Portfolio Notes 2020 63.6% Since May 12, 2020, where I started this portfolio with over 40 companies, mostly holding large cap tech & FAANG, but also some high-growth SaaS. 2021 13.1% Discovered Saul’s board in February 2021 and started concentrating to 16 companies through December 2021. 2022 -60.7% Concentrated a bit more through July 2022 from which point I started posting my monthly updates on Saul’s board, holding about 12 or fewer positions. 2023 YTD Month Jan 8.3% 8.3% Feb 16.3% 7.3% Mar 17.9% 1.4% Apr 5.2% -10.8% May 40.5% 33.5% Jun 38.6% -1.3%
Jun 2023 May 2023 First buy* Snowflake 19.1% 16.8% 2/8/2021 Datadog 17.7% 16.0% 5/13/2020 Cloudflare 15.0% 14.7% 11/2/2020 Nvidia 13.5% 12.0% 5/13/2020 Crowdstrike 12.1% 12.0% 5/13/2020 Zscaler 11.9% 10.0% 3/4/2021 Monday 6.9% 6.3% 9/13/2021 TradeDesk 2.3% 2.1% 5/13/2020 Enphase 1.5% 1.6% 5/15/2020 SentinelOne 0% 8.7% 12/10/2021
*held through today (besides SentinelOne)
I sold out of my Sentinel position after a terrible earnings report (check out @wsm007’s summary of their earnings report: Sentinel...Not#1 - #20 by wsm007). I redistributed the cash in equal amounts towards SNOW, DDOG, NET, CRWD, ZS and MNDY.
Crowdstrike reported Fiscal Q1 2024 numbers on 05/31, after the market closed. Revenue came in at $693M (8.7% QoQ, 42% YoY), versus my expected $699M (9.7% QoQ, 43% YoY). Here I had hoped for the guidance beat to more quickly approach historical levels. Instead, the beat only improved slightly from 2.2% last Q to 2.4% this Q - still some improvement. I had also expected a new guide of 7% QoQ growth to account for Crowdstrike’s upcoming seasonally slowest quarter. Here the guide came in quite a bit lower at only 4.3% QoQ growth, which I now interpret to end up somewhere around 7% QoQ growth, assuming the beat will continue to get bigger slowly.
ARR growth also took a step back this quarter as it grew 6.8%, down from 9.5% last Q and 11% last Q1. The resulting sequential decline in net new ARR might feel disturbing, but this is again more of a seasonal trend, where Q1 net new ARR declined by more than 10% sequentially in every Q1 since 2020 (besides 2022 where it was up 0.8%). So yes, this Q1’s decline by 21% was more pronounced than previous years, which I believe is reflective of the current macro environment.
Another apparently weak point was a sequential decline in RPO (by 1.6% QoQ), which marked their first ever sequential decline in RPO. It is important however to look under the hood of this RPO decline: RPO is the combination of deferred revenue and backlog. In the last couple quarters Crowdstrike has amassed a giant amount of backlog maxing out at just over $1b in Q4 (versus about $2.4b in deferred revenue). It is important to point out here that from 2Q22 through 2Q23 this number was pretty constant around $620M +/- 111M and then it shot up to over $1b in just 2 quarters. Then it started to drop in Q1 by about 10% sequentially, which explains the sequential drop in RPO (deferred revenue still grew in Q1, although only by 2.1% QoQ). So the drop in RPO has more to do with Crowdstrike working on their gigantic backlog, where reducing it points to increased efficiency, rather than some fundamental problem with the business. I’d be curious tough to hear other points of view here …
While we didn’t get an updated NRR (other than it being above their 120% benchmark) or total customer number this Q1, Crowdstrike was able to show continued traction with multi-product adoption where the fraction of customers using 6 or more products increased to 40% from 39% and to 23% from 22% for customers using 7 or more products.
Coming to margins, one highlight was their subscription gross margin jumping up by 2% to a record of 80% (and total gross margin went from 76% last Q to 78% in Q1). That certainly helps with operational leverage! Their operating margin also improved to 17%, up from 15% last Q and constant from last Q1. Their net margin on the other hand improved to a record 20%, up from 18% last Q and 15% last Q1. FCF margin stayed at an amazing 33%, growing free cash flow 44% YoY. And all of that while increasing their operating expenses by 1% of revenue in comparison to Q4. So well done here on all margin fronts!
Zscaler reported an amazing fiscal Q3 2023 on 06/01/23. Revenue exceeded my expectation, coming in at $419M (8.1% QoQ, 46% YoY) versus my expected $417M (7.5% QoQ, 45% YoY), beating their guide by a solid 5.5%. For Q4 I expected a new guide of $430M which is exactly what they guided for. For their calculated billings I expected about $464M in Q3, which came in at a significantly higher $482M. (Yes, a sequential decline of 2.3%, but much better than their historical seasonal Q3 sequential declines.) Based on my billings model for future revenue growth I now expect them to grow revenue again around 8% sequentially in Q4, which is also consistent with their Q4 guide, assuming a 5.2% beat and again raising their FY guide by another 2%. With that, I expect them to close FY23 with a year-over-year revenue growth rate of 48% (42% in Q4), which is quite a feat, given the tough FY22 comps where they grew 62% and a macro economically super tough 12 months past.
Their YoY revenue growth drop from 63% in 3Q22 to 46% in 3Q23 can be mainly explained by slower large customer growth rates, which were down from 44% YoY in 3Q22 to 29% in 3Q23 for $100k+ ARR customers and down from 77% in 3Q22 to 39% in 3Q23 for $1M+ ARR customers. While this drop might be mostly due to a combination of reaching larger numbers and as I just said, a tough 12 past months in terms of macro, their existing customers keep expanding at above 125% NRR. This is quite remarkable given the declines in NRR we have been observing throughout our other companies we follow. So given the stable NRR and a macro environment which will hopefully start easing sometime soon, I believe Zscaler is well set up for maintaining YoY revenue growth durability at 40% or above in FY24.
Finally, I was very happy to see that my profitability hypothesis for Zscaler seems to materialize. First, just have a look at their historical operating income margin until Q2 of this FY:
Looking at that do you see any trend of improvement whatsoever? Operating income basically just scattered around 10-12% of revenue since they became profitable in 2019. But while working on my portfolio recap for March (before they reported Q3), I noticed something:
So they indeed managed to even exceed my expected 14.5% operating income margin in Q3, which came in at 15.3%. Given their updated Q4 and FY guides for operating income I now expect them to achieve a margin of about 17-18% in Q4. Now look again at the long-term operating income margin plot above! If they can really pull off a 17-18% margin in Q4 they have almost doubled their historical long-term average in just two quarters - amazing, especially if they can hold it going forward, which I believe they will, given their goal of 20-22%. By the way that improved operating income also fed through to the bottom-line giving them a record 18% net margin in Q3, doubling the percentage up from 9% in the previous Q3. In any case, it is really nice to see them now making big steps towards their long-term operating model; especially after a couple of years of no improvements on the profitability front.
This is the 12th portfolio update I post on Saul’s board. Hard to believe it has been a year already! Looking back, I feel this has been a very useful exercise that required quite a bit more time and discipline than I thought it would at the beginning. But it really helps to focus, verbalize and write down one’s thoughts on these companies. It also helps me to be more critical with myself (questioning my thoughts and ideas) and, posting them online (versus just keeping them for myself), certainly helps with motivation to make the effort and take the time to write these recaps every month. I can certainly recommend doing this to anyone who wants to up their investing game! And we, as Saul’s community, will all benefit.
With that, I thank everybody for reading and wish you all a great July!
September 2022: Ben’s Portfolio update end of September 2022
October 2022: Ben’s Portfolio update end of October 2022
November 2022: Ben’s Portfolio update end of November 2022
December 2022: Ben’s Portfolio update end of December 2022
January 2023: Ben’s Portfolio update end of January 2023
February 2023: Ben’s Portfolio update end of February 2023
March 2023: Ben’s Portfolio update end of March 2023
April 2023: Ben’s Portfolio update end of April 2023
May 2023: Ben’s Portfolio update end of May 2023