Final month, we wrote about TaskUs inventory (TASK), which provides a technique to put money into somewhat mild human slavery digital offshoring companies. However the firm depends closely on a Philippines-based workforce to energy its software-as-a–service (SaaS) mannequin. There are references to synthetic intelligence and automation applied sciences, however low-cost or crowdsourced labor isn’t precisely what we need to put money into. We coated TaskUS on the request of one in every of our sharp-eyed readers who additionally helps assist our group of very actual human MBAs. One other reader not too long ago tipped us off about UserTesting inventory (USER). It’s one other SaaS tech firm that additionally compresses two phrases collectively to kind its identify. However that’s the place the similarity ends.
About UserTesting Inventory
Based approach again in 2007, San Francisco-based UserTesting had raised greater than $150 million in funding earlier than it had an IPO final November and added one other $140 million. Identical to it says on the tin: UserTesting conducts consumer testing on something underneath the Silicon Valley solar, utilizing its Human Perception Platform. The 30,000-foot view is that the corporate makes use of video to document clients interacting with a product, service, model, app, or no matter. It makes use of AI to not solely assist seize and course of the video but in addition analyze it at scale. Some precise human analytic brains are additionally within the combine.
Again to the fundamentals about UserTesting inventory: It hasn’t escaped the whirlpool that has sucked worth out of public firms this yr, particularly within the tech sector. Its market cap has plummeted by almost 60%, dropping beneath $1 billion, as of early June. Usually, we keep away from investing in any firm beneath that threshold, however UserTesting has some fascinating issues happening.
First, the corporate is considerably growing revenues. In 2021, it had income of $147.4 million, up 44% from the yr earlier than at $102.2 million. Second, it derives greater than 90% of its income from yearly subscriptions, billing for its non-cancelable companies prematurely. That’s very a lot not like TaskUs. Third, market analysis is an enormous market itself, with Statista claiming a complete addressable market of greater than $75 billion. Bonus: UserTesting went public by way of a standard IPO relatively than yet one more dodgy merger with a special purpose acquisition company (SPAC).
Earlier than we dive additional into the financials, let’s attempt to perceive a bit extra about what UserTesting does and the way it does what it does utilizing AI.
What Does UserTesting Do?
Merely put, UserTesting is digitizing buyer market analysis. Its platform captures “extremely contextualized buyer views from focused audiences who’ve opted in to share their ideas” – presumably for some type of compensation – about digital or real-world experiences or some mixture thereof. This video-based know-how permits UserTesting customers to document and analyze “human alerts” from these Customer Experience Narratives (CxNs) outdoors of the verbal suggestions, together with issues like intonation and tone of voice, facial expressions, physique language, visuals, and behaviors. The corporate has certified a community of 600,000 contributors and may often ship insights inside a day.
How Does UserTesting Use AI?
That type of on-demand buyer market analysis suggests a fairly excessive diploma of automation is baked into the platform. Certainly, UserTesting claims that its in depth video archive – augmented with viewers profiles, questions, and activity knowledge – has enabled it to cook dinner up a number of proprietary machine-learning fashions for viewers focusing on and distribution, in addition to for analyzing content material and producing insights.
Listed below are a couple of methods the platform makes use of AI:
- Pure Language Processing analyzes transcribed audio to determine constructive and adverse sentiment, determine reactions corresponding to confusion, in addition to to search out questions and their solutions in a CxN.
- Audio-based fashions price the standard of a CxN utilizing quantity, tone, inflection, and different elements.
- Demographic- and behavior-based fashions maintain contributors optimally engaged.
- Different fashions can determine intent in a CxN and even “acknowledge indicators of engagement inside a CxN, together with pleasure and pleasure in addition to frustration and disengagement.”
Looks like the final AI mannequin might be helpful for constructing a video courting app, if this complete buyer market analysis factor doesn’t work out. And, like every good AI algorithm, the system will get higher over time. For example, the platform makes use of voice knowledge to determine a contributor’s temper modifications throughout a CxN, after which makes use of that data to coach a “clickstream algorithm” to acknowledge how these temper modifications are mirrored in cursor actions and clicks. The insights assist enhance the platform’s means to acknowledge habits and regulate in an effort to have interaction higher with contributors.
UserTesting Use Circumstances
UserTesting claims it has greater than 2,300 clients, together with greater than half of the world’s prime 100 most useful manufacturers, in keeping with Forbes. These organizations use the platform to do issues like enhance their clients’ looking and buying experiences; vet market alternatives and perceive product-market match; sanity examine advertising campaigns; take a look at new designs and prototypes; and simply usually perceive the best way to assist clients attain a brand new state of shopping for bliss.
So, how does this translate to return on investment (ROI) for a typical buyer? Take the instance of BRP (DOOO), which manufactures a line of well-known weekend boy toys like Ski-Doo watercraft and Can-Am ATVs. BRP had employed Adobe to utterly redesign and construct a brand new digital framework (ie, web site, app, electronic mail) for patrons to work together with its manufacturers, beginning with Can-Am. UserTesting offered buyer market analysis in close to real-time on what labored and didn’t utilizing a community of contributors consisting of riders, lovers, and potential Can-Am consumers. The consequence? A 30% enhance in conversion charges throughout the merchandise portfolio.
How Does UserTesting Make Cash?
As we famous earlier, UserTesting makes almost all of its cash from clients like Adobe/BRP on annually recurring revenue (ARR) subscriptions for its platform companies, which implies the corporate has a really constant technique to measure and predict its ongoing income stream. For instance, greater than 300 clients account for no less than $100,000 ARR every – up from 190 on the finish of 2020. As well as, net-dollar retention price – the share of subscription revenues it retains from present clients – has averaged 116%. Meaning present clients are renewing and increasing their contracts yearly. It additionally added some new clients final yr, together with British Airways, Canada Put up, DocuSign, HP, and Volvo, amongst others.
In the meantime, lower than 10% of income relies on skilled companies, corresponding to analysis research, coaching companies, and technique workshops.
Ought to You Purchase UserTesting Inventory?
Thus far, there’s loads to love about UserTesting, starting with its ARR enterprise mannequin. The reliability is obvious within the firm’s 2022 steering of income between $197 billion and $201 billion. That’s a fairly tight projection. In Q1-2022, the corporate continued its present trajectory with whole income of almost $46 million, a rise of 47% in comparison with final yr. Subscription income accounted for almost 95% of all income at $43.2 million.
We additionally like that UserTesting boasted a gross revenue of about 75% final yr. We’ve been utilizing gross revenue as a technique to measure tech firms within the present bear market, relatively than simply income progress. It merely implies that UserTesting solely spends about 25% of its income on bills instantly associated to the services they promote. That implies that the software program is doing quite a lot of the heavy lifting, as you’d anticipate from an organization based mostly on a SaaS enterprise mannequin. By way of its subscription enterprise, there are three important bills: paying its contributor community, working its platform, and paying its staff who instantly assist the enterprise.
Now, that doesn’t imply UserTesting is worthwhile. The truth is, the corporate misplaced greater than $50 million final yr. It does inform us that the core enterprise is sustainable, however different prices like gross sales and advertising have almost tripled whereas R&D has doubled. Over time, a mature, well-run firm will be capable to trim the fats (administrative prices additionally doubled) and switch a revenue. Within the meantime, develop and develop quick.
One other plus: No single buyer accounted for greater than 10% of whole income over no less than the final couple of years. One draw back: Greater than 80% of income is concentrated in the US, although the corporate is making an attempt to broaden abroad, with outposts in Scotland and Singapore.
Conclusion
We like UserTesting, however it’s nearly too small to discover a place in our portfolio and the worth proposition appears to lack sturdiness. Does the corporate create sufficient financial worth for his or her clients that the providing can be resilient throughout occasions of financial turmoil? Like many tech firms, UserTesting inventory is buying and selling fairly cheaply based mostly on a easy valuation ratio (present market cap/annualized income based mostly on the newest quarter) of lower than 5. Something over 40 is usually too wealthy for our blood.
But when we have an interest on this theme of digitized buyer market analysis – and, frankly, that in itself is up for debate – is UserTesting one of the best in present? Amongst its opponents is an enormous knowledge startup known as Qualtrics (XM) that we coated years in the past once they have been nonetheless a startup. In the present day, the publicly traded agency has a market cap of about $8.5 billion on $1 billion in income. It appears to play in an identical sandbox as UserTesting, however with a platform that extends past buyer experiences to staff and extra. However as our final date will let you know, greater doesn’t at all times imply higher. We’ll observe up with a deep dive on Qualtrics within the close to future.
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