Ben’s Portfolio end of July 2022

Ben’s Portfolio end of July 2022

This is the first time I post my portfolio on Saul’s board. So, for some context: I started this stock-picking portfolio in May 2020, back then with over 40 companies. I started following Saul’s board after discovering it in February 2021. Shortly after, I started concentrating to 28 positions through September 2021 and to 16 in December 2021. I had some high-growth names in my portfolio from the beginning, but the majority was in FAANG and large-cap tech companies. Since December 2021 I continued to concentrate a bit more and now hold 12 positions.

I want to use this opportunity to thank all contributors to Saul’s board and everyone for following its rules. Special thanks to Saul, Mooo, Stocknovice, GauchoRico, Bear, Ethan, Muji, WSM and Fish who taught me so much about this complicated thing called investing and I am looking forward to learning more!

My results from May 12, 2020, when I started this stock picking portfolio through July 29, 2022:

2020	63.6%	(Since May 12, 2020)
2021	13.1%	
2022	YTD	
Jan	-19.9%	
Feb	-18.7%	
Mar	-21.3%	
Apr	-37.8%	
May	-50.5%	
Jun	-53.5%	
Jul	-49.6%	

These are my current positions:

Datadog 	20.6%

Crowdstrike 	13.4%
Snowflake	13.4%
Zscaler 	11.1%

SentinelOne 	7.7%
Nvidia 		7.3%
Cloudflare 	6.7%

Hubspot 	6.1%
Monday 		4.6%
ZoomInfo 	4.1%
Enphase 	3.3%

TradeDesk 	1.7%

Company comments

Monday: Monday reported revenue of $108.5M, just shy of my expected $110M. Given current macro and Monday’s mission criticalness (or the absence thereof), I must say I am a bit relieved that it wasn’t significantly less. What is even better is their guidance for next Q and their full year guidance increase. I now think it is entirely possible for Monday to deliver full year revenue growth of 75 - 80%. Although raw sequential revenue increased only 3.4% this Q, this number would jump up to 42% if they deliver $127M revenue next Q which is my current interpretation of their guidance (18% QoQ, 79% YoY). Coming to profitability, they took a hit that was basically expected, resulting in -40% Operating income margin. Again, the good news is that they guide for improved margin which I interpret to be at -25% next Q. An important point from the conference call was that they front loaded expenses as they usually do each year:

Eran Zinman – Co-Chief Executive Officer
Yes, Andrew. This is Eran. So just to give you more color about the increase in spend. So about $10 million to $11 million of it was Super Bowl advertising, which we mentioned in the previous quarter. Another $10 million, I would say, roughly is increasing our headcount. So usually, we accelerate hiring around Q1 in terms of salespeople, customer success managers, customer support and so on, which the effect of this in terms of sales power will unfold in the next few quarters. But for us, it was an opportunity to increase our sales force. And the rest of the increase, give or take, is increasing the performance market. And usually, in Q1, we see strong demand in the market for two like hours which continue to Q2, Q3, and Q4, but there’s usually an acceleration in Q1. And for us, it’s a great opportunity. And as I’ve mentioned previously, we managed to scale our performance marketing, while keeping the same efficiency and unit economics in terms of acquiring new customers. So we’re very happy about our investment in terms of performance marketing.

Roy Mann – Co-Chief Executive Officer
I can add – it’s Roy that, like if you look at the history of the company, we’ve been doing this around each year during January. And compared to last year, we kept the same efficiency metrics and ratios. So we’re really happy with that ability.

Also, looking forward they stated:
“While growing and scaling the company will remain our top priority, we are equally focused on improving capital efficiency and operating leverage as we move forward.”

Finally, large customer growth dropped from mostly ~30% QoQ in 2021 to 21% QoQ. Given the current economy I don’t think this is too surprising and IMHO could have been much worse. To end with a positive highlight, they reported Net Retention Rate of large customers of 150%+ and those large customers now make up 22% of total ARR, up from 12% in Q1, 2021. This is a positive sign that shows that land and expand works nicely. Given these results I am happy that I reduced my position by ~45% before earnings, which I think was justified given their reported numbers. I think I’ll keep it a relatively low conviction position until their next report, when they will have another chance to show that their outlooks become reality; re-accelerating revenue growth, profitability margin improvement and large customer growth acceleration is what I will be looking for.

Upstart: While the business performance was lately impacted by negative macro, I have two main concerns that led me to sell this position for now.

  1. I am still not 100% convinced that AI underwriting is the (only) future. It clearly works as the plot showing annualized default rates as of Mar’22 (Prior 4 Yr Vintages) shows:…. But what always bothers me with plots like this is that it doesn’t give you any insight into the underlying sampling distribution. I suspect that if you would write the number of datapoints that contribute to each matrix element in the the corresponding field, you would likely find that the majority of datapoints lay on the diagonal from top left to bottom right. And this is where Upstart has no advantage over FICO. How many datapoints remain in the top right and bottom left corners, you may ask? Well, I did ask Upstart IR a couple of months ago and they never got back to me.
  2. I started having doubts about management understanding of / insight into their own business. Just look what they boldly claimed in their most recent Q4 ER call: “Any decrease in loan demand at the margin from borrowers reacting to higher-nominal interest rates will be more than offset by the growing demand for credit in the broader economy as stimulus evaporates”. And 3 months later in their most recent ER call: “Given the hawkish signals from the Fed, we anticipate prices will move even higher later this year, which will have the effect of reducing our transaction volume”. So either they had no clue what will happen to their business if interest rates go up or they were misleading investors - I hope the former and even that is bad. And it makes me wonder what else they got wrong.
    A second big mistake of management was taking that many loans on their balance sheet. And yes, while they have started to reverse, it was a mistake nonetheless, which caused a significant loss.

Bottom line: until (and if) Upstart turns around there will be plenty of time to jump back on. But for now, I am out.

P.s.: Quite interesting to see the parallels to Upstart here:…
and here:…

Snowflake: Product revenue was as with almost all companies that reported last Q slightly below my expectations, so not a big surprise. Aside from the revenue anchor their guidance had provided and also looking forward with their current guidance for CQ3, as well as the fact that they didn’t raise full-year guidance, we can now see that the revenue hit due to efficiency improvements seems to be extended over the next few quarters -which (while not certain) would be worse than what I hoped for. I was also a bit disappointed about the large customer growth which was only 12% QoQ this quarter. This might again be tied to current macro conditions rather than a new trend, but we’ll see. On the profitability side of things I think the trend is still intact even though net margin and non-GAAP operating margin didn’t improve compared to the previous quarter. Last but not least, their FCF was amazing this Q (If I recall correctly, they expected that and said so in the last earnings call), still a positive. Overall, I would say I am slightly underwhelmed by the new numbers this last Q. Why am I holding this company as one of my top positions then, you might ask. Well, in short: I don’t really see any other company growing revenue like Snowflake does, while at the same time marching towards profitability; While revenue growth took a hit (and might continue to do so for the next few quarters) due to the efficiency improvements, I view this more of a temporary (or strategic) slowdown. And as long as profitability margins keep trending towards the positive, I am happy to continue to hold the company as I believe growth can easily return to three digits YoY. The reason for this believe is in the narrative of the investment thesis: Unlike with pure security companies (e.g. CRWD), companies like Snowflake are expanding into ever new verticals (including security). What is also different is that their products are growth drivers for their customers, while security IT spend is a risk mitigation allocation, as Peter Offringa nicely concludes here:…. So for now, I am trusting Snowflake’s excellent management that they will deliver the numbers I have laid out above and this is what will be necessary to keep this a large position for me going forward.

Some of my additional, recent notes:

  • longest runway / growth durability of our companies: SNOW, DDOG, NET all up there.
  • Snow has several +30M deals lined up
  • Usage is more and more AI/automoatically generated (only 30% human and decreasing). Machine driven data generation / usage is just starting to explode, expanding SNOW’s TAM.
  • New acquisition: 800M for Streamlit: way for data scientists to publish a web app / dashboard from python script. → no front-end experience necessary. Combine with snowpack for python. Exciting acquisition, not for revenue, but embeddability (is that a word?).
  • Bought Streamlit for less than 2% of SNOW market cap, so not very dilutive and thus less concerning (than when for example OKTA bought Auth0 or Twilo bought Sendgrid).
  • SNOW also has lots of cash to support such an acquisition without hurting their balance sheet too much.

Zscaler: My first take of the numbers after their last ER is that everything seems to be on track: They pretty much hit my revenue expectation (which seems to be the exception this last season as most other companies were all slightly lower), so that is great. I want to emphasize how amazing it is, given that most of our other companies face macro headwinds, that Zscaler continues to deliver growth durability at a 63% YoY clip which is the highest it has been since beginning of 2019. Revenue guidance also supports this which suggests that Zscaler will clock a solid 62 to 63% YoY growth for their 2022 FY. Related to revenue, billings has contracted this Q, which is absolutely expected; they always had negative billings growth QoQ in their fiscal Q3, even though it has been a notch lower (-6% QoQ vs. -3% QoQ in the corresponding quarters the two prior years, but more on that later). Profitability margins improved by at least 1% and FCF margin even by 3% which is great. While large customer growth stayed constant at 8% QoQ in comparison to last Q, their very large customer growth (>$1M) grew 15% which is a nice re-acceleration from +12% the Q before and +11% the Q before. I have a hard time to find any negatives in the numbers this Q.

Remember when people sold out of Snowflake because of a one-quarter drop in RPO? Or when people sold out of Crowdstrike because revenue growth was slowing? Well, here we have Zscaler with soft billings and in contrast to my positive take on their numbers above, many people I look up to have sold out of Zscaler (or significantly reduced their positions). The main two reasons I could identify were long sales cycles in combination with tougher growing competition in NET and PANW, and soft billings in the last two quarters. I want to address both and share my thoughts which might be completely wrong, which is why I hope some of you will weigh in here.

  1. long sales cycles: Maybe I am looking at the wrong metric here, but below is a comparison of a couple companies we often discuss, showing Jamin Ball’s GM Adj. Payback in months: With 22 months, I would say ZS is in good company, even with other Board favs having much longer cycles, such as SNOW (27 months), BILL (31 months) and MDB (36 months).

**Company 	GM Adj. Payback (months)**
Datadog 	9
Zscaler 	22
Snowflake 	27
Crowdstrike 	12
Cloudflare 	20
SentinelOne 	16
Monday 		20
ZoomInfo 	15
MongoDB 	36
Bill 		31
Hubspot 	25
Fastly 		57
Atlassian 	10
Amplitude 	31

  1. soft billings in the last two Q’s: I think the relevant plot to look at here is the QoQ % plot which nicely shows the seasonality of this metric, and, more importantly how strong this metric fluctuates in a given quarter going from year to year:

	Q1	Q2	Q3	Q4
2017		75.4%	-28.5%	75.3%
2018	-25.1%	58.9%	-17.1%	74.4%
2019	-32.3%	78.2%	-26.4%	48.6%
2020	-29.8%	53.4%	-3.0%	48.4%
2021	-25.7%	60.3%	-3.0%	47.6%
2022	-25.4%	**48.4%**	**-6.0%**	

I point that out, because that leads me to think that a few percent fluctuation is basically in the noise. And the last quarter being 3% ‘softer’ than its counterparts from the two prior years would make me conclude that it is within the noise. Actually, If you just look at the fluctuations in individual Q’s you see much more than just a few percent variations along the way, especially in Q2s and Q3s, which are the ones we debate. But even conceding the soft billings point in the last two Qs (especially in Q2), I was wondering what that could mean for upcoming revenue growth. At this point I remembered that WSM had looked at this in detail and I decided to reproduce what he had done. Basically his hypothesis is that the last 4 trailing quarters of billing’s average (“4Qt”) correlates well with the next quarter’s revenue (most recent quarter on the right in the table below). He is correct:

4Qt					$39.11	$43.18	$48.63	$54.40	$64.39	$70.16	$82.43	$89.91	$97.50	$103.43	$108.52	$120.18	$137.46	$151.57	$175.71	$199.14	$233.48	$259.24	$293.17	$323.32
Rev-1Q	$26.78	$29.43	$32.96	$36.54	$39.86	$44.98	$49.16	$56.17	$63.30	$74.30	$79.13	$86.11	$93.59	$101.27	$110.52	$125.89	$142.58	$157.04	$176.40	$197.07	$230.52	$255.56	$286.81	
Delta %					1.9%	4.0%	1.1%	3.2%	-1.7%	5.6%	-4.2%	-4.4%	-4.2%	-2.1%	1.8%	4.5%	3.6%	3.5%	0.4%	-1.0%	-1.3%	-1.4%	-2.2%	

Here 4Qt is the trailing 4-quarter billings average and Rev-1Q is revenue of the Q after the current 4Qt number. So we can use this to predict revenue within about 3% (one standard deviation) or 6% (two standard deviations), meaning that within 95% probability next Q’s revenue will be within +/- 6% of the 4Qt metric (or equivalently within +/-3% with 68% probability). Ok, enough of theory, the most recent 4Qt metric is $323.23, which, if it was revenue in the upcoming quarter (FYQ4)) would mean 12.7% QoQ and 64% YoY growth. That is roughly in-line with their guidance, which I interpret as $322 (12% QoQ, 63% YoY). All good to me. Ok, but what about the following Q? Let’s say billings will come in again 3% weaker than the previous few FY Q4s which were all around 48% QoQ. That means 45% QoQ or 4Qt of $365.54. In that case, next FY Q1 would be a further acceleration of revenue growth QoQ to 13.1% (or 58.6% YoY). Now if billings in Q4 is as constant as it has been the last 3 years in Q4, a billings growth of 48% QoQ would result in 4Qt of $368.14, which, in Q1 revenue would be even 13.9% QoQ revenue growth or 59.7% YoY. The bottom line is, just following the numbers, I don’t see Zscaler necessarily slowing QoQ revenue growth in the next two quarters. In fact, if they return to their 2021 billings growth in 2023, they are set to maintain 60% YoY revenue growth for the remainder of 2023 (italic billings numbers: assumption, italic revenue numbers: prediction using the 4Qt metric, this is how it could play out):

Billings					Revenue						Revenue						
QoQ	Q1	Q2	Q3	Q4		QoQ	Q1	Q2	Q3	Q4		YoY	Q1	Q2	Q3	Q4	YR
2017	0.0%	75.4%	-28.5%	75.3%		2017	0.0%	9.9%	12.0%	10.9%		2017	0.0%	0.0%	0.0%	0.0%	0.0%
2018	-25.1%	58.9%	-17.1%	74.4%		2018	9.1%	12.8%	9.3%	14.3%		2018	48.8%	52.8%	49.1%	53.7%	51.3%
2019	-32.3%	78.2%	-26.4%	48.6%		2019	12.7%	17.4%	6.5%	8.8%		2019	58.8%	65.2%	61.0%	53.3%	59.2%
2020	-29.8%	53.4%	-3.0%	48.4%		2020	8.7%	8.2%	9.1%	13.9%		2020	47.9%	36.3%	39.7%	46.2%	42.4%
2021	-25.7%	60.3%	-3.0%	47.6%		2021	13.3%	10.1%	12.3%	11.7%		2021	52.3%	55.1%	59.6%	56.5%	56.1%
2022	-25.4%	48.4%	-6.0%	*48.0%*		2022	17.0%	10.9%	12.2%	*12.7%*		2022	61.7%	62.7%	62.6%	*64.0%*	*62.8%*
2023	*-25.5%*	*60.0%*	*-3.0%*	*48.0%*		2023	*13.9%*	*9.1%*	*15.1%*	*13.3%*		2023	*59.7%*	*57.1%*	*61.1%*	*61.9%*	*60.1%*

So, summarizing the billings discussion: yes, applying WSM’s 4Qt metric to predict revenue, YoY revenue growth will likely drop below 60% in 1Q23 (FY), but just because of tough comps with the 17% QoQ growth quarter in 1Q22 (FY). So the QoQ revenue growth prediction is what we should look at which would be around 13.1% if billings will continue to be slightly weaker than usual next Q (namely 43% QoQ) or even 13.9% if billings growth recovers to their historical 48% QoQ in 4Q21 (FY). - A QoQ revenue acceleration in 1Q22 (FY) in both cases! Now keep in mind that, as I pointed out earlier, there is significant statistical uncertainty in using the 4Qt metric to predict revenue growth and if you just look at the probability spectrum, QoQ revenue growth could come in a couple percent lower or higher. So, I am not saying QoQ revenue will accelerate the next two quarters, but concluding that revenue growth will slow down because of the soft billings in the last two quarters is also not justified IMHO.

One more point that gives me some confidence in future billings is the following commentary during the last ER call:

Patrick Colville
Thank you so much for having me on and echo everyone else’s congratulations on a very impressive set of numbers. My question is on the billings guide, which to me was probably the standout metric of the quarter. So I think above probably where many investors were expecting, so very healthy there. Can you just talk to what you guys are seeing in the pipes for fiscal fourth quarter and the health that I guess you underline the confidence to give that strong billings guidance for the fiscal year.

Remo Canessa
Yes. I’ll start it. And Jay, if you’d like to contribute anything. We have a strong pipeline. As we talked about, we’re becoming more strategic. Our deal sizes are getting bigger. We review our pipeline with our sales organization. And based on our projections, we did give a strong guide, Patrick, which is basically up 6%, basically guide up. The key thing is that with the world that’s changed with in this way for a while with applications in the cloud and users removal and workloads both in the cloud and on-prem and other locations, platform Zscaler created really addresses this market head on.
Also, the efficiency that we create for customers at a very attractive ROI. It’s really what stands out. And so we’re seeing with large customers that adopting more of the platform, as Jay has talked about, we’re seeing that. So it is basically a review of the pipeline and review what we feel we’re comfortable to guide to.

Jay Chaudhry
Yes. So I think what Remo said, our projections always take into account our pipeline, our customer engagements. But at a qualitative level, as I talked to lots and lots of CIOs and CSOs, I mean there is a sense of uncertainty out there. And they’re beginning to think about how do I do my cost and complexity reduction by consolidation. And that’s where we start becoming pretty important. And for that, customers are driving transformation. We help them with it. On top of that cyber is a big issue. So when you bring all these things together, we become more important for them, and they start a discussion with, Jay, what all security products and networking products can I replace with you? And now, we are able to actually talk about a bigger set of products that need to be removed, which actually leads to a bigger part of platform to be bought.
Now on top of that, it’s interesting to see certainly on the high-flying private start-up companies, which would talk about all kinds of different hiring, how many employees, all that stuff is getting tempered down. That means the unnecessary noise in the market, it’s expected to slow down. And it’s fascinating to see people calling us from those start-ups already. So we are bullish about the business.

Fatima Boolani
Remo, this one is for you. In Jay’s script, a lot of anecdotes around the multi-land transactions in the 8-figure deal momentum in the $1 million customer momentum. So what I wanted to ask you was just from a booking standpoint, I think you’ve called out that you are seeing a bigger multi-year commitments from some of your customers. So we’re certainly not seeing that impact on billings in terms of your invoicing duration. But I’m curious if you can comment or share any sort of observations on your backlog? And if there’s any duration impact in there that we should be thinking about more critically?

Remo Canessa
Yes. That’s a great question. If you take a look at our RPO and CRPO growth on a year-over-year basis. Those are committed deals. Our RPO growth was 83% and our CRPO growth was 75%. Related to duration, the duration was comparable on a year-over-year basis. There’s no headwinds. We expect duration to be in that 10 to 14 months range. So I mean, the key things from billings. Billings is calculated billings, which is calculated off of deferred revenue. So that’s what we actually build. But we look at the RPO and CRPO growth rates, RPO is 83% and CRPO at 75% growth rate on a year-over-year basis.
Now having said that, even though those metrics are outstanding, we still feel that billings is the best measure for Zscaler because we found that duration period from 10 to 14 months. That’s – so I hope that answers your question. I believe that answers your question. But the actual commitment that customers are making to Zscaler is quite impressive.

So, Zscaler management seems very bullish on their business and billings in particular.

Some of my additional notes:

  • billings isn’t like the classical SaaS type revenue growth because it is very lumpy, so billings growth decline less scary / worrisome.
  • some of the billings might be for more than just next 12 months - something to keep in mind.
  • All eyes will be on the new FY guide which they will give during the next ER - hoping for at least 40% YoY revenue growth guide (or $1530M for FY23), which is the same YoY percentage they gave in Q4 FY21 for FY22.
  • ZS might have just stockpiled billings when they were in the 70s% and this might even out the current drop and result in continued smooth revenue growth trend going forward.
  • Federal spending was lower than expected, but there has been push by government to boost up cybersecurity and since ZS should see tailwind going forward.
  • Came also out as top leader for zero trust on Garter chart.
  • Also extended partnerships with S and CRWD and joined XDR partnerships on both as well as deepening authorization levels with government.
  • Is ZS favorable in comparison to end-point focussed companies? ZS is approaching security from network perspective. The world is evolving towards connectivity and thus need for endpoint protection goes down. If ZS would become “perfect” you wouldn’t need endpoint, but on the other hand you also always want layers.
  • ZS or NET? Is ZS the big-dog in the space or is it NET or other players? And is that what we should be looking at for NET? NET is layering on other services on top of the network which makes the whole solution more sticky. "all roads lead to Cloudflare”. Cloudflare could surprise to the upside going forward bc of various TAMs that are increasing, but ok if not and just keeps growing at 50+%.

Crowdstrike: looking back at their last ER, Crowdstrike managed to even slightly exceed my revenue expectation ($487.8M vs. $487M expected), which is great. This is the third Quarter where they grew 13% sequentially, so they clearly stopped decelerating now. Next Q will be their seasonally slowest quarter, but guidance which I interpret to come in at around 12% QoQ looks on track. Margins didn’t change much this Q, but were already good before. Customer growth continues to decelerate from 18% → 15% → 15% → 12% → 11% → 10%. I am still wondering if their trend towards fewer, even larger customers continues to be responsible for this or not. Declining growth in RPO (4% QoQ) and ARR (11% QoQ) show some signs of weakness, although net new ARR (-12% QoQ) was the same as 2020 Q1 and 2021 Q1 (while 2022 Q1 was +0.7%). I’ll be watching those metrics closely when they report next. Other than that, a very solid quarter I would say, with continued Cybersecurity tailwinds ahead!

SentinelOne’s revenue growth got pretty close to my expectations, while re-accelerating QoQ from 17% to 19%. I actually had to double check their guidance for CQ3, as I thought I made a typo when I saw 23% QoQ guidance! But before you jump, note that this guide includes Attivo which is expected to contribute $8M. If I back out 8M of next Q guide from Attivo this gives a guide of ~12.5% which is in-between guide of last two Qs so expect in-between 17 and 19% QoQ revenue growth → 18% QoQ, which is still very good, and in-line with the last two Qs. Unfortunately they didn’t improve leverage, as CQ2 operating income margin dropped sequentially from -66% to -73%. This, however, seems to be partially a seasonality effect, yet given their guide I didn’t expect that much of a drop. It’ll be even more important that Sentinel picks up the trend again to show improving leverage going forward. Large customer growth was disappointing clocking in as their lowest since 2019 with only 14% QoQ; not sure if macro related or not… another point to watch out for. So SentinelOne needs to show improved leverage/profitability in the next ER if they want to keep me an happy investor.

Datadog: looking back the last couple of Q’s I noticed that my revenue expectations have historically been slightly on the high side for the companies I own. Keeping that in mind makes me feel a little better about Datadog’s revenue this Q1, which was clearly lower than I expected. Given the seasonality of DDOG’s revenue growth and disregarding the guidance & expectation anchor that the company has given us & my interpretation of it, I think Q1 revenue growth was pretty much in line with its history. What worries me more, however is next Q’s guidance, which I now interpret as 12% QoQ revenue growth. Putting it together with this Q’s revenue, what would otherwise just look like seasonality, now smells like slow-down to me. So then the next question is, is there something else happening to offset such revenue growth slowdown? I think the answer is profitability. All profitability margins significantly improved, which is a big plus (especially in the current macro environment). Also looking forward, I was happy to see that large customer growth didn’t slow down this Q, which might work against longer term revenue slow down in the next few quarters. I am still mulling over how to react, but start thinking that a 20% position maybe too large.

Some additional notes:

  • consistent executer, really understand how to go to market and what to emphasize on to hit a certain revenue target. Given that, maintaining their current growth rate is conceivable. also new innovations/ product sets, growing number of products by ~30% yoy. evidence that new products are driving revenues, like security.
  • Strategic partnership with AWS and expanding into dev workflows.
  • also expanding towards business analytics (potentially a la amplitude).
  • various tailwinds and innovation.
  • TAM: cloud growth indicator of secular trend driving this company. rapid pace of innovation. massive co-sell. have been massively hiring, product is selling itself: R&D has larger budget than S&M.

Cloudflare: Not much to say here. Cloudflare is a great example of durability with very constant revenue growth above 50% YoY and GM at 78%. Profitability margins have slightly improved and are currently in the slightly positive range (Non-GAAP). FCF margin did drop last Q to -30%, primarily related to a unique withholding tax payment of approximately $30M. I will look at adding to my Cloudflare position if they can continue their trends in the upcoming ER.

Hubspot: I have owned Hubspot since June 2020. I think Hubspot has been at a crossroads for quite a few quarters now. While revenue growth has accelerated from the low 30’s% YoY in 2020 to up to 53% YoY in 2021, it is now coming back down into the high 30’s% YoY. So was it all a COVID boost? Maybe, but what kept me invested still are two points that speak against a temporary COVID only boost:

First, while their ASRPC (Average Subscription Revenue Per Customer) has dipped after COVID, it has constantly increased since then. Indeed, in the last two quarters it significantly went above their long-term pre-covid average and most recently grew at 11.6% YoY. What is even better is that they expect this to hold as
“this year, we are focused on ASRPC growth that’s in the low double digits. And I continue to remain comfortable at those levels.” (Kate Bueker, CFO)

Second, they have been named number one leader in CRM software in G2’s Spring 2022 CRM Grid (…), which looks even more remarkable given all the completion that was included, like Salesforce on second place and Microsoft on place 16. Note, monday .com was on place 5!

ZoomInfo continues to deliver solid numbers. While revenue growth in the high 50’s% YoY isn’t the best in comparison to some of our other companies, its durability in combination with outstanding gross (82%) and profitability (40% Op. income, 31% net income, 52%! FCF) margins makes this a pretty solid investment case. Large customer growth has been also stable in the 12 to 16% QoQ range and Schuck certainly knows how to sell his company. What has always stopped me from investing more into this company were concerns about privacy. But I think their recent efforts in this space make me less and less worried. From the highlights of the recent 2022 analyst day (…:slight_smile:

  • Contact information only small part of ZI data
  • Collect only business contact info (data you would find on a business card or resume)
  • Such data has been carved out from legislation as “non-sensitive” data.
  • ZI goes one step further and proactively contacts anybody who’s contact information was added and gives opt-out and update options. Also share opt-out lists with other companies and uses and maintains don’t call lists.

Going forward I would especially be interested to see how they intend to manage growth and profitability. The market might favor FCF in the current situation but, if they don’t know how to re-invest their incredibly high FCF margin dollars that might hurt growth in the long term.

Some additional nuggets from the last call:

  • We signed an eight-figure deal with Alphabet in the quarter.
  • We set a record high for new business ACV added in EMEA and international year-over-year growth remains strong at 80% on a greater than $100 million revenue run rate business.
  • Shopify signed a multi-year deal, expanding ACV by more than 5x, growing to hundreds of users for the SalesOS platform and adding automated data enrichment from OperationsOS.

Enphase Energy: they pretty much blew my revenue expectation off the roof: I had expected $516M vs. $530M actual. That is 68% YoY and 20% QoQ! What’s even better is their new guidance, indicating an even stronger quarterly revenue growth rate than this quarter. We might even see 80% YoY growth next quarter. But wait, it gets even better: While their gross margin improved by “only” 1% to 41% (42% non-GAAP, which, of course isn’t great in comparison to SaaS), all profitability margins which were already very good improved by a lot: operating margin went from 26 to 29% (up from 24% in the same Q a year go), net margin from 25 to 28% (up from 24% in the same Q a year go) and fcf margin from 20 to 36% (up from 16% in the same Q a year go)!

I think Enphase has a lot of growth potential, especially internationally, and as you can see from the transcript, they are rapidly expanding internationally: “Our U.S. and international revenue mix for Q2 was 80% and 20%” while the Q before “U.S. and international revenue mix for Q1 was 84% and 16%, respectively”. Zooming in a bit further, this Q “We experienced strong growth in the U.S. and even stronger growth in Europe. In the U.S., revenue increased 15% sequentially and 66% year on year. In Europe, the revenue increased 69% sequentially and 89% year on year, led by strong demand for our microinverters in Netherlands, France, Germany, Belgium, Spain, and Portugal.”

What is nice to see here is that both US and Europe revenue growth accelerated QoQ, in the US to 15% QoQ, up from a 9% QoQ and in Europe to 69% QoQ, up from -6% QoQ. I think though that part of the strong sequential increase in Europe is from pent-up demand as the previous “sequential decrease was due to unforeseen shipment delays toward the end of Q1.” I also found their 22% sequential increase in Latin America impressive as I figured from the call that regions there have much less stability in electric grids, where Enphase Energies solutions nicely fit to provide stability.

Coming to softer metrics, their “customer demand for Q3 is very robust and exceeds the higher end of our guidance range. The component availability is certainly better than what we have experienced in the last 18 months. This has enabled us to meet the growing demand, but there are still global logistics challenges that are not unique to Enphase.”

On the outlook for future gross margins they expect those to continue to grow as they scale their battery business. “as the percentage of IQ8 become more and more, our gross margins will go up, and we will guide them appropriately. That’s why we increased up the gross margin by one point right now.”

One issue I have with Enphase Energy that I don’t have with SaaS companies is that Enphase will have to produce more and more microinverters and batteries to keep up with growth and, at the same time, have to again start selling from zero micro inverters / batteries every new quarter. This is in stark contrast to our subscription based SaaS businesses. I think for that reason alone Enphase will probably not become a large position in my portfolio. The analyst from J.P. Morgan was asking a question along the same lines:

“So Romania is still on track for 1Q '23? I believe you’ve said that’s about 750,000 micros. When do you think you need to make a decision to potentially increase that or move elsewhere in Europe?”

For reference, they currently have capability to produce 5 million microinverters per quarter, so their new plant in Romania should increase that capability by 0.75 million (it might be actually closer to 1million) per quarter, that is 15% increased capacity. Of course, unlike with software, there is a physical limit, but Badri’s reply essentially implies that they will continue to massively increase production capabilities:

“Yes. I think the decision is staring at our face. I mean, it’s kind of obvious. We should get a lot more than 750,000 microinverters. We are going to make that happen. But first, let’s get our manufacturing and production done by Q1 '23, and I think we can immediately add another full auto line, and we can take it up to a couple of million units very quickly.”

In conclusion, this business seems to be firing on all cylinders and now that supply chain issues seem to be fading, I think we will continue to see strong growth in the near-term. I don’t have a good feel though for how long this growth can last, but for now, with new verticals coming up (like EV charging) I think Enphase is still early in their S-curve.


Prior to reviewing (“verifying”) any numbers, this is an excellent review.

I especially liked reading your thoughts on ENPH. Part of the reason is likely a slight case of confirmation bias, since ENPH has become an increasingly large position in my portfolios, but another is that IMO, it fits in perfectly to a concentrated port with lots of software and data tech. One thing to watch is that some of their success will continue to depend on government policies and incentives, but enough countries are pushing green tech that I think their products will be in demand for a long time. That’s before considering that ENPH has been my second-best performer this year behind another outlier/moonshot (CELH.)

One minor question for me is in Jamin Ball’s calculation for MDB’s payback period, which I’ve noted previously, and seems rather long. But your number is correct, and has prompted me to review those numbers, since I have a relatively large position in Mongo.

Thanks for the great review. Well done, sir. *

• sexist assumption that you are male, for no good reason other than a bad habit.


Remember when people sold out of Snowflake because of a one-quarter drop in RPO? Or when people sold out of Crowdstrike because revenue growth was slowing? Well, here we have Zscaler with soft billings and in contrast to my positive take on their numbers above, many people I look up to have sold out of Zscaler (or significantly reduced their positions). The main two reasons I could identify were long sales cycles in combination with tougher growing competition in NET and PANW, and soft billings in the last two quarters. I want to address both and share my thoughts which might be completely wrong, which is why I hope some of you will weigh in here.

1. long sales cycles: Maybe I am looking at the wrong metric here, but below is a comparison of a couple companies we often discuss, showing Jamin Ball’s GM Adj. Payback in months: With 22 months, I would say ZS is in good company, even with other Board favs having much longer cycles, such as SNOW (27 months), BILL (31 months) and MDB (36 months).

Ben - I’m not sure Jamin’s metric has anything to do with the length of sales cylces. At least, not in the way we use the term in the sales industry. Length of sales cycle (to me) means how long it takes to close a piece of business in it’s most basic form. In my business (chips) it can take about 2 years to go from engagement in serious discussions to revenue. Much longer for medical, space, mil/aero etc.

Jamin defines “Gross Margin Adjusted CAC Payback”:

(Previous Q S&M) / (Net New ARR x Gross Margin) x 12. This metric demonstrates how long it takes (in months) for a customer to pay back the cost at which it took to acquire them.

In other words, how efficient is it to acquire new customers and what does it ultimately mean to the business (when NRR’s are considered).

We are hearing CEOs and CFOs state that sales cycles are elongating, which simply means (to me) that customers are delaying commitments in some cases.


Yes Ben, that was an amazingly first monthly summary, but a long sales cycle means that it takes a long time to close the deal from start to finish, in Zscaler’s case because you are changing out the system for the entire company, so it has to go through the CEO, CIO, CSO, etc. It can take a year.

At the other extreme would be Monday, where one or two teams can start using it in a few minutes, on their own, and it can then spread virally throughout the company, or Crowdstrike, who has installed security for a large company in a weekend when pressed, or Sentinel or Cloudflare who can do it probably even faster than that.

Best wishes, and thanks for your summary.