Medallia (MDLA)  joins the red-hot “New Enterprise SaaS” group with their IPO this week. They sit at the high end of the “customer management” space which has companies like Qualtrics (acquired by SAP during their IPO for $8B). Increasing recognition of this space may also be good for lower-end players like SurveyMonkey (SVMK).

The whole “customer experience management” label is pretty touchy-feely as an enterprise software category. We’ve gotten used to CRM and BI but customer experience management is still very nascent.

In the old days senior level managers at a company, even the CEO, might spend some time in the field with actual customers and front-line employees to get a true picture of both the customer and employee experience. There have been many stories and Harvard Business School case studies based on the insights senior managers get when they actually try and use their own products and services. Alas this is a fashion that has long passed.

Customers still matter and thanks to the internet, social media and more online business the amount of available data has increased as has the potential sales impact from reviews and other consumer expressions of sentiment. In other words the problem is bigger and the stakes are higher.

The Product & Competition

At first the idea of the Medallia product was underwhelming. Aggregating online customer feedback from multiple sources is a pretty easy problem to solve and it’s been done before. Years ago one company even came public with this as their main product (Bazzarvoice came public in February of 2012 at $12/share and a market cap of $684M. The company was acquired by PE firm Marlin Equity Partners for $521M at the end of 2017.)

But Medallia has solved the problem more broadly and completely than prior attempts. Here are the differentiating factors as we see them:

  1. Broad data collection: A company needs to integrate data from multiple points including phone conversations, surveys, feedback forms, product returns, online reviews, etc.
  2. Enterprise scale: Looking at any one data source or many over a short interval are fairly easy. But companies need both many sources and a longer time series of data from each one. In a consumer-facing problem data scaling is a must-have.
  3. Ease of use: They have invested heavily in building the product itself so that it scores highly in terms of usability and navigation for new users – a key aspect most other systems lack.
  4. Compliance: This is where the lightbulb really went bright. This is the dullest but in many ways most essential element to get right in terms of enterprises, especially the large ones that make up the target market for this product.

Two snippets from the roadshow presentation underscore the multiple needs for data protection and security that must be part of any successful vendor solution.

The other leader in this space is Qualtrics which as a part of SAP now is a large, well-funded competitor to Medallia. If Qualtrics grew at the same rate last year their revenues would have been about $450M last year which compares to $337M for Medallia. SurveyMonkey (SVMK) posted revenue of $254M for 2018.

There are quite a few private companies in the space, many of them focused on one specific aspect of customer experience management like surveys or the NPS score. One that achieves more scale is InMoment which was acquired by PE firm Madison Dearborn in May of 2019. They should remain a credible competitor for Medallia unless they are driven in a different direction by the new owners.

Market Opportunity & Valuation

The TAM provided of $68B is a reasonable start but it’s more fair to at least consider the affinity different industries have for this type of software. A bull might say that “everyone has customers so everyone needs this” but the truth is that different industries will have their own methods. Using a very broad brush it’s clear that at least half of that is real market opportunity so we’ll say $34B. We may revisit this figure as Medallia grows and the market gets bigger. The current top three vendors are doing well over $1B in annual revenue today so there is plenty of room to grow.

Looking at valuation we note that management gives a rather broad range of profitability in their “target model.” The bottom line presented is 20%+ non-GAAP operating margin but the range (if you do the math) is actually 13% to 22%.

We’ve given them a fairly generous set of point estimates in calculating our PFV below. In this low-interest rate “risk on” environment we would expect the lower discount rates to be used which suggests a $30 to $35 price estimate for the shares in the aftermarket. We’d certainly be willing to buy it up to $25/share.

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