Description

Summary

We see 4x potential upside as Trustpilot makes significant fundamental business improvements following a leadership team upgrade.

Introduction

Trustpilot Group plc (“Trustpilot”) operates the world’s leading and most-trusted online consumer review platform, with 1.1 million rated businesses, 60 million monthly unique visitors, and a quarter-billion total reviews.  The Trustpilot platform holds a dominant position in Europe and is the clear #1 in rapidly-growing North America.  The firm is headquartered in Copenhagen, Denmark, and its shares trade on the London Stock Exchange.

Trustpilot has an unmatched combination of reputation and scale.  Its platform is held in high regard by consumers, as Trustpilot aggressively deletes “fake” or spam reviews – creating a second-to-none repository of verified and authentic reviews.  The Trustpilot brand is widely known and respected; businesses advertise their Trustpilot ratings everywhere from the London Tube to product packaging to social media and e-mail campaigns.  Each year, Trustpilot receives over 100 billion brand impressions (see Exhibit A).  While a small number of high-quality review platforms exist for specific verticals (such as G2 for US software), and a few fake-review-riddled platforms exist at scale (such as Yelp or Google), we believe Trustpilot is unique in possessing both quality and global reach.

Exhibit A

Source: Trustpilot Group plc

The Trustpilot business model is classic B2B2C software-as-a-service (“SaaS”), with gross margins above 80% and annual recurring revenue (“ARR”) above $200M.  Trustpilot provides tiered subscriptions to tens of thousands of firms who then receive valuable insights, analytics, and other services (but never the ability to influence or change reviews).  For many businesses, Trustpilot is mission-critical: the platform helps them better understand and innovate their products or services, and to more effectively engage with, target, and convert their customers.

Our investment thesis is straightforward.  Like many companies, Trustpilot struggled to adapt as it grew from a start-up to a global operation with nearly 1,000 employees across nine offices.  Trustpilot’s founder had the self-awareness to recognize this – and decided to recruit a professional leadership team who could take the business to the next level.  As the new team implements numerous blocking-and-tackling improvements, we see a clear path to faster growth, better net revenue retention, more efficient operations, and higher profits.

Trustpilot currently trades for less than 4x 2024 ARR.  Rule-of-40 SaaS firms tend to trade for 7-8x ARR (or more).  As Trustpilot’s operational improvements bear fruit and the firm achieves Rule-of-40 status, we think Trustpilot’s ARR multiple can rise to match its Rule-of-40 SaaS peers.  At the same time, we see growth accelerating from the mid-teens to the mid-twenties, leading to ARR of $400M+ in three years.  Double the multiple and double the ARR – that’s 4x potential upside.  From a recent share price of 190p, we see fair value of 750p by the end of 2027.

The Notorious ZBT

Our story begins with Zillah Byng-Thorne (“Zillah” or “ZBT”), a Scottish businesswoman and executive.  We consider ZBT one of the finest business leaders in the UK – or anywhere.  Her track record speaks for itself.

ZBT hails from a working-class background, raised by a single mother.  After graduating from the University of Glasgow, Zillah had stints with Nestle and GE before being named CFO (at age 29) of a PE-owned retailer with 3,000 shops and 20,000 employees.  She was subsequently poached by Auto Trader Group plc (now a FTSE 100 company) where she advanced the firm’s hugely successful digital strategy as CFO, and then as interim CEO.

In 2014, Zillah assumed her first permanent CEO role with listed Future plc (LSE: FUTR) (“Future”).  At the time, Future was a fallen angel – down more than 90% from its highs, the company was losing money and had a market cap of just £30M.  ZBT cut costs, boosted cash flow, improved the culture, and implemented her strategy.

The results were astonishing.  Eight years later, Future’s adjusted EBITDA reached c. £300M – and Future’s market cap exceeded £4 billion.  Investors dream of the mythical “100-bagger” investment.  Zillah actually delivered it.

What makes Zillah so successful, in our view, is her mix of “left brain” and “right brain” talents.  Her background is financial, and she insists on disciplined operations and attention-to-detail on costs.  At the same time, Zillah is adept at building culture, empowering her team, communicating purpose, and setting a clear vision and strategy.

Running a large, public company is challenging – but ZBT is the rare executive who understands both shareholder value creation and “what good looks like” in an organization.  We consider her the very model of a great CEO.

Future’s Loss, Trustpilot’s Gain

So naturally, Future failed to retain her.

British institutional investors, to a degree not seen in other first-world economies, “outsource” shareholder voting to third-party proxy advisory firms.  To a layperson, such a policy must seem ridiculous.  Institutional investors are fiduciaries who ought to carefully consider what is in the best interest of each company and its shareholders, before voting accordingly – but in overly-bureaucratic UK, relying on third-party proxy advisors like ISS and Glass Lewis helps these investors avoid controversy (and liability) around tough votes they may be required to take.  A huge number of UK institutional investors simply vote how ISS or Glass Lewis tells them.

The proxy advisory firms, in turn, care more about public perception than whether a particular company (in which they hold no stake) does poorly or well.  This misalignment is bad for businesses, and terrible for UK plc.

In 2022, Future found itself caught in this crossfire.  Future’s board of directors, fully aware that ZBT had helped create billions in shareholder value, judged it in the company’s best interest to boost her pay package and implement an incentive program that would reward Zillah and her team for future success.  The compensation plan was carefully designed and fair, and would have sailed through in the US (and most other developed markets).

But not in the UK.  Railing against executive compensation plays well in the British press – and ISS and Glass Lewis, knowing their audience, have taken a dim view of pay packages that exceed a self-defined baseline.  Whether the management team has earned the pay – or warrants it – is not considered.  The effect on British markets has been grim, as top UK executives move to the private markets or to roles with global companies who do not face the same scrutiny.  Simply put, the world’s best executives rarely choose to work for a listed UK plc.

To no one’s surprise, ISS and Glass Lewis waged a campaign in opposition to Future’s pay package for Zillah and her team.  The vote was nearly automatic (with shareholders following the proxy advisor recommendations), and the proposal was rejected.  Zillah handled it gracefully, but to have a pay rise turned down after creating so much shareholder value surely must have stung.  A handful of months later, once the noise around the vote had quieted, Zillah handed in her resignation.  “No person is bigger than the company,” she declared.  Future shares today trade for less than half the share price at the time of the compensation vote, costing shareholders close to £2 billion.

Future’s loss, of course, would be another’s gain.  We watched with keen interest to see where ZBT would go next.

Founder-Led to Professional-Led

While Zillah was making plans to depart Future, Trustpilot was wrestling with its own path forward. 

Peter Mühlmann, who founded the company in 2007 and served as Trustpilot’s long-time CEO, had overseen a period of tremendous growth culminating in the company’s initial public offering (“IPO”) in 2021.  But as the business expanded, it began to struggle operationally – especially in the high-potential North American market.

Running a start-up is not the same as managing a large company.  Many founders overstay their welcome.  It can be difficult for a founder to give up control – and far too often, the transition is messy or even adversarial.

To his tremendous credit, Peter recognized this.  He decided he was no longer the right person to lead the company – and that Trustpilot had to shift from “founder-led” to “professional-led”.  After a search, he convinced Zillah to oversee the transition.  ZBT joined the Board in October 2022 and became Chair in early-2023.

Zillah recruited Adrian Blair, an executive with a track record of success, to the CEO role.  Adrian had previously helped scale a start-up (as the 15th employee of Just Eat plc, the “DoorDash of Europe”), overseen a global tech enterprise (as Chief Business Officer of Cera, responsible for 7,000 employees), and grown a B2B2C SaaS business (as CEO of Dext, tripling the customer base in three years before selling to private equity).

Ahead of Adrian’s arrival in late-2023, Zillah acted as de-facto Executive Chair, deeply involved in the nuts and bolts of the business – including building out a fresh senior leadership team.  Peter stepped into a better-suited role as Trustpilot’s brand ambassador.  The pieces were in place for meaningful value creation.

Fixable…And Being Fixed

The crux of the investment thesis now came down to two questions: (1) were the issues facing Trustpilot fixable, and (2) could we gain conviction that these issues were being fixed by new management.

To answer these questions, we conducted a detailed qualitative assessment of the business.  We also performed a proprietary quantitative analysis of nearly two million publicly-available data points.

Our work identified four key areas for improvement:

• #1: Scattershot vs. Targeted.  North America represents Trustpilot’s top growth opportunity.  Unfortunately, it was severely underperforming.  Trustpilot had taken a “scattershot” approach to winning share in the US – attacking every industry vertical at once – rather than focusing on sectors where Trustpilot could achieve the best traction and payback.  As a result, revenue growth in North America was half that of Trustpilot’s other markets.  We believed a targeted sales approach would lead to faster growth.

• #2: Price-Led vs. Value-Led.  Perhaps the most important metric by which to judge a SaaS business is Net Dollar Retention (“NDR”), the spend that carries over from one year to the next from existing customers.  Best-in-class SaaS companies have NDR’s of 110% or even 120%, indicating customers are finding so much value in the product that churn is low and clients are choosing to increase their spend.  Trustpilot’s NDR had never exceeded 100% as a listed firm, and we estimated its NDR was especially poor in North America (under 90%).  The cause?  Trustpilot’s sales force was leading with price to close contracts – resulting in low-quality customers with high churn.  We believed overhauling the sales culture (particularly in North America) to focus on value, not price, could dramatically improve customer retention.

• #3: Working Harder vs. Working Smarter.  Setting aside edge cases where a business is in hyper-growth, a well-run SaaS business with gross margins above 80% should earn EBITDA margins of 20-30%+.  Trustpilot’s EBITDA margins were negative.  Our research indicated Trustpilot was working hard, but not working smart – and all kinds of opportunities existed to operate the business more efficiently.  We believed Trustpilot could dramatically boost profit margins by professionalizing its operation.

• #4: The “C” vs. The “B”.  Finally, it became clear in our due diligence that Trustpilot had fallen into the classic B2B2C trap of structuring its business to serve the “C” (the end user) rather than the “B” (Trustpilot’s actual business customers).  This strategic error was wasting resources and causing the business to operate well-short of its potential.  We believed by re-aligning its strategy to focus on its actual business clients, Trustpilot could meaningfully improve its customer value proposition.

None of this was rocket science – in fact, these were all straightforward blocking-and-tackling fixes.  But what really stood out to us was Zillah, Adrian, and their team immediately “got it” and set to work resolving the issues.

The US sales team and strategy was overhauled.  Trustpilot re-focused its US business on verticals with the quickest payback and likeliest traction.  In 2022, North American bookings growth stood at +10%; by H1 2024, bookings growth had more than doubled to +23%.

Trustpilot launched a cultural refresh to emphasize “value” not “price”, implementing a consistent pricing framework across the organization and clearly articulating the customer value proposition.  The result was higher-quality customers with less churn.  In H1 2024, for the first time as a public firm, Trustpilot’s NDR reached 101%.

A company’s leadership team makes thousands of decisions each year.  Cumulatively, those choices add up to meaningful business impact.  As a founder-led business, Trustpilot wasn’t tightly-managed – and it showed in the numbers.  That has changed entirely.  One example: Trustpilot had no “self-serve” function to onboard smaller clients.  Every customer, no matter how big or small, could only access the Trustpilot platform with live support.  In 2023, Trustpilot implemented a self-serve platform for quicker onboarding at lower cost – a win-win.  In 2022, Trustpilot’s EBITDA profit margin was -3%; in H1 2024, the company’s EBITDA profit margin was +13%.

Finally, Trustpilot fully understands the pivot from “C” to “B”.  This is made plain in Exhibit B, a side-by-side of the Trustpilot flywheel as presented by Peter (on the left) in 2022 and by Adrian (on the right) in 2024.  At its heart, the difference is this: Trustpilot as an organization is no longer centered on “volume” (more reviews), it is centered on “quality” (more active business customers who receive clear value from the Trustpilot platform).  Importantly, Trustpilot’s staff is buying in: applications to work at Trustpilot are up while employee turnover is sharply down.

Exhibit B

Source: Trustpilot Group plc

But perhaps no number tells the story better than the bottom-line.

Since the beginning of 2023, Trustpilot has announced six profit upgrades to the market.

The problems are fixable, and being fixed.  The new strategy, under a new team, is clearly working.

Three Risks…

We see three core risks to our Trustpilot investment.

The first is execution.  The crux of our thesis is that a new leadership team will both improve Trustpilot’s customer value proposition and operate the business more efficiently, leading to faster growth, wider profit margins, and Rule-of-40 status.  To the extent these goals are not met, our investment could prove wrong.

The second is valuation multiple.  We think Trustpilot likely trades for 7-8x ARR once it reaches Rule-of-40 status.  This may not happen.  Valuations in the UK for tech companies are often 1-2x lower than valuations in the US.  We believe ZBT and her team are well aware of this discrepancy – it’s one reason Trustpilot launched a share buyback earlier this year – and that if Trustpilot does not receive a full multiple in the UK, other options exist to achieve fair value including (1) a sale of the company or (2) re-listing to the US.  Trustpilot has several American directors, a substantial US business, and reports its financials in US Dollars, all of which make a NASDAQ listing realistic.

The third is ZBT.  Our interest in Trustpilot started with our high regard for Zillah.  Should ZBT depart the company, our conviction in the investment would be reduced.  We don’t see Zillah leaving over compensation – Board remuneration is rarely fought over in the UK (the focus is on CEO pay), and most of Zillah’s financial exposure to Trustpilot is via shares she has purchased, not salary.  We also note Zillah has implemented her strategy and overhauled the C-Suite to her liking; the business is pointed in the right direction with real momentum.  Every day that goes by, our thesis becomes less about ZBT and more about the team and strategy she’s helped put in place.

…And A Consideration

There is also one stock consideration to keep in mind: Vitruvian Partners (“Vitruvian”).

Vitruvian is a London-based private equity and venture capital firm that invested in Trustpilot in 2014.  Following Trustpilot’s IPO, Vitruvian’s stake in the business was close to 50M shares.  As would be expected of any venture capital firm with a long-in-the-tooth public holding, Vitruvian has been a seller of Trustpilot shares.

That selling has become urgent in 2024, as the fund through which Vitruvian owns its Trustpilot shares reaches end-of-life.  In the last five months, Vitruvian has poured 28M shares into the market via back-to-back secondaries that have both “broken deal price” (when the share price subsequently falls below the deal price, indicating a failed offering).  Trustpilot’s business momentum is terrific – but Vitruvian’s sloppy selling has weighed on its share price.

Fortunately, Vitruvian’s stake is down to 9M shares, or just 2% of the company.  We expect a “clean-up” sale from Vitruvian in the near-term.  Clearing the share overhang can serve as an important catalyst for the shares, as it will allow investors to once again focus on Trustpilot’s robust fundamentals.

Conclusion

There is – of course – plenty more to the Trustpilot story.

We could point out how Zillah and Adrian have gone into the market repeatedly to buy Trustpilot shares for their personal accounts.  Or that Trustpilot has already spent tens of millions of dollars on share repurchases, with more buybacks expected soon.  Or we could detail further insights from our data-backed proprietary quantitative analysis, which provide confidence the company is heading in the right direction at accelerating pace.

But perhaps the best takeaway is simply to look at Trustpilot’s progress under the Rule-of-40 framework.

In 2022, Trustpilot’s revenue growth was +14% and its EBITDA margin was -3%, for a score of 11.

In H1 2024, Trustpilot’s revenue growth was +17% and its EBITDA margin was +13%, for a score of 30.

The inflection has arrived.  Trustpilot is growing faster, retaining customers better, and earning higher profits than just 18 months ago.  We think Rule-of-40 status – and a substantial re-rating for the shares – lies directly ahead.

Catalyst

• Revenue Growth Accelerates From Mid-Teens % to Mid-Twenties %
• Net Revenue Retention Improves to 105-110%
• EBITDA Margins Expand From 13% to 20-30%+
• Achievement of Rule-of-40 Status
• Clean-Up of Vitruvian Partners Share Overhang
• Other Potential Catalysts Include A Sale of The Company or A Re-Listing to NASDAQ