UserTesting (USER) is a company focused on collecting customer insights for businesses to improve the usability of their products. Shares of the company just hit the market, and in this episode, we break down how this business is a huge beneficiary of where the world is going and how it'll have to educate the market to meaningfully grow.

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This video was recorded on Nov. 19, 2021.

Dylan Lewis: It's Friday, November 19th, and we're talking about another S-1. I'm your host, Dylan Lewis. I'm joined by's Airhead Advocate of Automating Asset Accumulation, Brian Feroldi. Brian, I want to note that you write your title. I don't write your titles. That's you calling yourself an airhead. I'm not calling you an airhead.

Brian Feroldi: I feel like that's at least 25% of the prep that I do for these shows, is coming up with a name for myself, but I have fun doing it and that's what matters.

Dylan Lewis: I think our listeners enjoy it and I certainly enjoy the tongue twister to kick things off. I will note we're talking about a company whose name starts with U. Usually we get alliteration leading into that. We are talking about UserTesting today. Didn't tip that with our title, but this is a super-interesting business. I think a very sign of the times type company, Brian. We are talking about it largely because we had two listeners write in, shout out to James and Steven, two folks that wrote into the show wanting to talk about this one. This is brand-new Brian, just came public this week.

Brian Feroldi: I'm really glad James and Steven brought this to our attention because this company is pretty small. It's valued today at about 2 billion dollars, didn't really move much based on the IPO currently trading right around its IPO price. But this would have flown under my radar if it wasn't for James and Steven highlighting it. I'm glad they did because this is a very interesting business.

Dylan Lewis: Very interesting business. I think one that squarely gets at where the world is going. Those are always very interesting businesses to check out. Why don't we kick off right away with the mission. "To empower every organization with the breakthrough perspective, they need to deliver truly exceptional customer experiences using human insight." It's little buzzword heavy Brian, but it does do a pretty good job of explaining what this company does.

Brian Feroldi: I like mission-driven companies and I like that the company put this right upfront. To your point, you could probably delete about half the words in there and then get the insights that are going for but it does spell out what this company is trying to do.

Dylan Lewis: If you want the plain and simple version of it, it basically helps businesses see experiences through the customers' eyes. I'm going to pull directly from the S-1 here so that they can explain in their own terms. They say, we've pioneered a video-first enterprise-grade software-as-a-service platform that enables organizations to see and hear the experiences of real people as they engage with products, designs, apps, processes, concepts or brands. Platform captures authentic, credible, and highly contextualized customer perspectives from targeted audiences who have opted in to share their thoughts for their digital real-world or omnichannel experiences. Brian, this is basically a business that gets your core user you're able to identify as your core user, puts products or experiences, it could be unboxings, it could be site layouts in front of them and then gets their organic reactions.

Brian Feroldi: It's a really cool interesting product that this company has made. They call out that the problem they're really trying to solve is collecting user feedback in real-time currently is not easy. It's hard to find consumers for businesses to connect with that are willing to do this. Or the way that companies, enterprises do this nowadays is they pay an agency tens of thousands of dollars to go out do this testing. There's often a long delay in the feedback loop where it takes months for them to get a report and if the report has any actionable feedback, it's possible that the product or the website has already changed. UserTesting's product dramatically speeds up that process. It's really cool. I actually went on the website to test it out. Basically, you go in there as a brand, if you want you can ask any question that you want so you want to validate your unboxing experience or how your user website works, you fill out some forms to target exactly the audience that's you're going for. Within a matter of hours, you will have real-world feedback of customers using your product or website back to you. Then the company also has automated software that scans through the videos as these users are using the product to highlight any moments of frustration or excitement. It's a really cool technology.

Dylan Lewis: I was watching a video that one of the co-founders did, it was an interview and it's just talking about the genesis of the company. He was at Apple at one point, and he had watched this breakdown basically of users unboxing an Apple laptop and trying to get an Apple laptop set up. We generally think of Apple as this super intuitive company, plug and play, very easy, very user-friendly and yet there were still complications that people ran into in trying to do that. That process of understanding exactly where the pinpoints are for your customers, it's a huge part of that iterative product design or website design or whatever that experience might be in making it as easy as possible because ultimately it doesn't matter what you're able to promise people if the interface isn't intuitive, if the unboxing isn't intuitive, it's not going to land far.

Brian Feroldi: Have you ever designed a product or a graphic or anything like that, you have in your way how you want the user to do it. But when the user actually uses it often times they are looking at completely different things than you want to. I experienced this firsthand when I was working for the company prior to The Motley Fool way back when I was making the user guide. We had this whole unboxing experience that was supposed to be magic for the user, and we watched some videos that users posted on YouTube. This is way back in the day of them doing that. We're like, "Oh my God, they're not doing anything [laughter] the "right way."

Dylan Lewis: It's amazing you have this idea of how things should go in your head. That's true whether you're creating content, whether you're trying to explain something to somebody, or whether you're trying to build an experience that's intuitive. Whether it's navigating a video library or navigating an e-commerce website. Ultimately, what you have in your head does not get transmitted over to your customers. You need to be able to understand how they are looking at these things. That's exactly what this company helps people do. I think crucially Brian, at scale, I think that's where this business is able to separate itself from some of the legacy experiences that people typically lean on for these types of insights.

Brian Feroldi: You can imagine the value of this kind of product to a company, especially if you're on your website. A/B testing at a lot of companies improves conversions rights in small percentages and those small percentage can lead huge outsized results. I would imagine the investment in this technology could lead to companies capturing far more revenue than they would without this.

Dylan Lewis: Yes, I think it's incredible. A lot of what we experience, whether it's through e-commerce companies or content companies like Netflix, it's the result of rigorous A/B testing. They give you a small sample size or they give a feature to a small sample size of people, understand how that impacts usage and whatever they are trying to drive that. Then if it does that, they wind up expanding it and rolling it out to everybody. Before a lot of that even happens there is this testing phase and I think that's where this company can step in. There are a lot of very obvious use cases for something like that, with product design, with UI. With marketing we talk about unboxing too. But really, I think if you are looking for insights on how the actual customer is experiencing something, this is a business that can probably step in and help you.

Brian Feroldi: For sure. What's also nice about this product is they do have some built-in integrations with many of the leading products on the market today. The company calls out, for example, that this work seamlessly with products by Adobe, by Qualtrics, by Slack, by Atlassian's products, Jira and Trello. We both know that that integration leads to a higher satisfaction and increased stickiness.

Dylan Lewis: Brian, when I put the company in the company's own words, pulled right directly for their S-1, I said SaaS right up there, enterprise grade software-as-a-service company. No surprise here when we look at the business model and the relationships they have with their customers. Two main revenue sources for this business. We have subscriptions, 94% of their total revenue, and we have professional services, 6% of the total revenue. Pretty typical dynamics here. Most software-as-a-service companies have that breakdown, they have to have that professional services revenue.

Brian Feroldi: For sure subscription revenue, the one that we care about that is high-margin and makes up about 93, 94% of total revenue in any given quarter. Professional services revenue that's the handholding for companies that want help getting up and running with the product. That is a necessary evil for a lot of these software server company. It is worth noting that they actually have a positive gross margin on that business, that they lower gross margin in the core business, but it is still there. Still, it's a pretty typical model that we've seen at this company.

Dylan Lewis: You put it all together, about $135 million in trailing-12-month revenue stacks with about what you'd expect for the two billion dollar debut for this business, 44% top-line growth in the first half of 2021. That high revenue number coming from the subscription-based means pretty strong gross margins, Brian, 73%. We've actually seen them expand a little bit from where they were in 2020. As you also might expect with a business like this, Brian, losing money and sales spend is really the culprit.

Brian Feroldi: One of the things that the company calls out is it believes that it is primarily competing against companies doing this for themselves. We've seen that with many SaaS companies and there are pluses and minuses to that. When you are opening up a brand new market for yourself, that's great. The competition isn't as intense. The downside is there is a massive education span that has to go into educate customers as to why they need this. As a result, we see heavy spending on sales and marketing, which is the No. 1 cost. The No. 2 cost is research and development and the No. 3 cost is overhead. But those costs are pretty heavy and as a result, this company is losing money on a net income basis and a free cash flow basis.

Dylan Lewis: I think as you would expect for a business that is in the stage, and I'll say we will get into a little bit the competition discussion, but I don't know that there are a lot of businesses doing precisely what this company does that are very big at this point. I think that there are elements of this company that exist in other offerings and there are small players that do precisely what it does, there's no one that's really big that has absorbed this market yet and they're going to have to do a lot to educate their customers and they're going to have to prove to them that it's worth going with them instead of whatever they have in terms of in-house operations already. You mentioned the losses, Brian. What's nice is even before IPO, this company had a pretty decent amount of cash on the balance sheet, did not seem to have much in the way of long-term debt.

Brian Feroldi: That financially was good about this company. But through the first nine months of 2021, this company's free cash flow was negative 29 million dollars. If you annualize that for the year, call it a 30 million dollar free cash flow loss that should in theory, decrease in time as that top line continues to move higher compared to what they now have on their balance sheet thanks to their IPO, it basically ended September and on a pro forma basis with about $189 million in cash, zero debt, so this company does have the financial resources to continue to reinvest in itself and run at a loss for a few more years if it wants to.

Dylan Lewis: I think if you look at the liabilities for them, largest one I saw was 73 million in unearned revenue, which as liabilities go, is one that you're pretty happy to stomach, Brian.[laughs]

Brian Feroldi: For sure. That is a sign of pent-up unearned demand. But the thing that I'll always pay attention is to the real liabilities, which will be the long-term debt and on that front, this company doesn't have any. Great to see it.

Dylan Lewis: Looking over at leadership. This is not a founder-led business, but both founders are involved with the company, as I understand it. Founded by Darrell Benatar who is on the board and Dave Garr, who I believe is at the the company, but perhaps isn't on the executive team. The CEO, Andy MacMillan, took over a couple of years ago and has a pretty bona fide pedigree in the tech space.

Brian Feroldi: I also looked at Dave Garr. If you look at LinkedIn, it says that he is still the co-founder of UserTesting, but his name hasn't been anywhere in the SEC filings and is not on the executive team and is not on the board so it's possible he's just a "rank and file employee." But this is a situation where the founders did hand over the CEO role to Andy MacMillan. As you said, he was a former product executive at both Oracle and Salesforce. He seems like a very accomplished individual. The next check for us is always, ownership and Glassdoor, pretty good ratings there. The company gets 4.2 stars out of five. MacMillan himself has an 88% CEO approval rating. Pretty good. MacMillan actually owns 4% of shares outstanding. Compare that to Darrell Benatar, one of the co-founders. He owns about 5.5% of shares, but 4% ownership of this business, considering the CEO has only been there for three years, is actually a pretty good number.

Dylan Lewis: Yeah. I think that's pretty good alignment and also, for someone who is not a founder and took this company public, he's actually been with the business for several years, I think he has been with UserTesting since 2018. It's not like he was hired as the executive to take them public 12 months ago. He has been with this business and understands that has been a better with it for quite some time. Which for me, given that he's not a founder, is always reassuring.

Brian Feroldi: For sure. Nice to see. I will always pick the founder. If I can't have that I'll take a long time executive. I'd like to see executives being at the company for more than five years, so he's starting to inch close to that, but I do like to see that he does have 4% ownership in this business, his incentives are definitely aligned with ours.

Dylan Lewis: We mentioned earlier that a big part of what this company is going be doing, I think over the next couple of years, is really educating and creating awareness in the marketplace for what they're able to do. Maybe how they're able to do it better than the in-house operations for a lot of these businesses. We see already though there are some pretty big names on the customer list for this company.

Brian Feroldi: The company has already signed up more than 2,100 customers in total and this is from a wide range of industries. A couple of flagship customers, they have DocuSign, Microsoft, Subway, Lowe's, Puma, Albertsons, Pitney Bowes. It is nice to see that they have signed on a lot of companies, not just tech companies, that are from so many different industries.

Dylan Lewis: I will say, I think this company is still very much in the infancy of targeting enterprise customers. There's a pretty classic arc that they went through. It started as a pay-as-you-go model when they were founded back in 2007, it transitioned to subscription about a decade ago, and now that they've reached a certain size, they are firmly in SaaS and they're targeting these enterprise customers. Tough to do that until you're a business of a certain size, Brian. But I think we're going to see increasingly more and more big names start joining that customer list.

Brian Feroldi: What's nice to see is as of the middle of 2021, some of those customers are spending a substantial amount of money with UserTesting. Again, the middle of the year, they had 249 customers that are going to spend at least $100,000 with this platform in any given year. The company also did give us the number that we love, a dollar-based net revenue retention rate. This number isn't as sky-high as we see with some other businesses. But overall, for a software-based solution, it's pretty good. It was 117% in the first half of 2021 as of the most recent quarter, that did tick up a little bit to 119%. Clearly shows that the company is doing a good job and not only hanging on to its customers, but gradually upselling over time too.

Dylan Lewis: I will note we always like to look at customer concentration. If you go back over some of the recent years, they have not had a business comprised more than 10% of accounts receivable, so we didn't see a lot of concentration. That changed once we got to 2021. They do have one customer accounting for approximately 18% of accounts receivable as of midway through 2021. The con of that is there's a little bit of customer concentration there, Brian, the pro of that is that it looks like they signed a pretty big contract with somebody.

Brian Feroldi: Yeah. It is accounts receivable. Importantly, it's not sales so it is going to be on the owners of the company to collect against them and this is a little bit eye opener they haven't collected as of yet, so that will be something to watch. But overall, the company does have 2,100 customers. It's broadly diversified so I'm not going to knock this company off for having any customer concentration issues.

Dylan Lewis: We talked a little bit earlier just about how this seems like a business that is where the world is going. We know that these digital businesses, these platforms, these e-commerce storefronts. It is such a test and learn iterate environment. I can't think of a business that is better positioned to help benefit from that than a company like this. It seems like there's plenty of opportunity here in front UserTesting.

Brian Feroldi: The company did put out some TAM numbers in its S-1 and these do come from third parties such as S&P, Capital IQ, as well as the IDC, both numbers that those entities threw out in 41-47 billion dollar range. Compare that to the trailing 12-month revenue of 140 million and the opportunity is clearly huge. What's more, the company's growth strategy is pretty similar to what we see for any given SaaS company. It lands new customers, roll out new products, up-sell existing customers, create new partnerships and expand geographically. One thing that I was pleasantly surprised to see was that this company already has a presence in international markets, 18% of revenue is currently gathered from outside of the United States. The company believes there's a meaningful room to improve that number over time. But the fact that it's 18% already shows me that this concept does translate into international markets.

Dylan Lewis: I think there's nothing inherently North American about what they are doing here. The challenge, I think as they look to scale things internationally is they want to make sure that they have the user base for the audience that these businesses are looking to test. In a way, this is kind of a marketplace. They connect people that are in parts of various demographics and check the boxes for who companies are trying to get in front of. They need to be able to connect those people with the companies. They need to establish that base of testers and people that can provide feedback, but there's nothing to say they couldn't do that.

Brian Feroldi: Yeah. It is worth pointing out that if you're interested in becoming a tester of one of these products, you can go right to UseTestings' website and sign up. They pay something like $10 for five minutes or more. You can do more detailed analysis. I think it's up to 32 or even $100 per hour to become testers. Like you said, I do think there are some network effects at play here. Once you get to a certain size of users on your platform, you can help your customers to target exactly who they're looking for. That is a dynamic for investors to be aware of.

Dylan Lewis: Yeah. I'll give a shout out to our listener, Stephen here. In the email that Stephen wrote us, mentioned that he was an on-and-off tester for some time to make some side money and noted that it has been harder to qualify for the tests, which to me, Brian, is a sign that the quality of the testers is improving, and that's what you want. But I also love just the boots on the ground type of approach, the first-hand experience with this business. We talk about all the time how it's so important to get the perspectives of users. Love that in this email that we got from one of our listeners, even proposing the idea for the show. We got a little bit of that.

Brian Feroldi: Yeah, for sure. Nothing beats first-hand experience. It is good to see those qualitative factors.

Dylan Lewis: When it comes to risks, we've talked about it a little bit. I don't know if there's anyone that does precisely this in a big way, in the mid-cap or large-cap space. I think there are elements here that exist at some bigger offerings. But in doing my homework on the competition, Brian, I saw that there are a couple of small players that operate in a very similar space. There's UserZoom and there's TryMyUI, and they are quite similar and that they're trying to harness user experiences, get them in front of companies in a way that scales, but I don't really see anyone that's bigger than them that is squarely focused on this market.

Brian Feroldi: It seems to be a differentiated business model too. Keep in mind the traditional way that a company that do this is they would hire a consultant group to comment, perform these user tests, and provide a report after the fact. UserTesting's tools allow you to essentially do that yourself quickly and get the results back very, very fast. It is disruptive to that market. To your point though, they do have some closer direct competitors with users in TryMyUI, but they do seem to be the top dog in this space.

Dylan Lewis: Yeah. There are other big businesses that get at pieces of this. There's online sentiment and survey companies, Qualtrics, Medallia, SurveyMonkey, a business we've talked about on the show before. There are analytics companies like Google Analytics, for example, we use at the Fool. Then there's research firms like Kantar, there's panel aggregators. There are a lot of people that get at the bits and pieces of this. I think the sauce for this business is the fact that it's virtual, the scale that it's able to offer, and probably the speed that it's able to offer.

Brian Feroldi: In addition to that, the software that they have that helps to comb through the actual user videos themselves and automatically pull out the key parts. If you've ever tried to sit through a video recording of somebody doing something, there's a lot of data that goes in there. Having software that automates that product is key.

Dylan Lewis: Yeah. Brian, I would almost say looking at this business, I see the bigger risk of them not being able to convince people that it's worth outsourcing this if they have in-house operations already, especially if they're targeting enterprise customers. Based on the competitive landscape, I feel like they're actually in a pretty good position to seize the green field in front of them.

Brian Feroldi: I would agree with that. I mean, my biggest knock against this company is that it's spending so much money on sales and marketing that it's not producing any net income or free cash flow at the time. On the flip side, as long as the company is rapidly growing its user base, which it's doing, keeping customers, which it's doing, and up-selling them over time, that's an investment that this company should keep the gas on for as long as possible. What's more? The company didn't need to come public, I think this was in some ways both a financing event and a marketing event for UserTesting. On that front, we might see an acceleration in this company's business.

Dylan Lewis: Yeah, I think that's right. I think it's absolutely dead on. You mentioned some of the things that were on my list for the concerns, the risks, and that some of the financials, but it makes sense for the stage this company is at. I do think one thing that we have to keep in mind with a company like this, is in addition to the fact that they have to educate a lot of customers, I think what this product fits into in terms of the hierarchy of decisions is lower and maybe a little bit less necessary than some other software providers that are out there that we often talk about on the show.

Brian Feroldi: Yeah. That's something that I'm still personally struggling with this company. Is this a need to have product? Can't do business without it? Or is it a nice to have product? I mean, it does make products better, and you could make the argument that using this product leads to better customer experiences down the road, which leads to higher conversion rates, higher revenue. On that perspective, I could see the investment that companies make into this product really paying off in the long run, but that's something that requires education and salesmanship upfront to convey that message. That's just a dynamic that I'm personally working through.

Dylan Lewis: Yeah. I think one way to look at that is if your budget is tight and you have a CRM tool, or you have an email tool, or you have an e-signature tool, those are probably a little bit more directly necessary to the core operations of your business. Whereas this is something that layers in as insights that drive where your business is going. If money is tight, I could see spend coming back and maybe going to other places, and this could be maybe one of the first line items that companies look to get away with.

Brian Feroldi: Yeah. I could very much see this company being an acquisition target for a larger business. I mean, I personally think this would slide in beautifully to's model as a wonderful add-on future. Knowing that company's history, they could sneeze and acquire this company for a little bit. Obviously, you don't want to bet that this company is going to get acquired, but I could very much see this being a nice addition to a big company's portfolio.

Dylan Lewis: Yeah. From your lips to Marc Benioff's ears, Brian. [laughs] We talked about some of the things we're concerned about. I do think there are a lot of things to be positive about with this business. One of them being market leader, and it feels like where the world is going. Traditionally, that has been a pretty good investment case as you're looking at software players.

Brian Feroldi: Yeah. There's definitely more to like here than there's not to like here. It's a market leader. The SaaS model is awesome. The founders are still involved. Even though they're not involving the day to day, they still have their handprints on it. Good Glassdoor ratings, the gross margin is high, and I think can continue to rise an impressive list of customers and differentiated product. When you layer in that fact, I don't think the stock is trading at a crazy valuation either. Somewhere around, say, 12-15 times sales, that is not a number that is pricing in tons and tons of hypergrowth. If this company can continue growing as it just reported, there's upside here.

Dylan Lewis: Yeah. I think this is the kind of business that can probably find revenue acceleration depending on the customers that they bring on, especially with the size that they currently are. I think that valuation number is very reasonable. For me, it's a watch list stock, and one that I'm really glad that our listeners put on our radar, one that I'll be keeping tabs on and seeing, are we going to continue to see the growth rates that we've seen or we're going to see the adoption? Can they make that case to these enterprise customers? If so, I think there's a very compelling business here.

Brian Feroldi: I'm right there. I mean, at first glance it looks really good, but I want to see how this company performs as a public company before I get more excited about it.

Dylan Lewis: Let's see those earnings reports, right, Brian?

Brian Feroldi: You got it.

Dylan Lewis: [laughs] Brian, thanks so much for joining me on today's show.

Brian Feroldi: Anytime, Dylan. Hope you feel better.

Dylan Lewis: Thank you, I appreciate it. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say hey, shoot us an email at or tweet us at MFIndustryFocus. If you want more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on!