Final month, we wrote about TaskUs inventory (TASK), which presents a strategy to spend money on a little bit gentle human slavery digital offshoring providers. 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 wish to spend money on. We lined TaskUS on the request of considered one of our sharp-eyed readers who additionally helps assist our group of very actual human MBAs. One other reader lately tipped us off about UserTesting inventory (USER). It’s one other SaaS tech firm that additionally compresses two phrases collectively to type its identify. However that’s the place the similarity ends.
About UserTesting Inventory
Based manner 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 person testing on something beneath the Silicon Valley solar, utilizing its Human Perception Platform. The 30,000-foot view is that the corporate makes use of video to report prospects 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 corporations this 12 months, particularly within the tech sector. Its market cap has plummeted by practically 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 12 months earlier than at $102.2 million. Second, it derives greater than 90% of its income from yearly subscriptions, billing for its non-cancelable providers 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 conventional IPO moderately than 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 kind of compensation – about digital or real-world experiences or some mixture thereof. This video-based expertise permits UserTesting customers to report and analyze “human indicators” from these Customer Experience Narratives (CxNs) exterior 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 might often ship insights inside a day.
How Does UserTesting Use AI?
That kind 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 job knowledge – has enabled it to prepare dinner up a number of proprietary machine-learning fashions for viewers concentrating on and distribution, in addition to for analyzing content material and producing insights.
Listed below are just a few methods the platform makes use of AI:
- Pure Language Processing analyzes transcribed audio to determine optimistic and detrimental sentiment, determine reactions resembling confusion, in addition to to search out questions and their solutions in a CxN.
- Audio-based fashions charge 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 may very well be helpful for constructing a video courting app, if this entire buyer market analysis factor doesn’t work out. And, like several good AI algorithm, the system will get higher over time. As an illustration, 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 with a purpose to interact higher with contributors.
UserTesting Use Instances
UserTesting claims it has greater than 2,300 prospects, together with greater than half of the world’s prime 100 most precious manufacturers, in keeping with Forbes. These organizations use the platform to do issues like enhance their prospects’ looking and buying experiences; vet market alternatives and perceive product-market match; sanity verify advertising campaigns; take a look at new designs and prototypes; and simply typically perceive find out how to assist prospects 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 fully redesign and construct a brand new digital framework (ie, web site, app, electronic mail) for purchasers 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 outcome? A 30% enhance in conversion charges throughout the merchandise portfolio.
How Does UserTesting Make Cash?
As we famous earlier, UserTesting makes practically all of its cash from prospects like Adobe/BRP on annually recurring revenue (ARR) subscriptions for its platform providers, which implies the corporate has a really constant strategy to measure and predict its ongoing income stream. For instance, greater than 300 prospects account for at the very least $100,000 ARR every – up from 190 on the finish of 2020. As well as, net-dollar retention charge – the share of subscription revenues it retains from current prospects – has averaged 116%. Which means present prospects are renewing and increasing their contracts yearly. It additionally added some new prospects final 12 months, together with British Airways, Canada Submit, DocuSign, HP, and Volvo, amongst others.
In the meantime, lower than 10% of income relies on skilled providers, resembling analysis research, coaching providers, and technique workshops.
Ought to You Purchase UserTesting Inventory?
To date, there’s rather a lot 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 complete income of practically $46 million, a rise of 47% in comparison with final 12 months. Subscription income accounted for practically 95% of all income at $43.2 million.
We additionally like that UserTesting boasted a gross revenue of about 75% final 12 months. We’ve been utilizing gross revenue as a strategy to measure tech corporations within the present bear market, moderately than simply income progress. It merely implies that UserTesting solely spends about 25% of its income on bills immediately associated to the services they promote. That means that the software program is doing loads of the heavy lifting, as you’ll anticipate from an organization based mostly on a SaaS enterprise mannequin. When it comes to its subscription enterprise, there are three primary bills: paying its contributor community, working its platform, and paying its workers who immediately assist the enterprise.
Now, that doesn’t imply UserTesting is worthwhile. The truth is, the corporate misplaced greater than $50 million final 12 months. It does inform us that the core enterprise is sustainable, however different prices like gross sales and advertising have practically tripled whereas R&D has doubled. Over time, a mature, well-run firm will have the ability 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 complete income over at the very least the final couple of years. One draw back: Greater than 80% of income is concentrated in america, although the corporate is attempting to develop abroad, with outposts in Scotland and Singapore.
Conclusion
We like UserTesting, however it’s virtually 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 prospects that the providing shall be resilient throughout occasions of financial turmoil? Like many tech corporations, 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 the perfect in present? Amongst its rivals is an enormous knowledge startup referred to as Qualtrics (XM) that we lined years in the past after they had been nonetheless a startup. Right this moment, the publicly traded agency has a market cap of about $8.5 billion on $1 billion in income. It appears to play in an analogous sandbox as UserTesting, however with a platform that extends past buyer experiences to workers and extra. However as our final date will let you know, greater doesn’t at all times imply higher. We’ll comply with up with a deep dive on Qualtrics within the close to future.
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