Chit Chat Stocks - Fundamental Analysis: Medallia (MDLA)

Episode Date: May 14, 2020

On this show we discuss Medallia. Brett gave it a rating of 7.6 and Ryan a rating of 6.  --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. This is the Fundamental Analysis Show on Chit Chat Money. My name is Brett Schaefer, and I'm here as always with Ryan Henderson, and we're talking a name I don't think we've heard about before. So this is a new company to us. It is Medallia, M-E-D-A-L-L-I-A, if anyone wants to look it up. Do you want to talk about what they do and then the history of the stock and the company? Yeah, this is a recommendation as well that we got through the email. So shout out to uh whoever emailed it thank you we love the recommendations yes but yeah so medallia is an experience management sass business so and i know that's like tons of buzzwords but their goal is basically for businesses to embed their software solutions to their stack in order to enhance the

end customers overall experience and what is the stack their code base yeah i mean i might i might getting that wrong to be honest it's yeah it's like it's the whole like uh going from the back end to the front end of the code base it's like the entire thing um i don't know if that makes it more confusing or clears it up but yeah okay and they're the businesses that they like address or they that they offer solutions to ranges from everything so uh automotives financial services government insurance restaurants retail e-commerce it it's basically any business So it's a subscription service, but they run basically a land and expand model. So when the enterprise signs on, it's typically for like one solution or maybe a few, but

over time they'll add a bunch of the other solutions that Medallia offers. So think about after you've purchased something from a website or an app, there's like, sometimes you'll get a pop-up that tells you to ask to rate your experience. That's one of Medallia's products at work. so that's kind of what they do is they're trying to enhance that customer experience thus the experience management i'm putting that in air quotes um so that's kind of their business model and they offer a ton of different products i'm not going to get into all of them yeah a ton a ton of products you're right yeah really like at least a few dozen which is good

if i mean that is good for the business i guess but it's hard it's a lot to cover for a short show like this um i'll get into the history though there's very little information on the actual company history, but on their 10K, it says they were founded in 2001 with the goal of helping the world's largest companies understand and improve customer experience at scale. It looks like both the founders were working for a consulting group when they realized, basically through talking to a bunch of different Fortune 500 companies, that the world needed this type of product. One of the co-founders is still on the executive team and he's the chairman of the board. I could not find the other co-founder. The co-founder that's still there is Borge

Hald. And they brought in a new CEO last year or 2018 named Leslie Stretch, who served as the CEO of Calidus Cloud before the company got acquired. I think it was for 2.5 billion. Looks like he has a pretty good track record there. Are you sure it's a guy? It is. Yeah. No, I looked at the picture. He meets the eye test. He checks out. He looks like he knows what he's doing um but yeah it looks like he has a good history with the calidus cloud business before this apparently he 10x to them i guess was kind of written in a blog post by medallia um but yeah so that's kind of the business they're not founder-led anymore all right yeah and they ipo'd late 2019 if i'm not mistaken their valuation looks like they have a market cap of

$3 billion, almost $3 billion exactly, ticker of MDLA, price of $23.61. They're unprofitable, classic SaaS company with high gross margins that can't seem to make any money. EV to sales is 7.6, margin adjusted price to sales is 48.75, which is extremely average, like right in the middle of all the companies we cover. Free cash flow margin was negative 12%, which is a good indicator because of their subscription offering. They back end some of the revenue. So they have to spend a lot and then they're going to get some of the revenue or they're going to, sorry, they're going to go all of the cash upfront on the contract or maybe most of the cash, but they have to recognize the revenue over the life of the contract. So it's going to look like the revenue is not as high as

it actually is compared to what they're actually bringing in cash. So the free cash flow margin is something to watch out for because their net margin is so low. They have no dividend and they just IPO'd. So it's tough on the share count to really judge. We'll see over the next few years here how that looks on the stock-based compensation. $200 million in working capital, which is okay. I don't think they'll have any liquidity issues anytime soon, but they do have net debt of negative 319 million. I wrote billion, it's million on there. So they could easily raise some debt if possible. Their balance sheet isn't levered up at all. So if they have to take down a revolver or take out a 300 or $400 million convertible note in these uncertain times,

they could easily do that. Yeah. And I'll get right into the earnings then. Their full year 2020 revenue was $402.5 million, up 28% year over year. Subscription revenue made up 78% of that, and subscription revenues grew at 26% year over year. They have 64% gross margins. That was up from 63% last year. Operating loss in 2020 was $114.9 million. So think about it, $114.9 million operating loss on $400 million in revenue. Right now, they've got a pretty low operating margin. And last year, they had $80.4 million as an operating loss. So yeah, losing a lot of money. Their net loss was $112 million, sort of in line there with the operating business. Net revenue retention rate at the end of Q4 was 119%. Great number there. They have 757 enterprise customers

is now up 39% year over year. They had 343 million in cash and cash equivalents. They're spending 45% of revenue on sales and marketing, and they're spending 27% of revenue on stock-based compensation. I was going to mention this, but we read a good piece from Ryan Reeves about the nature of stock-based compensation and when businesses should and shouldn't use it. Do you kind of want to talk about how it relates to price to sales? Yeah, I think I have to read that again because I might get it wrong, but we're probably not going to link it in the show notes. I always forget to do that. But he is an ex-guest on the show. I guess not an ex-guest. He was a show guest back in November or December of 2019. So if you want to take a listen, you can. He's very

smart and young, really, really good at investing, at least in our opinion. But the way that he explained it is the sales ratio matters. So if you're spending 27% of your revenue on stock-based compensation and your sales ratio is 10, then it dilutes the company by 2.7%. But if, or sorry, the share count by 2.7%, because you have to divide that by the sales multiple. But if their sales multiple is one, then it's still a 27% deletion. So the sales multiple matters. And that's why something like a company like Zoom or Shopify, if they have a larger stock-based compensation, that could technically be a good thing because they're using it as more of a currency compared to someone that's lower on the revenue side, say like a regular retailer

like Walmart or Target. you all right next up is digging trenches what do you think uh i don't know so it sounds like they're they introduced this as like a business like this did not exist before they came along right but I guess they I don't know how that equates to a moat but it seems like they're the leader in the space and they mentioned that a lot throughout like earnings and 10ks and conference calls yeah I would hesitate just because this is our first time looking at it and we haven't really looked at any competitors whether they have a strong moat I would just go

right down the middle one and a half although I think you're going to get this we're going to get to this later but they do partner with service now adobe and salesforce to sell things so i would think that lowers their moat a bit um just because they're on a closed ecosystem compared to someone like salesforce who onboards someone like medallia for these products yeah um so further reading then what are you looking at uh simple i mean it's it's tough because there's so many future growth opportunities and it's really i could say like all right i need to learn about all the 12 different products they have, but I would like to know what products their partners and customers use the most. So SMS, which is messaging analytics, predictions, et cetera. Um, they don't really

give any of that out. Um, so what one is the most important and do they have like higher net promoter scores on any of them? Now, when you say partners, there is a difference between partners and customers, isn't there? Yeah. Yeah. So, I mean, I guess like wherever they're selling it through too. I guess they would know that. But yeah, customers is different. That would be the businesses. I mean, sometimes they call them their partners, even though they're their customers, just to try to make it seem like it's an amiable relationship. But yeah, it's definitely what their customers are using the most. Okay. I am looking at then the relationships with their partners because they talked a lot about this on the conference call and it's a little

hard to tell what these partnerships actually entail. So they are partners with Salesforce, adobe and service now and like i think it was like 10 others or something like that i'm curious what those actually like what's the nature of those relationships why is it beneficial to for medallia to do this like i i just don't understand that entire sort of aspect of their business so i that's something i would definitely look into yeah i think salesforce has an app store sort of like shopify so that could be an easy explanation but the other ones i have no idea yeah all right future growth opportunities what do you have okay first one this is just a joke but they uh opened the conference call and said congratulations to all

our employee or all our medallions and they were referencing their employees uh so stopping doing that would be great but a real one would be they're accessing unstructured data like voice and our digital interactions videos i put here podcasts are they using us but helping clients understand this uh so an easy example would be um i don't think they do this and i think spotify does this on their own but say spotify wanted to aggregate all the listeners uh not listener well i guess who what's listening to you know who's listening to what on a podcast but also what's being said on that they could you know do that very well for someone because that's a very complicated task but basically it's like internet surveillance uh which you know it's morally tough

but can be very profitable because it's very helpful to all these companies. They said on the conference call they have about 60 customers using the Medallia Experience Cloud to analyze non-survey sources like WhatsApp. So typically they use surveys, but this is something where they can go broader, I guess deeper, and try to get to more data online. Yeah, interesting. I don't totally understand what the Medallia Experience Cloud is. And if you explained it to me a few times,

I think I'd still struggle to understand it. And if you think about it, they have tons of products like that that are being rolled out. And so you constantly have to keep up with that. I'm paying attention to the Medallia Sales and Service app. They launched this during their most recent quarter on the Salesforce App Exchange, which I didn't know existed. Makes total sense. That's great on Salesforce part. But according to a CRM blog post, it says, by integrating Medallia with Salesforce, sales organizations can measure the effectiveness of sales programs while contact center professionals can resolve customer service issues faster.

So I looked it up, and here's another quote as well. The Medallia sales and service experience app captures customer sentiment and perspective at key moments of truth during sales and service cycles and combines it with Salesforce data, providing users with actionable insights right in the Salesforce dashboard. So it sounds like companies that use Salesforce basically can pay for this app, and it says it's $10,000 per company per year. if 50 of the enterprise customers added this it would be almost four million to the top line at the minimum so it looks like it could be a lot of it could be very useful for businesses that are primarily sales driven businesses um yeah i think that'd be a huge add to the top line yeah and it's how they're getting that strong uh expansion rate of 119 percent um yeah i mean that sounds good it's kind of weird that they're going through salesforce i wouldn't think they would

have to do that but i guess salesforce has built a strong ecosystem i would wonder what salesforce's take rate is though is it like two percent ten percent yeah i'm curious i'm not sure that but it does make sense in that more customers can reach it through that app exchange right right all right highlights and lowlights what do you have so they have a lot of enterprise customers and i do like the land and expand subscription business model that's it's like if you could build the ideal business model, that's kind of what it is. And it's reflected in their Dubner number or their dollar-based net expansion rate, which is really solid. They're also accelerating revenue growth. Same low light though. It's frustrating to try and

figure out A, the stickiness of the product, and then B, what the product actually does, because we don't get any hands-on experience with this. And I feel like I have very little edge for B2B businesses as an investor that never uses the product. And so that can be a little frustrating and it's going to take a lot of digging into each product before I would make or take a position on this company. So I guess that's my low light is there's a lot of stuff that's hard to understand.

Yeah, it would take, I mean, a lot of hours of research. And if you want to do it, that's fine. Maybe you can get some edge there. But yeah, it's just tough researching a company like this. It's not like Starbucks or something where you're like, oh great they sell coffee you uh have to actually spend a few hours looking through the 10k surveys all their website stuff um for reference we spend i i probably spent an hour and a half maybe two hours looking at the 10k the conference call the earnings reports

and if it's not clear what all you do with within two hours they've got to have a better way of describing the business. Yeah, that is a definite low light. All right. I'll get into mine highlights the RPO number, which is remaining performance obligation. That is strong. It's higher than the revenue growth. And it looks like they're locking in already 330 million in revenue for 2020. So that's great because that shows how recurring the revenue actually is. The number is solid. Like you said, 119% is expanding. So the expansion rate is accelerating. and their company can be applied to any industry, which gives them a large addressable market. And profitability is not as bad as it looks. You really want to look for, with these SaaS companies,

maybe you want to take into stock-based compensation as a consideration. I guess that's up to you, but really you want to look at the free cash flow number, maybe back out stock-based compensation and something else, but that's what's going to show how much money they're actually bringing in. I also noted here, 25% of their customers are using four or more of their modules. I think that's great. Shows that expansion number is going to be, you know, can continue to grow if the customers, you know, want to use all their products. Lowlights, they have that problem, like you said, that you need to explain it to me 10 times from where it's tough to tell other companies what they're doing. So they have to have a large sales staff. Also tough

to judge who is the best in their industry outside of the NPS score. So they say they're the best, but are they actually the best? Who knows? Who are their competitors? Something to look into. And I guess that's not really a low light. But again, lastly here with the data, if they get bigger, they will be a Facebook-like target for their data harvesting practices, because this is basically a surveillance company. Yeah. And businesses like them, um because of their data aggregation abilities and they they were i mean they were transparent about it but they were harping on it like we have the best data aggregation abilities um and that does kind of put your target a target on your back um as business yeah all right rating

yeah before that i wanted to touch on your remaining performance obligation i think i read in the 10k that a lot of these contracts are uh wrapped into one to three year contracts So that's probably the RPO number is important to pay attention to because of the longevity of these contracts. But yeah, rating, I'll get right into it. I'm going to go with like a six. Valuation isn't bad, but there's just too much to understand about the business that I don't understand. And I always get this with B2B businesses because I don't have any hands-on experience. Like if I was using this every day and I was like, okay, I can clearly see it's a use case. It might be different, but I don't get that experience.

So I'm going to go six. Yeah. Well, maybe we'll have to get you. We'll have to break your cherry on the B2B businesses, get you to research it more. But I'm going to go higher. I like a lot of the stuff here. Numbers look great.

Valuation looks solid. Gross margin number is great. Their margin adjusted price to sales, which is what I like to look at for these growth businesses is solid. I'm going to need to do more research, but it looks like they have a large opportunity in front of them. Little to no competition, at least currently. So I'm going to go like seven, six. It's going on the watch list for sure. I'm going to do a lot more research. Maybe could see myself buying shares at some point, but right now I don't know enough, but there's a lot of good things to like. If you understand the business a lot, you can see how they could be a market outperformer if they continue with the sales

growth rate. All right, that's going to do it for this episode. Thank you guys for listening. Make sure to follow us as always. Like we mentioned, every show on Twitter at Chit Chat Money. It's very simple. And then email us like someone did for this episode at chitchatmoneypodcast at gmail.com. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Thank you for listening. We'll see you guys next time. Thank you. This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+.

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