I tend to agree. I respect Saul’s opinion that guidance should be taken with a grain of salt. That said, we can look at past guidance vs actual results to get some insight into what we can expect. In the first table below, I show the revenue guidance vs actual revenue for the last couple years, taking into account the switch from 605 to 606. The average beat is 108% (i.e. an +8% beat). The best is 112%.
Qrtr Guide Actual % +/- YoY growth
605 4Q 18 43 45 106% -
605 1Q 19 47 48 104% 49%
605 2Q 19 52 57 111% 61%
605 3Q 19 60 65 108% 57%
605 4Q 19 74 83 112% 85%
606 1Q 20 84 89 106% 78%
606 2Q 20 92 99 108% 67%
Last quarter, they issued Q3 and full-year guidance. We can use that to get Q4 guidance. If we then take 112% as a best-case scenario, we can estimate actual Q3 and Q4 revenue, and the YoY quarterly and annual revenue growth rates that guidance implies. In the second table below, I show this i.e. the Q3 and Q4 guidance, and the estimated actual revenue based on the 112% best-case beat (which could obviously be wrong), and also the implied YoY growth rates. The last entry is the annual (FY2020) YoY growth rate. The value is 57%, which compares to 61% annual YoY growth for FY2019. On a quarterly basis (i.e. upcoming Q3 and Q4), it appears we should expect a substantial slow down, potentially to <40% (if we take the average 108% beat, we get 50% YoY in Q3, 34% in Q4, and 54% for FY2020).
Qrtr Guide Estim. % +/- YoY growth
606 3Q 20 100 112 112% 56%
606 4Q 20 106 119 112% 40%
606 FY2020 395 420 106% 57%
One thing you may notice is that by assuming 112% beat in Q3 and Q4, we end up with 106% beat for FY2020. This is because the estimated FY2020 full-year revenue already includes the impact of the +6% and +8% beats in Q1 and Q2, so the impact of the +12% assumed beats in Q3 and Q4 are diluted. If that seems confusing just take my word for it, or feel free to double check my math.
None of this takes into account business-specific details such as what Phoolio brought up. There are other ways of looking at business performance, such as TTM metrics, that would not show as substantial decline, since Q1 and Q2 were such strong quarters. I don’t think any decisions should be made on these estimates alone, but I did personally decide to reduce my Mongo position from ~9% to ~7% after hearing the call, and I may reduce it to 5% (unless the market does it for me first!). I also think I am giving them a larger beat (+12%) than I should. There is a lot of talk about potential cap ex slow down across the market in Q3 and Q4. The question that has been asked in a lot of other posts is how that might affect our companies. The consensus seems to be that this is a benefit i.e. our companies provide mission-critical software that cannot be done without, and depending on the underlying driver of any cap ex slowdown, IT spend on cloud SaaS solutions could even increase, at least relative to other areas. My thinking is that this is mostly relevant to the expand side of the strategy, but what about the land part of the strategy?
One other thing that came up in the call was the anticipated larger than average cash burn in Q3:
“We are pleased with our cash flow performance year-to-date, but expect to burn cash in the third and fourth quarter of fiscal 2020, as we continue to make significant investments in the business. Also given this year’s stronger than expected Q2 cash flow performance, Q2 may not be our peak quarter for negative cash flow, as is typically the case.”
This could add another area of weakness in Q3/Q4. Sorry to sound negative on Mongo, but I think it is worth considering that implied revenue growth is <40% in Q4 without a sizable beat. On the bright side, Non-GAAP operating margin has been trending in the right direction, and as implied by Phoolio, Mongo is a true winner with a massive opportunity ahead. If anything, perhaps the analysis above could be useful as a tool to be a little patient in terms of adding to Mongo, and if you are keen to add, you may get a good opportunity in the next six months!
Let me know what I am missing!