Ask the Monkey

The much-anticipated SurveyMonkey ($SVMK) IPO is scheduled for tonight. The proposed price range remains $9-11. For a relatively small deal (13.5M shares) there are a lot of banks on the cover – 11 in all with JPM, Allen, and BofA leading the charge.

Online surveys are a niche market but SurveyMonkey has emerged as a clear category leader in the space. The product has a number of significant advantages which we will outline below.

There are a lot of small competitors in the online survey space including a pretty large “free” offering from Google. By using Google Forms and Google Sheets a simple survey can be conducted with the results accessed and analyzed in a no-nonsense fashion. This solution has been around for a long time is a favorite for small efforts with quasi-technical types of users.

In terms of survey-focused competition, we see a few that are being extra competitive – Forsee has more of an enterprise focus, as does SurveyGizmo and Qualtrics. However, all these companies rely on the old demo/salesperson model of sales. There are no free versions and no visible online pricing. With few exceptions, the self-service model will be a better to-g0-market.

It’s been a while since we’ve used a survey tool so we decided to survey our own clients here at IPO Candy with a short Survey Monkey survey. A few things stood out relative to “basic” solutions like Google Sheets/Forms:

  1. It’s a very smooth sign up process and you are instantly creating a survey from scratch or a template. The built-in design of the UI is strikingly better than what you would get with Google Forms.
  2. When you type a question the monkey does a great job of reading into it to gauge your intent and suggest the right type of response format – multiple choice, sliding scale, comment box, dropdown? This makes it much easier to design your survey. Our 10 question survey took only minutes to complete.
  3. Besides the smart question types, the system also performs some level of review of your survey before you send it out. Ours didn’t have any issues but it provides some piece of mind before you blast something out to your clients and prospects.
  4. Once results come in the monkey has a bunch of built-in graphics for analyzing the results and even more importantly a slick presentation of the results can be created with a few clicks. For many corporate users, it would mean they wouldn’t even need to use a presentation tool like PowerPoint.

One thing you notice right away is it’s easy to use “premium features” without really knowing it. That puts you into a not-too-cheap paid level. We’ll get to that below. This is also part of the reason that you get so many damn surveys!

Strategy and Growth

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It’s worth noting that Survey Monkey had the presence of mind to acquire Wufoo back in 2011 for $35M. At the time Wufoo was simply killing it – they had the best solution for what we’d call “commercial” forms – online payment, collecting data and hosted form processing.

Today SVMK has a very large free user base and a “brand” that is emerging as a de facto choice for many business users. They are the market leader and have a free offering, why not just go with that? That’s why so many users have opted to get started with Survey Monkey. The figures show the massive “free” user base and the small but growing segment of paying users. At the same time paying users are growing ARPU is still rising.

If you use Survey Monkey to do anything you will soon find yourself paying a fairly high annual fee. Individual plans cost $384/year and go to $1,188/year. These are fairly high numbers for functionality that might not be very difficult to replicate. Team plans start at $75/month for three users and then step up to $225/month for three users and ultimately there is their “enterprise pricing” which is individually quoted. It’s not that these prices are unreasonable, they seem just a little high to someone who pays for scores of these services every year. It would seem like there is a monster opportunity to come up with a $99/year offering that would be a meaningful step up from the free service but not cannibalize the $384/year product. It might hurt ARPU but if the higher end business continues to grow it could be introduced in some form that would keep ARPU flat.

An area less talked about is the ability to get survey data from consumers. SVMK offers this as a turnkey service that is very attractive. Clients can even pick specific regions to ask survey questions and get fast results. With the upcoming elections and the drive for a deeper understanding of consumer preferences, this could be a huge growth driver for the business. Right now SVMK doesn’t pay for participation but responders can raise money for their favorite charities by participating. It’s unclear what kind of “selection bias” this will introduce but it’s an attractive opportunity for SVMK to develop over time.

Growth in paid users has been consistent but not particularly speedy. The numbers speak for themselves. My personal opinion is that they jump to the paid tier is just too high for many of their users but I can’t confirm that with data. We’ll have to see how the company handles this as they grow. Right now they seem more interested in increasing ARPU than driving growth in paid users.

Competition, Caution, and Conclusion

As we noted there is competition out there. Low-end free offerings and paid services that are more on par with SVMK. One thing Survey Monkey has is market position and awareness. One service, G2, does a pretty good job of collecting reviews on enterprise software. Competitors score pretty good ratings but it’s the number of ratings that grabs our attention. SVMK is bigger by an order of magnitude!

Revenue growth has improved in the last two quarters and the company reported 21% YoY growth in Q2. Not really fast growth but not bad and at least improving. Management also shared their long-term model which we’ve included below.

One thing not highlighted much (as usual) is stock-based compensation. It’s a factor in most any IPO but for SVMK it’s out-sized. Specifically, it was $35M in 2017 and close to that in 2016. It’s running at $18M per quarter so far in 2018.

To put those figures in perspective non-GAAP income from operations was $7M in the most recent quarter. So with SBC included the company is still losing lots of money.

Investors have been comfortable looking through SBC and we play the game as well since that’s what drives the market. However, one thing investors can’t overlook is the large share count which will limit long-term gains in the shares of SVMK.

But wait? Aren’t these high margins real? Yes, the margins are real and high but that’s because the high use of stock-based compensation means that you don’t see the cost in the P&L – you see it on the balance sheet in the form of a rapidly increasing share count. As a shareholder, this dilutes what those high margins are worth to you on a per share basis.

Our IV model reflects generous growth and a reasonable multiple along with the current share count. Since this is a “Quick IV” it doesn’t fully account for the high SBC at Survey Monkey but the number is still a decent guideline for what the company is worth.

In conclusion, the IPO should do well as the fundamentals are good and investors are loving the SaaS space right now. With 11 cheerleaders in place we no that no success at SVMK will go uncheered and promoted. Investors would be wise though to keep the large and expanding share count in mind when they make their decisions. The upside may be less than you think if you consider our IV to be at least approximately correct.

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