Based investment thesis on customer number alone is not going to see the big picture.
Thanks for the tip. I’ll try to keep it in mind. In the meantime, let me try to expand a bit…
How can you compare FSLY to CFLT?
Quite simply, actually. FSLY and Pivotal (or whatever) are examples of firms we’ve discussed that struggled to maintain a short a run of acceleration because it was driven mostly by an increase in current customer spend without adding enough new customers to keep it going. The comparison has nothing to do with the business being cloud or non-cloud. It’s about the levers that drive future revenue growth.
You see, one of things I’ve learned here is the most successful companies tend to nail both the “land” and “expand” part of the business model. I’d consider net retention rate a pretty simple proxy for the expand part. Well, how’s that look?
CRWD: 125% at the end of last year and its usual 120%+ so far this year.
DDOG: 130%+ for all eternity.
NET: 119% at the end of last year and 123%, 124% and 124%.
SNOW: 168%, 168%, 169% (holy crap).
CFLT: FY20 134%, FY21 125%, 1Q22 117%, this Q back to 130%+, a stated baseline on the call of 120%+ the next few quarters, and a long term goal of 130%+.
Good for CFLT on reversing the trend. That looks like a lot of those other companies and could mean the start of big things. Sign me up for that.
Of course, that must be balanced by the land part. The simplest proxy for that (in my opinion, of course) is customer growth. Let’s take a peek.
Large customer number growth rate from last two quarters: 9.98% and 7.62% respectively sequentially.
Hmmm. That sounds OK, doesn’t it? Well…
DDOG: 11.7% and 14.6% at a larger scale.
NET: 15.1% and 15.8% at a larger scale.
SNOW: 9.5% and 10.1% at a larger scale (using total customers since we don’t have $50K or $100K).
Do you notice how those other companies’ rates are increasing while CFLT’s are decreasing in the same general business environment? And Confluent’s total customers trended the same way at 11.4% and 6.7%, meaning a lower number of customers that might one day grow into the >$100K group. Two quarters doesn’t necessarily tell the whole story though, which is why I’m asking for help in understanding this dynamic from others who might know better. Should I be concerned about this or not? I can’t help but notice CFLT isn’t showing the same recent strength as those others. Why is that and will it be a problem going forward?
The cloud revenue is growing faster than customer adds. I think there’s some kind of usage fee in the cloud revenue. And this usage is explosive.
And this is partially my point. Explosive usage is great and exactly what we want to see. The downside is current customers can only explode so much before budgets tap out. That’s a disadvantage of usage-based models vs subscription-based. Of course, that’s not nearly as big a concern if the company keeps adding enough new customers to explode on the front end. You know whose business model benefitted from a usage explosion but couldn’t add enough customers to keep it going? Fastly. (And please let’s not spin to FSLY as a company. This is only about the customer/usage/revenue relationship. I wish I had a better example, but I unfortunately don’t.)
So, does CFLT’s current performance indicate a future CRWD/DDOG/NET/SNOW or is it a FSLY/PVTL head fake? I’m not saying which one because I don’t know yet. But I do know there’s a lot of smart people here, so I figured I’d ask.
Don’t get me wrong. I hope everyone who holds CFLT makes obscene amounts of money on it. In fact, it looks like many are already doing quite well. If I can determine CFLT’s business trends are good enough to augment my other ideas, I might join the party. Can anyone send an invite that addresses the above?