Ben’s Portfolio update end of September 2024

SlowAndFast · September 30, 2024, 8:56pm

Ben’s Portfolio update end of September 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%
Jul	7.0%	-11.6%
Aug	12.6%	5.3%
Sep	13.0%	0.3%

These are my current positions:

	Sep 2024	Aug 2024	First buy*
Nvidia	23.7%	23.6%	5/13/2020

Cloudflare	12.7%	13.0%	11/2/2020
Datadog	11.5%	13.7%	5/13/2020
Crowdstrike	9.5%	9.5%	5/13/2020
Snowflake	9.0%	9.0%	2/8/2021
Monday	8.2%	7.0%	9/13/2021
Zscaler	8.0%	10.6%	3/4/2021
Axon	7.7%	5.6%	4/2/2024
Samsara	5.1%	3.6%	1/8/2024

TradeDesk	3.9%	3.8%	5/13/2020

Enphase	0.6%	0.7%	5/15/2020

*held through today

Company comments:

Crowdstrike:

Key insights:

Reported Q2 numbers not expected to be impacted significantly by July 19th incident since just 8 business days before the Q2 book was closed.
Real test of incident impact will be Q3 numbers.
Commentary cautiously optimistic pointing at only few percent churn since incident (versus a worst-case scenario of company bankruptcy).
New flex-term pricing options good move to drive further customer adoption with less upfront commitment (creates less visibility, but great way to hook customers if products are great, which they seem to be).
Q2 revenue growth on weaker side, but otherwise steady secondary growth metrics with continued profitability margin expansion.

Crowdstrike reported fiscal Q2 2025 on 8/28/24. Of course the big question on every investor’s mind was to gauge the impact of their July 19 incident. But since the incident happened just 8 business days before they closed their books for Q2, we shouldn’t really expect any significant impact to be reflected in their Q2 numbers. So other than listening to management commentary, the real test will come when they report Q3 results. What is encouraging though is that commentary since the incident regarding the impact was rather positive. Just consider that investors were weighing the real possibility of bankruptcy directly after the incident. Since that possibility is basically off the table by now, it is no surprise that shares have soared over 30% since the August 1st bottom. Indeed, it is now more likely than not that Crowdstrike lost just a few percent of their customers since the incident. And while they expect a $60M revenue impact due to new sales incentives, so far the long-term vision stays intact. I actually think their move to offering a flex-term pricing was a good move, irrespective of the incident because it’ll allow customers to easily test new products for a while without being locked into any longer term commitments. While that makes future revenue growth less predictable I think it has the potential to fuel more revenue growth, that is, if the new products a customer adopts are really worth it for them. So I am cautiously optimistic that Q3 won’t be the disaster that many feared after the incident.

I think it is still worth to briefly review their Q2 numbers, if just to establish a baseline for Q3. So, Q2 revenue was $964M (4.7% QoQ, 31.7% YoY) versus my (pre-incident) expectation of $974M (5.8% QoQ, 33.1% YoY) and beating their guide by 0.4% - certainly on the low side of historical beats. For Q3 they guided for $982M (1.9% QoQ, 24.9% YoY). A 1% beat would bring them to $992M (2.9% QoQ, 26.2% YoY). Net new ARR was $217M and grew 2.8% QoQ, down from 13% a year ago and 15% two years ago. RPO was $4.9b and grew 4.3% QoQ. RPO YoY growth was still way above revenue growth, at 37.8% but came down again after having accelerated from 32.2% in Q3 to 36.6% in Q4 and to 41.8% in Q1. More interestingly, cRPO grew 27.1% YoY, which is below their YoY revenue growth of 31.7%. I don’t think though that is something to be alarmed about as cRPO has been lagging revenue growth now for four quarters in a row, by typically 2% to 2.5% (with the exception of Q1 where it was only lagging by 0.1%). NRR was consistent with their expectations for the quarter which I interpret to be close to their benchmark of 120% and maybe more importantly, gross retention was at an outstanding 98% at the end of Q2. So if they lost only a few percent of their customers due to the July 19 incident, it could be within the noise of their typical 2% customer churn. Multi-product adoption was also good, where subscription customers with five, six, and seven or more modules represented 65% (vs. 65% in Q1), 45% (vs. 44% in Q1) and 29% (vs. 28% in Q1) of subscription customers, respectively. Notably, deals with eight or more modules grew by 66% over the prior year and 48% of all customers with $100,000 or more in ending ARR adopted at least eight modules, an increase of more than 10 percentage points over the prior year. Finally profitability margins continued to expand: Operating margin to 23.5% from 21.3% last Q2 and 21.6% in Q1; Net margin to 27.1% from 24.6% last Q2 and 25.2% in Q1 and FCF margin to 28.2% from 25.8% last Q2 and 35% in Q1. For Q3 I’ll be looking at how much their fundamentals were impacted in comparison to this baseline and any indications on potential longer-term impacts.

Zscaler:

Key insights:

Stronger than expected revenue growth in Q4 with new FY guide and Q4 billings pointing to continued, albeit slowly decelerating revenue growth.
Steady billings growth in the second half of the FY (45.1% growth in 2H25, versus 45.7% in 2H24 and 41.5% in 2H23).
There might be a thesis that their emerging and new AI products could lead to re-accelerating revenue growth or at least growth durability at some point, but it is too early to tell.
Solid land-and-expand metrics with strong customer additions and new customers signing up for more products from the start (creating some NRR headwinds).
Profitability took a little breather this quarter, but overall still on a good trend. I’d like to see them pick a the pace here again in FY25.

Zscaler reported fiscal Q4 2024 on 9/3/24. Revenue growth came in stronger than I had expected at $593M (7.2% QoQ, 30.3% YoY), versus my expectation of $589M (6.4% QoQ, 29.5% YoY). This was a strong guidance beat with 4.7%, significantly above Q3’s 3.4% and Q2’s 3.8%. So while their Q1 guide seems a little weak at $605M, I’d expect them to beat that by a similar percentage as this quarter. The reason for this expectation is because my updated billings model predicts revenue growth for Q1 at $635M, which would be a 4.9% guidance beat. If they can manage that, Q1 YoY revenue growth will be at 27.8% and QoQ growth at 7.1%. Zscaler also put out the new FY guide at $2.61b at the midpoint. If they can beat that by 5.3%, just as they beat their initial FY24 guide by 5.3%, that would bring them to $2.75b or just shy of 27% YoY growth in FY25.

Q4 billings appears to be on the weak side at 45% QoQ growth, as it is down from 49.1% QoQ growth in 1Q23 and 50.6% QoQ growth in 1Q22. Initially I was disappointed, but then I realized that that Q3 billings growth was significantly stronger than usual, so in the end it could just be the timing of deals that shifted some of the billings we would have seen in Q4 to Q3. Indeed, billings grew 41.5% from 2Q22 to 4Q22, 45.7% from 2Q23 to 4Q23 and 45.1% from 2Q24 to 4Q24, so pretty much the same as last year.

RPO grew more than I had expected, by 15.5% QoQ to $4.418b and 25.9% YoY. cRPO growth on the other hand was atypically weak for Q4s, growing only 8.7% QoQ, down from 13.8% and 18.5% in the last two Q4s. So cRPO YoY growth continued to decelerate to 25.9%. With that, and their new FY guide it is pretty clear that Zscaler will continue to slowly decelerate revenue growth - unless there are new revenue drivers that can contribute meaningfully in the future. With the advent of AI and a whole slew of new products (like ZDX, Zero Trust for Branch and Cloud, and AI Analytics), there is certainly a possibility of that happening, but I wouldn’t count on it until I see it in the forward looking numbers. That said, there is reason to be cautiously optimistic as “emerging products contributed approximately 22% of new and upsell business in fiscal '24, up from 18% in fiscal '23. We expect this contribution to grow to mid-20s in fiscal ’25.”

Land-and-expand metrics were pretty solid, with new customer additions growing 6.1% QoQ in the 100k+ cohort and 8.4% in the 1M+ cohort. That equates to a net add of 178 new 100k+ customers and 44 new 1M+ customers. Those numbers are on par with 4Q23 where net adds were 177 and 49, respectively. NRR did continue to decline slightly to 115% but saw some pressure due to new customers immediately signing up for more upfront. “While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar-based retention rate in the future.”

Finally, profitability progress took a bit of a breather this quarter. While Zscaler’s gross profits historically grew in-line with revenue growth, operational leverage typically showed up further down towards the bottom line with operating and net income growing faster than revenue. While both are still growing significantly faster than revenue, at 48% YoY and 39% YoY, this Q4 was significantly below previous quarters which tended to be closer to 100%. As a result operating and net margins didn’t expand QoQ, but slightly contracted to 21.5% from 22% and 23.7% from 25.3%, respectively. At least they are still up from the previous Q4 where they were at 18.9% (OM) and 22.2% (NM). It’s the same story with FCF, but here the margin expanded both from last Q (22.3%) and last year (22.3%), to 23%. With that I’d like to see them again pick up the pace with profitability in FY25; especially with the expected, slow but continued revenue growth deceleration.

Samsara:

Key insights:

Strong revenue growth at 37% YoY.
Boring good secondary growth metrics with steady NRR metrics RPO growing faster than revenue and cRPO accelerating to 37.5% YoY, up from 36.7% YoY last Q.
Solid customer growth with strong net adds in both large customer cohorts.
Great profitability growth and margin expansion, driven by continued operational leverage as operating expenses (SBC subtracted) continue to grow significantly slower than revenue growth at 25.7% YoY.

Samsara reported fiscal Q2 2025 on 9/5/24. Revenue came in at $300M (6.9% QoQ, 36.9% YoY) versus my expectation of $301M (7.1% QoQ, 37.3% YoY), so pretty much in line with that and beating their guide by 3.9%. I interpret their Q3 guide as $322M (7.4% QoQ, 35.7% YoY) and they raised their full year guide by 1.4%. With that and ARR growth of 35.9% YoY I think they are continuing on a healthy growth trajectory.

Secondary metrics were also very steady this Q with NRRs constant at 115% for core customers ($10k+ ARR) and 120% for large customers. Those numbers haven’t changed in the 3 quarters where they reported them. RPO grew 40.1% YoY and cRPO growth accelerated to 37.5% YoY, from 36.7% in Q1.

Customer growth was solid, if not very good. They added 169 new large customers (>$100k), which is up from 140 last Q2. Now I had originally expected 193 new customers in this cohort. The reason for this was because they had a weak Q1 where they only added 116 new large customers, and I wanted them to catch up from that. But keeping in mind that the weak Q1 came on the back of an extremely strong Q4 where they added 185 customers, it now becomes obvious that their new customer add numbers are still small enough that they are very much affected by the timing of deals. Maybe a better way to look at this is to calculate the net adds in the trailing twelve months. Here they grew Q2 to a record 618 continuing the nice trend up and to the right:

Also great, we got another glimpse at their very large customer growth numbers, where they added 14 new ones, bringing up the number of customers that bring in more than $1M in annual recurring revenue to 98.

Finally, Samsara continued to deliver strong profitability growth, displaying continued operational leverage which results in significant margin expansion. One key driver for this success is that operating expenses grow slower than revenue growth and quite a bit so: While revenue growth was 37% YoY, their non-GAAP operating expenses, which I calculate as operating expenses minus SBC, grew only 25.7%. This is also remarkable as this number is down from 28.4% a year ago. As a result, operating margin expanded to 5.8%, up from -2.7% last Q2 and net margin expanded to 8.7%, up from 1.8% last Q2. FCF margin expanded to 4.4% from 2.2% last Q2.

Wrap up

In case you missed my earnings recaps of Cloudflare, Datadog, Snowflake, Monday and Axon, you can find them here: Ben’s Portfolio update end of August 2024. That concludes what I thought was a pretty solid earnings season, where Cloudflare added a record 13000 new customers (more than double of typical past quarters), Datadogs NRR seems to finally have bottomed while they continue to deliver strong multi-product adoption. Snowflake delivered excellent secondary growth metrics with RPO growth at record levels, solid data sharing progress and strong customer growth. Monday’s blissful price increase created new tailwinds for revenue growth while gross retention stayed at record levels and their new products are being adopted extremely well, meaningfully adding to revenue and growing at 150% YoY (CRM) and 250% YoY (Dev). Axon keeps adding to their secret sauce with new, (should I say addictive?) products like Draft One, which uses body cam video, audio and GPS from all officers at a scene, to draft police reports, while continuing to deliver blistering revenue growth (34%YoY) and a world-class NRR of 122%. Crowdstrike seems to overcome their July 19th incident well (but the real test will be the upcoming Q3 report!), and Zscaler’s revenue growth is decelerating, but doing so relatively slowly, while otherwise chugging along. And Samsara performs steady as she goes with outstanding revenue growth at 37% YoY and solid land-and-expand metrics, while continuing their strong profitability trends up and to the right.

Thanks for reading and I wish you all a great October!

Ben

Past recaps

Topic		Replies	Views
Ben’s Portfolio update end of September 2023 Saul’s Investing Discussions	0	2355	September 30, 2023
Ben’s Portfolio update end of December 2023 Saul’s Investing Discussions	0	2579	December 29, 2023
Ben’s Portfolio update end of August 2024 Saul’s Investing Discussions	1	2653	September 8, 2024
Ben’s Portfolio update end of August 2023 Saul’s Investing Discussions	0	2769	September 3, 2023
Ben’s Portfolio update end of July 2024 Saul’s Investing Discussions	0	2057	August 1, 2024

Ben’s Portfolio update end of September 2024

Ben’s Portfolio update end of September 2024

Returns and portfolio holdings:

These are my current positions:

Company comments:

Crowdstrike:

Zscaler:

Samsara:

Wrap up

Past recaps

Related topics