Amplitude - why I sold

Investment Analysis Clubs Saul’s Investing Discussions
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Two recent investor conferences - the UBS Conference on 7 Dec and the Wells Fargo Conference on 30 Nov - were quite bearish and convinced me to sell Amplitude. Management basically admitted that Q4 will be weak and the weak guide was not due to conservatism from being a “newly public company”. A few points raised by Management:

  1. The strong growth in Q2 and Q3 benefited from one-off factors (early customer renewals, Covid tailwind, semi-annual comp plan which spurred sales team to close deals early); and that’s coming back to earth in Q4.

  2. the newer products - Experiment and Recommend - are small, does not move the needle and not responsible for the sales spike in Q2 and Q3.

  3. The rapid margin improvement in 2021 was due to under-investment in costs because of Covid. That will change in 2022 as it spends more - it soft guided to 40% revenue growth in 2022 and -20% operating margin in 2022.

If it similarly beats its Q4 guidance by 5% (similar beat % as Q3), this implies 48.8 mil Q4 revenue or 7.3% sequential growth.

I believe this would causes its NTM multiple to contract to the low 20s or even worse (under the current poor environment).

I have included the quotes below.

Comments on Q4:

UBS Analyst: “but I believe 2Q had some early renewal and pull-forward activity as well as some larger expansions, which I think made for a little bit of a tougher compare in 3Q. So, I guess in terms of how you’re thinking about the renewal opportunity as we look into the back half of this year because of that, and some of like the expansion opportunities, did that – did you see any impact there,
and is there any risk associated with that?”

CFO: “obviously, Q2 because of the – our
semiannual comp plan and some the customer kind of growing that fast and kind of renewed and expanded in
Q2, some of that probably [garblded] in Q3. So, maybe it’s a little bit early. But I think the
bigger picture is, to zoom back, I was just kind of thinking about the market longer term, and that’s kind of where our investments and kind of it’s really about, right? We’re – obviously, quarter to quarter, there’ll be different kind of movement”

CFO: "Yeah. And, I mean, I think the main driver is actually to think about what kind of accelerated kind of Q3 – would
accelerate Q3, which is really kind of we have, as we mentioned, you know, a few customers who has a really large expansion in the state benefits from COVID in Q2.
And when you – when we do that, the way that we recognize revenue is we – you know, if they have a remaining contract, we take that plus a new contract and recognize it gradually. And so, what that typically does is it obviously boosts your Q3 revenue, but then it makes your Q4 revenue and sequentially quarter-on-quarter a tougher comparison.

On the 2 new products:

CEO: "We have seen great early traction on them [Experiment and Recommend]. I think in terms of, just to set the expectations, in terms of it’s not like it’s they’ve made massive impacts across our average deals or anything like that. They’re still again on small portions of the overall customer base, relatively speaking. Within those, I think there’s a bunch of promising indicators that we’re
excited about.

On Operating Margin:

CFO: on operating margin side, you know, actually when we’ve looked at it,
we feel like we’ve almost been too efficient [in 2021]. You know, the reality is, if you look back at 2020, we didn’t really understand or know, and I guess you can blame me for it, that we didn’t know how it’s going to be. And so we basically took a little bit of a pause in March of 2020, just because we wanted to understand how that was going…

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I didn’t listen to the whole thing, but I don’t think your quote is right in “Comments on Q4”

https://investors.amplitude.com/events/event-details/ubs-glo…

The CFO stated he wasn’t going to comment on Q4 due to the blackout period. Yes, there are a few comments on the strength of the first half of the year but I wouldn’t necessarily translate that to a bad Q4 guide. As he noted in the Q3 earnings, he just doesn’t have visibility.

I didn’t have enough time to post the exact statements, but for those that are interested, you can listen to the Zoom call in the above link.

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I didn’t listen to the whole thing, but I don’t think your quote is right in “Comments on Q4”

I took the quotes verbatim from the Factset transcripts and did not add my own words to it.

You can form your own inference from what the CEO and CFO said. It is important to read between the lines - to me it’s quite clear that he’s alluding to Q4 facing a tough comp and that the strength in Q2 and Q3 is likely not sustainable into Q4.

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For those who emailed me on how I accessed the transcripts of those conferences, you’d probably need a subscription to bloomberg, factset, thomson reuters or the likes.

But of course, you can watch the conversations yourself via Amplitude’s Investor Relations site: https://investors.amplitude.com/news-events/events-and-prese…

Management basically admitted that Q4 will be weak and the weak guide was not due to conservatism from being a “newly public company”.

I disagree with this statement. Amplitude’s CFO said that they are in the middle of Q4 and won’t be giving an update on Q4 guide at present. Everything they said should be taken in light of that.

1. The strong growth in Q2 and Q3 benefited from one-off factors (early customer renewals, Covid tailwind, semi-annual comp plan which spurred sales team to close deals early); and that’s coming back to earth in Q4.

I agree with this when it comes to Q2, when sequential growth was 18.5%, but in Q3 they grew 15.9% sequentially. This is the context for the what the UBS interviewer was asking about. In other words, why the “slow down?” (Note: 15.9% sequential growth still compounds to 80% annual growth.) And the answers did not surprise me. No, they’re not going to grow 18.5% sequentially every quarter by any means – Q2 was abnormal. But I don’t see where they said Q3 was atypical at all.

If it similarly beats its Q4 guidance by 5% (similar beat % as Q3), this implies 48.8 mil Q4 revenue or 7.3% sequential growth. I believe this would causes its NTM multiple to contract to the low 20s or even worse (under the current poor environment).

If that were to happen, I completely agree with you! 7% (or even 8% to 10%) sequential growth simply wouldn’t cut it for me. I have already gone on record saying for Q4 I am expecting $51m+ at least, which would be more than 12% sequential growth. https://discussion.fool.com/belief-amplitude-will-report-revenue… Honestly expect it to be more in the 13% or 14% range, and nothing in the conversation with the UBS analyst made me feel differently.

I think it’s important to think about what management can and cannot say at conferences like this. It’s natural for us to hang on every word and try to take signal from things that may not actually be signal. Or to take things out of context. Just my opinion, and I can certainly be wrong. This is not my top conviction position – we still need to let them prove it. But the way I see it, this is a company with a market cap under 7b now, growing at 70% and trading at less than 25x next year’s revenue.

Bear

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But I don’t see where they said Q3 was atypical at all.

The CFO explained at some point during the conference that because of the “ratable” way they recognize revenue, the large renewals in Q2 also benefited Q3 but sets up Q4 for a tough comp.

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CFO " Yeah. And, I mean, I think the main driver is actually to think about what kind of accelerated kind of Q3 – would accelerate Q3, which is really kind of we have, as we mentioned, you know, a few customers who has a really large expansion in the state benefits from COVID in Q2.
And when you – when we do that, the way that we recognize revenue is we – you know, if they have a remaining contract, we take that plus a new contract and recognize it gradually. And so, what that typically does is it obviously boosts your Q3 revenue, but then it makes your Q4 revenue and sequentially quarter-on-quarter a tougher comparison.

This is the quote on how the large customer renewals. I haven’t delved into the exact accounting nuances on how their revenue recognition works but he’s saying that the customer renewals benefited both Q2 AND Q3, and sets up Q4 for a tough comp.

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And when you – when we do that, the way that we recognize revenue is we – you know, if they have a remaining contract, we take that plus a new contract and recognize it gradually. And so, what that typically does is it obviously boosts your Q3 revenue, but then it makes your Q4 revenue and sequentially quarter-on-quarter a tougher comparison.

The CFO did also add to the above statement that they are being prudent, and later in the call that they are providing guidance that ‘they feel good about’. This suggests some degree of sand bagging to me

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After watching the UBS piece I came to the same conclusions as Bear. Like him, I hear explanation for slightly slower growth in q3 vs q2. There is nothing I heard nor anything in their numbers that indicates deceleration going. Their customer growth is strong, their net retention rate is as well and they expect it to expand, not to contract. Their new products are starting to add to revenue and they clearly think they are in the early adopter stage. I’d be shocked if they came out with sub 10% growth numbers next quarter. Re profit margin, this is a company that is very early in their cycle, they say they went to the market relatively early to get the resources and brand recognition to scale up and capture the very fragmented market (think hiring talent that wants stock options). We want them to invest as long as that investment is paying off.

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