March 17, 2020

Medallia, Inc. | Update 1

We remain short Medallia, Inc. (MDLA) as the company has used M&A to mask rapidly deteriorating organic revenue growth. We believe fair value is >35% below current levels.

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Medallia Inc. (MDLA) has used M&A to mask rapidly deteriorating organic revenue growth. FY 21 organic growth will be worse than we originally estimated and easily the slowest growth rate in over a decade. Shares have over 35.0% downside.

Prescience Point Research Opinions:

  • Reiterated FY 21 guidance despite recent M&A implies organic growth is rapidly deteriorating: In Feb. 2020, MDLA acquired LivingLens which we estimate will provide ~$10.0 million to FY 21 revenue. However, MDLA reiterated FY 21 revenue guidance last week implying organic growth will be below 15.0%, lower than we estimated in our Initiation Report and the slowest growth rate in over a decade. As a result, MDLA is now definitively not an “accelerating” growth story.
  • M&A used to obfuscate weak underlying growth from core business: Over the last year, MDLA spent $110.8 million on M&A while providing little commentary or guidance about the revenue impact from the acquired companies – a stark contrast to the negligible amount of M&A done before Mr. Stretch became CEO. It’s very clear recent M&A has propped up reported revenue growth while obfuscating weakening organic growth.
  • Path to profitability remains a fairy tale: MDLA remains unprofitable and we continue to believe long-term guidance for non-GAAP operating margin of +20.0% is not achievable. The Company hasn’t been profitable for the last twenty years despite minimal competition in its core enterprise business. It’s unrealistic to believe it can suddenly become profitable, especially as competition is just heating up.
  • COVID-19 implications could be meaningful, lasting, and very negative: MDLA’s core customers are some of the ones most impacted by COVID-19 (and an oil crisis). A post COVID-19 environment could result in current projects/implementations being pushed out or even canceled, less wins as sales teams can’t do client site visits, and lower operating leverage.
  • Key executives have unloaded massive stakes since post IPO lock-up expiry: Since the IPO lock-up expired on 01/15/20, MDLA CEO has sold over 25.0% of his beneficial ownership and CTO has sold over 20.0%.
  • Shares have over 35.0% downside: We value Medallia’s shares at $12.61, a downside of more than 35.0%. Recall, less than a year ago

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