Monday.com Files for U.S. IPO

The team at Monday.com has officially submitted an F-1 filing with the Securities and Exchange Commission, signaling its intent to become a publicly traded company in the United States.

For some time, industry observers, including TechCrunch, have understood that the provider of corporate productivity and communication solutions has surpassed $100 million in annual recurring revenue (ARR).

Anticipation and Filing Details

Speculation regarding the initial public offering (IPO) filing has been ongoing for several quarters. The release of the F-1 document by Monday.com on a Monday morning was widely anticipated within the tech community.

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Since the filing became available, analysts at The Exchange have been carefully reviewing the details. Initial analysis will focus on several key areas.

First, we will examine the company’s historical revenue growth to determine if the COVID-19 pandemic spurred an increase in growth during recent quarters.

Key Areas of Analysis

Following revenue analysis, the focus will shift to profitability, cash burn rate, share-based compensation, and the company’s overall product roadmap.

The assessment will conclude with a summary of key findings, alongside a review of Monday.com’s marketing expenditures. The company’s extensive digital advertising campaigns are readily apparent to many.

A thorough examination of the data is now underway, and we will proceed directly into the financial details.

Revenue growth remains the primary indicator of success for any venture-backed organization, and that is where our analysis begins.

Revenue Growth is Gaining Momentum

This represents positive developments for the company, its workforce, and those who have invested in it. Monday.com experienced revenue increases from $78.1 million in 2019 to $161.1 million in 2020, demonstrating a growth rate of 106%.

Between the first quarters of 2020 and 2021, the company’s revenue climbed from $31.9 million to $59 million. This equates to approximately 85% growth. What specifically indicates that the company's revenue expansion is accelerating?

The company’s growth in revenue, measured sequentially by quarter, is increasing. Consider the following data:

From Q2 2019 to Q3 2019, the company saw an increase of roughly $4 million in revenue. During the period from Q2 2020 to Q3 2020, this figure rose to $6.1 million.

More recently, revenue increased by $7.6 million from Q3 2020 to Q4 2020. This acceleration continued to $8.8 million from the last quarter of 2020 into the first quarter of 2021.

While growth rates may eventually decrease as the revenue base expands, the clearly visible and consistent increase in sequential revenue is a strong indicator.

The substantial gains in top-line revenue during recent quarters also clarifies the timing of Monday.com’s initial public offering. The current market conditions are favorable, and the pandemic’s impact is lessening, but the consistent growth is particularly attractive to investors.

Understanding Monday.com’s Financial Performance: Losses and Cash Flow

During the first quarter of the current year, Monday.com reported a net loss of $39 million. Approximately $14.5 million of this loss was attributed to stock-based compensation expenses. Consequently, the company’s net losses, when adjusted for SBC, were comparatively lower.

Interestingly, Monday.com refrains from publishing adjusted metrics commonly used by startups, such as EBITDA and adjusted EBITDA. These metrics are often employed to present a more favorable, though potentially misleading, picture of profitability. This decision to avoid such adjustments is commendable, suggesting a mature approach to financial reporting.

Therefore, analysis is limited to examining the company’s cash flow figures, which are detailed below:

A key question arises: what constitutes a non-GAAP operating loss? Essentially, this figure represents the company’s total operating loss, excluding share-based compensation costs. This approach is reasonably justifiable.

However, it’s important to note that this metric doesn’t directly correlate with adjusted free cash flows. The calculation of adjusted free cash flows involves several components.

Specifically, adjusted free cash flow is defined as “net cash utilized in operating activities, reduced by cash spent on property, plant, and equipment, and capitalized software development, plus one-time expenditures like capital costs related to headquarters construction.” In effect, Monday.com is factoring in the expense of office build-out as an adjustment to its free cash flow.

The validity of this adjustment is open to interpretation. Nevertheless, the company achieved near-breakeven status on this metric during the latest quarter, which is a positive development.

From this data, we can conclude two key points. First, according to standard accounting principles, Monday.com demonstrates significant unprofitability, largely due to stock-based compensation. Second, regarding actual cash burn, the company’s financial deficits are within an acceptable range – ranging from acceptable to favorable – for a rapidly expanding software business.

Monday.com: Beyond Status Updates

While many users primarily recognize Monday.com for its status update functionality, the company’s offerings extend far beyond this single feature. A closer examination reveals the breadth of their development efforts and future plans.

Monday.com positions itself as a “Work OS,” a designation that implies a versatile platform capable of supporting diverse tasks and integrating with numerous other systems. The question remains: does the product genuinely fulfill this ambitious description?

The following is a summarized account of the Work OS narrative, as presented in Monday.com’s F-1 filing, with selective omissions for brevity and reordering of information. Clarifications and additions are indicated within brackets.

This portrayal is surprisingly effective in making the “Work OS” label more palatable. Furthermore, the company’s performance appears to validate this approach.

With a customer base exceeding 120,000 and a net dollar retention rate of “119% and 121% for customers with over 10 users” during the three-month periods ending March 31, 2020 and 2021 respectively, Monday.com’s product roadmap is progressing successfully.

Typically, initial public offering (IPO) documents are laden with superfluous content and overly elaborate language. In this instance, the writing is clear and the company’s claims seem credible, avoiding excessive use of inaccurate jargon. Alternatively, perhaps an additional dose of caffeine is required.

Advertising Expenditure at Monday.com

Monday.com has demonstrably invested in advertising initiatives. Many users, including myself, encounter the company's vibrant advertisements while viewing content on YouTube, particularly when ad-blocking software is not enabled. This prevalence of Monday.com ads has led to commentary on social media platforms, notably concerning their initial public offering (IPO) documentation.

The question then arises: does Monday.com allocate substantial resources to marketing? The answer is affirmative. A significant $191.4 million was dedicated to marketing in 2020, representing an increase from the $118.5 million spent in 2019.

Considering Monday.com’s total revenues of $161.1 million in 2020, the marketing expenditure is considerable. Notably, sales and marketing expenses continued to exceed revenue during the first quarter of 2021, the company’s most recent reporting period.

This level of advertising investment likely contributed to the financial performance of Alphabet, the parent company of YouTube.

Key Takeaways Regarding Marketing Spend

• In 2020, Monday.com’s marketing budget reached $191.4 million.
• This figure represents a substantial increase compared to the $118.5 million spent in 2019.
• Marketing costs surpassed revenue in the first quarter of 2021.

The company’s commitment to advertising is evident, and its impact on platforms like YouTube is widely observed.

Recap of Key Findings

Let's summarize the core takeaways. Here’s a review of the essential points discussed:

• Monday.com demonstrates strong sequential revenue growth, although its year-over-year growth rate experienced a slight deceleration in the first quarter of 2021 compared to the full calendar year 2020.
• Despite reporting significant net losses, the company's adjusted free cash flow position is considerably more favorable than initial net loss figures might suggest.
• Monday.com presents a relatively transparent profitability picture, requiring less reliance on adjusted metrics compared to many similar companies. Overall, Monday.com has exhibited commendable efficiency, though this is best observed through analysis of its Generally Accepted Accounting Principles (GAAP) results.
• The company’s forward-looking product strategy is notably compelling. Should the no-code movement continue its current expansion, Monday.com is well-positioned to benefit from increased market demand.
• The substantial advertising spend associated with Monday.com is noteworthy.

We view this initial assessment with optimism. Further analysis will follow once the initial pricing range is announced.