Moritz’ Portfolio Summary - April 2023

Last week, the hyper scalers (Alphabet, Microsoft, and Amazon) reported better-than-expected earnings for cloud, raising hopes of an end to the macroeconomic situation that has been muting growth rates of cloud businesses in general. As a result, stocks of companies like MDB, SNOW, and DDOG rose by about 10% in one evening.

However, two things happened after that:

  1. Amazon made it clear that customers are still evaluating ways to optimize their cloud spending amidst the tough economic conditions, and that April revenue growth rates were about 500 basis points lower than those seen in Q1. Rally ended.

  2. Cloudflare reported its earnings, which I thought was a terrible start to the earnings season. You can read more about my thoughts in the company review section below.

My Portfolio in April 2023

The goal of this portfolio review is to help you understand how I think about investing, see what I’m doing, and help me learn. I hope this review is useful for you!

This review has 4 parts:

  1. How my investments did compared to the overall market
  2. How my money is invested and how strongly I believe in each investment
  3. The changes I made last month to invest in new opportunities or reduce risk
  4. Updates on the companies I invested in

Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice. Everything expressed here is just my personal opinion. I am not a professional, so please don’t follow me blindly as my perspectives could lead to incorrect conclusions.

1. How my investments did compared to the overall market

Timestamp: 4/30/2023

2. My Portfolio

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3. The changes I made last month

Added: Monday

Due to strong earnings and the ongoing decline in the stock price, which has now reached a forward EV/S of below 7.5, I increased my allocation to approximately 8%.

Added: Crowdstrike

Crowdstrike’s earnings call had a positive tone, with revenue up 47.9% YoY and 9.7% QoQ, remaining performance obligations up 20.4% QoQ, and surprised us with a 12% QoQ increase in ARR, instead of the expected decline of -10%. I increased my position to approximately 9%.

Added: Zscaler

On April 25th, before Alphabet and Microsoft reported their earnings, the market became pessimistic again. Due to the ongoing decline in stock price, the valuation reached a forward EV/S of 8.2 which I now consider to be undervalued. I increased my position by about 1 percentage point to keep it above 5%.

4. Company Reviews

Note: To keep it concise, only companies with noteworthy updates might be included.
Absolute numbers relate to last quarter’s earnings release.
Metrics are adjusted values (Non-GAAP).


Snowflake

What they do: Provides data storage, management, and sharing for the cloud
Confidence tier: Champion
Type of revenue: Consumption-based
Cash: $5.1B
TTM revenue: $1,938.8M (product)
Market cap: $48B vs last month’s $45B

Noteworthy Updates in April

  • Snowflake has launched a new service called Manufacturing Data Cloud for companies that make things like cars, phones, or machines. This service helps these companies use their data to improve how they make and deliver their products. For example, they can use data to see how well their machines are working, how fast their products are moving, and how satisfied their customers are. Snowflake also works with other partners who provide solutions and data sets for different manufacturing problems. Sounds like lots of added value for manufacturing companies and should provide more use cases to Snowflake customers.

Recap and Conviction

Snowflake reported strong Q4 revenue growth with product revenue up 54.4% YoY to $555.3M. Full-year 2024 product revenue is expected to grow 40% to $2,705M. Operating income margin is projected to reach 6% in 2024, with free cash flow margin forecast at 25%.
Customer growth slowed but large customers expanded spending. Snowflake repurchased $2B of stock and expanded its AWS partnership.
Despite lowering its revenue forecast for 2024, Snowflake’s growth thesis remains intact due to its large scale, strong free cash flow, and continued high growth.

Read my most recent review here
→ Snowflake reports on 5/25/2023


Cloudflare

What they do: Provides cloud-based security for infrastructure exposed to the internet
Confidence tier: Champion
Type of revenue: Subscription-based
Cash: $1.7B
TTM revenue: $1,053.12M
Market cap: $15.6B vs $18B last month

My Take

No sugar-coating, this report was awful, and the 25% stock price drop was deserved.

The question now is: how awful will other businesses report? This will determine whether Cloudflare is awful or not:

Low light #1: Revenue was $290.2M (I expected $294M), 36.8% YoY, 5.6% QoQ, missing their guide for the first time in history by 0.3%. Management attributed this to slower expansion from existing customers and a significant increase in elongated sales cycles (27% for new customers and 49% longer for existing customers) during the quarter. One factor for the increase was the broadening banking crisis (Alteryx reported similar lines in their earnings call), which made companies increasingly cautious. Almost half of the new business closed in the last 2 weeks of the quarter, which is very nonlinear for them.

Low light #2: Management guided to $306M (I expected $319M) in Q2, which is a big reduction. My expectation for next quarter incorporates no beat but also no miss, meaning $306M.

Low light #3: Full Year 2023 revenue guide was reduced by 4% to $1,284M from $1342M. This is very disappointing. Last quarter, management mentioned guiding very conservatively. “We have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives.” Either the macro has worsened significantly, as explained by management, or Cloudflare has an execution issue, since they also mentioned rotating (firing) 100 sales reps, since they underperformed.

At least they shouldn’t have any issues on the hiring side, since they received more than 0.25 million applicants in Q1. We’ll have to wait for other companies to report to evaluate this matter.

Hoping for them, this is the most conservative guide they ever gave. If we consider no further improvement, revenue growth will land at 32% for FY2023. That’s a significant slowdown from 49% last year.

Low light #4: Dollar-based Net Retention Rate decreased to 117% from 122%. Last quarter, I noted that I wasn’t too concerned. Well, now I’m slowly becoming concerned. Still, Cloudflare mentioned “not experienced elevated churn” and they anticipate it not to decrease further based on the current data. The sales cycle for existing customers increased by 49% year over year, which was the main reason for the decreased DBNRR.

The customer additions (Added 5914 total, and 114 $100K+ customers) were so-so, but considering the awful topline metrics and management’s explanation of significantly elongated sales cycles, I’m fine with the development. Unfortunately, $500k+ and $1M+ customer additions, which were the highlight of last quarter, are only mentioned in Q4.

Not everything was a low light though, since they managed to continue improving on profitability with several record-highs. I expected them to come in much weaker due to the usual seasonality in Q1:

  • Gross margin held up at 77.8%
  • Operating Income was $19.4M, 9.4% operating income margin, up from $4.92M a year ago.
  • Net Income was $27.2M, 9.4% net income margin, up from $3.45M a year ago.
  • Earnings per share was $0.08, up from $0.01 a year ago.
  • Operating Cash Flow was $36.4M, 12.5% operating cash flow margin, up from $-35.47M a year ago.
  • Free Cash Flow was $13.9M (I expected $0M), 4.8% free cash flow margin, up from $-64.4M a year ago.

Good: The positive development in profitability was not due to reduced expenses in Sales & Marketing or Research & Development, which is still in line with previous trends.

So, what do I read out of this mess?

I can see some red flags such as missed revenue guide (first time ever) and lowered FY guide. However, according to management, the macro environment has significantly deteriorated during the quarter, amplified by the “banking crisis”, which Alteryx and other companies reported as well in their recent earnings call. Customers have increasingly protected their budgets - which raises confidence, that it’s not an isolated issue for Cloudflare.. Management also noted they had 100 sales reps getting fired since they underperformed vastly.

Now, since hyper scalers like Google, Microsoft and Amazon reported positive earnings, it might be an execution issue on Cloudflare’s side, right? Not so sure: hyper scalers have a consumption-based revenue model that responds more quickly to customer behavior. Cloudflare’s subscription-based revenue model may lag, meaning it remains stable for longer, then declines with a delay, then improves again - after DDOG, SNOW, MDB, etc., have already recovered.

It is also worth noting that several CFOs of trusted companies have now missed their own “premature” guidance (e.g. Snowflake, Sentinel One, now Cloudflare), which increasingly suggests how opaque the current situation is, and I would be cautious about “misleading” accusations. Should they have given a more conservative guide? Maybe. But perhaps at that time, it was their best conservative guess.

On the other hand, profitability is soaring with several record highs and unexpectedly good free cash flow for a seasonally poor Q1 - which suggests that Cloudflare does not have an execution issue. If that were the case, profitability might go down (e.g. price pressure from competition, etc.).

Furthermore, management has emphasized that they did not encounter increased churn, and that renewal rates were consistent with the high levels seen in the previous four quarters. The improvement in pipeline that they observed over consecutive quarters has continued and shows no signs of slowing down. Additionally, win rates against competition remained strong.

Hypothesizing About the Lowered FY Guidance

Bull Case:

During the earnings call, management noted that they continued to witness a challenging business environment, which deteriorated significantly in March when negative headlines emerged related to SVB, the broadening banking crisis, which was in the first two weeks of March. They then stated*: “[…] almost half of the new business closed in the last 2 weeks of the quarter, which is very nonlinear for us.”* I understand this as things improving at the end of March. Remember: other companies have reported similar issues early in this earnings season.

I have been following Cloudflare’s CEO, Matthew Prince, for a long time now. He is a trustworthy and respectable CEO who cares deeply about his company. If I were in Matthew Prince’s position, I would issue a very conservative, sandbagged guidance to avoid missing it ever again. Doing so would make it possible for the company to beat and raise expectations.

In addition, management emphasized the 100 quota sales reps who underperformed and only generated 4% of annualized new business last year, compared to the top 15% of reps who hit 129% of their quotas. I understand that Matthew Prince wanted to emphasize the discovery of areas for improvement, which provides upside, and is not responsible for the slowdown, which indicates that there are no bigger execution issues.

Bear Case:

As of the end of March, there have been no improvements. Execution issues, fueled by underperforming sales representatives, are real and things are continuing to get worse. It is possible that Cloudflare may have to lower guidance again next quarter while other businesses thrive. RIP.

Next Steps

Personally, I am leaning toward the bull case. However, please note that this is not advice. Remember that I am just a regular person and I could be a naive goat, hoping for the best.

I need more puzzle pieces (= earnings of other companies, e.g. ZS) before jumping to conclusions. If they paint a similar picture, then I will not part ways with Cloudflare. I am not trying to wear rose-colored glasses, but I don’t have a bad feeling at the moment as I had with other companies in the past (i.e. Zoom).

Being completely ruthless in times like these could result in the cat catching its tail. I might reduce my position to risk management but don’t see a reason to sell until other companies have drawn a bigger picture.


Datadog

What they do: Provides cloud-based infrastructure monitoring
Confidence tier: Contender
Type of revenue: Consumption-based
Cash: $1.9B
TTM revenue: $1,675.57M
Market cap: $22B vs last month’s $22B

Noteworthy Updates in April

  • Announcend the acquisition of Codiga, a provider of code analysis tools. It allows them to expand their observability features into code analysis, providing a comprehensive platform for the software development lifecycle. This move helps developers write better code, reduces stress and time spent on fixing tech debt, and underscores DataDog’s leverage by moving beyond observability and into developer experience.

  • Bottomline, a financial technology provider, announced a new integration with Datadog, a monitoring and security platform for cloud applications. The integration will allow joint customers to reconstruct user sessions and capture performance metrics and security logs to protect against fraud and data breaches in critical IBM environments.

  • Announced the general availability of Application Vulnerability Management, which automatically uncovers and prioritizes vulnerabilities in open-source libraries. With open-source code making up at least 70% of all software and vulnerabilities projected to rise to almost 2,000 a month in 2023, the new offering allows organizations to continuously identify and manage vulnerabilities in open-source libraries in use within their applications. Using real-time data from Datadog’s observability platform, Application Vulnerability Management prioritizes these identified vulnerabilities with context from all impacted services, workloads and infrastructure resources, enabling DevOps, security and engineering teams to work together and resolve issues quickly based on their risk.

  • Announced the general availability of Data Streams Monitoring, which enables organizations to track and manage the performance of applications that rely on messaging systems like RabbitMQ. Data Streams Monitoring automatically visualizes all interdependencies and key health metrics across all streaming data pipelines to help organizations prevent and troubleshoot latency and downtime. The solution is now generally available for Kafka and RabbitMQ, with support for more technologies coming soon.

Recap and Conviction

Overall, the company continues adding new customers and expanding existing customer relationships. While growth slowed temporarily, it has since picked up again. The increase in multi-product customers is especially encouraging, demonstrating the strength of the company’s value proposition.

I remain optimistic about DataDog’s growth prospects despite its conservative guidance of 25% growth next year. While growth may slow down from its current 50% rate, I believe DataDog will continue durable growth beyond 2023 due to its new products, large market opportunity, steady addition of new customers, and existing customers spending more. The CEO also cited focusing on new customer segments and geographies, as well as developing new products, as key drivers of future growth.

Read my most recent review here
→ DataDog reports on 5/4/2023.


Sentinel One

What they do: Cybersecurity firm catching up with CrowdStrike
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $1.2B
TTM revenue: $422.16M
Market cap: $4.6B vs last month’s $4.4B

Noteworthy Updates in April

  • Appointed Sally Jenkins as Chief Marketing Officer. Jenkins brings over 30 years of experience in B2B and B2C marketing, having worked at Elastic, Informatica, VMware, and Symantec. She will be responsible for developing and executing SentinelOne’s marketing strategy to elevate the brand and support growth. Jenkins is expected to leverage her experience in SaaS, data, and cybersecurity to position SentinelOne as a leader in the industry.

  • Announced integrations with key industry players including Aruba, Checkpoint, Cisco, Darktrace, Extrahop, Fortinet, Palo Alto Networks, and enhanced collaboration with Vectra AI. The integrations expand the company’s firewall and network detection and response (NDR) capabilities, allowing organizations to gain insights to rapidly identify and respond to attacks across all vectors. The partnership with Vectra AI provides enriched signal analysis, while integrations with other companies allow SentinelOne’s XDR platform to detect network-borne threats and attack techniques.

  • Unveiled a new threat-hunting platform that uses generative AI and reinforcement learning to detect and autonomously remediate attacks across the enterprise. The platform aggregates and correlates information from device and log telemetry across endpoint, cloud, network, and user data, delivers insights and recommends response actions that can be immediately executed. The platform also allows users to ask complex threat and adversary-hunting questions and run operational commands to manage their entire enterprise environment using natural language.

  • Launched Singularity Security DataLake, a cloud-native security data platform that provides a comprehensive view of data across security ecosystems, enabling organizations to quickly detect and respond to threats in real-time. The solution seamlessly ingests any data type from any product or source and fuses it with endpoint, workload, and user data. It also leverages new AI-powered anomaly detection capabilities to proactively identify anomalies and stop attacks faster than any human could. The solution delivers results up to 10 times faster than traditional SIEM offerings and reduces the cost of channeling data by up to 30 percent.

  • Announced early access to its integration with Wiz, which will allow companies to identify, prioritize, and fix cloud security threats more efficiently. The integration enables SentinelOne to automatically ingest relevant context from Wiz about cloud resources, including vulnerabilities, misconfigurations, and exposed secrets, improving outcomes for security teams. The integration also allows security teams to visualize their cloud security posture in real-time, identify attack paths to critical cloud resources, prioritize risks, and protect cloud workloads from build time to runtime.

Recap and Conviction

Sentinel One reported strong Q4 2022 results, with revenue of $126.1M, up 92.1% YoY and 9.4% QoQ, and added 750 customers. They expect to focus on product innovation in endpoint and cloud security and expanding platform capabilities.

While Sentinel One is still cash flow negative, the Q1 operating margin guide and FY2024 gross margin and operating margin guide show positive trends. Key metrics to watch include $100,000+ customers, dollar-based net revenue retention, and cash flow.

Read my most recent review here
→ Sentinel One reports on 6/5/2023


Crowdstrike

What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
Confidence tier: Contender
Type of revenue: Seat-based (Endpoints)
Cash: $2.71B
TTM revenue: $2,241.27M
Market cap: $28.3B vs last month’s $30.5B

Noteworthy updates in April

  • Introduced the industry’s first EDR/XDR offering for ChromeOS devices in partnership with Google, called CrowdStrike Falcon Insight XDR. This offering provides visibility and threat detection for ChromeOS devices without the need for an MDM solution. The new capabilities include native ChromeOS XDR, simplified management in the CrowdStrike Falcon console, and accelerated incident triaging and response. The integration will be generally available for customers by June 2023.

Recap and Conviction

Crowdstrike’s Q1 2023 earnings call showed strong revenue growth, profitability, and customer retention metrics. However, guidance was impacted by budget scrutiny and longer sales cycles.

I expect minimal beats for the next 1-2 quarters before a possible acceleration in Q3, assuming conservative growth assumptions. I also believe, that Crowdstrike’s seat-based subscription model indicates a stabilized market, but do not expect further quarter-over-quarter acceleration. I added more.

Read my most recent review here
→ Crowdstrike reports on 6/2/2023


Zscaler

What they do: Cybersecurity firm that provides services secure user-to-app, app-to-app, and machine-to-machine communications over any network and any location
Confidence tier: Contender
Type of revenue: Subscription-based
Cash: $1.91B
TTM revenue: $1,348.1M
Market cap: $13.1B vs last month’s $15.6B

Noteworthy Updates in April

  • Zscaler is also a leader in the Gartner Magic Quadrant for Security Service Edge, experiencing strong revenue growth, growing faster than the overall market, and has a strong marketing message, extensive network, and ecosystem of partners. However, clients report pricing and sales arrogance as complaints, and the platform’s UX is not a leading example. Zscaler has been slow to release common features and lacks some advanced features expected in this market.

Recap and Conviction

Zscaler’s Q3 earnings report showed strong revenue growth, profitability, and cash flow, but slower calculated billings growth might lead to weaker revenue growth guidance for the future. Customer growth was so-so, with 30 new $1M customers and the lowest number of new $100k customers in 2 years.

Zscaler faces competition at the lower end of the market but performs well at the high end. The company is on track for $5B annual recurring revenue, but future growth may be lower than the current 30% rate. I’m considering giving less weight to calculated billings and focusing on other key metrics.

Read my most recent review here
→ Zscaler reports on 5/26/2023


Bill

What they do: Simplifies, digitizes, and automates complex back-office financial operations
Confidence tier: Bench
Type of revenue: Transaction- and Subscription-based
Cash: $2.7B
TTM revenue: $857.03M
Market cap: $8.2B vs last month’s $8.1B

Noteworthy Updates in April

  • Ken Moss has been hired as the Chief Technology Officer (CTO) of BILL, a leader in financial automation software for small and midsize businesses. Moss brings over 30 years of experience in online commerce, search, and interactive entertainment, and has a track record of using data-driven development as well as innovative machine learning and artificial intelligence (AI) to deliver strong business results. Moss succeeds Vinay Pai, who is retiring as CTO after five years with the company.

Recap and Conviction

Bill’s Q2 2023 revenue was $260M, a 66.2% YoY increase and a 13.1% QoQ increase, with strong non-GAAP profitability due to float revenue and operational excellence. Divvy, one of Bill’s businesses, is experiencing strong growth in terms of both the number of transactions and revenue, with the highest revenue per transaction at $9.21.

Bill announced several updates, including the acquisition of Finmark, a $300M buyback program, and the launch of an SMB-focused solution with new bank partner BMO. Management’s reaction and initiatives following the Silicon Valley Bank event increased investor confidence in Bill’s projected >50% YoY revenue growth. My conviction remains unchanged.

Read my most recent review here
→ Bill reports on 5/4/2023


The Trade Desk

What they do: Provides a platform for Ad Buyers (Agencies, Brands, and other technology companies)
Confidence tier: Bench
Type of revenue: Long-term master service level agreements (similar to recurring)
Cash: $1.32B
TTM revenue: $1,578.29M
Market cap: $31.4B vs last month’s $27B

Recap and Conviction

The Trade Desk reported 24.1% revenue growth and guided to 15% growth in Q1. Adjusted EBITDA was a record 49.9% of revenue. Net income decreased due to tax rates but increased 15% for the full year. EPS was $0.38. Operating and free cash flow also reached records at 35.3% and 25.3% of revenue.

The Trade Desk outpaced 8% sector growth at 32% and high margins which is supporting my confidence. The $1T TAM, CTV, Netflix opening, and shopper market support growth. No content means partnerships with anyone. CPM is double linear TV’s, very profitable. A $700M buyback offsets dilution

Next year, growth is expected to be fueled by the U.S. presidential election. This will be supported by Netflix, which has recently added an ad-supported option to its platform.

Despite lower growth, which I believe is temporary, my conviction increased which is why I added.

Read my most recent review here
→ The Trade Desk reports on 5/10/2023


Monday

What they do: Provides collaboration software based on low-code and no-code building blocks
Confidence tier: Bench
Type of revenue: Subscription-based (seats)
Cash: $886M
TTM revenue: $519.02M
Market cap: $6.2B

Noteworthy Updates in April

  • was ranked among the top 5 companies for the UK’s Best Workplaces for Wellbeing 2023 in its class

  • plans to incorporate AI capabilities into its platform in 2023, opening it up for third-party developers to build AI apps on the monday WorkOS, which will be available to customers through the monday AI Assistant. The company will launch a beta version of the monday AI Assistant in May, expanding how customers interact and build on the WorkOS platform. As an initial offering, Monday will release a collection of innovative apps built internally on the same monday AI Assistant infrastructure where external developers will soon be able to build. These apps will support various use cases, from sharing helpful suggestions to improving workflows.

Recap and Conviction

In Q1 2023, revenue was $149.9M, up 56.9% YoY and beating expectations. Gross margin was 90% and operating income was $14.3M, up from a loss. Large customers grew 85.9% to 1,474. The $50K+ cohort grew ARR to 76% of total revenue. Monday was the fastest-growing new product on G2. Despite headwinds, full-year guidance is decent. Close monitoring of customer growth is desired, though further decline is expected. I liked the results and increased my allocation.

Read my most recent review here
→ monday reports on 5/15/2023


Closing Thoughts

In the short term, the market can be brutal. Bears, especially on days like these, sound smart because they seem to see clearly and understand more than the blind public. Being pessimistic is the easy thing to do.

But it’s a question of perspective. It’s important to zoom out and remember why stock prices continue to disappoint: multiple macroeconomic effects, like the war in Europe, rising inflation and interest rates, followed by fears about a bigger banking crisis.

However, at the risk of sounding like a broken record, tech and software are here to stay, and businesses worldwide are going to invest in this sector for a very long time.

Will the stocks in the portfolio reach their previous all-time highs? Maybe, because some of them will accelerate and show strong growth durability for years to come. Maybe not, because some of them will hit a wall or just decelerate due to the law of large numbers.

But does it matter?

Yes, for the short-sighted Wall Street looking only six months into the future, and yes, for traders with a focus on getting rich quick which rarely works out.

No, for an investor buying great companies and understanding that there is more behind growth slowing temporarily due to mentioned macroeconomic conditions.

Discounted free cash flow calculations can help come up with the right valuation in the present, but - from what I’ve learned - often do not play out as expected in the long term. For high-quality, high-growth companies with new growth vectors and optionality emerging, these calculations are mostly meaningless.

Furthermore, new companies to invest in will emerge, making it possible for us to ride the continuous cycle of waves for decades to come.

Again, it can be tough to weather the storm. But you’ll never learn more about the market and yourself than now. I encourage you to embrace and appreciate it. This is a golden opportunity to grow and learn.

It’s a matter of time before the market turns risk-on again.

Remember: Tough times don’t last, tough people do.

I hope this statement provides some comfort to you, as it does for me. :hugs:

Appendix

Earnings Calendar

Company Earnings release Time
Cloudflare 4/27/2023 Post-Market
Datadog 5/4/2023 Pre-Market
Bill 5/4/2023 Post-Market
The Trade Desk 5/10/2023 Pre-Market
Monday 5/15/2023 Pre-Market
Snowflake 5/25/2023 Post-Market
Zscaler 5/26/2023 Post-Market
Crowdstrike 6/2/2023 Post-Market
Sentinel One 6/5/2023 Post-Market

My Watchlist

Company Earnings release
Confluent 5/3/2023
Duolingo 5/9/2023
Docebo 5/11/2023
Global-E 5/17/2023
Okta 5/26/2023
Samsara 5/26/2023
MongoDB 6/1/2023
Gitlab 6/2/2023

My Previous Portfolio Summaries

Thank you for reading.

Happy Investing, everyone!

PS - I started posting on Twitter and I would love to connect with you there as well!

86 Likes

Great summary Mooo. I think you especially got this one right:

During the earnings call, management noted that they continued to witness a challenging business environment, which deteriorated significantly in March when negative headlines emerged related to SVB, the broadening banking crisis, which was in the first two weeks of March… **Remember: other companies have reported similar issues early in this earnings season.

I have been following Cloudflare’s CEO, Matthew Prince, for a long time now. He is a trustworthy and respectable CEO who cares deeply about his company. If I were in Matthew Prince’s position, I would issue a very conservative, sandbagged guidance to avoid missing it ever again. Doing so would make it possible for the company to beat and raise expectations.

In addition, management emphasized the 100 quota sales reps who underperformed and only generated 4% of annualized new business last year, compared to the top 15% of reps who hit 129% of their quotas. I understand that Matthew Prince wanted to emphasize the discovery of areas for improvement, which provides upside…

So many companies have been blindsided by the sudden worsening of the B2B atmosphere, and it’s not a sign that the CEO’s have been negligent.

Saul

36 Likes

Since DataDog reported slightly after I wrote my summary, I will add my thoughts on their earnings here:

Datadog rallied by 16% after reporting Q1 2023 earnings that were “better-than-feared”.

Revenue for the quarter was $481.7M, indicating YoY growth of 32.7% and QoQ growth of 2.6%. However, revenue was lower than expected due to a $5M service outage in March. Management learned from this incident and will take measures to prevent similar outages in the future. Excluding this, revenue would have missed my expectations by only 1.4%. RPO increased by 7.5% sequentially, stronger than any previous Q1’s in history, indicating customer commitment.

DataDog achieved $2B in Annual Recurring Revenue for the first time, and management guided to $502M, which was only 0.7% below my expectations. As expected, the full year 2023 revenue guide has been raised by 0.5% to $2,100M. The projected operating income for the full year 2023 is $360M.

Strong profitability: gross margin consistent at 80.5%, operating income $86.4M, 17.9% margin, net income $98.1M, 20.4% margin, EPS increased to $0.28, op cash flow was $133.79M, 27.8% margin, and free cash flow was $116.34M with a 24.2% margin. Operating expenses were consistent with previous trends, indicating that DataDog is continuing to invest appropriately.

They added a record-breaking 2,200 customers, including 1,400 from the acquisition of Cloudcraft. However, when excluding those, only 900 organic customers were added, which is below the 1000 mark for the first time since 2020. Additionally, they only acquired 130 customers valued at $100k or more. Management explained that this was due to a combination of weak seasonality in Q1 and macro factors during the call.

Large customers contribute to a solid 85% of total ARR. In addition, existing customer usage growth improved compared to Q4. It is worth noting that larger-spending customers continue to grow slower than smaller-spending customers, which explains the next point.

DBNRR was over 130%, but the trailing 12-month NRR is expected to be below 130% in Q2 due to customers being more prudent with their budgets.

DataDog signed an 8-figure ARR deal with a leading AI company (OpenAI), and a 7-figure expansion with a Fortune 500 healthcare business. An interesting case study about a healthcare expansion has been published: Before using DataDog, major incidents would mobilize up to 150 employees for around 3-4 hours. With DataDog, they only need 20 employees for around 30 minutes, with an opportunity to further reduce these numbers. At an hourly rate of $90, an incident without support from Datadog would cost up to $47,000. With Datadog, it only costs $900. That’s an incredible decrease in expenses.

Tailwinds are ahead: AI will expand observability opportunities (good for DDOG) and increase demand for computing and storage, while also driving digital transformation and cloud migration. Management reiterated that the trend towards digital transformation and cloud adoption is continuing, with customers gradually optimizing usage and consumption patterns. One interesting commentary on hyperscalers: DataDog has decoupled from AWS deceleration and maintained higher growth than other hyperscalers in terms of sequential and ARR growth.

Overall, it was a decent quarter considering macroeconomic effects. The key metrics to closely watch are total customer growth and growth of customers spending $100k or more, which I would like to see pick up again (!). Nonetheless, my thesis remains intact: DataDog will accelerate growth and maintain durable growth beyond 2023 due to its new products, large market opportunity, steady addition of new customers, and existing customers spending more. I do not plan to make any changes to my allocation.

38 Likes