I believe I can pinpoint two recent catalysts. Tenable (TENB) reported earnings 4/24 AMC and took companies like ZS, NET, FTNT, PANW, CRWD, and S down with it. Probably DDOG and others as well. Then on 4/27 Cloudflare came along.
What happened is that TENB cut their FY year guidance. Two short snippets from the call:
The last two weeks of March exacerbated these conditions as the banking crisis came to light. Specifically, we saw longer lead times in purchasing and approval phases of our sales cycle in the first quarter versus what we had typically experienced …
First, our annual CCB guide reflects a continuation of the selling environment that we experienced at the end of March. While in April, we closed a number of the deals that pushed out of Q1 and demand generation was strong in the quarter, our guidance assumes that new business will take longer to close over the remainder of the year in light of the macro.
Sounds familiar? Before turning to Cloudflare, here are two snippets from Alteryx’s earnings call:
When we guided on our last call, we had factored in some macroeconomic headwinds but we did not anticipate the financial system events that occurred in the final weeks of the quarter, which did affect our customer behavior.
While we have no material direct exposure to the impacted banks to-date in terms of cash balances and no material vertical market concentration, we did see elevated deal scrutiny, longer sales cycles, and shorter contract duration.
We did see sales cycles elongate towards the end of the quarter. And really when the regional banking crisis hit, a few weeks before the end of the quarter, we really saw customers sit on their hands in shock about, how this was going to play out. So that did impact our linearity in Q1.
And then we have Cloudflare putting the horror movie on full display:
Matthew Prince
… the quarter saw new challenges, macroeconomic uncertainty, which intensified over the course of Q1 with every failing bank, resulted in a material lengthening of sales cycles, a significant decline in close rates, even as win rates held strong and an extreme back-end weighting to the quarter. To give you some sense, almost half of the new business closed in the last two weeks of the quarter, which is very non-linear for us. … The quarter most reminded me of Q1 of 2020 when businesses were paralyzingly nervous about the impact of COVID-19 …
Thomas Seifert
Last quarter, we highlighted our expectation for sales cycles to continue to lengthen for both the first quarter and full year 2023. However, the level of elongation experienced in the first quarter was unprecedented and far surpassed our forecast entering the year,
[…]
Also, we believe that currently depressed close rates and elongated sale cycles are temporary in nature. We cannot predict when the increasing caution is exhibited by the customers during the first quarter will recover. As such, we have assumed these headwinds, which intensified in the month of March will persist through the end of the fiscal year.[…]
We looked at close rates and assumed that what we have seen in the third and fourth quarter of last year of elongation would continue. But the deteriorating environment surprised us. We saw sales cycles really elongate far beyond our forecast up to 27% on average and then the expansion, as I said before, close to 50%.
So, we have three companies sharing a similar story that points to a rapid deterioration, and I believe that’s the overarching thing. The “a little dense here” question during the Cloudflare Q&A and subsequent answer and elaboration told me that staying invested in the sector might be a rough ride.
As for ZScaler, they already have quite long sales cycles, and from my reading of their call there seemed to be a focus on upsell, which might be a difficult proposition in an environment where companies are cautious and looking at cutting costs. It looks like they’re also facing increased competition from Palo Alto Networks, and to some extent Cloudflare. Although this is just how I see it.
Anyway, seems like part of the recent drops aren’t directly about ZScaler. However, I believe it’s good to take what can be gleaned from recent earnings calls as backdrop regarding whether “missing something” or not.
Hope that’s helpful.