Getting ready for earnings season

Investment Analysis Clubs Saul’s Investing Discussions
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As we get into the meat of earnings season, I am narrowing down the criteria to evaluate an upcoming quarterly report. I would like to get input from this well-informed investor community - please let me know if I am missing anything key in my approach. Apologize in advance if this post violates any board rules (I checked before posting and I think I am in the clear).

Given the rising rate environment and market volatility, I am being more strict with my growth stock holdings. I want to own the ones that I believe will do well in 2022-2023. I recently used the following criteria to run a filtering and scoring exercise on about 93 stocks. I published the results on my substack (see below). I lean towards quantitative measures and GAAP metrics that can be used to track and compare across industry peers.

Here is what I want to see in the earnings report:

Healthy revenue growth
Future estimated revenue growth is more important than past revenue numbers.
Rev Gr YOY must be >= 50% and staying steady or increasing
Rev Gr FWD must be >= 40% (extra credit if >= 100%)
Average of Seq Gr QOQ for last 3 quarters + est. next qtr Gr QOQ must be >= 10%
Most companies should provide 2022 guidance in the upcoming earnings report, which will be instructive. For some companies, a specific product line is more important to look at versus the overall picture. e.g. CRWD’s subscription revenue stream is more interesting than their professional services.

Other revenue-related metrics such as ARR, RPO, Deferred revenue
If a company reports any or all of these, I look at their growth rates YOY and QOQ, looking for steady or improving numbers.

High gross margins
Gross margin must >= 50% (extra credit if >= 80%) and staying steady or increasing.
Margins for specific product lines along with a look at their respective revenue growth rates could be more informative.

Path to profitability
If a company is not yet profitable, I would like to see them move in that direction with purpose and action. EBITDA, imo, eliminates a lot of income statement noise and allows me to compare apples to apples across peers.
QOQ EBITDA should be increasing in at least 3 of the last 4 quarters.
Operating Margin QOQ should be holding steady or improving.

Gaining market share
Healthy sequential customer growth QOQ over at least 4 quarters.
Enterprise and higher paying customers are more important than retail customers.
Average customer growth QOQ for last 4 quarters must >= 10%.
NRR >= 100% and holding steady or rising.
NOTE: This is perhaps the most important set of attributes for the 2022-2023 environment.

Cash is king
Especially this year, I want to see a decent amount of cash on the balance sheet to avoid secondary stock offerings or bond/debt issuances. And also looking for healthy or improving cash flow performance.
Cash on balance sheet must be >= $500M.
Cash flow from operations rising QOQ for at least 3 of last 4 quarters.
Free cash flow increasing QOQ for at least 3 of last 4 quarters.

Debt
Total debt / Total cash on hand must be <= 0.75.

Key questions to ask:

  1. Did they beat guidance for the quarter? Extra credit only for a 10+% beat.
  2. What is their outlook for the next quarter and year? Important to pay attention to both the written word in the report as well as the C-suite words during the earnings call. Sometimes tone of the conference call is informative, however I don’t read too much into it.
  3. Any impact to TAM via new product launch, new markets (international incuded) entered, new major customer win, mergers, acquisitions?
  4. Any key C-suite management changes?
  5. Any major tailwinds / headwinds that will impact this company in 2022-2023?
  6. Can I communicate in 1-2 sentences why I have invested in this company (elevator pitch)?

Final question: Has my conviction level changed given all of the information above?

Beachman
Publishing my thoughts at @iwannabeontheb2 and beachman.substack.com

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This list is somewhat off topic for the board here, because you have a number of things that are not part of the criteria I see Saul members use. Not sure why you wouldn’t just use the guidelines Saul has posted.

Staying on topic for here…

Cash and Debt are going to be very ‘problematic’ on these fast growing SAAS companies.

You are missing customer growth/adds and then on top of that NRR (net revenue retention?) as signs that they are growing even faster than their revenues show.

As for gross margins, I want to see them growing or holding. Any dip should be explained well. I don’t have a set number there.

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This list is somewhat off topic for the board here, because you have a number of things that are not part of the criteria I see Saul members use. Not sure why you wouldn’t just use the guidelines Saul has posted.

Hi dlbuffy,
actually I’m happy to see a board member decide his own criteria as long as he’s trying to evaluate a company. I’ll admit though that some of his criteria looked a bit minimalist to me (like gross margins down to 50%, and Revenue growth rate forward down to 40%). That wouldn’t make it to investment for me, but maybe it would for him.
Best to you both,
Saul

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Hi Beachman.
Thanks for listing your criteria.
I agree with Saul’s comment that the 40% threshold for next year’s revenue growth seems low and, if anything, would show a deceleration (a word that we all abhor on this board) if you’re looking for 50%+ YOY in the last reported year. Same for the 50% minimum Gross Margin.
Anyway, I see that you don’t include any criteria for management. Granted, management is difficult to model and/or distill down to a number, but I would give some extra credit to companies founder-led, where founders still own a considerable chunk of stock, or, if not founder-led, where insiders as a group own at least 10-15% of the stock.
Finally, a word of caution on using averages. I see you have a criterion for QOQ average growth over the last 3 Qs + the next one as >= 10%. Again, you don’t want to give credit to high averages underlying a deceleration.
Just my thoughts.
Thanks again for posting this.
Silvio

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Thanks to all for the feedback.

I like the idea of including a metric related to founder-led companies.

I am also looking into the rate of change of institutional ownership QOQ.

I understand that some of the thresholds above are too low for investors on this board who prefer hyper growth companies in their portfolio. Please allow me to provide some clarification and perspective:

  1. 2022 - 2023 is going to be a very different environment in the capital markets.

  2. These thresholds are just that - starting thresholds and a means of conducting comparisons between stocks with similar products and services. e.g. How do you decide whether CRWD is better than S or ZS? How do you compare AMPL and ZI?

  3. I started this exercise with 93 stocks, then boiled it down to about 41 companies which were then scored using the criteria listed above. CRWD, DDOG, MNDY, SNOW scored the highest (NVDA too btw, but that would be off-topic here). The next tier of high scorers were CFLT, DLO, NET, ROKU, S, UPST and ZS. AMPL and ZI did not score so well comparatively, so this informs me about whether I want to own them or lean more heavily into DDOG and SNOW.

After each earnings report, there is always a robust discussion about the numbers for that specific company. And then the question arises, should I hold, buy more or sell? Is there another company that will perform better than this company and I should move there? I plan to use a framework like this to make such decisions.

Cheers and thanks again for the feedback.

Beachman
Publishing my thoughts at @iwannabeontheb2 and beachman.substack.com

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Key questions to ask:
1. Did they beat guidance for the quarter? Extra credit only for a 10+% beat.

Just about every company we discuss on this board will beat their guidance each quarter as this is customary for high growth stocks. If a company fails to meet their guidance in this era, then look out below. I think you ought to restructure this question and ask, “how big was their beat over the guidance?” It is also a bit arbitrary to set 10% as the bar for an excellent quarter as every company guides and beats guidance by a different margin. For example, let’s look at a few different companies and their beat history.

First is Crowdstrike. Here is a breakdown of their actual revenue versus their guidance and the percentage the of the beat. Most recent numbers are on the right. Please note I always use the mid-point of guidance to compare against.

 
**Actual vs Guidance**					
	 $4.6 	 $6.8 	 $14.9 	 $12.2 	 $10.9 	 $19.7 	 $16.9 	 $12.9 	 $16.3 	 $18.4 
**Beat %**				
	  4.5%	  5.8%	  10.8%	  7.3%	  5.8%	  9.2%	  6.8%	  4.4%	  5.1%	  5.1%

Here is same data for DataDog.


**Actual vs Guidance**							
         $11.6 	 $13.2 	 $5.0 	 $10.7 	 $14.5 	 $12.5 	 $21.5 	 $23.5 
**Beat %** 							
          11.4%	  11.2%	  3.7%	  7.4%	  8.9%	  6.7%	  10.1%	  9.5%

And lastly, take a look at Zoom’s beat history.


**Actual vs Guidance**						 
         $15.8 	 $10.6 	 $12.3 	 $128.2  $163.5  $87.2 	 $71.5 	 $53.2 	 $34.0 	 $33.3 
**Beat %**					
          12.2%	  6.8%	  7.0%	  64.1%	  32.7%	  12.6%	  8.8%	  5.9%	  3.4%	  3.3%

By tracking and learning the typical beat percentage for each company, you can gain a better understanding of how well (or poor) the quarter went. For Crowdstrike, a 10% beat is highly unlikely as we see they generally guide within about 5% of where they expect to end up. They have only beat by 10% once and it was two years ago - their average beat is only 6.5% over the last ten quarters and it has dropped to an average of 5.4% over the last year. This tells me if they beat their guidance by 10%, it will mean they absolutely crushed their expectations and had a blow out quarter. On the other hand, if they come in with a 2% beat it will indicate a poor quarter and likely a sign of slowing sales.

Datadog on the other hand, may very well beat their guidance by 10% given their average beat over the last two years is 8.6%. Notice the one outlier in their beat history? The tiny 3.7% beat is reflective of the quarter impacted severely by COVID. Knowing this, I expect DataDog to consistently beat their guidance by at least 6-7%, whereas I only expect at least a 4-5% beat for Crowdstrike.

And lastly there is Zoom. Obviously most of us sold out a long time ago, however there is much we can learn from them. Their beat history tells such a clear story of a business that exploded over night, and then quickly came back down to earth. They had their three largest beats ever in a row, however this has led seven straight quarters of decreasing beat percentages. This is a red flag as it shows they are no longer growing revenue quickly enough to beat guidance by 6-7% plus as they had in the past.

All in all, I would encourage you to track the guidance provided by each company and compare it against their actual revenue. By doing this, you will know what type of beat to expect each quarter - is it 5% like Crowdstrike or 8% like DataDog? Anything above or below will indicate how the company performed against managements (and your) expectations.

Rex

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I think you are both on the wrong track, slightly… if the size of the beat over the guidance is what you are playing off of, this is just the mo-mo game.

When Saul and Bear discuss what they intuit the beat could be they go through that figure to look at where the range of YoY and QoQ growth is going to be. “The Beat” is just a shell game with WS analysts and the press. It’s the actual growth metrics that inform whether or not the company is still on a strong, growth-y track.

-Another Rob

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When Saul and Bear discuss what they intuit the beat could be they go through that figure to look at where the range of YoY and QoQ growth is going to be.

To Rob (rtichy) - I agree, the beat just reflects the amount of sandbagging. It’s the QoQ and YoY actual revenue that count.

And lastly there is Zoom. Their beat history tells such a clear story of a business that exploded over night, and then quickly came back down to earth.

To Major Fool (Rex) - I disagree. I never even looked at the beat history. What I looked at was their sequential (QoQ) revenue gain which went like this: - up 102%, up 17%, up 14%, up 8% which is when I quit counting as I was long out.

How do you compare AMPL and ZI?.. AMPL and ZI did not score so well comparatively.

To Beachman - These two are small companies just starting out and you can’t use the same scales and compare them to companies like Snowflake and Zscaler.

Long approx
DDOG 20%,
SNOW 20%,
ZS 20%,
S 15%,
MNDY 5%

Hi ronjob - we think alike, but not exactly the same. My top six are DDOG, MNDY, SNOW, ZS, ZI, and S, and they make up 83% of my portfolio with smaller positions in NET, AMPL, and UPST. I have MNDY higher up, and ZI as one of those big positions.

Best,

Saul

Links to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board. (It’s in three parts)

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”

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Saul,

you cut big on net/mndy/zi to add to snow/zs/s. I can see the ones you sold are weaker stocks vs the ones you bought and that is probably a good decision. I just want to understand if you have any real time method you use to assess daily/weekly fluctuation and move weights.

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Saul, you cut big on net/mndy/zi to add to snow/zs/s.

Nope, I’ve sold out of Crowd, as I have indicated several times that I was in the process of doing, and gradually continued to reduce my Upstart, and did sell some Cloudflare. I can’t imagine how you thought I had cut big on Monday since I still listed it as my second largest position, nor why you thought I had cut big on ZI.

Saul

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Stryker

Saul has answered you once, you need to reread a post to make sure you had it right the first time before answering the same question again. Here is the original post below. Obviously Saul is pasting a comment from another poster and then commenting that their top holdings are only similar, not exactly the same.

TMB

“Long approx
DDOG 20%,
SNOW 20%,
ZS 20%,
S 15%,
MNDY 5%

Hi ronjob - we think alike, but not exactly the same. My top six are DDOG, MNDY, SNOW, ZS, ZI, and S, and they make up 83% of my portfolio with smaller positions in NET, AMPL, and UPST. I have MNDY higher up, and ZI as one of those big positions.

Best,

Saul”

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Hi Saul, I actually like ZoomInfo ( ZI) but haven’t started a position yet but may start one soon. I think they have built a very unique B2B Database and specially like their timing of joining Snowflake’s Data Marketplace to centralize and streamline data delivery.

I think the availability of that data on Snowflake can open up a huge opportunity for all those businesses which are already on Snowflake’s platform and the ones that will migrate in the future.

This was from their press release…

“Customers can now use Snowflake’s platform to integrate ZoomInfo’s industry-leading company and business contact data into their technology stacks—with no additional integration or extract transform load required—and generate insights at scale.”

Also, if I recall correctly Frank Slootman ( CEO of Snowflake) did call out ZoomInfo during the last earnings call.

Cheers!
ronjob

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Seems to me like you are on the wrong board. We don’t much care about ROI. Our companies often don’t have much because they ever investing everything they have to grow. Perhaps a re-look at the knowledge base will help.

Also it seems you are confusing ROI with revenue.

Gordon

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You may not care about ROC, but the smart money cares.

I’m not gonna go on a rant here, but the short rebuttal here is that what we (and all growth investors) care about is potential ROC. And potential EPS. And potential FCF. You’re not going to make a lot of money if you try to bet on things that have already happened. But if you can spot a great company years before everyone (and their brother) realizes it’s a great company, you can grow your investment as the company grows.

E.g. Datadog (after falling 35% from its high) is currently a ~45b market cap. In Jan 2020, it was about 14b. At the time their TTM revenue was about 300m. Now it’s about 900m. It was expensive at 14b…and you can say it’s still expensive at 45b. But there’s a reason it’s not still at 14b. And that reason is that it has slowly and surely convinced many, many investors that its potential is much bigger than that.

Question for us now is: Is Datadog’s potential significantly bigger than 45b? I think it is. So I don’t want them to focus on profitability until they grow as big as they can. I can’t give you a number for how big Datadog’s revenue (and potential profit) stream can get before they start to saturate the market. I can only say I don’t see any signs of it slowing down. That’s growth investing, and there are many other types of investing – but they are off topic for this board.

Bear

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Somewhere up in this thread I wrote…

"…Hi Saul, I actually like ZoomInfo ( ZI ) but haven’t started a position yet but may start one soon. I think they have built a very unique B2B Database and specially like their timing of joining Snowflake’s Data Marketplace to centralize and streamline data delivery.

I think the availability of that data on Snowflake can open up a huge opportunity for all those businesses which are already on Snowflake’s platform and the ones that will migrate in the future…"

I believe today’s announcement of ZoomInfo partnering with Google to make their B2B data available from Google’s BigQuery data warehouse is a pretty big deal…

That’s why I had bolded very unique B2B Database; it would be more appropriate to call it “a very unique and a very valuable B2B Database”. It’s a company that both Snowflake and Google are proud of being on their platforms. Isn’t that special!

I had never given ZoomInfo much thought before but thanks to Saul for bringing this to my radar ( just like Zoom a couple of years back :))

Here are some nice things about ZoomInfo from the news:

"ZoomInfo is one of the best ISVs we work with and as we grow in enterprise accounts, the ability to share the information they have as a value-added service is critical,” said Sudhir Hasbe, senior director of product management at Google.

When companies unlock their data advantage it means they have the ability to uncover new insights, build new business models and improve experiences for both employees and customers,” said Sudhir Hasbe, Senior Director of Product Management, Google Cloud. “Our announcement with ZoomInfo today is a perfect example of how we can continue to empower companies to unlock their data advantage by getting even more out of their BigQuery investments to further drive value from their data.”

“We have quite an overlap of BigQuery customers who are using ZoomInfo data,” said Sneh Kakileti, head of product at ZoomInfo. “With this partnership they can directly consume that data within their systems of operation and access Google’s other functions like analytics and machine learning.”

"The deal isn’t exclusive and Kakileti wouldn’t rule out the possibility of striking similar arrangements with other database and analytics providers. “I’m not saying I would turn away Snowflake,” he said, referring to the popular cloud data warehousing company.

Sources:
https://www.businesswire.com/news/home/20220125005308/en/Zoo…

https://siliconangle.com/2022/01/25/google-zoominfo-partner-…

Cheers!

ronjonb (@ronjonbsaas on twitter)

P.S. I took advantage of the selling today and bought some more ZoomInfo in addition to the 5% position I had build up recently.

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