Company Overview

Medallia, a leader in experience management software, filed for a $100M IPO (the amount is almost always a placeholder). The company is slated to trade on the NYSE under the ticker “MDLA” with BofA Merrill Lynch leading the IPO. Medallia believes they have created a new category of enterprise software called experience management. They offer their customers a SaaS platform called the Medallia Experience Cloud that captures data from customers and employees (primarily through surveys) to help companies derive insights. The company offers products across customer experience, business experience, employee experience, and product experience with use cases that include helping customers drive cross-sell opportunities, reduce churn, gain product development insights and improve reputation management. Their main competitor, Qualtrics, was acquired by SAP days before trading for $8B in cash. Medallia is similar to Qualtrics but has mainly focused on larger enterprises to date — for example, they were both at a similar revenue scale but Qualtrics had 9,000+ customers at IPO vs. 565 for Medallia (there is a financial comparison later in the post). Across Medallia’s customers, they analyze 4.9 billion experiences annually and have performed 8 trillion calculations in a single day over the past year. The company is based in San Francisco, California and has 1,258 employees globally. Medallia was founded in July 2000 as Berrypick and changed their name to Medallia in May 2001.

Company Timeline Output

Product Offering

Medallia offers a broad product suite under their Medallia Experience Cloud umbrella and enables enterprises to monitor, measure, analyze and close experience gaps through 3 core capabilities 1) gathering data from signals from customers, businesses, employees, and product journeys 2) applying AI and machine learning on that data to derive insights and 3) enabling companies to drive targeted actions. Their platform was purpose-built for customer experience (CX) — which they believe is the largest segment of experience management — but have developed other products for business (BX), employee (EX) and product experiences (PX).

• Customer Experience (CX): Enables customers to engage their customers across multiple channels and throughout the customer life-cycle to drive loyalty, reduce churn, and increase revenue.
• Business Experience (BX): B2B-focused product enabling customers to increase value and loyalty from their B2B customers and partners and to personalize B2B experiences, save at-risk accounts, and grow revenue.
• Employee Experience (EX): Enables customers to gain insights into their employees’ experiences to improve employee engagement, optimize the employee lifecycle, and personalize employee experiences.
• Product Experience (PX): Enables customers to gain insights into every stage of the product lifecycle, including concept design, product launch, usage, and at the end of life to build better products and increase engagement.

The company also offers a range of add-on modules which include the following:

• Medallia Athena Text Analytics: Turns unstructured feedback from customers and employees into actionable insights.
• Medallia Social: Captures feedback and promotes ratings and reviews across social networks and websites to manage social reputation.
• Medallia Digital: Optimizes engagement across digital channels such as web, mobile, and IoT applications.
• Medallia Conversations: Engages customers and employees on messaging platforms in real-time (beyond just surveys).
• Mobile Applications: Provides insights, workflow, and alerts on mobile devices.

The Medallia Experience Cloud has bi-directional integrations with many other enterprise applications as well (examples below):

Lastly, Medallia offers the “Medallia Application Directory”, which is a marketplace of industry vertical and horizontal applications built on their platform to help customers and partners simplify the discovery and purchase of add-on capabilities.

Summary Metrics and GTM (Go-to-Market)

Medallia is almost an 80% subscription-based business and 90%+ recurring if you include their managed service offering. The company has also been accelerating revenue growth year-over-year over the past few quarters and did $93.6M in total revenue last quarter, up 32% YoY. They did $313.6M of total revenue in FY’19 (ending January 31), up 20% YoY. Implied ARR, (quarterly subscription revenue * 4), was $286.8M last quarter, up 29% YoY. The company was profitable on a non-GAAP basis for the first time last quarter at a 6% operating margin (less SBC). Operating cash flows are generally positive in their first and fourth quarters and usually negative in the second and third quarters. Below are a few other stats about the business from their S-1:

• 565 total customers including 8 of the top 10 global communications and media companies, 7 of the top 10 global hospitality companies, 6 of the top 10 global banks, 5 of the top 10 global insurance companies and 5 of the top 10 global auto companies; this includes 32 of the Fortune Global 100. No customer represented more than 10% of revenue in FY’19.
• The average ACV (implied ARR / total customers was $508K last quarter). Sales cycles are typically 9+ months.
• Their dollar-based net revenue retention rate was 126%, 116%, 122% and 119% as of January 31, 2018 and 2019 and April 30, 2018 and 2019, respectively.
• Contractual subscription agreements are typically 1 to 3 years in duration and their dollar-weighted average contractual term was 2.5 years this past quarter.
• Their top 10 customers represented 25% of total revenue last quarter.
• Over half of Medallia’s customers have more than 1,000 employees using their platform. 50% of MAUs (mobile monthly active users) use their mobile applications on a daily basis as of May 31, 2019.
• Medallia has created more than 30 pre-packaged solutions for customers that are usually implemented within 6–8 weeks. In the last six months of FY’19, over 70% of new customers chose the pre-packaged solutions.
• Over the past year their platform processed over 4.9 billion experiences, 7.2 billion digital visits, and 100 million social reviews. In FY’19 their platform supported over 300 million API calls.
• 27% of their total revenue was from international last quarter.
• The company had 8 issued patents and 13 pending non-provisional or provisional patent applications filed as of last quarter.
• Sales commissions are amortized on a straight-line basis over the expected period of benefit, which is 5 years for Medallia.
• While Medallia is based in San Francisco, California, they have invested heavily in international engineering offices in Argentina (179 in R&D) and Israel (42 in R&D) for a total of ~220 R&D employees (most likely engineers) outside of the U.S.
• Since inception, the company has invested $500M+ in research and development and SaaS operations.
• Their last private round, a series F in February of 2019 was at a $15.00 per share price.

Medallia is focused on selling its platform to large enterprises through a direct sales force (both inside and field sales). They consider large enterprise to be companies with annual revenue of $1.5B+ and mid-sized companies with annual revenue between $150M–1.5B. While they have developed relationships with channel partners, revenue from those partners is limited to date. Medallia prices the software based on the functionality and capacity needs of customers. For customers using their Customer Experience and Product Experience product suites, Medallia prices based on the “determination of a value unit” which is determined by industry. For example, a value unit could be a hotel property, retail location, airline route or product SKU and they calculate pricing on multiple factors such as transaction counts and feedback captured. Employee Experience and Business Experience suites are priced on employee and user counts, respectively. Medallia bills customers annually in advance.

Market Opportunity

Medallia believes the market they are evangelizing, experience management, is still in the early stages and the TAM (total addressable market) to be $68B across all their products. Medallia applied their respective average ACVs (annual contract value) and product attach rates to an S&P company data set for enterprises with $1.5B+ in annual revenue and those with $150M–1.5B in annual revenue.

Competition

Medallia believes they compete in a few categories that include in-house or custom-built solutions, other survey tools such as Qualtrics and SurveyMonkey, contact center companies such as Nice and Verint Systems, and consulting firms like MaritzCX and Towers Watson. The company also mentions there are competitors in specific segments of their product suite — for example, they could compete with a company like Pendo.io*, which provides a SaaS platform for product experience, in their PX segment.

Investors and Ownership

According to Pitchbook, Medallia has raised $338M to date from Sequoia, TriplePoint Venture Growth, and Saints Capital. Sequoia was reported to have led the company’s series B → series F financings. 5%+ pre-offering institutional investor shareholders include Sequoia (41.0%). Sequoia also owned ~10.4% of Qualtrics prior to their sale to SAP. Borge Hald and Amy Pressman, each directors and co-founders of Medallia (husband and wife) are each at a 15.1% pre-offering stake. Their last round, a $70M series F in Feb-2019 was at a $2.33B pre-money valuation, according to Pitchbook.

M&A / Business Combinations

Medallia reported they have acquired 2 companies — Strikedeck and Cooladata, both in 2019.

• On May 16, 2019, the Company acquired Strikedeck, Inc., a privately- held company and provider of a customer success platform for business to business customers. The purchase consideration was $11.0 million in cash.
• On June 17, 2019, the Company acquired Cooladata Ltd. (Cooladata), a privately held company in Tel Aviv, Israel, for a purchase price of $7.6 million in cash. Cooladata is a cloud-based behavioral analytics platform that can derive and predict customer sentiment.

Medallia vs. Qualtrics

Medallia’s primary software-focused competitor, Qualtrics, was acquired for $8B in cash by SAP prior to trading. Given both companies offer a similar product, there is a table below comparing each company — they are strikingly similar in many ways although it’s clear Medallia has a much bigger focus on larger enterprise sales, whereas Qualtrics had a higher velocity sales model and lower average contract value (they even had a self-serve free trial).

Medallia vs. Qualtrics | Implied ARR ($M)

Below is a chart plotting both company’s implied ARR over their disclosure period (note there is an extra quarter for Qualtrics as they reported an S-1 amendment with an updated quarterly result). Qualtrics surpassed Medallia on their most recent disclosure.

Financials and Metrics Outputs

Medallia isn’t growing as fast as some other recent IPOs (Zoom was at a similar revenue scale and was growing 100%+ YoY) but its growth has been accelerating year-over-year in the past few quarters; they grew total revenue 32% YoY last quarter compared to 20% in FY’19. Customers do expand over time and their dollar-based net revenue retention rate was 119% in the most recent quarter. Their implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR * gross margin/sales and marketing spend of the prior quarter), was at a 45-month median over the disclosure period. Higher than some other software IPOs but they are selling into very large enterprises which tend to have longer sales cycles. Medallia has $132.9M in cash and marketable securities and raised $338M in capital, implying they have burned through ~$205M to get to almost $300M of implied ARR, which is no easy feat. Outputs of other metrics are below.

Historical GAAP P&L & Metrics (000's)

Quarterly Subscription Revenue ($M)

Implied Ending ARR ($M)

Medallia added $15.4M of implied net new ARR over the past quarter and $64.5M over the past year.

Quarterly Gross Margins

Quarterly non-GAAP Operating Expenses as a % of Revenue

Quarterly GAAP and Non-GAAP Operating Margins

Revenue Mix Percentage

Cohorts

Medallia did release some cohort data. The chart below shows recurring billings of each cohort over time (this includes subscription billings plus managed service billings). The FY’14 cohort is almost 3x its initial value and subsequent cohorts are growing steadily. Medallia’s dollar-based net revenue retention rate was almost 120% last quarter.

ROI/Efficiency

Medallia released a graphic that shows the ROI of their platform based on customer feedback from a report Medallia commissioned from Forrester. See below;

Sales Efficiency and Payback Periods

Medallia doesn’t release customer counts by quarter, but the below output plots their implied months to payback using the inverse of a CAC ratio (net new implied ARR * gross margin/sales and marketing spend of the prior quarter). The magic number is defined as just net new implied ARR/sales and marketing spend of the prior quarter. Given their focus on enterprise, it’s not surprising their months to pay back are higher than say a company like Zoom, which was <9 months using this same method. It also bounces around more which isn’t atypical for a company selling large, enterprise deals.

Cash Flows ($M)

Quarterly GAAP P&L / Metrics (000's)

Valuation

Medallia is most likely to be valued on a multiple of forward revenue. The output below uses NTM (next-twelve-months) revenue as a proxy based on an illustrative range of growth rates (companies do not release projections in S-1's). The output also includes an ARR multiple range based on those same public high-growth software companies. For context, Qualtrics was acquired at a rumored ~15x forward revenue multiple and high-growth software multiples on average have risen further since the acquisition.

Medallia is the largest standalone player in the experience management software space after the Qualtrics acquisition. Their biggest competitor, Qualtrics, was slightly larger from a revenue perspective and was growing faster. With that said, the same trends that enabled Qualtrics to grow and ultimately be acquired for a strategic multiple by SAP will likely enable Medallia to trade well, even with a slower revenue growth rate. There’s a massive market for large enterprises that need insights about their customers (both B2C and B2B), employees, and products — Medallia should have a successful IPO.

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*Meritech Capital is an investor in Pendo.io.‍