Monday Q2: WTF happened?

😱 Double beat, double raise and down 25%

Monday posted a double beat and a double raise—yet the stock dropped 25%.

Days like this force me to go back to basics to reevaluate the company. First, clarify what I actually believe about the company (I’ve done this previously when I bought the stock and increased my position); second, identify what the markets view is, where my view diverges from the market’s; and stress-test both sets of assumptions.

Let’s do this for Monday. First the quarter.

Q2 was another quarter of high growth on Monday’s steady trek.

Revenue beat, by 2% Revenue growth of 27% came in far above guidance of 24.5% Q2 saw a very large rise in R&D and SG&A costs, which impacted margin improvement and operating income.

2025 guidance was raised across the board and rate of increase is fairly steady across the board. Revenue was raised by 0.3% (relative to 0.7% last quarter) - Operating income and OM was raised by 6.12% and 8.33% respectively (increased pace from Q1s 6.5% and 4.35%) - FCF up 3%, on top of the 3% in Q1.

The business had some key wins:

1. "record number of net new adds of customers with over $100k in annual recurring revenue (ARR)". As Monday increases their upsell into enterprise, growth of high user accounts is growing and this improves overall NDR.

2. Launched: Monday Vibe, Monday Magic and Monday Sidekick. These are three pretty cool AI based features. Vibe lets you vibe code apps but the key differentiator is that it’s connected to your Monday DB, which gives immediate relevancy to the app. Monday Magic decreases the friction of becoming a Monday power user, building dashboards and automations for you with AI. Sidekick is your more classic ‘chatGPT agent for Monday’ - ask questions, plan work and get more things done.

There were more wins and the business is really operating very well. But….

What happened that caused the stocks drop?

Simple - analysts are expecting more growth....27% is simply not enough. But it’s not only that.

To set the scene on Monday:

Customer growth compounded 22% since 2019 - 2024, and revenue has grown by greater than 3x. But that story came under pressure this quarter.

2024 total customers only grew 8% over 2023, and in Q2 2025 customers with 10+ seats only grew 9%. So it seems like the SMB segment, the core of Monday's historical business is slowing.

Why?

This matters because the Street is expecting high 20's - low 30's growth for Monday. If this narrative/expectation comes under threat, the multiple will compress...High growth companies that trade at higher valuations (Monday has been trading at ~10x sales) are very sensitive to future growth concerns... and that's exactly what happened this quarter.

Monday's growth is modeled on two factors: programmatic ads, which is there bottoms up marketing motion to SMBs, and cross and upselling to enterprise accounts, including Monday Workforce and new products like CRM, Dev and Service.

Monday has two core product groupings. Monday work management, which is mature and a market leader, and their suite of new products: CRM, Service and Dev. The former, while it started as SMB focused, is now focused on and perfect for enterprise while the latter products are doing the original Monday Work Management playbook - starting down market with ease of use and slowly swimming up market.

Analysts have been expecting these two product groupings together to maintain the company's rocket ship like 30% growth.

To put this into numbers, growth definitely decelerated - from 30% in Q1 to 27% in Q2. While that was above management guidance, analysts have been expecting more. Q1 guidance was for growth of 26.5%, and it came in at 30.5% a 300 bp beat. Q2 guidance was 2 percentage points lower, at 24.5%, and came in at 26.5% a 200 bp beat. Guidance was both lower and beat was smaller, leading to a 300 bp sequential deceleration.

Worse, forward guidance for 2025 while up, was up by $3m LESS than the Q2 beat, implying sequential misses and something wrong with the business. While $3m only 1% of Q3 revenue, it's an implication.

It's not surprising that in that context analysts were looking for reasons for the growth deceleration. The first question on the quarter tried to parse it apart:

Nice results. But I'm wondering that you're pivoting to the enterprise, NDR in the enterprise is picking up, the growth rate in the second half is good. but you didn't take it up. Typically, there is a bit of a raise to the second half expectations as you finish up the first half. And the product customer adds for the new products also seem good. But it feels like there's -- that you're waiting to hit an inflection point in the business where the new products and the pivot to the enterprise can stabilize the growth rate, maybe cause a bit of an inflection, but we're not quite there yet. I would love to get your thoughts.

And also simultaneous with that inflection that you're looking to achieve, presumably, you're adding on a couple of new executives as well.

So help us walk through all the puts and takes of the executive adds and the inflections that you're looking to achieve in your business.

To translate: you're growing customers and NDR in enterprise yet aren't raising guidance substantially, so what's slowing down...? We'd expect to see the upswing in sales for CRM, Service etc to increase overall revenue faster.

However that didn't materialize this quarter, in fact Monday's management seemed to be teaching analysts that their new products, CRM, Service and Dev are much more focused on the mid and low end of the market segment than upselling into enterprise.

Co-CEO Roy Mann

Just as a reminder, while work management is very mature for enterprise customers and kind of high end of mid-market, the newer products, the CRM, [ dev and ] service are currently more serving the SME segment...... while the changes we've done to go-to-market team and organization and a lot of other things is driving upmarket expansion so I think both things are contributing to continued expansion of our revenue and growth, although it's definitely 2 separate efforts that, over time, as we mature the product and sell to high-tier customers, will become one.

Co-CEO Eran adds color later in the call:

So definitely, we see the ACV growing in CRM. Actually we see it over 20% year-over-year increase in Q2 in terms of the ACV of our customers in CRM. Mostly it's seat expansion, larger lands of customers.

So definitely, it shows that the investment that we put into the products, making them more -- going more upmarket, adding features and functionality pays off.

So like we said, accounts count is not the only indicator. We see accounts utilizing Monday CRM in a broader way.

→ This is growth mismatch number one. CRM, Service and Dev are for SME, not enterprise (yet), so one doesn't inform the other and growth velocity could therefore slow down and be a longer ramp. These are products aimed at strengthening the mid market segment. While analysts were expecting these products to be upsold quickly, welllll that's wrong. It'll take a bunch of years to replace Salesforce apparently.

The Main issue: Generative AI search

Another analyst targets growth it from demand perspective, and this is the question that sets it all off on the call.

Aleksandr Zukin

I guess maybe can you talk about the demand environment, the spending environment...?

Roy Mann

So we do see a lot of demand in different areas, like in CRM, that we can grow in. We shift things into mobile. But we do see some pressure from Google on the new side, though it's not something we didn't encounter before.

So it's considerably small on that respect....

Eliran, CFO:

...we are seeing some softness within the down market due to the changes in the Google algorithm...

The rest of the call was basically all about Google search weakness. It makes sense - Monday is a programmatic advertising company and Gen AI is changing customer acquisition channels.

Naturally this impacts SMEs much more than enterprise, where Monday already has a powerful sales motion built. The impact to Monday's lower end is concerning. The company was built around a bottom-up marketing funnel built heavily on programmatic advertising and Google channels. While today it's much more mature and sells up-market into the enterprise, that's where most of the growth is coming from. The aforementioned growth products (CRM, Service, and Dev) are all focused on the lower end of the market where these changes to Google's algorithms can impact them greatly.

Management did indeed call out the low end being pressured:

Co-CEO Eran:

But yes, part of it is the pressure, Eliran and Roy mentioned in the low end of the market. And also, part of our strategy in CRM, and we kind of repeated that several times, is landing bigger customers and having higher ACV customers would drive a lot of focus on that front. And we continue to improve the product and landing larger and larger customers.

So I think that just the amount of customers is not the perfect indicator of our progress within the product. And maybe over time, we'll shift to a more telemetric that represents that.

The rest of the call focused on the Google and low end weakness, trying to figure out how material it is, how much it impacted the weakness in the quarter and guide relative to expectations.

Nine questions addressed this issue.

Here are some examples:

Arjun Bhatia

Can I go back just for a second on the Google changes? I'm curious how you go about kind of remediating the impact from the AI search on customer acquisition cost. I understand, I think for work management, maybe not as big of a deal given you're getting up market traction and it's more sales-led. But I imagine it impacts service and CRM and dev a little bit more. And then Eliran, how long -- like how do you contemplate that into the guidance for the rest of the year in terms of how long that might take to remedy?

Roy Mann

It's Roy. I can start, and then Eran can complete.

So it's not something we didn't see before. It's now -- it's not a huge impact that we see on performance marketing, and we have a lot of room to grow in other areas and we can optimize for that. We're also doing a lot of AI in AI and what's been searched by people in AI and that they find us there. But generally, it's not such a big impact right now and we can mitigate it in many different ways.

Steven Enders

Okay. That's great to hear. And then I want to follow up on, I guess, some of the Google commentary from earlier and the impact of search. But it seems like you already have put some of those plans into place. I guess, what has been maybe the efficacy of those changes so far? I guess what kind of gives you confidence that the changes you've made will kind of play out as expected and, I guess, the confidence you're going to have in the second half guide from the Google impact?

Roy Mann

So like one thing to remember is that we have around 250,000 customers and a lot of the growth we see come from expanding them, okay, in multiproduct and giving them service. The new part is obviously smaller but very important for the long term. And like I said before, it's not such a significant impact until now, not nothing we didn't see before.

So it's just a matter of budget allocation and scaling on areas that we improve on.

So we do that always, okay? Like we improve some areas of the product and then shift to another -- some other areas in media, like YouTube and other areas.

So it's not just like that we have a lot of things to do. And we see the impact quickly.

So it's something we can improve and iterate quickly.

So yes, it's not that big.

Eran Zinman

Yes. Maybe Steven, just to add to what Roy said. Look, over the last 4 or 5 years, we've seen many, many things change in the market, anywhere from prices spiking up by 30% at some point 3 years ago, to prices going down.

I think what gave us a lot of confidence throughout all the years we've been doing performance marketing is, one, we don't only do just ad words.

So we have a lot of other channels as well. And also, we monitor every campaign, every click, every expense, so we're not flying blind everywhere, which was unoptimized, we optimize.

So we know we can optimize, we know we have full visibility into how we spend that budget. And we're doing the right tweaks to kind of remain efficient and just distribute the funds in a very organized way.

Analysts worried about the 'miss' on guidance raise, is this due to Google SEO changes?

So you beat the quarter in Q2 by $ 6 million, but you only raised the full year by $3 million.

And so I guess we're all wondering a little bit like, is that kind of buffer on the Google search side? Is that the new CRO? Where is that buffer coming from?

And maybe that concern is justifiable since management is also uncertain even though it's very small?

Eran Zinman

So maybe I'll start with the second part of the question.

…We saw some weakness in the lower side of the business. Part of it is because of the Google changes, part of it is maybe some other trends that it's going to hard to I understand kind of where exactly they're coming from, but we see a little bit of weakness regardless of the Google search.

And look, we try to be as transparent as possible about the impacts we see from the search engine. It's just not that material right now. But it's a start of a trend, so we're starting to be -- we want to be a little bit more conservative about, I don't exactly -- I don't control -- we don't control exactly Google will play this out, how the world is going to be.

So we're trying to understand what are the implications.

Currently, in terms of -- I don't -- we don't have the exact percentages, but very, very low, almost insignificant. But it has some effect in our ability to acquire some part of the lower end of our customer base.

So that's the best visibility we can give right now.

This answer reveals, in my opinion, a lot of what's weighing on the stock. If management can't explain the miss and reaffirm guidance to the extent that the Street is looking for, then how can the Street and investors get comfortable with future growth?

At some point, though, this leads to 'over fitting' on a conference call - it’s a dynamic I’ve seen happen many times. You can see this when analysts start to use the narrative to explain too many things even when it shouldn't.

As more focus goes into the over-fitting dynamic, management responses become more frustrated usually, and it’s up to the investor do determine who is ‘right’.

This question below exemplifies the over fitting as well as the core strength in the business.

The question focuses on NDR being down and thinking that perhaps Google SEO is the reason for it, when in fact management had guided previously that NDR would go down because of pricing that was taken last year, and that in fact NDR is expected to go up in the back half.

This is classic overfitting, especially in light of management's response that retention is at its all-time high across all cohorts.

Connor Murphy

So I just want to go back to the SEO question.

Just I mean I understand the component where it's impacting net adds. But are you guys seeing more churn downmarket as well? Because I'm just -- I mean, I'm looking at the NDR down 1%, upmarket is flat.

So I wanted to get a little more color on the downmarket customer base? And then I have one follow-up.

Eran Zinman

Connor, this is Eran.

So we actually see the opposite.

Our gross retention is at all-time high. And it's not just on the enterprise part of the business but across the whole customer base.

So we don't see any change in terms of churn or their ability to expand. Like I said, it looks very good. And like we said before, it impacts a little bit customer adds in the beginning of the funnel. But overall, it doesn't change the churn profile.

Some thoughts

Sometimes all it takes is for a few cracks to form a large narrative. And that's what happened regarding growth for Monday in yesterday's quarter. This isn't to say that the market is irrational - in fact, the market is rational.

Monday is priced at a premium valuation which is based on future growth. And if that growth comes in question because of changes in the macro environment due to generative AI, then this should decrease Monday's multiple.

The combination of slightly weaker guidance for growth going forward, a few comments on the call, and slowing growth at the low end of the market (where Monday has historically been so strong) are in many ways the perfect storm for this company's narrative.

I'll add that in my opinion, many investors don't quite get Monday and still see it as a low-motivation Excel with colors product which lends itself to a "shoot first and ask questions later" dynamic around the stock.

Higher costs?

If that wasn't enough, there were a few items on the cost side that also concerned analysts. Mainly, that costs increased as opposed to decreased in costs over the past few quarters and increased in stock-based compensation and hiring. This led to questions on the margin structure and the investment cycle.

Josh Baer Morgan Stanly

I think at a high level, this year could be thought of as an investment year with 30% head count growth, and that's slightly ahead of top line growth, a bit of margin compression. And the result, obviously, a ton of product innovation, the go-to-market motion that's maturing and able to penetrate upmarket.

So I'm just wondering, as we look ahead beyond this year, can we see the yield on these investments in the form of higher, more durable growth or more operating leverage, just looking ahead? Any thoughts on how you'd characterize the future, if this is more of an investment year?

Eran Zinman

Yes, Josh. This is Eran. I can start. I mean definitely coming into 2025, we had a very concrete plan. On one hand, we had some catching up to do in terms of hiring for the sales organization because we saw so much potential within our existing customer base and a lot of demand. And we're doing that. It will continue to grow into 26 but in lower percentages, I would say, for the sales organization.

And then for the R&D part, we definitely saw a big opportunity in investing into R&D. And coming into this year, we put a lot of effort into building new AI capabilities into the platform and just working on each one of the products.

So it was an era of investment. But we're already starting to see fruits of all that investment in how people leverage AI, how people use the products, going upmarket, definitely see the fruits of that.

I think '26 is going to be very different in terms of head count growth. We're going to be more efficient compared to '25. But we're going to see a lot of the investment and the results of what we've done in '25 going into '26.

All is not lost!

As I mentioned up top, Monday delivered a great quarter with some great new launches. Importantly, these are going to be net additive on upselling AI, which should increase revenue.

Matthew Bullock

I wanted to ask about AI actions. Obviously, the cumulative number is growing nicely, but it looked like the in-quarter AI Actions sequential growth did slow. Maybe just help us think about how the AI actions trended relative to your internal expectations. And then help us think about the potential monetization story in 2026. And I have one follow-up.

Eran Zinman

Yes. Sure. This is Eran.

So we're actually very happy with the adoption of the AI action. It grew by almost $20 million this quarter. And just as a reminder, we started to introduce payment at the beginning of the year.

So obviously, it had some effect on adoption. But apart from that, we see more and more accounts kind of suppress the 500 AI monthly credit limit, and we're starting to see kind of more revenue accumulated from the AI action.

So we're very happy with the progress and the adoption of the AI actions.

And also, we have some new generation AI features, like Roy mentioned, Magic, Vibe and Psychic, which also contribute to the AI usage.

So overall we're very happy with the adoption within the platform.

All of this finally opens the door for AI adoption and monetization which should be big:

James Wood

Great. And just as a quick follow-up, the -- I mean, interesting to hear that you're already getting AI consumption-related revenue, it sounds like people burning through, their allotted credits coming back to purchase some. I mean should we be thinking that this kind of sets the stage to see bigger AI monetization next year on the heels of driving adoption this year?

Roy Mann

It's Roy. Yes.

So exactly that, like I think we're driving more usage with value. Pricing it allows us to get the feedback and optimize the product to give enough value that customers will continue to buy more. And like Eran mentioned, we're adding new products of AI that build more solutions and workflows to consume those credits. And we see that we are expecting to increase it over time.

Vibe coding has led to some of the fastest growing products in history. Adobe claims that AI products are already driving $250m in ARR just a year after launch. If Monday Vibe or Sidekick really take off, that could be a large growth driver for Monday’s revenue re-acceleration. I still haven’t made up my own mind on the potential for these products, but the potential is definitely there.

What I’m doing

I've been following Monday for seven years and have been listening to management talk and present their company metrics and operating philosophy for a long time. I believe this is a team that can execute and figure out problems. I value their transparency, and while generative AI search might be a problem for their GTM, I don't see this as a core threat to their business model. In fact, I see generative AI enhancing the core functionality of a work management platform. Generative AI superboosts the functionality and efficiency of these tools, and Monday Vibe is a great use case for that.

Perhaps I'm the one who's off-base - I never expected Monday to be able to grow for 30% forever. I trust management's guidance. I do think this is a company with a strong moat, strong potential growth going forward for years and years despite (or perhaps because of AI after the new launches).

Monday is one of the biggest positions in my portfolio, and I'm going to be using this dip (aka crash) to add aggressively. The main risk of adding is not that the business will go down hill, rather that all companies in the SaaS sector have been hit in 2025, and it's uncertain when they'll bounce back and get over the slowing growth narrative that AI has generated.

In terms of valuation, Monday is trading at ~7.9x revenue. Unlike many other SaaS growth companies, Monday’s gross margins are an incredible 90%. When this company reaches operating efficiency it’s going to be a cashflow monster. Using Adobe as a comparable (since they also have a fantastic high margin business), Adobe has consistently had free cash flow margins of ~40% over the past few years.

Use that for Monday and very VERY quickly you start reaching bargain value valuations. For example, using a 25%, 20% and 15% growth rate for 2025 - 2027, and assuming a mature FCF profile you’d receive*:

2025: 18.8x FCF

2026: 15.6x FCF

2027: 13x FCF

Stretch that out for a few years and any long term investor should be buying this hand over fist.

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*This isn’t a valuation model, simply a way to think about the company value.