Ben’s Portfolio update end of June 2024
Returns and portfolio holdings:
Portfolio Notes 2020 63.6% Since May 12, 2020, when 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 77.8% 2024 YTD Month Jan 5.9% 5.9% Feb 17.5% 10.9% Mar 13.6% -3.3% Apr 6.4% -6.4% May 6.8% 0.4% Jun 21.0% 13.3%
These are my current positions:
Jun 2024 May 2024 First buy* Nvidia 22.4% 22.5% 5/13/2020 Crowdstrike 19.4% 18.0% 5/13/2020 Datadog 14.0% 13.4% 5/13/2020 Cloudflare 11.9% 11.0% 11/2/2020 Snowflake 9.6% 11.0% 2/8/2021 Zscaler 9.6% 9.6% 3/4/2021 Monday 5.5% 5.9% 9/13/2021 Samsara 2.7% 3.1% 1/8/2024 Axon 2.7% 2.9% 4/2/2024 TradeDesk 1.7% 1.8% 5/13/2020 Enphase 0.5% 0.8% 5/15/2020
*held through today
Company comments:
Samsara:
Key insights:
- Need to look at adjusted revenue numbers to understand this and upcoming quarters.
- Comparing recent Q1 sequential revenue growth rates, this Q1 shows first stabilization after dropping for 3 years in a row, yet the re-acceleration I had hoped for didn’t happen yet.
- They had announced in the previous quarter that guidance beats will be lower going forward because they have more visibility into future revenue growth. This Q their beat dropped accordingly from a four-quarter average of 6.5% to 3.2% in Q1. They also raised FY guide by 1.5%.
- With that my thesis has changed from revenue growth acceleration to revenue growth durability, if not slight deceleration, which is also supported by their cRPO YoY growth which was 36.7% versus revenue growth of 37.4%.
- While NRR was good, their $100k+ customer sequential growth dropped to 6.3%, while it was always close to 10% or higher before, adding only 116 new large customers (I had expected around 185 - that is 60% more than they actually got!), a dark-yellow flag, which will hopefully clear up when they report next and given the extra week in the previous quarter, which might have created a tough comp.
- They are doing well on the profitability front, nicely expanding margins YoY, driven by operational leverage (SBC-subtracted operating expenses growing significantly slower than revenue).
Samsara reported Fiscal Q1 2025 on 06/06/24. Revenue came in at $281M (1.6% QoQ, 9.4% adjusted QoQ, 37.4% YoY), versus my expectation of $288M (4.4% QoQ, 12.4% adjusted QoQ, 41% YoY). As a reminder, their last FY had an extra week in Q4 - an oddity we’ll have to account for as we track these numbers, so I’ll only talk about adjusted revenue numbers in what follows. So was this revenue figure good, bad or neutral? There are different ways to look at it. Samsara added a record $24.2M in net new revenue, significantly above their previous record of $19M which they just set in Q4. Keep in mind though that Q1 is a seasonally strong quarter for revenue growth. So let’s compare to the past Q1s, starting from 2021, where revenue grew QoQ 22.5% → 15.5% → 13.4 → 9.5% → 9.4%. Looking at this, one could say this was relatively strong because it stopped the downward trend. On the other hand, just a quarter ago my thesis was that they’ll slightly re-accelerate YoY revenue growth or at least stay durable. YoY growth stayed pretty much exactly where it was in Q4. So they fulfilled the lower end of my expectation. Also, their 1Q25 revenue beat their guide by only 3.2%, which is way below their last four guidance beats which averaged 6.5%. They did say however that their guidance is going to be less conservative this year because of more forecast predictability. So what does that mean for their outlook? For Q2 I now expect them to grow revenue by 7.1% QoQ and 37.1% YoY, looking for a 4% guidance beat. For FY25 they raised their guide by 1.5%, to $1209M at the midpoint. Given their “less conservative guide” comments I’d like them to beat their initial FY25 guide, which they gave in Q4 by around 5% (down from my 8% expectation three months ago), which seems more prudent given their new guidance language and considering they beat their initial guides for FY24 and FY23 by 11.2% and 13.9%, respectively. If they can manage that, that would bring them to around 36.7% YoY revenue growth for FY25, just down a little from the just reported 37.4% YoY growth in Q1. So my updated thesis for Samsara’s FY25 revenue growth would be that it stays close to durable. With that I have penciled in 37.1% YoY growth for Q2, 36.7% for Q3 and 36% for Q4, ending the year with 36.7% more revenue than in FY24 (Q4 un-adjusted would be 26.3% and FY25 un-adjusted would be 33.8%). Because my thesis changed from revenue acceleration to durable growth or slight deceleration and because of the customer growth red flag I mention below I have stopped building this position up for now.
What supports the revenue growth durability thesis is that RPO grew 41.6% YoY and current RPO grew 36.7% YoY, in-line with my FY25 revenue growth expectation. It is also worth noting that while cRPO growth stayed constant from Q4, total RPO growth jumped from 37.9% in Q4 to 41.6% in Q1, which tells me that customers are committing to longer contracts.
NRR also stayed at their target levels of 115% / 120% for their two customer cohorts, which is good, however their large customer growth was not good this quarter. This brings me to the big dark-yellow flag for this report: Their $100k+ customer sequential growth dropped to 6.3%, while it was always close to 10% or higher before, adding only 116 new large customers (I had expected around 185 - that is 60% more than they actually got!). So why did this metric fall off a cliff this quarter? The only comment I saw on this avoided the question and shifted the focus on increased revenue per large customer:
Alex Zukin Q Analyst, Wolfe Research LLC
Perfect. And then maybe just as a follow-up, if I look at the net adds this quarter, really solid at [ph] 116 (00:20:04). What’s the takeaway from that? It’s a little lower – for the $100,000 customers, it’s a little lower than last year’s kind of cadence. But is that – is there any kind of incremental macro hesitancy that’s maybe shifting things more seasonally to the back half or qualify that number if you can?
Dominic Phillips A Executive Vice President & Chief Financial Officer, Samsara, Inc.
Yeah. No, I think you’ve got to look at both sides of this, not only the number of $100,000-plus additions but also the average ARR per $100,000-plus customer increased to $316,000 this quarter versus $305,000 in Q1 of last year. Last year, the average ARR per customer was flat, 0% growth versus the prior Q1. This quarter was up 4% and so we more than offset the number of $100,000-plus adds by increasing the average size per customer, and you can see that result in the ARR mix from March customers increased to 53% this quarter, up from 52% last quarter and 49% a year ago.
So the question remains whether this was just a one-quarter blip (maybe also due to the extra week in the previous quarter?) and whether we’ll see much stronger large customer growth in Q2 or not. If not, that would certainly be something that would hurt the investment thesis.
One other thing I was thinking about that could have caused the lower large customer growth could be increased competition, but at least their gross margin doesn’t see competitive pressures yet - quite the opposite, as it again increased now to 77%, up from 76% in Q4 and 75% in Q3. So maybe potential customers are just holding back on budget decisions a little bit more because they want to see how the expected upcoming AI product wave will affect the case for Samsara’s products?
Lastly, profitability: SBC-subtracted operating expenses grew 24.3% YoY, versus 29.5% last Q1. Again, similar to Q4, this growth of operating expenses is significantly slower than revenue growth of 37.4%. So as a percentage of revenue, expenses dropped to 74.7%, down from 82.6% in the previous Q1 and 91.3% in Q1 two years ago, showing nice operational leverage which will hopefully continue going forward. For now, this leverage allowed them to actually book an operating income of $6.2M with a margin of 2%, versus my expectation of a $5.5M operating loss. I think the trend here looks pretty good with strong margin improvement over the last couple Q1s: -42% → -18% → -9.3% → 2.2%.
Zscaler:
Key insights:
- Revenue growth has been lighter than I expected now for two quarters in a row and there are no clear signs yet of YoY growth rates stabilizing (besides maybe cRPO suggesting stabilization at a lower YoY growth than they have now, see next point).
- cRPO YoY growth accelerated for the first time in 10 quarters and is now slightly below their YoY revenue growth rate (rev. grew 32.1% YoY, cRPO grew 29.0% YoY), giving us a hint that revenue growth might start to stabilize slightly below 30% YoY.
- Billings was very strong this quarter, eking out a sequential gain against seasonality and a previously guided -7% sequential drop. But even with that, my model from billings predicting future revenue growth suggests further YoY revenue growth deceleration in Q4.
- NRR dropped another percentage point to 116% and large customer growth was OK, just a little shy from my expectations. Yet, I like them to perform stronger here again in Q4.
- Profitability has been amazing, not only this Q3, but essentially since about 5 quarters where they started to break out of their ~10 to 12% operating margin range, now reaching 22%.
Zscaler reported Fiscal Q3 2024 on 05/30/24. I thought revenue was a little light at $553M (5.4% QoQ, 32.1% YoY), versus my expected $560M (6.6% QoQ, 33.7% YoY). But even with that, they were close to my expectation for their new Q4 guide, guiding to $566M (2.3% QoQ, 24.4% YoY) versus my expected $568M, which points to QoQ acceleration coming up in Q4. In-line with that, and with just one quarter to go, they increased their FY billings guide by 1.7% and FY revenue guide by 1.0%. This might have partly been driven by the strong billings they delivered in Q3: Billings came in at $628M (+0.1% QoQ, 30.2% YoY) versus my expected $609M. Keep in mind, this is a very seasonal metric! This was the first positive sequential billings growth since my recording of this metric in 2017. Also impressive because their original billings guide for Q3, which they gave in the Q2 conference call implied the strongest sequential Q3 drop in the last five years: a 7% decline in billings (while in the last four years, they typically only declined 2-3% sequentially in Q3, with an exception of 2022, which was a 6% decline). So this billings result was significantly better than what I had hoped for. And another reminder: for Zscaler in particular, we care about billings because in the past it has been an excellent predictor of next quarter’s revenue growth. So what does that billings number tell us for Q4 revenue? Updating my billings model, I now expect them to deliver $588M revenue in Q4, which would equate to 29.3% YoY growth and 6.4% sequential growth.
While the expected QoQ acceleration sounds good, the bigger issue I see with Zscaler is that unlike with for example Crowdstrike, Datadog and Snowflake, I don’t see Zscaler’s revenue growth settling yet. While revenue growth rates have come down a lot in recent years, Crowdstrike seems to have settled at around 33%, Datadog reaccelerated from 25% to 27% and Snowflake has been durable at around 32% to 34% the last three quarters. Instead of reiterating what I have written in the corresponding company comments towards that end, I am just giving the example of current RPO (cRPO or revenue to be recognized in the next 12 months): Crowdstrike had cRPO YoY growth at 30-33% for the last 3 quarters and accelerating in the last quarter from 30% to 33%, reversing the falling trend for the first time in 5 quarters. Datadog has accelerated their cRPO YoY growth from 30% to over 40%(!) in the last two quarters, which is significantly above their recent YoY revenue growth. And Snowflake has also accelerated their cRPO growth from 28% to 31% in the last 3 quarters. Zscaler on the other hand has decelerated cRPO growth from 33% to 29% in the last 3 quarters. On the bright side, cRPO growth is still roughly inline with the YoY revenue growth I expect for Q4, so if cRPO growth doesn’t drop further (and it might have bottomed already in Q2 at 28.6% followed by 29% in Q3) we might start seeing also some revenue growth durability going forward after Q4 and into FY25. But it is too early to make this call, which still leaves us with the question: When will Zscaler’s YoY revenue growth deceleration stop?
Also important to keep revenue growth strong going forward is maintaining strong customer growth and net retention rates. The latter unfortunately continued to drop to 116%, which is down from 125% a year ago and 117% in Q2. And customer growth came in somewhat shy of my expectations, with 100k+ customers growing 3.6% instead of my expected 4% and 1M+ customers growing 5.2% instead of my expected 6%. With that they added less customers in each cohort than they did in the previous quarter. In order to turn the tide here I think they’ll need to add around 175 $100k+ customers and around 52 $1M+ customers in Q4, which doesn’t seem crazy given their typically strong Q4 here, but won’t be easy either. But that’s roughly what I’ll be looking for.
Given these top-line and secondary metrics I wouldn’t maintain a large position in Zscaler if it wasn’t for their continued display of strong operating leverage and greatly improving profitability growth trends. While I wanted to see an operating income around $118M, we got $122M, resulting in a healthy profitability margin expansion over 3Q23, expanding OM from 15% to 22%, NM from 18% to 25% and FCF margin from 18% to 22%. What also helped here is that their gross margin increased to 81.4%, up from 80.8% last Q and 80.2% a year ago. I also think it is worth highlighting that while revenue growth has dropped from 63% YoY in 3Q22 to 32% YoY in 3Q24, operating expense growth has come down from 71% YoY to 21% YoY during the same time frame. This allowed them to more than double their operating margin and triple their net margin in the last two years - quite a feat.
So going forward I’ll be looking for signs that their revenue growth rate stabilizes while continuing their margin expansion, although at a much slower pace than what we saw from FY22 to FY24.
Crowdstrike:
Key insights:
- Strong Q1 revenue and ARR growth, as well as Q2 and FY guides solidify thesis of durable revenue growth throughout FY25.
- cRPO YoY growth accelerated matching revenue growth also confirming growth durability thesis.
- RPO YoY growth at 42%, significantly above their revenue growth rate of 33% showing customers increase their contract durations.
- Invoice volume, which is not recorded in deferred revenue or elsewhere in their condensed consolidated financial statements, also referred to as backlog, grew an astounding 87% YoY and up 10% QoQ against seasonality, demonstrating especially strong demand for Crowdstrike’s products this Q1.
- NRR and gross retention stable while multi-product adoption is humming along.
- Profitability trends on track with continuing margin expansion YoY.
Crowdstrike reported Fiscal Q1 2025 on 06/04/24. If there is something like a perfect quarter Crowdstrike just showed us how it looks like: Revenue came in at a staggering $921M (9.0% QoQ, 33.0% YoY), versus my expected $913M (8% QoQ, 31.8% YoY). Their new Q2 guide came in at $958.3M - $961.2M, exactly as I had expected and they raised their FY guide by 0.54% confirming that they expect durable revenue growth in FY25 at more than 31% YoY growth. Inline with this, they reported ARR growth of 33.4% and delivered net new ARR of $211M, versus my expected $195M (subscriptions make up 94.7% of their revenue).
RPO YoY growth has accelerated from 32.2% in Q3 to 36.6% in Q4, all the way up to 41.8% in Q1. cRPO YoY growth was 30-33% for the last 3 quarters and accelerating from Q4 to Q1 from 30% to 33%, reversing the falling trend for the first time in 5 quarters. These great RPO numbers are substantiated by a record growth of invoice volume (referred to as backlog), which grew a stunning 87% YoY to $1.7b. Even more amazingly, backlog has been down sequentially 10% in Q1 of both FY23 and FY24; This time around it has been up 10% QoQ showing extra strong demand for Crowdstrike’s products during this Q1.
Their dollar based gross and net retention rates were consistent with their expectations, the latter of which I interpret as being close to their benchmark of 120% (it was 119% in the last three quarters and they only give the actual numbers for each quarter at the end of each fiscal year in their Q4 earnings presentations). Also, module adoption continued its trend up and to the right, where the percentage of 5+, 6+ and 7+ product customers grew by one percent in each cohort, to 65%, 44% and 28%, respectively.
Crowdstrike has historically increased their operating expenses going from Q4 to Q1 and also did so this year, especially turning the crank on sales and marketing and getting the word out that they are the number one cybersecurity company in the world. On the profitability front they were able to continue their margin expansion, growing their operating margin to 21.6%, up from 16.7% last Q1, growing their net margin to 25.2%, up from 19.7% last Q1 and growing their FCF margin to 35.0%, up from 32.8% last Q1.
… What a quarter!
Wrap up
That’s it for another earnings season. In case you missed it, I’ve covered the earnings of Monday, Axon, Datadog, Cloudflare and Snowflake in my last monthly update, here: Ben’s Portfolio update end of May 2024
As always, thanks for reading and I wish you all a great July!
Ben
Past recaps
July 2022: Ben’s Portfolio end of July 2022 - Saul’s Investing Discussions - Motley Fool Community
August 2022: Ben’s Portfolio end of August 2022 - Saul’s Investing Discussions - Motley Fool Community
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
June 2023: Ben’s Portfolio update end of June 2023
July 2023: Ben’s Portfolio update end of July 2023
August 2023: Ben’s Portfolio update end of August 2023
September 2023: Ben’s Portfolio update end of September 2023
October 2023: Ben’s Portfolio update end of October 2023
November 2023: Ben’s Portfolio update end of November 2023
December 2023: Ben’s Portfolio update end of December 2023
January 2024: Ben’s Portfolio update end of January 2024
February 2024: Ben’s Portfolio update end of February 2024
March 2024: Ben’s Portfolio update end of March 2024
April 2024: Ben’s Portfolio update end of April 2024
May 2024: Ben’s Portfolio update end of May 2024
