Ben’s Portfolio end of August 2022

Ben’s Portfolio end of August 2022

This is the second time I post my portfolio on Saul’s board. You can find my July recap (with some background info) here:…

My results from May 12, 2020, when I started this stock picking portfolio through August 31, 2022:

2020	63.6%	(Since May 12, 2020)
2021	13.1%	
2022	YTD	Month
Jan	-19.9%	-19.9%
Feb	-18.7%	  1.4%
Mar	-21.3%	- 3.2%
Apr	-37.8%	-21.0%
May	-50.5%	-20.4%
Jun	-53.5%	- 6.0%
Jul	-49.6%	  8.3%
August	-46.0%	  7.3%

These are my current positions:

		August	July
Datadog 	17.6%	20.6%
Snowflake 	16.6%	13.4%
Crowdstrike	12.5%	13.4%
Zscaler 	10.6%	11.1%
Cloudflare 	10.4%	6.7%

SentinelOne 	7.8%	7.7%

Nvidia 		5.7%	7.3%
Monday 		4.7%	4.6%
ZoomInfo 	4.6%	4.1%
Hubspot 	4.2%	6.1%
Enphase 	3.1%	3.3%
TradeDesk 	2.2%	1.7%

Company comments


In my July recap I wrote “re-accelerating revenue growth, profitability margin improvement and large customer growth acceleration is what I will be looking for.”

Well, both QoQ revenue and large customer growth held steady at 14% and 21%, respectively. I think given current macro this is much better than what most people expected, especially for a company that appears less mission critical than most of our other companies, and in an environment where CFOs actively look for leaking faucets, and aim to cut costs. So, while they didn’t manage to re-accelerate on that front, the fact that they didn’t decelerate either, shows Monday’s strength, even in the current environment. What’s better is that raw sequential revenue increased 17.5%, which is a sharp acceleration from 3.4% last Q, 1% the Q before and 6.5% the Q before that. Looking forward, they did raise full year guidance by 2% to $500M, up from $490M at the midpoint. This percentage raise is on the higher side of what our other companies already reported. Revenue guidance for next quarter is $131M, which listening to the call, I interpret as a deceleration to 11% QoQ, as “It should be noted that we did see some softness in demand in Europe at the end of Q2”, and later in the discussion “We also see it in July, to be honest. And if you combine into this the FX impact, it’s also definitely something that we should account for”.

The third point I was looking for was improved profitability margins and boy, did they deliver that. Both Operating Income and Net Income improved sharply from last quarter, which was front loaded with yearly expenses. Operating income improved to -12% of revenue, up from -40% last Q and up from -14% in the same quarter a year ago. Based on their non-GAAP operating margin guidance of -29%, I had expected -25%, so this was a very positive surprise to me. Similarly, Net Margin improved to -12%, up from -40% last Q and up from -16% in the same quarter a year ago. Well Done Monday! Operating margin guidance for next quarter looks even better with -19%, which is 10% better than last Q’s guidance, so we should expect their significant improvement of leverage to continue next quarter. FCF margin held steady at -16% and “we expect margins in H2 to improve” and “free cash flow (…) is going to be low double digits (…) as a percentage of revenue by the end of the year. And I would assume that somewhere next year in H2, we’re going to see a shift toward breakeven or some free cash flow positive.” This is exactly the trend I am looking for as an investor. Net retention rates held also steady in all categories with >125% for all customers, >135% for customers with 10+ users and >150% for customers contributing >$50k ARR and from the call: “we believe we are now at the stage where it’s stabilized”.

Continuing with the earnings call, I found the following statement in the earnings call script interesting, which probably isn’t new news, but I hadn’t heard it before:

Roy Mann – Co-Chief Executive Officer
Since the company was founded, we’ve generated approximately $4 in recurring revenue for every $1 we burn. The secret behind our efficiency is our BigBrain analytics platform. If you’ve ever visited our offices, you’ve seen dashboards on nearly every wall displaying insights from BigBrain, our in-house business intelligence tool. BigBrain collects over 200 million events a day, which informs each of our marketing campaigns and every interaction we have with our customers.

I asked myself what in particular is behind this statement and what specifically separates their company dashboards from just fancy wall art. And, more importantly I asked myself if and how their customers can use Monday the same way to improve efficiencies - probably the favorite word of many CFOs out there, especially these days. I still only have a somewhat fuzzy idea of the answer to this question as Roy goes on to say “By measuring everything, we empower our employees to make efficient, data-driven decisions”. You can watch some examples in this short video made for investors: The linked video gives you some idea of how you can improve efficiency with Monday which certainly gave me a better feel for it. Co-CEO Eran goes over a couple specific customer cases showing examples how they were able to improve business efficiency and produced large ROI from their adoption of Monday’s products, for example “Motorola had significant cost saving, along with increases in overall productivity, producing an overall return on investment of 346%

From the product perspective the big news this quarter (for me anyways) was Monday’s announcement of their new Work OS product suite, which I understand as (for now) five specific verticals (projects, dev, marketer, sales CRM and work management) that are based on the Monday platform and allow customers to quickly adopt those new tools instead of having to build them for themselves (- which they certainly could do with Monday). I think capitalizing on their own platform by building new verticals on top of it is a great move that could turn out as a revenue booster. Indeed, “Within two months, we have had over a thousand new paying accounts sign up with our new Work OS product.” I can also imagine that combining multiple of those products has the potential to consolidate and further improve the business processes of their customers, while making it more sticky. “These new products expand and elevate our go-to-market strategy and create additional entry points for new customers to our platform.” I like to think of it in a similar way as some other board favs that have successfully added more and more products on top of their platform (think Crowdstrike). I think we shouldn’t get too excited about this yet though as “It might take some more time to kind of have another growth on top of the already existing growth that we have.

Regarding whether large customers (>$50k ARR) now contribute more or less to ARR than last Q, which previously was 22% up from 12% sequentially:

Roy Mann – Co-Chief Executive Officer
We continue to see strong growth across all customer segments with enterprise customers leading the way.

So while enterprise customers aren’t necessarily all contributing more than $50k in ARR, I think it is likely that the percentage large customers contribute to ARR further improved this quarter (I didn’t see any other reference of this in the most recent transcript).

Finally, regarding pricing, they “haven’t raised prices since 2019” and currently don’t plan to do so, while “our new Work OS product (…) offer[s] us the ability to charge a premium over our work management platform while giving this value to our customers.” What I also like here is that Monday doesn’t seem to have to give discounts to drive revenue and that growth is truly product led. Summarizing my additional, new thoughts in Monday’s narrative: Going forward, I can see Monday in a similar situation like for example Crowdstrike, offering more and more revenue growth driving products/modules to their portfolio, which makes it an even more exciting investment narrative.


Revenue came in pretty much exactly as I had expected at $406M (I had expected $407M), which translates to 12% QoQ, 74% YoY. New guide (essentially zero sequential growth) points to 9% QoQ, which is a further deceleration, although Q3 has always been seasonally slower than Q2 (besides the COVID hit in 2Q20). Full year guidance was only raised by $10M at the midpoint, a 0.6% increase - so basically flat. Although hard to use to predict revenue, cRPO (RPO to become revenue in the next 12 months) dropped to 55%, down from being above 80% in the last four consecutive quarters. This, together with the revenue outlook, points to further YoY deceleration in Q3 and Q4. So if we assume they will clock in 9% quarterly growth in Q3 (64% YoY) and realize that their Q4 sequential growth is typically at least 20-30% stronger than their Q3 sequential growth, I expect Q4 to come in around 11% to 12% sequential growth or 50-52% YoY. Will growth oriented investors run for the exits when they see this - similar like with Crowdstrike last year? I don’t know, but wouldn’t be surprised to see Datadog go through a similar revenue growth trajectory (first drop, then stabilize) since both companies are at a similar size where the law of large numbers starts making revenue growth (re-)acceleration harder and harder.

Datadog also added 1400 new customers this quarter, a 7.1% sequential increase resulting in a slight growth deceleration from 7.9% in the same quarter last year. If we add back in the 200 customers that were turned off in Russia and Belarus, sequential growth jumps back to 8.1% actually the highest number we have seen in 5 quarters. The more important customer number to look at though is the number of large customers because they contribute 85% to annual recurring revenue: In-line with their revenue growth seasonality, large customer growth dropped from 12% QoQ to 8% QoQ. This is worse than I had hoped for, but we saw such a drop also after COVID, which turned out to be temporary. So it looks like the often discussed fears that Datadog will slow down in recessions or economic down-turns had some foundation. The good news is that customer growth using 4 or more products picked up again to 13.2% QoQ, up sequentially from 11.7% and customer growth using 6 or more products held steady at 25% QoQ. So did NRR at 130%+. Operational leverage held strong with 21% operating income margin and 21% net margin, both slightly down from 23% last Q, but up from 13 and 14%, respectively in the same Q a year ago. FCF margin dropped from 36% to 15%, and down from 18% a year ago and, gross margin improved by 1%, to 80%.

I have three main take-aways from the earnings call:

1. They saw some improvements in July:

Sanjit Singh – Morgan Stanley – Analyst
Really impressive Q2 results with 74% growth. I wanted to talk a little bit about some of the trends you’re seeing in the business and particularly with respect to the guide. I guess the first question is, as the quarter progressed, when did you start to see some of these slower usage trends in some of these verticals? If you could give a comment on that? And then, David, in terms of the guidance in terms of how you were framing it, can you give us a sense of what you’re sort of assuming in the back half with respect to Q3 into Q4? Is it some of the trends that you’re seeing in July? Did that improve or stabilize or worsen? Just give us some sort of context on how you are framing the guidance for the back half, that would be super helpful.

Olivier Pomel – Co-Founder and Chief Executive Officer
OK. So I’ll start maybe with the linearity. We did see the viability in usage growth that we mentioned. We saw that start really in late April, May and June.
So as we got deeper into the quarter. I should say that this is – if you’re thinking of what happened at the COVID, this is not a sharp pullback as we have seen at that time. But we saw it’s just for some customers still growth, but slower goals for certain types of customers and others than what we would have seen historically. I should say that while we did see that for some of our products, especially the ones that have more of a volume component, net logs and some APM, we did see continued healthy growth in host or I should say, cloud expenses and containers, which really are indicative of the fact that the cloud migration is proceeding as it was before.
To fully answer the question also, I think you’re getting ahead of what David is going to talk about a little bit. In July, we did see an improvement on those trends, but we still remain conservative in our outlook for the short term because of the noisiness of the data we’re seeing there

2. They have been more conservative in their guidance than usually:

David Obstler – Chief Financial Officer:
And in this quarter, I mentioned that by passing through less of the beat we inject an incremental level of conservatism. (…) And the reason for that is the macro uncertainty.

3. They see some macro impact where their customers are trying to reduce costs and they feel this impact more with enterprise customers:

Mike Cikos – Needham and Company – Analyst
I did just want to come back to that other point previously regarding the SMB versus enterprise. And really, is it fair to characterize some of the, I guess, movements you’re seeing with these larger deals? Is it maybe less of an impact to you at the SMB level, either because you’re their wallet share when they’re looking to pay out their vendors? Or is it possible that those SMB organizations just have less exposure to your more usage-based products.

Olivier Pomel – Co-Founder and Chief Executive Officer
They have the same exposure (…) is it worth your time to save, $5,000. probably not. If you’re a much larger customer, it’s worth your time to save $500,000. And that’s what we see with those optimizations.

This got me to wonder (I wrote this before Snowflake’s ER): Looking at Snowflake, which is also, like DDOG consumption based, they just passed on a huge efficiency improvement to their customers. While CFOs of their customers are going to continue to look for leaking faucets, I wonder if Snowflake will see much less of an impact going forward as their efficiency improvement already saved a lot of their customers’ costs.

Speaking of …


We are monitoring our key business metrics, which we believe are leading indicators of the macro economy impacting our business. We are not seeing these metrics soften across the customer base. (…) companies globally are prioritizing Snowflake right now. (…) I just feel that the resistance is completely breaking and people are going cloud.” [Those who don’t are] “going to get left behind, you can’t take advantage of innovations that are only available on the cloud. (…) we’re going to see acceleration out of this as opposed to people holding back.

Wow, what a statement to make! This is the proverbial stake melting in my mouth. Just think about this for a second. We have all these great hyper growth companies we invest in, and even they talk about how macro is negatively impacting their business (to various degrees). And here we have Snowflake, a consumption based company, not a subscription based company, basically saying screw macro we are thriving like never before. And then they go ahead and back it up with their numbers: $466M, 18.2% QoQ, 83% YoY. And I had expected $453M, 15% QoQ, 78% YoY, wow #2! Speaking about backing up: anyone backing up the truck yet?

The next Q product revenue guidance is interesting though, because it is only 8% QoQ growth. They did mention that “in Q3 last year we saw unusual seasonality due to reaccelerated product revenue growth”, which led to 23% QoQ growth, 4% above the previous Q3 growth and previous Q2 growth as well. Keeping that in mind, they stated “Nothing has changed in our guidance philosophy” and “there is uncertainties in the macro environment right now and I think the guidance is prudent that we put out.” So I interpret that as a very indirect way of saying should macro start to hit us unexpectedly in Q3, we want to be covered with our guide which is why it is only 8% QoQ.

What got me even more excited than this quarter’s revenue, which led to QoQ revenue growth that is again more in-line with what we saw in CY21 (19-20% besides the 23% outlier Q3), is their large customer growth of 19% this quarter. This is a nice re-acceleration from 12% last Q. This is exciting as it is a leading metric for revenue growth and large customer growth has historically been the most correlated with future revenue growth. Both revenue growth and large customer growth were much higher than I would have expected given all the macro concerns our companies are currently dealing with - I guess they didn’t apply to Snowflake; at least not this quarter. And all of this after just having implemented a massive efficiency improvement which was expected to temporarily slow down revenue growth. While I thought this would take several quarters to turn around, maybe one quarter was already enough?

While RPO QoQ growth did plateau in the last two quarters (0% in Q1 and 3.8% in Q2), “we expect we’ll have a big increase in RPO”, which is encouraging. And while massively re-accelerating revenue growth, their operating income margin also jumped up 4 percentage points from last Q, to +4%, and up from -9% in the same Q last year - cool! Related, it is interesting to hear that “the first half of the year is always the biggest hiring”, which means from that standpoint (similar to Monday .com) we should expect margins to continue to improve in the second half. And for S&M new-hires, which has exceeded 50% growth in the first half, “it’s about a six-month period to ramp” until we should expect those new-hires to start contributing to revenue growth. Looking further into the future, “We will continue to show leverage year-after-year”. I don’t think anybody expected FCF margin to stay anywhere near the insane 46% they had in Q1, but delivering +13% with those revenue growth numbers is a solid result. Net retention rate stayed outer worldly at 171%, while “our top customers continue to grow. And I haven’t seen that slowing down, the NRR”. One second-tier metric to keep an eye on is data marketplace listings which only grew 13.3% this quarter, vs. 22% in the two prior quarters and over 30% in the three quarters before that. We don’t have much history here and I wouldn’t be surprised if this is a lumpy metric, yet, over the long term, it will give us a feel how much traction the whole data sharing aspect of Snowflake gets.

Some additional points from the call:

  • In Q2, the number of Snowflake data sharing relationships, measured with what we call stable edges, grew 112% year-on-year.
  • Today, we have 590 Powered by Snowflake registrants, representing 35% quarter-over-quarter growth.
  • Our integration with the recently acquired Streamlit is tracking well against plan.
  • We are pleased to announce our intent to acquire Applica. Applica mobilizes unstructured data for advanced analytics and machine learning.
  • Specifically, regarding Snowflakes insulation against current macro, “I would like to remind everyone that Snowflake gets prioritized fairly high inside the enterprise (…) we feel that this is not one of those expenses that people are going to casually cut back on, because it’s strategically compelling and important. (…) by and large, most of our customers are still ramping, moving workloads to us. And we think that is going to continue on average with our customers. (…) it’s actually quite attractive for customers to have a consumption model because they can sign a contract with us, but then they can throttle up and down how much they want to use. You can’t do that in a SaaS model. You’re going to pay no matter what, whether you’re using it or not. So, this gives customers actually more confidence to contract with us knowing that they can throttle up and down. So, we actually think it’s an advantage in the type of times that we’re living in as opposed to a negative, which is what it has been portrayed on the sell side and in the media.


Revenue came in exactly where I had expected it, at $235M. This resulted in 10.5% QoQ growth, up 1% from a quarter ago and unchanged from the QoQ growth in the same quarter a year ago. Guidance for next quarter implies the same QoQ growth rate we saw this quarter and full year guidance was slightly raised by 1.4% to $970M at the midpoint. I was especially relieved to see their large customers growing again 13.8% QoQ, up from 8.5% last Q and 12.4% the Q before. Given what we see with other companies which showed a significant drop in customer growth - likely due to macro - I take this as a very positive result. On the other hand though, total customer growth slowed to 2.4% QoQ, down from 5.8% in the last two quarters. So even Cloudflare must feel the pressure there. What is promising however is that large customers now make up 60% of their revenue, up from 50%, just a quarter ago, so the revenue from smaller customers (the growth of which is currently decelerating) is becoming less important, but still significant. Dollar based net retention rate dropped just a little bit to 126% from 127%. So did their gross margin on a GAAP basis, from 78% to 76%, but more importantly it stayed constant at 79% non-GAAP. Coming to profitability, they delivered what they promised: margins stayed around zero and FCF margin, which took a hit last quarter due to a withholding tax payment returned to close to zero at -2% of revenue. They expect FCF to be positive in the second half of the year:

Matthew Prince – Co-Founder and Chief Executive Officer
Our operating margin was right at breakeven, which continues to be our plan so long as we can deliver strong growth. What I’m watching closely is our free cash flow margin. It showed significant improvement quarter over quarter, and we continue to forecast it will be positive in the second half of the year. (…) I’m ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive.

Prince also reiterated the slow down in their Q1, “In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills” and concluded that those metrics “at least stabilized” throughout Q2. I find this encouraging and somewhat surprising. Maybe we will be through this down-turn faster than many think? I find this also encouraging given that “we have not factored in our guidance that things would improve from here on moving forward.” In any case, while Cloudflare sees it getting harder to acquire new customers, “it’s gotten easier to talk to our broad set of existing customers about doing more with us.

Of course Prince was eager to tell us about their competition as “A Fortune 500 energy company signed a $784,000 three-year deal. They had been using Zscaler. They found Cloudflare solutions easier to use, more performant, and integrate it across their full security control plane. As I said last quarter, we like our win rates when we go head-to-head with Zscaler and Palo Alto Networks because our product is better and can scale to meet the needs of complex organizations like this one.

What I think is also shielding Cloudflare somewhat from the current macro is that only 11% of revenue is represented by pay-as-you-go business (down from 14% last Q). Those are the customers which are most likely to churn and “shift(…) down to our free customer tier.” On the other hand, however, “We are, from a company history perspective coming from a pay-as-you-go business where people gave us a credit card even at the beginning of the second quarter, the majority of our revenue was monthly billing. So, we’ve made first ride into that direction of annual billing.

Regarding the Zscaler vs. Cloudflare discussion I often hear people telling that it takes a long time to adopt Zscaler while Cloudflare is a quick and easy thing. I think we need to differentiate a little more and Cloudflare’s CFO addressed this point nicely in the call: “the challenge [with partner programs] was that for a lot of our early products took five minutes to sign up, and they just worked out of the box, and so there wasn’t a lot of value to add as a value-added reseller.” And “we saw with Zscaler that their success with a handful of partners in selling Zero Trust products was really successful. Those products take more work to actually implement and deploy within an organization. It’s not a five-minute setup.” So I think if Cloudflare is competing with Zscaler in zero trust, it will be also for them a lot more work than what they have been doing historically. But it looks like they are pulling it off quite well so far as “we’re seeing $1 million-plus wins that close in – oftentimes in a matter of days or a short number of weeks, which is just – because we can just prove how successful that is”. Speaking of zero trust, this was the update on the Area1 acquisition: “we’re seeing really great wins from very large customers. And we think of that product as being a gateway to help with people on their Zero Trust journey. (…) It turns out everybody has got a phishing problem.” Oh yes, it seems like (almost) everybody:… ;).

FedRAMP, FedRAMP, FedRAMP? “it’s like being in line with DMV. We’ve pulled our ramp number and are just waiting for it to come up for us to get our FedRAMP certification

In answering his last question from the call, Prince nicely summarized his view on the current economic situation and how Cloudflare sits in it. I’ll just recite it slightly paraphrased to conclude my analysis of Cloudflare’s earnings release:

I think that the economy is still in really rough shape. (…) from what we hear from customers, customers are really still suffering, And the economy, I wouldn’t say that the economy itself has stabilized. What I would say is we have had the flexibility in our business to be able to adapt to a very difficult environment. That environment continues to be difficult, and I think it will be difficult at least through the rest of the year. But being able to deliver products that deliver real value, have an incredible ROI, can save customers’ money, and are must-haves, not nice to haves, puts us in an incredibly powerful position. And as I said in the prepared remarks, I would not trade places with any other CEO.

Well said!


Is due to report on September 8. Based on their guidance and last billings numbers I am expecting revenue of approximately $322M (12% QoQ, 63% YoY). As I wrote in my last recap the two things that fellow investors think might hold Zscaler back are their recent soft billings and long sales cycles. I addressed the former in my last recap and just wanted to quickly follow up on the latter: While I agree that Jamin Ball’s GM Adj. Payback period is a different (but still very useful) metric, I was wondering how long those sales cycles actually are. Many investors complained about Zscaler’s long sales cycles, but I couldn’t find anyone actually quoting a number. So I did some digging and found the following from Zscaler’s 2Q22 transcript:

Brian Essex – Goldman Sachs – Analyst
Great. Any way to quantify what sales cycles are and how they’ve trended?
Jay Chaudhry – Chief Executive Officer, Chairman, and Founder
I would say we haven’t come and said they are reduced by x percent, but I would say it’s a range we have always said the lower smaller deals was three to six months and bigger are from 6 to 12 months. It’s getting bigger, probably there’s a movement for the lower side of it. But deals come in many shapes and sizes. So they are all of it, but we are – we have a very rapidly growing pipeline and our close rates are pretty good as well.
So I feel very bullish and comfortable.

While that doesn’t sound super long, here is what I found for Cloudflare:

Shaul Eyal – Cowen and Company – Analyst
Understood. And Thomas, maybe one for you, question on elongated sales cycle. I know it’s a bit tricky, it differs from customer to customer. But maybe can you generalize for us how long – how much are these cycles being elongated? Are we talking two weeks, three weeks, more than that? How could we be thinking about it? The word elongated is a very, very general term.
Thomas Seifert – Chief Financial Officer
Well, I would say for the main part of our business, we are still far below 90 days from a sales cycle perspective. So, when we talk about elongated sales cycles, it’s in the upper end of our cohorts where you look at the bucket, $500,000 to $1 million of ACV where it’s moving out. But there, it’s moving out by weeks, not by days.

So Cloudflare is at least twice as fast as Zscaler! I couldn’t easily find sales cycles numbers for our other companies, but maybe some of you have already looked into that and found some - If you did, please share!


In summary almost all numbers got slightly worse besides two: first we have average revenue per subscription customer (ASRPC), which grew 9.8% YoY or 1.5% QoQ. This was expected though as they said during the last quarter’s call that they will be focusing on ASRPC growth in the low double digits this year. The continued increase in ASRPC tells me that the expand part of the “land and expand” works very well for them. Note that ASRPC is now significantly higher than their pre-COVID long-term average and ASRPC has now steadily grown each quarter for the last 8 quarters. The other number that didn’t get worse was QoQ revenue growth which stayed constant at 7% and while QoQ customer growth dropped to 5% from 6% last quarter, ASRPC seems to be the only thing that kept QoQ growth constant. Hubspot keeps innovating with with a “pricing and packaging strategy of driving high-value features down to starter while fueling innovation at the higher tiers”, which I think should work well, especially in times of efficiency improvement and consolidation seeking customers, while “we (…) saw lengthening of deal cycles and more decision makers getting involved in deals in June.

I could identify two main contributors that are negatively affecting Hubspot: First, as just alluded to, the current economy, as “we saw a softening in demand in June” and second what appears to be pretty strong FX headwinds, as “we expect FX to be an eight point headwind to as reported revenue growth in the third quarter”. This led to a new guidance, which I interpret as 5% QoQ next quarter, a further deceleration. Worse, they didn’t raise their full year guide, no, they cut it from 1.725B to 1.6925 at the midpoint, or by -1.9%: “our guidance assumes continued macroeconomic headwinds throughout the remainder of the year”. On the profitability front all margins decreased from a year ago, Op income from 9 to 7%, net income from 7 to 5% and FCF from 8% to 5%. GM has been constant at around 81 +/- 1% for a while now which is good.

Some additional points:
*41% YoY revenue growth in constant currency (36% as reported)
*46% percent of revenue is international
*ASRPC grew 14% YoY in constant currency (10% as reported) and expected to stay “closer to the 10% end of the double digit in constant currency” in the second half of the year.


Gross margin (82%), operating income margin (40%) and net margin (31%) have pretty much stayed constant in the last three quarters. FCF margin has dropped to 41% from an insanely high 52%, still one of the highest I have seen from the companies we discuss. What is more concerning to me is their revenue growth trend. Looking back the last two quarters ZI grew 8.7% sequentially, then 10.5% now. While this is a QoQ acceleration, it is significantly lower than the 12.5 to 13.6% they grew sequentially in Q2, Q3 and Q4 of 2021. Their guidance for next quarter, which I now interpret to be around 10% QoQ is again similar to the last 2 quarters indicating that ZI is currently more a 10% grower, rather than a 13-14% grower. Note here that 10% quarterly growth compounds to 46% YoY, while 13% quarterly growth compounds to 63% YoY - quite a different picture! Also, their large customer growth dropped to 9% QoQ from a 12 to 16% QoQ range in the previous 5 quarters - certainly doesn’t bode well for future revenue growth. So the big question for me is: Does the new revenue growth trend materially change the investment thesis? I am still mulling over this, but I can imagine that the tightening macro environment we saw developing in the last 2 quarters contributed to this current slow down. Now you might ask, wasn’t the slowdown already obvious from last quarter’s 8.7% QoQ growth? Well, not really because that could have been attributed to their seasonally slowest quarter. This is seen well when looking at cRPO (and RPO) which dipped to 6.8% (5.8%) QoQ growth in Q1 2021 and 6.5% (6.2%) QoQ in Q1 2022, while being around 10% in the corresponding Q2s and Q3s, and above 21% in the corresponding Q4s. But now that Q2 cRPO (RPO) has dropped to 6.9% (7.3%) growth and Q2 revenue growth has dropped to 10.5% as written above, their business-intrinsic seasonality cannot be blamed anymore for what appears to be a new, and slower growth trajectory. One more point on privacy improvements, which was a highlight in this Q’s report:

“Earned the International Organization for Standardization (ISO) 27701 privacy certification, further strengthening ZoomInfo’s commitment to data security and privacy. ZoomInfo has met the rigorous qualifications of ISO 27701, a privacy extension to the international information security management standard, ISO/IEC 27001, which the company attained in 2020. ISO 27701 provides the requirements and guidance for companies to establish, implement, maintain, and continually improve their Privacy Information Management System.”

while this must be good, I am wondering if this is a major milestone (or not) that will bring new customers on-board, who didn’t make use of ZoomInfo’s services so far because they were lacking this certification, especially in regions like Europe that are far ahead of the US in the privacy stakes.


Total revenue came in at $535M, $12M less than I had expected. This results in 9.7% QoQ growth (58.5% YoY) in their seasonally slowest quarter. So a slow-down in growth from last Q was expected, but it was also a ~1.9% slow down from the last two Q2s, which were around 11.6%. On the bright side, and maybe more importantly, ARR growth held steady QoQ at 11.3% and, maybe most importantly, net new ARR grew 14.5% sequentially, up from 4.6% in the last Q2, which is great. To give you a better feel for this, here are the sequential (QoQ) growth numbers for ARR and net new ARR:

**ARR growth, QoQ**				
	Q1	Q2	Q3	Q4
2018		26.8%	25.6%	25.1%
2019	20.6%	22.2%	22.1%	23.0%
2020	16.6%	16.2%	18.4%	19.7%
2021	14.3%	15.2%	14.8%	15.7%
2022	13.7%	12.6%	12.6%	14.3%
2023	11.0%	**11.3%**		

**Net new ARR growth, QoQ**				
	Q1	Q2	Q3	Q4
2018			21.1%	23.1%
2019	2.7%	29.9%	21.7%	27.2%
2020	-11.1%	13.7%	31.8%	26.7%
2021	-13.2%	21.9%	11.8%	22.1%
2022	0.8%	4.7%	12.9%	27.6%
2023	-12.2%	**14.5%**		

Following the rows and columns separately, you can nicely see the seasonality at play.

RPO growth, which was their weakest in the previous Q at 4% improved to 6.4% this Q. So while ARR, net new ARR and RPO where showing signs of weakness in their Q1, this Q2’s improvements give me some confidence - even though they missed my total revenue expectation. Another positive in my mind was that subscription customer growth stopped decelerating just shy of 10% QoQ growth. This number was going down from a high of 17.6% now for 5 consecutive quarters. I was wondering if Crowdstrike was more focussing on larger customers and that this was the reason for this slow down, yet in answering an analyst question along those lines, “we found that, hey, we got new logos coming in from large companies. We have new logos coming in from smaller companies. And as typical, the velocity is driven more by mid-market and SMB.” While this isn’t the clearest answer you could imagine, I interpret it as being neither a focus on SMB nor on large customers. Dollar based net retention rate was in-between 125 and 128%, “its highest level in seven quarters. The profitability picture didn’t change materially as operating income and net margins roughly stayed constant from last quarter (at 16%) and FCF margin had a seasonal drop from 32% last Q to 25%, but up from 22% in the last Q2. They expect “30% or greater free cash flow margin for the year while investing in key initiatives that will further widen the gap between CrowdStrike and the competition.”. Like with many other companies we follow, Crowdstrike sees “increased levels of required approvals on some deals as companies evaluated investment priorities, which can extend the time it takes to close deals. However, cybersecurity is not a discretionary line item.” And CIOs “are looking to consolidate on a platform like Falcon”.

Looking forward to Q3, I expect a QoQ revenue growth re-acceleration in the 11 to 12% range, based on their Q3 guidance. I expect Q4 revenue growth to be closer to 12%, down from 13% in the previous Q4 as “we suggest that investors adjust their seasonality expectations to exclude the impact of significant large deals such as the two approximately 8-figure accounts we discussed in Q4 of last year”. Full year guidance was raised from $2.214B to $2.228B at the midpoint, a $14M, 0.6% increase. Assuming Crowdstrike will re-accelerate to 11% QoQ for Q3 and 12% QoQ for Q4, they should be able to deliver $2.28B, or 57.2% revenue growth in the FY.

Some of my additional notes from this report:
*Ending ARR for our emerging products grew to $219 million, up 129% year-over-year.
*record-setting net new ARR for both Identity Protection and Humio and we also achieved record net new ARR for modules deployed in a public cloud.
*Gross retention climbed to a new record for the second consecutive quarter.
*we entered Q3 with a record pipeline.
*Q2 subscription customers with 5 or more, 6 or more and 7 or more modules were 59%, 36% and 20%, respectively. This represents a 70%, 84% and 105% year-over-year increase in these respective module adoption cohorts.
*strong growth in the U.S. at 53% and international revenue growth at 73% year-over-year.
*Their MSSP (Managed Security Service Provider) business has grown 150% year-over-year.
*FX impact? I think there was nothing material or we would have talked about it.

Wrapping it up

Another earnings season is almost over. SentinelOne and Zscaler are still to report (Sentinel might just have when I post this) and MongoDB is another company I am watching. So far it has been a pretty good season for our companies, despite economic headwinds. Based on these results so far, I have reduced my conviction in Datadog (rejoining the rest of the pack), ZoomInfo and Hubspot and I have increased my conviction in Snowflake and Cloudflare. So far I just shaved off a little bit of Datadog and Hubspot and added the proceeds to Snowflake and Cloudflare while I am waiting for the rest of our companies to report.

Thanks for reading and have a great September, everyone!