The shift from a zero interest rate policy environment, ZIRP in the common tongue, is providing a notable boost to a number of fintech companies. Fintech entities that once made the vast majority of their revenues from trading-related fees are seeing interest-driven incomes skyrocket this year. As a result, many fintech companies that may have appeared to be set for a structural unraveling of their business model have proved more durable than we might have anticipated; holding cash is now a very lucrative proposition.
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But it’s not just the fintech sector that is seeing similar tailwinds from the expanded value of holding cash. SaaS is another.
Digging through this week’s earnings reports, two companies stood out: WalkMe and Monday.com. The two Israeli software companies reported their recent results over the last few days. And both companies had certain profit results that bested expectations. In both cases, their results were partially predicated on interest-related revenues.
While we expect that investors will pay more attention to operating results than other income sources, it’s notable that interest rates have risen so much that revenue from cash holdings has grown large enough that their positive earnings impact is broadening.
Partly what’s at play here is that tech companies were overstuffed with cash for a multi-year period before the 2022-era correction in technology valuations. Some startups that were fed bales of cash are struggling to stay afloat today, having failed to raise more capital since their last private round landed during boom times. But for many other tech companies, the result of their prior fundraising is very good.
Let’s start with Monday.com: Its growth trajectory is one of my favorite stories in tech today, period. We praised the company last quarter for its results, noting that it was posting quick revenue expansion and profitability improvements despite a more conservative market for software spend. Monday.com also noted impressive growth in its free cash flow and adjusted profits.
https://techcrunch.com/2020/03/25/monday-com-surpassed-130m-arr-before-the-remote-work-boom/
This quarter was similarly strong. Beating expectations, Monday.com turned in 38% revenue growth, a GAAP operating loss of $2.5 million compared to a year-ago result of –$28.2 million, and GAAP net income of $7.5 million, up from $23 million net loss in the year-ago period. Oh yes, a SaaS company that is growing quickly and generating full-fat net income? It’s possible.
The funny thing about Monday.com’s results is that it managed to turn an operating loss into net income. How did it manage the feat? Rising interest-based incomes:
The company discussed its 34% free cash flow margin in its earnings call; CFO Eliran Glazer said the following (Fool transcript, emphasis added):
So 34%, obviously, is a very high percentage, and we would like to think about it as a one-off; although we said that we are going to be slightly above 20% originally when we gave Q2 guidance, so by the end of the year. It’s mostly about disciplined spending, as part of the improving efficiency. And even though with the macro environment, we have a very consistent customer collections and billings. We don’t come across any significant issues.
Actually, it’s very healthy. And also, just to be fair, with over $1 billion in bank — in the bank on the balance — we continue to generate nice returns with the environment of inflation. So, all of the above is very healthy for us in terms of efficient free cash flow.
Monday.com closed its Q3 with $1.05 billion in cash. That’s a lot, in case you were curious. And it helped the company hop to real profitability. We love to see it.
Then there’s WalkMe. WalkMe is not growing as quickly as Monday. Not that that’s a sin — most software public companies aren’t. But like Monday, it did better in bottom-line terms than expected. In its Q3 report, the company said the following:
Q3 was a milestone quarter as WalkMe achieved our goal of reaching profitability ahead of schedule [including] reaching non-GAAP profitability for the first time, reaching cash flow positive two quarters in a row and driving operational improvement despite lingering macro headwinds.
Inside of the company’s results was a more than doubling of its “financial income, net,” from $1.2 million in the year-ago quarter to $3.6 million in its most recent period. A smaller boost given that WalkMe has far less cash than Monday, but still notable all the same.
At first when reading the two earnings digests, I wanted to highlight rising profitability among software companies, full stop. But I think that that would have been incomplete; what is really driving some software companies into the black is not just leaner operations and more-stringent cost control. No, prior discipline that led to fat cash balances that came good when the price of money went up are helping as well.
Not a bad time to be a former venture darling, so long as you held on to some of the cash that you raised.
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