There was another great write up by Jamin Ball in his newsletter Clouded Judgment this morning, which summed up Q3 ’22 Public Cloud Earnings. The link to the article is here:
Here are some interesting take-aways:
• The “elite” performers in his view were DDOG, BILL, and ZS. He also thought MNDY, SNOW, HashiCorpo, Gitlab, and ZI had strong quarters. It is interesting to me that ZI was included in this list b/c of their guided substantial slowdown for next year.
• 91% of cloud companies beat their revenue guides. This is during one of the fasted rate hike cycles in history.
• Guidance was historically weak last Q. Historically, guidance is raised in the 2 – 3 % range. This time, it was -.1%. Still not that bad compared to what is going in the macro environment.
• Of the popular companies followed by the Board, the following placed in the top ten for revenue growth: S (106%), SNOW (67%), MNDY (65%), BILL (62%), DDOG (61%), ZS (54%), and CRWD (53%).
• In the top ten for FCF generation, CRWD (30%) and ZS (27%) made the cut. DDOG (15%) finished at eleventh and SNOW (12%) finished at twelfth.
• SNOW continues to tower over everyone with its NRR rate of 165%.
• The comparison of change in share price after earnings for cloud companies showed BILL, ZS, CRWD, NET, and ZI were some of the most punished stocks of the Q. To me, it really sticks out that BILL and ZS are on this list, because Jamin recognized them as “elite performers” based on their Qs. I added small bits to each after reading this article.
I am also impressed that DDOG and SNOW continue to “top the charts” as some of the top performing cloud companies.
Long SNOW, DDOG, BILL, ZS, NET, and CRWD (of companies discussed in this post) @Laneylawyer (currently on break from FinTwit but will likely be back next year)
I agree about DDOG and BILL (obviously, since they are my top 2 positions). But ZScaler seems to have a real slow down on their hands, being unable to increase their FY billings guide so it remains at 31%, and only raising fiscal year revenue guide to about 40% (which is a lagging indicator – Billings is the “where the puck is going” metric). So when they have to guide for the next fiscal year, that revenue guide could be in the high 20’s.
Does anyone see this differently? Do any of you see ZS as an elite performer?
Hi Bear, I also view the low billings number as a concerning development - on the other hand this was put into perspective on the call:
Andrew Nowinski - Wells Fargo: „Congrats on another nice quarter. I guess I just want to ask a question on the billings guidance. Maybe a little bit less of a raise than you’ve done historically. I’m wondering, number one, did you factor in a change in duration? Or what kind of duration assumptions do you make with regard to your billings? And then did you add any extra levels of conservatism into that guide given the macro backdrop?“
Remo Canessa - CFO: „Yes. The billing guide for Q2, the duration is similar to last year. It’s slightly above the midpoint. One thing to call out for fiscal '23, Q3 is going to have headwinds because in Q3 of last year, the duration was longer. Related to the conservatism related to our billing guide, it’s really related to what we saw happen in Q1. So what we saw happen in Q1, we’re taking forward into Q2 and for the rest of the year. What we’re seeing basically is elongation of sales cycles. As we talked about, and Jay mentioned, on the prepared remarks, our deal size is getting bigger. Customers are buying more of our platform. It’s more of a platform sale, all good. Our pipeline is increasing, our pipeline is increasing by region, each region’s pipeline is increasing. But whereas before for the larger deals, we talked about, it was 9 to 12-month sales cycle. It was trending down into more than 9 months, now it’s trending up more into the 12-month type range. So all those things basically were taking into consideration with our guidance.
Jay Chaudhry: „Remo, if I may add. The strong pipeline in Q2 is what we feel pretty good about. But we do know that there’s a closing time factor we are factoring in.“
Sure, there is definitely a slowdown similar to what we saw across the board. But I don‘t have any company in mind who had a stellar quarter. To me it seems the cloud sec companies struggle a little less compared to our companies in the endpoint market (S/CRWD/…).
I like their position for catching Fed business, stickiness and operating leverage.
Would I call it an elite performer - no, but I expect no surprises there, that‘s worth something right now.
Billings had a tough comp against 71% last year, and is lumpier than revenue. Going into last quarter we thought Billings was a problem but it reaccelerated with a huge 51% QoQ jump.
IMO from a high level it we had durable revenue growth again and good cash flow. Seems like FedRamp was a boon. Stagnating operating margin but positive (for 9 quarters now). BUT a slowdown in Billings and customer growth + relatively weak guidance (like all other companies).
Nice thing about ZS is this was their Q1 so won’t have to guide FY for another 9 months. Almost every other company will have to give a FY guide in Feb/Mar in the teeth of a recession.
ZS has the highest RPO balance relative to quarterly revenue of any company we follow at ~ $2.6B on quarterly revenue of ~ $ 355 million, or 7.5 quarters of revenue already on the balance sheet.
Not just ZS, but CRWD and S as well. One would think that cyber security stocks would be seen as indispensable and somewhat immune to the vagaries of the economy. But alas, all three of these premier security players have failed to perform well in the face of the Fed’s efforts to destroy the economy, er, I mean get inflation under control - whatever.
I did not hold a position in either ZS or S to begin with, but I did have a fairly large position in CRWD. Notice, I used past tense. Yes, I trimmed it considerably, maybe drastically would be a better choice of words.
The money went to BILL and MNDY. I had been resisting taking a position in MNDY, but it just kept on doing well. I finally had to agree with Saul’s analysis, despite the fact that I don’t consider their offering “mission critical.” And I am somewhat concerned about some of expenses management has incurred (Superbowl advert, premier Chicago office space), my opinion, even if valid, also appears to be wrong or maybe just irrelevant. In any case I now have a middlin’ position in MNDY.