Earnings are upon us...do your homework!!

[PoleekoCowboy]

Earnings season is upon us! All of the companies in my portfolio will be releasing their first quarters earnings in the next month…3 of them starting THIS week! Following are the dates (or best estimates where not yet announced by the companies):

AYX 5/6
NET 5/7
TTD 5/7
DDOG 5/11
OKTA. 5/28
COUP 6/1
ZM 6/2
MDB 6/3
SMAR 6/3
CRWD 6/4

A few other established SaaS companies have already released earnings and suggested or disclosed that Covid-19 is actually adding tailwinds to the global adoption of their digital services and subscriptions. It has also been claimed by several cloud and digital companies that the virus has accelerated the adoption of cloud technology overall by up to 5 years!

If this is true, then it may bode extremely well for the companies listed above. In the meantime, it will continue to be a very challenging economic environment for the foreseeable future (not to confuse the stock market with the overall economy) and Friday’s unemployment numbers will be dire, as will the continued death toll from this CoronaVirus. Even with phenomenal earnings growth, the companies in the portfolio may struggle, in the SHORT-TERM. And indeed many of them will likely follow suit with other companies who are simply declining to give ANY forward-guidance in this uncertain time. Who can blame them? That said, there are probably less than a few dozen companies of this size (over $5B market cap) growing revenues greater than 50% quarter over quarter over quarter over quarter (you get the point), with little or no debt, ARR, subscription contracts 1 to 3 years in advance, extremely strong Net Dollar based expansion rates (most above 120%), positive free cashflow, customer % growth in the triple digits, and, and, and…

LONG-TERM, I am extremely happy and enthusiastic with these companies in my portfolio and they have rewarded us by being up over 28% YTD (yes, since Jan 1, 2020 amidst this downturn) and over 300% in the past three years. Except for TTD which is doing very well by the way also, but which I have been reducing exposure to lately to add to other positions whose companies I have higher conviction or want to increase as a percentage of my portfolio, I have been adding to most of the other companies opportunistically when the price dips too low. (such as CRWD and AYX that I’ve owed for 11 months and 2+ years, respectively and love at these prices and based on their most recent releases last quarter)

For anyone who does not read the earnings or listen to the calls and wonders about how one does this, it is not difficult (Yes, I’ve been asked many times). But DO NOT TAKE anyone on this boards word for it! Listen to it yourself!

Earnings releases typically occur immediately after the daily stock market close at 1pm PT. I simply google the company website and click on the investor relations tab for each company to see the date the earnings call is being held and to get the link or number to the earnings call. Anyone can call in, though don’t expect to ask a question live, as that is usually reserved for preset analysts. One can also usually click on a link directly to “read” the release from the company site and also sign up to get an email notice whenever the company has a news release.

I STRONGLY encourage you to pick just one company above and listen to a call, especially if you never before, and then read the earnings release. Nothing can replace hearing the enthusiasm and conviction in the CEO and CFO’s voices…or in some cases dread or remorse! It is probably the single most important thing you can do for any company you own and will give you a huge advantage (yes, even and especially over the analysts who often don’t even write it up until weeks afterwards and even then get it wrong) in getting in or out of an investment quickly and before the public; and in understanding the financial, operational and management health of a company. I know people who research for hours what big screen TV, or latest iPhone, or computer or even internet provider to buy, or what house or neighborhood to move into, but they don’t do the most basic research on their stock investments by listening to a prepare and public quarterly earnings release and status update?? It takes me less than 30 minutes to read an earnings release and I never regret it…especially when it is my retirement and all my hard earned money on the line. I sometimes buy or sell shares in a company the day following a call based on what I hear and even when I don’t, I always come away with a better understanding of why I’m invested in that company. Stay healthy and thrive. I will leave you with a favorite quote from good ‘ol Walt for your deliberation:

“Either define the moment or the moment will define you. -Walt Whitman

Cheers!!

[stocknovice]

PoleekoCowboy –

That’s an excellent message and one that can’t be emphasized enough. One thing I’ve learned in spades around here is the importance of having a plan to continually assess and reassess the stocks we hold. To your point, ”It is probably the single most important thing you can do for any company you own and will give you a huge advantage (yes, even and especially over the analysts who often don’t even write it up until weeks afterwards and even then get it wrong) in getting in or out of an investment quickly and before the public; and in understanding the financial, operational and management health of a company.”

In the spirit of your post, here’s something I wrote previously about preparing for earnings season. It’s evolved for me over the years and is strongly influenced by the minds on this board. While it likely won’t provide much new for regulars, I’ll add it in case any others find it useful. I’m looking forward to some good discussions during what should be an illuminating earnings season…

PREPARING FOR EARNINGS SEASON

Every company has a story. That story is written by the news and information the company creates. Within this framework almost no info is as useful or relevant as the earnings report. The numbers in these reports are invaluable, mostly because the tale they tell is never biased. The challenge is having a plan in place to make sure they are interpreted properly.

Why does that matter? Because each of us has a thesis for owning a stock. If you’re actively managing a portfolio, earnings season is the ideal time to double check your work. Heading into a report, what information must you see in order to feel your thesis still holds? Personally, I try to determine what I’m looking for prior to viewing the actual results. This calms my mind and lets me review some crucial information without scrambling to crunch numbers, decipher conference call chitchat or react to after hours prices. I want to create a process for proactively evaluating this new information rather than emotionally reacting to it.

Most of my current companies reside in the Software-as-a-Service (SaaS) sector. The most successful seem to share some common traits:

• Strong revenue growth (accelerating growth is even better but tough to find).
• A large recurring or subscription revenue component.
• A low capital structure that leads to high gross margins.
• Expenses, secondary margins and cash flows that are all moving in a positive direction. That means shrinking as a percentage of losses or growing as a percentage of profits.
• Appropriate customer growth to support current business momentum.
• High net expansion or retention rates.
• Conference call comments that match the press release numbers. This is totally subjective, but I like to leave the call with at least the same general sense of enthusiasm I felt coming in.

Those are the baseline attributes I’m searching for. Another important factor – in my personal calculus at least – is a history of beating and raising guidance. Being honest, for all intents and purposes this has become a requirement for most growth companies in today’s market. Like most investors I never take initial guides at face value. However, rather than ignore them I review the firm’s recent trend of guides versus actuals to estimate the next quarter’s numbers. My remaining assessment of the quarter flows from there. Here’s a sample of the this thought process heading into Smartsheet’s (SMAR) Q1 2020 report:

“SMAR guides for $55M in revenues and 51.4% growth. They’ve beaten guidance the last three quarters by $2.9M (7.3%), $2.4M (5.4%) and $2.2M (4.4%). Given that trend, I think it’s reasonable to expect an upcoming beat of at least $2M (3.6%). That would put revenues around $57M and growth at 56.9%. Those are the headline numbers I’m hoping they can meet or clear.

Beyond the headlines, I’m looking for them to continue their momentum in large client growth and take advantage of a expansion rate that has accelerated to 134%. I’m also interested in their annual contract value (ACV). As their CEO stated last quarter: “…one of the real blessings of the company is, even though we did see a 50% step up in ACV, the number is still tiny. I mean, we’re taking $2,500 on average. So the opportunity for us to really reach the full potential with an account, we were talking orders of magnitude, not order of magnitude.”

Will any of those orders of magnitude find the top or bottom lines next week? We’ll see.”

The very first thing I do when reviewing the report is hold myself accountable to my expected numbers. No excuses or rationalizations allowed! I treat anything too far below my expectations as a possible sell signal. I’ll check the secondary numbers to see if they still support my thesis. I listen to the call and/or read the transcript. After plugging everything in and examining the results, the last thing I do is eyeball current guidance to see if it’s high enough to keep playing the beat-and-raise game.

So, how did things turn out for SMAR that quarter? Here is my post-earnings recap:

“I wrote last month I was looking for something around $57M in revenues with signs they are taking advantage of their room for growth…They came in at $56.2M (+55%) and held their 134% retention rate. Subscription growth accelerated slightly to 57% and subscriptions now account for 89.5% of total revenues. Gross margins are strong at 81%. High-end customer growth (>$5K, >$50K, >$100K) remains healthy and their average annual contract value grew 48%. Operating, net and FCF margins remain negative but continue to grind in the right direction. They also announced several developments this month, including designation as the only work execution platform listed in the FedRAMP marketplace for federal agencies and government contractors.

The flip side is SMAR also announced a secondary offering of 6.5M shares on June 10. That announcement led to a small dip, but the offering was priced strongly and the price action since suggests the market doesn’t seem to have a big issue with SMAR padding its coffers as it continues to grow. Putting it all together Smartsheet appears to be on the right track. They continue to execute and commented on their call that “every [sales] team outperformed their goals”. Despite coming in a tick below the revenue number I was looking for, their Q2 (51.0%) and FY (49.1%) guides make it fairly easy to see them continuing to challenge mid-50’s growth for the remainder of the year. All in all I viewed this as a solid but not spectacular quarter based on my expectations. I’m keeping my allocation as is for now.

Some other examples:

• NTNX was an auto sell right off the Q2 2019 release. Nutanix was already a complicated company for me to follow (a lesson in itself). Not only did the numbers disappoint, but the CFO stated in the release “our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring”. Frankly, that might have been the easiest sell decision I’ve ever made. I didn’t even need to plug in the numbers. No regrets and I didn’t look back.

• I sold VCEL in early 2019 when total revenue and the expected contribution from its flagship product didn’t pass my smell test. Their call comments were much more guarded and even a little defensive compared to the prior quarter. In addition, the guides for the next quarter and full year were way too low to think they had any chance to post attractive numbers in the beat-and-raise game. That let me exit with a profit just before a significant decline in the stock.

• In Q2 2019 this process kicked out $116-118M in expected revenues for OKTA. They came up just short at $115.5M. That got my Spidey senses tingling slightly and alerted me to dig deeper. After dumping in the secondary figures and listening to the call I decided the thesis still held. I kept my shares but shortened the leash. I still own the shares today.

• Using the same process, I came up with $123-125M for OKTA’s Q3 2019. Actual revenue came in strong at $125.2M. All the supporting figures lined up, their call was confident and they posted a record 10.5% free cash flow margin in a quarter management had already said would have higher expenses. I wasn’t surprised to see a post-earnings pop and actually had more conviction in OKTA exiting this particular quarter than the one prior.

Obviously, no matter what my estimate is I’ll never know the exact numbers a company will report. I can also list numerous instances where the market emphatically disagreed with my interpretation of results. That’s OK though. Investing is hard, and being wrong is a feature of the system rather than a bug. Trying to nail an estimate or predict short term market moves is not the point. The point is having a sensible plan for regularly reexamining the thesis that earned my hard-earned money. To that end focusing on the process is far more important than fixating on results. While I know my process is far from perfect, I’m glad to say it has worked far more often than not in keeping me grounded about what I own and more importantly why I own it.

I hope this helps and am more than open to any alternative methods or suggestions for improvement.

[Smorgasbord1]

NTNX was an auto sell right off the Q2 2019 release. Nutanix was already a complicated company for me to follow (a lesson in itself). Not only did the numbers disappoint, but the CFO stated in the release “our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring”. Frankly, that might have been the easiest sell decision I’ve ever made. I didn’t even need to plug in the numbers. No regrets and I didn’t look back.

I almost responded to Saul’s “April Mistake” thread, but I guess I’ll do it here.

I stayed too long in NTNX. I got out in the mid/high 30’s, which is better than today’s teens, but not as good as if I sold when most here did - and not just the stock price but what I could have made by putting more in my other companies.

That said, I think it’s worth explaining my reasoning at the time. It has been clearly proven to be wrong, but I do want to point out that often it’s not “falling in love” with companies that prevents selling, but an analysis of where the company is at and where it could go.

I understood Nutanix’s technology pretty well, having done a couple of deep dives here back in the day. Their marketing was always more obtuse than it should have been - and I’m going to remember that as one of my red flags moving forward.

At the time, Nutanix was moving from a bundled hardware + software sale model to a software only subscription-based sales model. As we know from other companies, that raises issues of revenue recognition, and since the total dollar amount of a sale will be less, many standard metrics comparing to the past will be skewed to look worse than the reality.

Yes, the sales gaff was concerning. However, I had previously worked at a company that fired its entire sales team, put in new sales leadership, and was able to rebuild the sales pipeline within two quarters. The result was much higher sales moving forward, and even the 12-month results a quarter later were better than the prior 12 months. So, having seen that first-hand, it didn’t seem unreasonable to me that Nutanix could pull off the same.

And let’s not forget that Nutanix’s customers are a happy lot. According to Gartner, Nutanix has had NPS (Net Promoter Scores) above 90 for half a decade now (https://datacentrenews.eu/story/nutanix-receives-accolade-fr… ), and is a leader in their “magic quadrant.”

Finally, their technology not only serves customer needs today, it has an expansion path for the future. Today it enables companies to easily setup extensible private clouds. The future path is to enable companies to move data and applications between their private cloud and any of the big public clouds (AWS, Azure, Google). This would be an enticing offering that if properly done and marketing could bring in big money.

So, while I was clearly wrong on NTNX, I do want to be clear that I didn’t fall in love with Nutanix, but that my analysis was that the company still had great products with recurring revenue that customers loved, a path for future growth, and that I had personally seen a sales team turn-around of similar scope.

As for the future, I’m no longer invested in Nutanix, but it’s getting undervalued enough that I might take a small position. This TMF article (free to all) https://www.fool.com/investing/2020/02/28/nutanix-stumbles-o… , points out that even today Nutanix’s results look bad due to the shift to subscription revenue (which grew from 73% to 79% of billings):

the effect of shifting to the subscription model on financial reporting is that revenue that would be recorded at the time of sale gets drawn out over the length of a contract, temporarily muting revenue growth. The company’s headline numbers also look worse because it is still shifting away from hardware and one-time software sales, meaning it’s rapidly losing sales in those categories.

Of course, company guidance is still bad and they are also for some reason not as immune to Covid impacts as other software business. The Sales team stumbles continue to reduce confidence in management.

[sjo]

Great posts regarding quarterly earnings calls PoleekoCowboy and stocknovice. With that in mind, the following are links to each of the upcoming quarterly earnings conference calls for the companies currently held in Saul’s portfolio. Each link contains the start time and time zone when the call begins. The fun begins about 15 minutes from now on the call for AYX.

This morning, CRWD announced their earnings date as 6/2.

Source: Investor Relations page for each company

5/6/2020 AYX
https://investor.alteryx.com/news-and-events/press-releases/…

5/11/2020 DDOG
https://investors.datadoghq.com/news-releases/news-release-d…

5/28/2020 OKTA
https://investor.okta.com/events/event-details/q1-fy-2021-ok…

6/1/2020 COUP Link not yet available on COUP’s I.R. web page

6/2/2020 ZM
https://investors.zoom.us/events/event-details/zoom-first-qu…

6/2/2020 CRWD
https://ir.crowdstrike.com/news-releases/news-release-detail…

sjo

[sjo]

AYX call begins in 1 hour.
Darn time zones :>)

[brittlerock]

Stocknovice and PoleekoCowboy,
Great posts!

Let me just put a little emphasis on a few points from my perspective. First off, I’m kind of lazy. So while I generally made a point of reading through the earnings call transcripts (sometimes not) I never did it with an objective. I did it more or less out of sense of duty, like this is one of the tings you just do if you wish to actively manage your portfolio. But to be honest, just reading the transcript is not a very meaningful activity.

Maybe this is not news for most folks who visit this board. I think a lot of you have a lot more investing experience than I. I’ve long sort of dabbled in the market as a dilettante. But it wasn’t until a few years ago when I started closely following this board that I got much more engaged, but I’m still learning and there’s a lot to learn.

The idea of preparing for the call by reviewing past performance and building a set of expectations about what I hope to hear/read and taking the time to focus on those things comes as a new idea to me. And maybe listening to and reading the transcript at the same time a day or two later to insure that I’ve really garnered an understanding of the information being imparted is something I’ve never done before. I will change that approach from this point forward. There’s something about the way the brain works such that if you engage more than one door of perception while focused on the same task that creates a much deeper learning experience than just reading or listening alone.

Record keeping is also something I’ve been rather lax about for a number of reasons. Here are a few, that stuff is out there, I can always go retrieve it whenever I want. True, but there’s a certain amount of resistance to actually doing so unless you’ve got it stored in your own filing system. Or I’ll remember the really important stuff, the rest of it is just filler. Well, there was a time when I was younger when I had the innate ability to retain a great many inter-related details. It was almost as if my mind worked like a relational database. Remember the keys and it’s easy to retrieve the details and follow the relationships. That made me really good at my job as a systems analyst. I’m older now. I must reluctantly admit my mind does not work in the same manner anymore.

For example, recently, Saul posted some financials about Roku that did not look good. They didn’t look good because they weren’t. He asked, “what am I missing?” I quickly asserted nothing and vowed to exit my position soon. But later in the thread, 12x and Bear both provided Saul with some of the information he was missing that made Roku look more attractive despite the numbers. While reading their input, I realized that I too knew much of what they had posted, but it did not come to mind as I was responding. Keep records and use them. Study them. There’s no substitute. Don’t simply rely on your memory. Well OK, maybe some of you can, like I said, when I was younger I could. But be honest with yourself. Are you really able to retain and recall important details over an extended period of time? If not, keep records.

And finally this demonstrates the value of keeping your portfolio focused on just a few outstanding companies. Every position you hold represents a commitment to keep abreast of relevant information. That’s a burden. If you hold 15 or more positions it’s unlikely that you will ever keep on top of all of them. Most likely you’ll short change all of them.

As those who read my posts know, I exited the market a while ago due to my fears of the damage that this pandemic will inflict on the economy, not just the domestic economy, but the entire world. But I came to realize that I had made a pretty big financial blunder (even though it was of mental health benefit as it took the burden of investing in the face of the enormous uncertainty off my mind for a bit). But I also came to realize that holding cash also poses risks. The value of cash erodes with time. Cash is a wasting asset. So I have carefully re-entered the market. I’m not fully invested as Saul recommends, but I’m not fully in cash either.

And I won’t dwell on it due to the rules of the board, but I’ve also started studying options and conservatively using covered positions as a way of generating some cash flow. I have much to learn, but I regret not having studied options sooner. They can provide a hedge and had I known better I might well have used them as an insurance policy rather than having exited. C’est la vie.

[foodles]

Wow, brittlerock, I could have written exactly what you just did (except for the last 2 paragraphs regarding exiting the market and options). As I was reading most of your post I just kept thinking, yeah, that’s me, too!

Know you’re not alone…and if there’s 2 of us, there must be more (although I’m not asking for more posts on the subject to confirm that theory).

I am also vowing to put more time/effort into learning and following my holdings as Poleeko and Stocknovice both gave great examples of.

[1poorguy]

Know you’re not alone…and if there’s 2 of us, there must be more (although I’m not asking for more posts on the subject to confirm that theory)

So is one not allowed?

I’m also somewhat lazy. I do my homework up-front. I approach a stock with a negative attitude. What can I find wrong with it. That’s why my posts may come off as negative (e.g. with Zoom). I’m trying to find the gaps in their armor. Posting on a board like this often stirs up rebuttals to my points, and that’s very useful to me (and hopefully my pointing out what I perceive to be holes is helpful to other posters). Often things I didn’t realize or never thought of.

Once I settle on a company, understand it, get what it’s doing and what it’s advantages are, I get lazy. I keep my eyes open for warning signs, but don’t track performance to the degree that many posters here seem to do. If I see warning signs, I dig deeper (though I hesitate to say “deeper” in the present company! you guys redefine “deep dive”!). If it’s a real problem, I may exit. If not, I go back to being lazy.

1poorguy (presently learning about Zoom and AYX, though not enough about AYX to start asking questions yet)