRM, okay? So when we think about capturing market, I think that's one, like winning deal, but also now with new customers where they see us as the opportunity to -- like as the best-in-class place for them to consolidate on to build many use cases on and I think that's like more of a focus with the current economic situation.

And to go to what Roy said earlier, we have more than 186,000 customers, 70% are non-tech. So everybody -- or some of the companies called out the tech industry as kind of having challenges, layoffs, reduction in force, cetera. I think that we are getting some protection, downside protection of the fact that we're actually servicing so many segments, so many customer base -- such a big customer base, which is very diversified. So I don't know to tell you that we are seeing anything -- anyone that we should call out. It's across the board, we're seeing some stability.

So we talked about -- I mentioned CRM a couple of times. So I wanted to ask about Monday sales, CRM, I think relatively new. What can you tell us about adoption? What type of accounts are you targeting with Monday sales CRM?

Yes. So I'm glad you asked. So it's a new product, and we -- essentially, the way it's built is that we packaged the Works platform as a CRM. So people used us in this use case for a while. And then we saw it and just like package it as a whole product, we have a dedicated team working on it, and they're going to market with a CRM. And within a year, we've been able, less than a year, we've been able to be like one of the top 3, I think, in G2 Crowd like up to the right, which was amazing. I didn't expect it. And the reason is because like we are better than almost all of those like massive smaller or like midsized CRM because we're more flexible. You can do whatever you want with us, people see it, and that's what they want. So a lot of them graduate from all those other tools, and they have very few options. It's like the top 3 and a lot of them choose us. And I think we're in a vacuum price point and easy to use, like the fact you don't need like a massive adoption of a team like an implementation cost and a lot of those things. And on the other hand, CRM is a huge segment that is greenfield, like so it's -- I don't know if it's half and half of those types of customers, but it's like certainly, we see both, like people graduating for other CRM software and like it's still growing a lot because of digitization and a lot of companies are digitizing and that's like a huge segment where you want a digital.

Just to add on that. So we really see, I think, that the best feedback that we get on Monday CRM is that it's not about the fishers, it's about the nature of the solution, which is highly flexible and people love it and feel that this is really something that goes with them and with their use cases. And it also allows something which is really unique is that it's also not about only the deals and the sales process itself, but also things that our post sales and, suddenly, you see other departments connecting to the Monday sales solution like legal and many others. And I think this, combining with the collaboration features within the platform helps to make this solution very unique.

Would love to ask -- dig in a little more on sort of this use case and prebuilt strategy of the sales CRM, also Monday Dev for development and product teams, I think, in beta. So what's what is your overarching strategy around prebuilt applications or templates, -- should we expect more along these lines of CRM and development?

Yes. So our -- so it's a really good question because like we also have the marketplace where we are -- have a lot of other people build their own solution and also selling them like partners. So the question is where do we draw the line? And we see Monday as a core tool that you use. Like if you want to run something, this is where we want to be. And for that, I think for kind of like every department, we would probably want some core solution around that over time. And we see people already using us for those type of things organically. So that's probably the natural path where we are less likely to go into a packaged product in specific verticals like hotels, for example, or hospitals or like such. And that's what we're expecting the marketplace and everyone else to do.

What is the economic contribution from the app marketplace?

So currently, our goal is to have that have a lot of developers on the marketplace, have them create a lot of value for our customers, enable us to like expand and offer like the long tail of solutions that we won't get to ourselves. And our KPI there is that they make money, which I think is super important. And we get like -- and so like I don't think we built any upside into the model from the marketplace. And like that's not something I think we should expect this year. But definitely, longer term, we should expect it, but we're not optimizing for that now.

Maybe just to add to that, that we're already thinking about the next 2023 is here, but we also think about 2024, 2025 and beyond. So we have a 3-year to 5-year plan. And when we are building the ecosystem together with the partners, the partnership we did with Appfire, and there are going to be others. We are going to create an ecosystem that will generate revenue, maybe not in 2023 and not meaningful in 2024. But overall, when you are thinking about the long term, we want to create an economy that will have a certain arrangement like revenue show or different arrangements that will definitely contribute to the long-term revenue.

And obviously, a lot of value to customers just having the value of the ecosystem. Is that contributing at all to efficiency around new customer additions?

So it contributes a lot for people to feel confident that they have like they're never going to get the wall. They can do whatever they want. And also specifically for specific verticals, we have some examples of app developers that like we go together in flows like bigger deals with land like really helps us to go after the long tail of many solutions. And in general, like the marketplace, because we are a platform, we plan to be a platform, really open one and give like anyone developing on us the capabilities that we have to package our own software like they can do it as well. It's like their first class cities. We see the marketplace as a core thing in our strategy.

So in a few minutes, I'll open up for questions from the audience. So start thinking of your questions. But first, I wanted to ask another on the product side, Daniel, maybe about Monday database infrastructure, Monday DB. How does that play into Monday's differentiation? And well, I'll start there.

Yes. So it's a great question. I think it's highly tied to the fact that Monday is so flexible. So we really have such a unique architecture that allows anyone to build almost everything and see it from the diversity and the use cases and the customers. And mandate in that sense is our way to push that forward to more scale, better performance supporting upmarket motion. And I think that when we visit customers and we talk about the use cases, as they always say, Monday provides me such great and such great ability to do anything that I want. I want more. I want it bigger, I wanted more performance. So Monday DB definitely a core part of being able to do this.

Is there a customer choice or in adopting Monday DB or monetization? Or is this just rolled out an infrastructure improvement across all customers?

So we really plan -- first of all, it's important to say that Monday DB is something that is going to be -- we have lots of steps in Monday DB. So the first step is the major and most prominent one would be this year, providing all of our customers better performance and scale. So it's going to be rolled out to them gradually over this year. But I think that as we see it, it's going to push more use cases and new things from the abilities that -- many provides and not directly for the Monday DB infrastructure in that sense.

It may be important to highlight that it is not a product. It's our underlying infrastructure. So like it's a rollout as we see fit gradually to a lot of customers in different versions throughout the year next year and like has a huge road map ahead of it.

I wanted to tie this Monday DB into more broadly in your push up market. Is this part of what's needed to achieve the goal of expanding and moving to larger customers?

Yes, definitely. Because like Daniel said, it's like we have the core infrastructure with just like amazing things in terms of capabilities and whatever you want. And then when you want to do that, it's scale, for example, with the CRM. You want probably some accounts, 1 million of contact and deals. Hopefully, they have them. And so this will allow us to get there to be massive scale that they can do and also with the magic of like have a schema-less database, they can build whatever they want, connect it, however way they want, like great dashboard across their whole account, understanding everything in one place. So essentially, Monday DB has the same vision. It's just like the new way for us to build the underlying data infrastructure for us.

Are there other product or go-to-market investments that are needed to achieve the goal of moving upmarket?

I think that going upmarket is something that we're heavily investing constantly. So as we see new customers, the new sizes of accounts, there are constantly new things that they need, and it's very diverse. It's around permissions, it's around governance, it's around performance, as we said, but it's something that we are constantly working on and constantly investing in. So I think that in that sense, everything that we do pushes us of markets. And we do have specific things that we are doing in order to allow specific needs of big accounts that are constantly growing, but it's more of an iterative journey, I would say. And each investment that we are doing, we see that it directly contributes to Monday being more suitable for bigger and bigger accounts.

And currently, what's your biggest customer from a seat perspective?

So we're roughly at the same place of 7,000. We've got like more of them, but -- and so like we're really aiming to increase the business that our strategy. If you have like a pyramid of like company sizes, okay, and this is like the smaller ones. So we're always pushing up and take the whole segment and really building our sales force in that way. So we're not trying to push up to the highest discount. We're trying to horizontally take over the market segment solidify that, push it forward, and we do that every year. I would bet that every conference we would come in the following years. We'll always talk about enterprise. We'll always be saying we're moving up. There's always going to be like -- or for the -- a lot of years to come a roadmap to cater like larger and larger cases and like larger deployments.

And just, Josh, that some of our peers are declared that they want to pursue only enterprise accounts. I think for us, and this is why we mentioned earlier, the top of funnel, the healthy activity that we see eventually will take us also further upmarket. And we would like to continue to focus on not also the enterprise but also mid-market and SMBs, obviously, to do the things that Daniel said, but for us, we are servicing all the segment. And this is what also drives our efficiency and our ability to invest further and continue to go up market.

We want the whole pyramid. And it caters to, by the way, like what I talked about before that one of the massive trends today is that the bottom up. Like people adopt software on the team level and then it goes up. So you have to be really good at that level as well, like the team level to have that organic adoption. And that's something we're conscious of, and we'll keep our focus always on the small ones as well as scaling up.

Great. Any questions in the audience?

Thank you. I appreciate the time here. I know over the past couple of years, we focused on bringing more direct sales into our sales motion. And so I guess now sitting here, looking back at that, how do you all think about how that's helped perhaps? Are you in economic, how it's helped our growth initiatives, just thinking reflecting on that and then just seeing out -- where we plan to take that from here.

I think this is probably one of the most important decisions that was made in the life of Monday. Back in 2018, we established a sales-led organization. Now more than 50% of our total headcount, we have close to 1,600 employees is what we call sales-led growth, which is sales partner, customer success. We have more than 300 sales reps -- what you see is basically you lend at new customers, but you also expand within existing customer base. And the fact that we have the salespeople and the sales-led organization is creating expansion, which brought up the MDR, the continued growth within our market. So for us, it was something that is super important in the strategy of Monday, and we'll continue to invest as we see fit when we continue to grow the business.

Well around, I wanted to revisit profitability. We talked briefly about free cash flow and operating margin and operating efficiency. Maybe taking a step back, if you could lay out any profitability targets that you have?

Yes. So I'll go back to my answer earlier, we said that around 2025, before 2025 are going to be profitable. So we -- obviously, over the last few quarters, we proved that we can grow and also improve the operating leverage. Profitability still to be consistent one is going to be around 2025 in 2 years from now, but we might be seeing periodics where we are going to be profitable based on the level of investment. We have levers that we can pull and push, Growing the top line is our #1 priority. We are equally or focus also on the bottom line, but we want to make sure that we are gaining market share, and we are capturing the market, and we are gaining market share right now. So even if we go to the beginning of 2023, so we want to make sure that we don't miss opportunities, but we're going to continue in accordance with our long-term operating plan.

And what are the largest sources of leverage to get there?

So if you think about what we keep saying, our BI system, BigBrain, this is something that when we invest either in performance marketing or bringing salespeople. We look at KPIs, sales efficiency, capital efficiency, return on investment cuts. So these are the things that we keep measuring and these are going to be our kind of guidance to how we are going to continue to invest. When we introduce new products, market DB, CRM, dev, they are creating upsell and co-sell opportunities within existing customer base. We are penetrating new segments, and we are also getting to new GTMs with canvas like products and Monday form. So we have a very clear strategy how to continue to grow the business in an efficient way.

And is it the right takeaway of this commentary that if the demand environment improved, we could see margins move lower in exchange for accelerating growth?

I wouldn't necessarily say that margins will go lower. We don't want to raise margins with growth. If we see the opportunity and we need to invest and maybe periodically, margins in the certain quarter will go down. It can happen. But overall, we want to make sure that we improve both on both fronts.

Excellent. We're out of time. Thank you very much. This is great. Appreciate it.