SurveyMonkey Inc.’s first quarter as a public company was a bit better than expected, as the “freemium” survey software company gained more corporate customers, but did little to answer one big question.
Is a company devoted to software that allows customers or employees to take surveys big enough to warrant being an independent public company, even if it’s the leader in an increasingly crowded market? The question became more complex after rival Qualtrics agreed to be purchased by SAP SE on Sunday for a whopping $8 billion. Could SurveyMonkey eventually be worth that much, or could it be worth a lot more to a software company looking to diversify?
Shares in SurveyMonkey rallied on the company’s results Tuesday, sending its shares up 8.5% in after-hours trading. Since its recent IPO, its shares have fallen about 34%, despite mostly glowing notes from analysts on Wall Street just starting to cover the company.
When asked about the SAP-Qualtrics merger in an interview with MarketWatch after earnings were released Tuesday, company executives said the deal “corroborated” their views that surveys could be a big market.
“SAP helped validate what a huge multibillion dollar market,” the company is in, said CEO Zander Lurie.
The company, also known by its legal name of SVMK Inc. SVMK, -1.83% , was founded in 1999, during the first dot-com boom, but it just went public — 19 years later — this past September. Like a few other so-called freemium software companies, most notably Dropbox Inc. DBX, -2.75% and Atlassian Corp. TEAM, +3.12% , SurveyMonkey’s business model is to win over a core group of individual users inside a company, and then as more users demand the software, a company’s IT department begins to buy commercial licenses.
Company executives told MarketWatch that SurveyMonkey was a pioneer in the movement to “bring your own software” to work, with consumers first signing up for free, which is now being supplemented by some sales efforts. When a customer implements a single sign-on account, it leads to a large number of “self-serve” deals. “But when we compete through a [request for proposal] we win our fair share of deals,” Lurie told analysts on a conference call. As the company said in its IPO prospectus, its success “depends on monetizing our user base by converting unpaid users to paying users, upselling organizations to SurveyMonkey Enterprise and then expanding their deployments.”
In the third quarter, SurveyMonkey had 621,000 paying users, up from 600,000 in the same quarter a year ago, within more than 300,000 organization domains.
The online survey business is currently a hot market, as evidenced by SAP SE’s SAP, +2.28% jaw-dropping $8 billion deal to buy Qualtrics International Inc., which was expected to go public this week. Qualtrics reported revenue of $290 million for 2017 and CEO and co-founder Ryan Smith told investors on a call with SAP that its IPO was 13 times oversubscribed, and it was being priced at a valuation of $5 billion to $6 billion before trading began.
One big positive about SurveyMonkey that a few analysts highlighted in their initial reports was how predictable the revenue stream was, a point executives highlighted with investors and MarketWatch.
“On Sept. 30, three-quarters of our revenue is booked,” Lurie said, referring to revenue for the next year, either on the balance sheet as deferred revenue or via renewals it is sure it will get.
But the SAP deal could also signify that perhaps a company the size of SVMK — which is projecting 2018 annual revenue of about $252 million to $253 million — would be better off as a unit of a much bigger company, with a big sales force help it grow. One of Survey Monkey’s investors is the venture business of Salesforce.com CRM, +1.27% a cloud company that has been on its own buying spree in the past year, and it’s conceivable Salesforce, which already integrates SurveyMonkey into its customer relationship management software, might want a more permanent relationship.
Investors won’t know for many quarters yet which approach works better, but they will likely debate the go-it-alone strategy question going forward.
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