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 which I kept until now. 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%
Mar 2023 Feb 2023 First buy* Snowflake 18.7% 18.9% 2/8/2021 Cloudflare 15.6% 15.4% 11/2/2020 Datadog 14.6% 15.6% 5/13/2020 Crowdstrike 12.3% 10.9% 5/13/2020 Nvidia 10.4% 8.8% 5/13/2020 Zscaler 10.3% 11.7% 3/4/2021 SentinelOne 7.9% 7.9% 12/10/2021 Monday 5.9% 6.5% 9/13/2021 Enphase 2.2% 2.3% 5/15/2020 TradeDesk 2.2% 2.0% 5/13/2020
*held through today
Snowflake reported fiscal Q4, 2023 on 3/1/2023. Product revenue came in at $555M (6.2% QoQ, 54% YoY). That is a tad lower than my expected $560M (7% QoQ, 56% YoY). I was also hoping for a new guide around $599M (7% QoQ, 52% YoY). Unfortunately this one came in quite a bit lower at $571M (2.7% QoQ, 44.6% YoY). I was hoping for some QoQ re-acceleration, which is now very unlikely to happen in Q1. So while that “hope” didn’t materialize, I must say that I had expected a slower growth guide for Q1 because of their Global 2000 customer growth 6 to 9 months ago; Here is what I wrote about that in my last Snowflake recap:
Again, the good news is however that G2000 customer adds doubled in 3Q23 (from 15 in Q2 to 30). So I expect to see a positive impact from that on their 2Q24 guide, which they will announce when they report next.
While I am optimistic about Q2 revenue growth, their full year guide was a big disappointment. They had pre-announced a relatively strong 47% in the last Q3 report and now had to reduce the guide to 40% YoY growth. So their full year outlook has significantly deteriorated since Q3. And applying the same, very moderate beat of only 2.6% they achieved on their FY23 guide issued in 4Q22, this would imply an FY24 growth rate of only 43%, down from 70% in FY23. But again, I am somewhat optimistic that they will manage a larger beat than last year, because nobody knew a year ago how much macro would deteriorate in the following 12 months. So if it has stabilized now and even improves in the second half of this calendar year, Snowflake might be able to deliver a significantly larger beat. And their world-class NRR of currently 158%, which I don’t think will drop below 130% (still a number that most of our other companies dream about) together with their >70% YoY large customer growth also sets them up to beat and exceed current, low expectations.
But even if they just meet their product revenue guide of $2.7B they will very likely reaccelerate QoQ product revenue growth after Q1: For example, one scenario to reach (and not exceed!) their guide would be:
Q1: 6.1% QoQ growth
Q2: 8% QoQ growth
Q3: 10% QoQ growth
Q4: 12% QoQ growth
Not too bad, especially since they are likely to do better than that. So similar like Datadog, the YoY numbers have a tough comp on top of a bad macro environment, both of which makes these businesses look much worse than they actually are. On the other hand, it would be a major red flag if Snowflake again reduces their FY outlook when they report next, so that will be an important one to watch.
Coming to secondary metrics, their RPO jumped to $3.66B more than doubling what they added in Q3 (and current RPO raw-add more than tripled from approx. $100M to $360M, adding up to a total current RPO of $2B, to become revenue in the next 12 months). That doesn’t sound at all like a company that is in trouble with customers pulling out. Granted, Q4 has always been strong in RPO growth and this Q4’s growth acceleration to 22% (up from 10.6% ← 4.1% ← -1.4%) was significantly less than the prior year where the QoQ percentage jumped to 47, up from 18 in 3Q22. But back then (Nov 2021 - Jan 2022), the economy had just started to take a hit.
Customer growth is another set of metrics showing relative business strength: Total customer growth has been very stable from 6.2%, 7.6%, 7.2% and 7.1% QoQ from Q1 to Q4. The more important cohort of $1M+ customers continued to show strength in Q4 with a record 43 adds, up from 41 in Q3 and 36 in Q4 of last year (I wanted to see at least 15% QoQ growth, which they managed to achieve). And while some might be concerned that they only added 19 new Global 2000 customers, which was down from 30 last Q and 30 in Q4 of last year, we have to keep in mind that we are still dealing with small numbers here. And given that it takes up to two years to land such a customer I am not too worried about QoQ fluctuations in this number. We could for example, instead look at the trailing 6 month adds which were indeed up to 49, from 45 last Q and unchanged from Q4 last year, BUT given a much worse economy than from July 2021 to January 2022. If you see it like this, adding the same number of Global 2000 customers in a time where those same companies have cut expenses as much as they could, was quite a feat.
Finally, profitability was great: operating income and net margins were at 6% and 9%, respectively, in-line with last Q and last Q4 while S&M and R&D even increased by 1% as a percentage of revenue in comparison to last quarter. More amazingly, FCF margin jumped to 39%, up from 12% last Q and 28% last Q4.
I have seen fellow growth investors in Snowflake jump in and out several times now in the last years since it’s IPO, for reasons that have so far always turned out to be temporary slowdowns and I believe this is yet another one of those. That said, I will carefully watch how they change their outlook going forward and, as I said earlier, I would view another reduction in their FY guide as a major red flag. But hopefully it won’t come to that and we will see QoQ revenue re-accelerating starting Q2.
Zscaler reported fiscal Q2, 2023 on 3/2/2023. Revenue was a positive surprise at $388M (9% QoQ, 52% YoY), while I had expected in-between $383M (7.5% QoQ, 50% YoY) and $386M (8.5% QoQ, 51% YoY). They guided Q3 to $397M which is a bit lower than I had hoped for. But after having raised their initial FY guide in the last report by 2.2% they again raised it by 2.2% in this report, which is great. With that and two more quarters to come (and hopefully one more raise) I expect they will close FY23 at a yearly growth rate of around 48 to 49%, which would not too shabby given the current economy and our other companies performance.
Billings came in quite a bit below my expectation at on 494M (vs. $527M I had hoped to see). In retrospect I realize that $527M or 55% QoQ growth was a bit too steep of an expectation since they only grew billings 48% QoQ in 2Q22. Given that 45% QoQ growth we got this Q2 isn’t lacking the previous Q2’s growth by that much I now think billings growth was OK. And we have to keep in mind that customers have been reducing their longer term commitments throughout industries, so some weakness here is expected. And I am ok with that as long as those customers just reduced their spending horizon, without changing its long term outlook, which seems to be the case.
$100K+ customers grew 5.4%, down from 6.1% last Q and 8.4% last Q2 and $1M+ customers grew 8.6%, up from 6.4% last Q and down from 12.1% last Q2. So a mixed bag I would say.
Last but not least, profitability metrics were amazing this quarter: operating income margin improved to 12.6%, up from 11.8% last Q and 8.7% last Q2. Net income margin jumped to 14.9%, up from 12.4% last Q and 7.5% last Q2. And FCF margin, which is a bit more seasonal jumped to 16%, up from 12% last Q2. And they managed to get these margins while increasing S&M and R&D dollars spent, staying in-line with last quarter’s fraction of revenue at 49% and 14%, respectively. So nice to see leverage improving the bottom-line here. Even better, it looks like their profitability trends will continue to improve rapidly: They guided Q3 operating income to be at $55.5M, which would result in a 14.5% operating income margin assuming again a minimum beat of 9% (i.e. $60.5M). Note, this quarter they beat their operating income guide by 15%. So I see them rapidly approaching 20%, given that their current FY operating income guide ($214M) implies a $78.5M operating income in Q4; So even without raising the FY guide another time and applying a very moderate beat of 9% to the Q3 guide and the implied Q4 guide, I end up with $85.6M in Q4 operating income which would be a 19% margin! If that or maybe even better margins materialize, Zscaler will become an incredibly efficient cash generating machine and I believe we are seeing the beginning of it right now.
Crowdstrike reported fiscal Q4 2023 on 3/7/2023. Revenue was $637M (9.7% QoQ, 47.9% YoY) and clearly higher than my expected bottom of $630M (8.5% QoQ, 46% YoY) at which I would have seriously thought about reducing my stake in the company. Luckily they surprised me positively with 9.7% QoQ growth, which was a 2.2% beat at the midpoint. Note, last Q they beat only by a historical low 1.5% at the midpoint, so seeing the beat increase again is a positive sign. For reference, in the two quarters before, they beat their guide by 4% and 5.6% and the 8-quarter average beat before that was 6.1% at the midpoint. My point here is that Q3 was a clear outlier for Crowdstrike and I wrote in my recap back then that I believe even management was surprised with the lower revenue for the quarter. Q4 beat was then again clearly better and unless macro suddenly deteriorates further we will probably get back to higher beats going forward. That brings me to their new guide: I had hoped for a Q1 guide of $674M which came in at $676.5M at the midpoint. So if the beats slowly drift back towards their historical percentages we might see stable QoQ revenue growth in Q1 of around 10%. If, on the other hand, the beat stays at the 2.2% level we got this Q, QoQ revenue growth will slightly decelerate back to 8.5%, same as in Q3. That said, I was very happy to see this quarter’s revenue growth accelerate.
Remember our Crowdstrike versus Sentinel discussion about net new ARR? (Thoughts on SentinelOne and its recent Conference Call - #12 by SlowAndFast) Where Crowdstrike said in the Q3 call “we believe it is prudent to assume that Q4 net new ARR will be below Q3 by up to 10%”. So instead of a 10% drop we got a 12% increase! I think that is awesome and I am curious how Sentinel will do when they report next week (they have “guided” for at least 20% net new ARR growth). EDIT after Sentinel reported: Sentinel also slightly exceeded their 20% net new ARR growth guide and achieved 26% QoQ.
I was also happy to see RPO growth acceleration to 20.4% QoQ, up from 11.6% last Q and 16.6% last Q4. Looking under the hood of RPO, we see a development that very well reflects what everyone tells us about current macro; that customers of our companies reduced their spending horizon, but long term opportunities stay in tact: While Crowdstrike added an astounding $120M to their backlog in Q3, which is a relative increase of 18.2%, it again increased in Q4 by another 29.6%, adding almost twice as much as last Q and increasing their total backlog to over $1b. From 2Q22 through 2Q23 this number was pretty constant around $620M +/- 111M and then it shot up to over $1b in just 2 quarters. Certainly bodes well for future revenue growth!
Crowdstrike’s NRR even accelerated to 125% or higher in FY23, which is great to see as well, and customer growth re-accelerated to 8.9%, up from 7.4% last Q. Again, I am a bit careful interpreting too much into the customer numbers though, because CRWD uses MSSPs which can mask and bias the actual number of customers and because they recently started moving down-marked towards SMBs. In any case, it is great to see multi-product adoption continued to improve by 1 to 2 percent in the three cohorts of 5+, 6+ and 7+ modules.
Operating income and net margins looked good this quarter at 15% and 18% of revenue and free cash flow margin improved to 33%, up from 30% last Q and 30% last Q4. So all good here.
Overall, I would say well done, Crowdstrike!
Sentinel reported fiscal Q4, 2023 on 3/14/23. They achieved revenue of $126M (9.3% QoQ, 92% YoY), less than my expected $130M (13% QoQ, 97% YoY). That was quite a drop from 12.5% last quarter and 17.2% last Q4. At least they managed to follow through on their projected ARR growth which re-accelerated from 11.1% last Q to 12.6% QoQ growth. As a result, net new ARR QoQ growth came in above their projected 20%, at 26%. While I wanted their large customer growth to reaccelerate above 15% QoQ it at least stayed constant at 9.4%. Considering that they are moving up-market and trying to get larger customers takes a bit of the pain away here. Coming to better metrics, NRR stayed above 130%, which I believe is the second highest from all companies I own (after Snowflake’s 158%). A highlight of this report was their improved gross margin, which jumped to 77%, up from 71%, last Q and 66% last Q4. That’s certainly nice to see. Finally, profitability continued to improve, while spending went up dollar-wise and slightly down as percentage of revenue (which I think is necessary since they are still far from their goal). Note next Q operating income margin guide seems to not show any improvement, but keep in mind that there is seasonality here where Q1 always gets worse than Q4 as front loaded with expenses. For the new FY, I am curious to see what they will be able to make with their 50% YoY revenue FY guide.
Snowflake and Datadog are consumption based and because of that I believe they will rebound the most once the economy turns. Judging from their secondary metrics of customer growth, RPO growth and NRR they certainly still seem to be on track. Together with Cloudflare those three companies also have the best long-term outlook in my mind, which brings them to the top of my portfolio. Leaving Nvidia (which I keep as a LTBH and which grew itself to a 10.4% position) aside, we have cyber security lined up next in our portfolio: I think Crowdstrike performed the best this quarter and I am looking forward to see their enormous backlog of $1b to move to the top line, which brings this company to place four of our portfolio. Zscaler, which holds a respectable 10.3% position in our portfolio, at 6th place, performed also quite well this quarter. While a year ago the billings development we see now would have been very worrisome, my thesis is that the relatively lower billings we see (not only with ZS by the way) is just a result of delayed business, not lost business. After all, I believe the current economic downturn will do little to the long-term outlook of our companies. In addition, it looks to me that Zscaler is starting to go through meaningful changes at their bottom-line and we might see a significant new trend to stronger profitability. That should bode well for the company. Next in the cybersecurity ‘basket’, we have SentinelOne at 7th place. Of the three just mentioned, I have the most questions about Sentinel and I see it as the most risky investment that hinges on continuing trends towards profitability while not decelerating revenue growth too fast. Will they be able to execute this vision? I have no idea, but following the numbers they have put out so far, they seem to be on trend. In 8th place, we arrive at Monday. Following their excellent numbers and their outstanding execution they should probably deserve a larger allocation than 5.9% of our portfolio. I can’t really nail it down, but something would make me feel uneasy if this was a +10% position right now. Maybe it is my foggy view of the future business landscape they operate in or the fact that I have ‘lost’ - on paper - the most money with Monday so far. Either way, I feel comfortable with a 6 to 10 percent position here. Tied for last place, we have Enphase Energy and The Trade Desk. The former probably also deserves a larger allocation than 2.2%; something I should think about. TTD is also just a 2.2% position I am keeping on my radar. I currently have no desire to sell or increase this position.
So there you have it. Another earnings season in the books and the next one is already starting. I am looking forward to finding out what it will bring.
Thanks for reading and I wish everyone a great April!
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