Another look at IOT (Samsara)

[thesea]

This company IPOed at the end of last year. MajorieFool wrote up a nice intro here: https://discussion.fool.com/introducing-samsara-iot-34987376.asp….

They have since reported earnings a couple of times. I thought it was time for another look and maybe to address some of the concerns that were raised in that thread.

What does IOT do:
Samsara Inc. provides solutions that connect physical operations data to its Connected Operations Cloud in the United States and internationally. The company’s Connected Operations Cloud includes Data Platform, which ingests, aggregates, and enriches data from its IoT devices and has embedded capabilities for AI, workflows and analytics, alerts, API connections, and data security and privacy; and applications for video-based safety, vehicle telematics, apps and driver workflows, equipment monitoring, and site visibility. It serves customers across a range of industries, including transportation and logistics, construction, field services, utilities and energy, government, healthcare and education, manufacturing, wholesale and retail trade, and food and beverage.

Management:
Sanjit Biswas (CEO) and John Bicket (CTO) cofounded Samsara. They previously founded a company together and sold it to Cisco for 1.2B, so they have done this before. They each own more than 20% of the company, overall there is a lot of insider ownership. Both are graduates of MIT so have technical backgrounds.

Financials:

Revenue
     1Q       2Q       3Q       4Q
2020 $19,179  $25,837  $33,210  $41,639
2021 $50,990  $56,764  $66,217  $75,934
2022 $87,731  $101,043 $113,819 $126,000
2023 $142,645
YoY					
2020 
2021 165.9%.  119.7%.  99.4%.   82.4%
2022 72.1%.   78.0%.   71.9%.   65.9%
2023 62.6%

Non-GAAP Net Margin
2020 (196.2%) (200.0%) (184.2%) (159.8%)
2021 (123.2%) (85.4%)  (51.6%)  (42.6%)
2022 (42.2%)  (29.7%)  (26.1%)  (14.6%)
2023 (18.4%)

Non-GAAP FCF Margin
2020 (203.0%) (171.6%) (177.1%) (177.8%)
2021 (123.5%) (91.0%)  (59.2%)  (47.1%)
2022 (45.6%)  (46.0%)  (37.8%)  (38.9%)
2023 (35.5%)

Revenue is growing at 63% at a run rate of almost $600M per year. I think the margin expansion is really good as well. The GAAP net income margins took a big hit Q422, when they went public, due to large grants of SBC. That is something to keep an eye on.

Moat
IOT is in a crowded field with a lot of players that have been around a while. According to them that only applies to the vehicle telematics part of the business (GPS tracking of vehicles). IOT also combines telematics with video feeds and AI to prevent accidents, improve driver training, and other applications. They also have site and equipment monitoring technology. They claim that their tech allows customers to monitor all operations in one consolidated platform and gain ROI from that.

They have 72-74% gross margin. This is impressive when you realize that this margin is net of the amortized hardware cost, cellular data, and cloud costs (they use AWS). In other words, when a customer signs a contract they provide the hardware, cellular data, and cloud support in that contract. They are still able to gross 72% even after those costs which tells me the software has a lot of value to the customers.

They also have support for over 150 integrations. They support the in-vehicle sensors for a bunch of manufacturers like Deere, Volvo, International, Ford, Mack, etc. So they don’t necessarily have to install hardware.

Pros
-Revenue growth and margin expansion are good for a company at $600M run rate
-Good, experienced, founder led management.
-High gross margins
-Mission critical product. If their tech delivers as promised, they will save customers money.
-Huge TAM (~$55B)
-Only 10% of their revenue comes from outside the US. So in the short term the strong dollar should not hurt them, and in the long term they have a huge growth opportunity.

Cons
-Crowded field with a lot of competition and established players.
-Free Cash Flow margins lag those of net income because of hardware costs. They will need to manage cash carefully until they are profitable on a non-GAAP basis.
-Hardware could cause supply chain issues in the short term.

If this has piqued your interest I urge you to check out the investor day presentation on their website and also read or listen to some of the calls and conferences.
https://investors.samsara.com/overview/default.aspx

I do not have a position at this time, but I put IOT on my watch list.

• Justin

[PaulWBryant]

Justin/TheSea,

Thanks for putting this together. A very useful summary. I like the (improving gross margin) and the historical growth. But from your post, I couldn’t see where growth is likely heading. I looked at their last quarter and saw the guide for next quarter is 144m at the high end, or 43%. Didn’t sound great, but then I saw that last quarter they had guided for 132m at the high end (~50%) and actually delivered 63%. With a similar beat they should be above 50% in Q2.

Also I saw that in Q4 they had guided for 578m (at the high end) for the full year (35% growth), and in Q1 they upped it to 600m (40% growth). A pretty nice raise! Makes me think growth could level off around 50%…no idea if it can reaccelerate from there. Also, it would be nice to see some cash flow improvement like you mentioned.

I agree this one is worth watching.

Thanks again,
Bear

[BeachMan2115]

@Justin/TheSea,

Color me intrigued. I am adding IOT to my watchlist and will be tuning into their earnings report on 8/31/2022.

“small company” with tons of potential serving multiple secular growth themes.

I am particularly impressed with the 12% average RPO growth over the past 5 quarters. Latest RPO stood at $1,101M…50% of which is expected to be realized as revenue in the next 12 months.

100k ARR customers growing at an average of 15% over the last five quarters. And DBNRR at 125%. Nice.

Only $130M in debt versus $860M in cash. And their relatively low operating cash flow burn suggests several years of runway.

Yes, the negative margins and cashflows are a concern, however they all seem to be heading in the right direction…aka…towards break even.

We have a lot more to learn about this company as they put out more earnings reports. We have had only two so far.

Thanks for bringing this company to our attention!

[thesea]

Thanks for your input Bear and BeachMan.

I meant to update this post after the last earnings call, so I am about 6 weeks late. Here are the updated financials including the last quarter which ended July 30 and was reported on Sep 6. As Bear speculated, they did beat their conservative guide by 6.6% for a YoY revenue growth of 52%. The guide for 3Q was low again at $156M, we’ll have to see if they continue to beat by a substantial amount when they report in the beginning of December.

Revenue
     1Q       2Q       3Q       4Q
2020 $19,179  $25,837  $33,210  $41,639
2021 $50,990  $56,764  $66,217  $75,934
2022 $87,731  $101,043 $113,819 $126,000
2023 $142,645 $153,523
YoY					
2020 
2021 165.9%  119.7%  99.4%   82.4%
2022 72.1%   78.0%   71.9%   65.9%
2023 62.6%   52%

Non-GAAP Net Margin
2020 (196.2%) (200.0%) (184.2%) (159.8%)
2021 (123.2%) (85.4%)  (51.6%)  (42.6%)
2022 (42.2%)  (29.7%)  (26.1%)  (14.6%)
2023 (18.4%)  (12.2%)

Non-GAAP FCF Margin
2020 (203.0%) (171.6%) (177.1%) (177.8%)
2021 (123.5%) (91.0%)  (59.2%)  (47.1%)
2022 (45.6%)  (46.0%)  (37.8%)  (38.9%)
2023 (35.5%)  (25.0%)

Revenue growth is slowing down quite a bit, but margins are improving as well.

Samsara participated in the Goldman Sachs Communacopia + Technology Conference 2022 as well. Samsara Inc. - Goldman Sachs Communacopia & Technology Conference. Here are some excerpts from the conference:

" I think a unique aspect of Samsara compared to other software companies is the reliance on hardware, right, to collect the necessary data. And Samsara really serves 2 big markets, so you know telematics and then video-based solutions.

And I think the cost around video-based solutions is more than telematics, if I’m not mistaken.

And so I think this plays into a key investor concern as it relates to profitability, like working capital and things of that nature. So how would you respond to investors who say kind of the continued reliance on hardware for the short to medium term is a reason they might be on the sideline?

The way that we collect the data from out in the field is through hardware. So we need to provide devices for these customers to go and enable across the board to collect that data from the field. That’s included as part of our subscription. So we’re term-based subscription SaaS model, so 3- to 5-year subscriptions based on the number of assets that you have. And the hardware is included as part of that license.

So 98% of our revenue is recurring. But if you need to collect the data from the field, you don’t have a way to get it in the cloud, we provide that hardware to you, and that’s an enabler.

This model has worked really well for us because it eases customer adoption, it’s plug-and-play for them. It’s something they can get up and running with very easily. And the costs are manageable. So if you look at our gross margin, in our last earnings, we reported gross margin of 73%. That has the cost of the hardware baked into it.

Also the cost of the cellular bill, the cloud fees, all of that is built in there."

I believe, in 2019, Samsara started implementing multiyear contracts like 3- to 5-year contracts. Does that mean this would be a big year for some of those contracts and – or renewals at least? Can you provide color on what’s going well with those renewals?
It’s been honestly a bit higher than we expected and had modeled in.

Yes, yes. Solid improvement. Do you pay attention to unit economics, lifetime value of the customer? I mean, how those metrics changing and you see that playing out in the future?
Yes, we’re very focused on that as we think about to Sanjit’s point, even expansion and investing in our sales force, whether it’s domestic or international. And so our LTV to CAC has been growing at 8x. We monitor that very closely.

After my last post I did start a small position in IOT just to keep it on my radar. I thought this last earnings report was good, not great. I am committed to see what happens in the next report at least. I will wrap this up with a list of pros and cons again.

Pros

• Revenue growth still above 50% YoY at a more than $600M run rate
• Product has potential to be a deflationary force for customers, saving them more money than it costs. This will be proved if their financials stay strong in the current environment.
• Considering they have a gross margin of 73% that includes hardware, cloud, and cellular data costs, they seem to have pricing power and a moat
• Improving operating, net, and FCF margins. They are very close to non-GAAP net income positive.
• Solid management team
• Long runway

Cons

• Revenue growth is quickly slowing. If this does not stabilize, then nothing else really matters.
• FCF margin lags income margin due to cost of hardware. They indicated this should improve as the supply chain normalizes. They have been keeping an excess of inventory to smooth out supply chain issues.

Thanks,
Justin