Sentinel One
What they do: Cybersecurity firm catching up with CrowdStrike
→ Read my most recent Sentinel One review here
Also, Wells Fargo downgraded S on worries over ‘declining’ demand:
“Our checks with resellers down ticked in [fourth-quarter], with 43% of resellers reporting Below Plan results, and just 10% Above Plan (-33% net vs -13% net last quarter),” Nowinksi wrote in a note to clients. He added that the four largest resellers of SentinelOne (S) all had “relatively weak results” and three of the four had below-plan results.
Separately, Nowinksi noted that CrowdStrike had more positive checks and looks to have “better momentum in the market.”
Nowinksi also noted that channel partners said the departures of Daniel Bernard and Raj Rajamani to go to CrowdStrike is “concerning,” especially since both are “highly regarded” in the industry.
Sentinel One will report on 3/15.
Crowdstrike
What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
→ Read my most recent Crowdstrike review here
Noteworthy news in February
Crowdstrike will report on 3/7.
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
→ Read my most recent Zscaler review here
Zscaler will report on 3/2.
Bill
What they do: Simplifies, digitizes, and automates complex back-office financial operations
Confidence tier: Bench
Type of revenue: Transaction- and Subscription-based
Trend to profitability: Yes
Cash: $2.7B
Revenue: $260.0M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 156.1% | 189.5% | 179.4% | 155.8% |
| 2023 | 94.3% | 66.2% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 51.2% | 32.2% | 6.7% | 20.0% |
| 2023 | 14.8% | 13.1% |
Revenue (core): $231.1M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 168.3% | 197.1% | 182.3% | 151.3% |
| 2023 | 82.6% | 48.6% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 51.6% | 32.3% | 6.4% | 17.7% |
| 2023 | 10.2% | 7.7% |
Revenue (standalone): $133.1M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 71.0% | |||
| 2023 | 61.6% | 37.1% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 15.6% | 25.0% | 5.1% | 12.5% |
| 2023 | 9.3% | 6.0% |
Customers Bill (standalone): 182.700
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 22.4% | 23.6% | 26.8% | 30.2% |
| 2023 | 35.6% | 35.3% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 4.6% | 6.5% | 8.6% | 7.6% |
| 2023 | 9.0% | 6.2% |
Revenue per Transaction (standalone): $7.31
| 2021 | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | $4.97 | $5.79 | $6.20 | $6.54 |
| 2023 | $7.06 | $7.31 |
Dollar-based Net Retention Rate: 131 %
| DBNRR | Q4 |
|---|---|
| 2021 | 124% |
| 2022 | 131% |
Revenue & Guidance
-
Total revenue was $260M, an increase of 66.2% year-over-year and 13.1 % quarter-over-quarter. I hoped for a bit more, but I am happy with that sequential growth.
-
Float revenue was $28.9M, an increase of 2588% year-over-year and 92.7% quarter-over-quarter. Nice to see and certainly helping profitability. Still, I expect flat revenue to slow down, once interest rates stop rising. The decrease should then get offset by an increase in transaction revenue again. Therefore I almost tend to put Float Revenue into “further insights” instead of looking at it as a highlight. But as of now, it is.
-
Core revenue was $231.1M, an increase of 48.6% year-over-year, and 7.7 % quarter-over-quarter. Looking at the trend, it continues to slow down. Core revenue consists of:
- Subscription revenues (24% of total revenue) came in at $61.5M, 5.9% sequentially → In line with the past 3 quarters, even slightly higher than last quarter (5.3%). I don’t see issues here other than that subscription revenues are a small part of total revenue.
- Transaction revenue (65% of total revenue) came in at $169.6M, 8.4% sequentially, a slowdown compared to the past 2 quarters (4Q22: 23.2%, 1Q23: 12.1%) → Not only that, usually we see >30% sequential growth in transaction revenue this quarter. → Total payment volume slowed to 3.7% sequentially (usually it is > 13% sequentially when looking at Q2s of the past few years). Clearly, the macroeconomic conditions put SMBs on “standby mode” influencing growth negatively.
-
Divvy revenue was $86.60, up 77.8% YoY, and 11% QoQ. → Great to see revenue from Divvy continuing to be strong.
-
The weak guidance to $248M in Q3 (meaning -5% sequentially) was obviously the primary driver of the stock price decline. But let’s not forget, Q3 is usually a seasonally weak quarter and I assume they are now guiding very conservatively until the macroeconomic situation fades = transaction volume is going to grow again (which might happen fast).
Cashflow & Profitability
-
Gross Margin was 86.7 %, up from 85.3 % a year ago.
-
Continuation of strong non-GAAP profitability, driven by opportunistic float revenue but also by operational excellence, since BILL’s operating expenses as a % of revenues stayed in line with the previous quarters (except for the R&D expenses, which were slightly decreased by 4 percentage points):
- Operating Income was $30.8 or 11.8 % of revenues, up from $3.38M a year ago.
- Net income was $49.5M or 19.0 % of revenues, up from -$0.22M a year ago.
- Operating cash flow was $55.23M (!!) or 21.2 % of revenues, up from -$12.93M a year ago.
- Free cash flow was $47.7M (!!) or 18.3 % of revenues, up from -$16.07M a year ago.
- EPS $0.42 cents, up from -$16.07 a year ago.
- $2.7B cash on hand while continuing to generate more should make it easy to get through the current environment.
- Based on the guidance, we should expect even stronger profitability next quarter (EBIT margin guide: 12% vs this quarter’s 12% EBIT margin).
Customers
-
Added 10,700 customers to bill standalone, an increase of 6.2 % quarter-over-quarter, in line with every Q2 in the past 4 years. → Looks strong, **but is inflated by the increase of customers added to the Financial Institution segment. Without those FI customers, the actual QoQ customer growth was at 2.8%, down from 4+% in the previous quarters (**4.9% → 4.2% → 4.2% → 2.8%). Unfortunatelly the total transactions of the FI segment is not growing much for a year now (quarterly FI transactions in millions: 0.8 → 0.8 → 0.9 → 0.9 → 1.0), while the number of FI customers more than doubled by 121.6% YoY to 52.3M. Why is this segment not gaining traction?
-
Revenue per Transaction from all customers was $7.31, a sequential increase of 3.5%. It’s good to see revenue per transaction increase in that environment, indicating customers continue to use their platform. Though it’s obviously slowing down due to macroeconomic conditions.
-
Added 1.900 customers to Divvy, up 59.4% YoY, 8.3% QoQ, now representing 24.700 Divvy customers. → Great to see still strong customer growth for Divvy, although it seems to decelerate since 4 quarters now (16.8% → 14.4% → 10.1% → 8.3%). This is most likely influenced by macro, but the key metric I am going to watch since BILL is a Divvy-story, see more below.
-
Revenue per Transaction from Divvy customers was $9.21, in line with last year and up 1.9% QoQ → Divvy customers deliver the highest revenue per transaction. Since Bill seems to be a Divvy-story it’s good to see that the average transaction delivers the highest value for that segment.
-
Total transactions for Divvy was 9.4M, up 77.4% YoY, 10.6% QoQ → In contrast to FI customers, the Divvy customers seem to correlate directly to transactions which I like to see.
Additional insights
-
Completed the acquisition of Finmark, financial planning, and cash flow
an insights software company. -
Accounted a $300M buyback program → Looking at how profitable they suddenly became, I hesitate to see this move negatively. If they keep also investing in growth initiatives, I am fine with it.
-
Launched SMB-focused solution with new bank partner BMO - Bill’s white label solution will offer a variety of payment solutions, including virtual cards to BMO’s customers, giving them a broad range of payment capabilities within one solution that automates bill pay and digitizes invoicing to help manage cash flow
-
Financial institutions contribute 4% to 5% of revenue → Bill is expecting a much higher percentage over the long term.
-
As mentioned last time, a 12-month payback period, which is great to see. Usually, you want SaaS businesses with payback periods < 12 months.
My Take
I lost some of my confidence since my last update since Bill seems to be an M&A-Divvy story which slowly becomes too complicated for me:
-
Bill standalone is still growing, but one could expect more momentum with that smaller revenue base of $133.1M. Also, I don’t like to see organic revenue to be slowing down in general (now 37.1% YoY).
-
The divvy-number-of-transactions (11% QoQ) and the divvy revenue (11% QoQ) is still growing strong for Divvy, which gives me the confidence to hold.
-
Customer growth for divvy seems to decelerate (8.3% QoQ, 1.900 net adds), similar to all other customer segments (likely due to macro), but still acceptable, though the number to watch for me.
-
The revenue per transaction for Divvy is the highest at $9.21, followed by $8.04 for core customers (FI customers excluded).
-
FI customers are still growing the fastest (QoQ: 25.8% → 21.5% → 24.9% → 16%) but don’t contribute meaningfully. Although 6 of 10 top 10 banks in the U.S. are customers, the number of transactions is not moving the needle.: While FI customers more than doubled YoY (121.6%), the number of FI transactions increased by only 25%. → Does it take time to ramp FI customers up since FI customers have to take time to understand the value of Bill’s white-label offering through a bank? From the call: “We’ve proven through our direct business the ability to create value for buyers and suppliers that will play out in the financial institution channel as well.”
→ What we have now, is Divvy as the main contributor to future revenue growth. I assume it’s critical that divvy customer growth doesn’t slow down much further, but let’s not forget, it’s negatively influenced by macro and we have to see what other businesses are reporting. I assume customer growth won’t look great for them as well.
I believe it is important for us not to look at overall customer growth (because FI customers are diluting that and we don’t know if/how they will bring revenue in the future) but to focus on the development of Divvy metrics (customer growth, revenue).
I am getting a bit tired of businesses that are either in the Fintech space due to their volatility or rely on mergers and acquisitions. Bill seems to be both, plus only 24% of revenue is subscription-based, which makes Bill more volatile to revenue growth and therefore less predictable.
I won’t let go of Bill since especially the somewhat strong guide to >50% YoY revenue growth still gives me confidence. but I might adjust its position size to an appropriate allocation.
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)
Trend to profitability: Yes
Cash: $1.32B
Revenue: $491M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 36.8% | 100.9% | 39.3% | 23.7% |
| 2022 | 43.5% | 34.6% | 31.2% | 24.1% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | -31.3% | 27.4% | 7.5% | 31.4% |
| 2022 | -20.3% | 19.5% | 4.8% | 24.3% |
Non-GAAP Net Income: $190.14M
| % Revenue | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 31.8% | 31.5% | 29.6% | 52.6% |
| 2022 | 33.2% | 26.2% | 32.6% | 38.7% |
Operating Cash Flow: $173.48M
| % Revenue | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 34.2% | 3.7% | 43.1% | 41.3% |
| 2022 | 46.4% | 24.3% | 34.8% | 35.3% |
Revenue & Guidance
-
Revenue was $491M, 24.1% Year-over-Year, 24.3% QoQ, → The market was happy with that growth, especially since its peers have mostly stopped growing. The Trade Desk continues to gain market share, driven by Connected-TV tailwinds.
-
Guided to $363M for Q1 → Which will result in 15% YoY growth. Certainly not high growth anymore, but it’s clear The Trade Desk is winning market share and growth should pick up again. Management called out, 6 weeks of Q1 2023 saw consistent demand acceleration throughout, which could mean more upside. Also, excluding the political election spend that TTD had in Q4 ‘22 that low single-digit percent share of political spend, the sequential seasonality is trending just slightly better than on average.
-
Guided to $78M adjusted EBITDA for Q1.
-
Operating expenses in 2023 will increase year-over-year due to a combination of the 2022 hiring flow-through, and return-to-office expenses, including travel and live events.
Cashflow & Profitability
- Adjusted EBITDA was $245M, 49.9% of revenues (!), a record high
- Net Income was $190.14M, 38.7% of revenues, down (due to tax rate differences) from $208.13M a year ago. → Although net income decreased YoY for Q4, for the full year it increased by 15%.
- EPS was $0.38, down from $0.42 a year ago (see above).
- Operating cash flow was $173.48M, 35.3% of revenues (!), up from $163.39M a year ago.
- Free cash flow was $124M, 25.3% of revenues (!).
Customers
- Customer retention was above 95% for the 9th consecutive year.
Additional Insights
-
2022 gross spend of nearly $7.8 billion - a record high.
-
95% of ad spend from stable master service agreements.
-
20% take rate stayed consistent for the 9th consecutive year.
-
Share of spend:
- By Channel Video 45%, Mobile 39%, Display 11%, Audio 5%
- By region: North America 90%, International 10%.
- By vertical:
- Travel tripped in spend in Q4 compared with a year ago as the sector continues to recover from the impacts related to the pandemic.
- Automotive was among the strongest verticals.
- Political election spend doubled QoQ to low single digit percent of spend in Q4.
-
CTV continues to be the strongest growth driver - Content owners like Netflix moving beyond ad-free subscription models help.
-
Jeff Green, CEO, predicts that more walled gardens will begin to take down some of their barriers. → TTD might one day be able to participate from the walled gardens, like Google and Facebook.
-
Announced $700 Million Share Repurchase Program helping to offset dilution from employee stock issuances.
-
Unified ID 2.0
- 75% of the third-party data ecosystem is estimated to be on UID2 in the first half of this year, up from 15% in the fourth quarter of last year. Companies like AWS, Snowflake, Salesforce, and Adobe already adopted UID2.
- Leading advertisers running campaigns on Disney’s UID2-powered audience graph report results 12X more effective in reaching target audience.
- Paramount Advertising announced its integration with UID2 to scale identity on its CTV inventory.
- DRAKO, location-based marketing, and analytics services company, announced its support of UID2.
-
Launched Galileo - enables advertisers to onboard and activate their first-party data quickly and easily
My Take
The longer I hold The Trade Desk, the more I believe it is not a story stock anymore. The fact, they are outpacing their competition significantly (increased their platform growth in 2022 at 32% vs. 8% for the total sector), plus their constant ability to deliver high margins (50% adj. EBITDA margin and 25% free cash flow!) gives me a lot of confidence.
The large TAM of almost $1 trillion (!) vs $175b traditional linear TV, mid-term elections, connected TV tailwinds, the opening of Netflix, and the shopper market should support a reacceleration of revenue further. They don’t own content, so they can partner with anyone. Ad dollars spent per thousand impressions (CPM) is double as high as on linear TV since programmatic targeting is better on connected devices. And they are very profitable.
I added about 1% and plan to increase my position opportunistically over time with a target of ~7%.
We don’t think that we have to compete with anything other than a 1962 product. - Jeff Green about the upfront market.
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)
Trend to profitability: Yes
Cash: $886M
Revenue: $149.9M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 84.7% | 93.7% | 94.9% | 90.5% |
| 2022 | 84.0% | 75.2% | 64.9% | 56.9% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 17.6% | 19.7% | 17.6% | 15.1% |
| 2022 | 13.6% | 14.0% | 10.7% | 9.5% |
Free Cash Flow: $29.7M
| FCF margin | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | -2.7% | -2.1% | 3.5% | 10.6% |
| 2022 | -14.9% | -15.6% | 10.2% | 19.8% |
Customers $50k+: 1,474 (151 net new)
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 219.0% | 226.4% | 231.4% | 200.4% |
| 2022 | 186.6% | 146.8% | 115.8% | 85.9% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 26.9% | 40.3% | 30.4% | 29.4% |
| 2022 | 21.1% | 20.8% | 14.1% | 11.4% |
Dollar-based net retention rate 10+ customers: 130+ %
| DBNRR | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 121% | 125% | 130%+ | 135+% |
| 2022 | 135+% | 135+% | 135+% | 130+% |
Revenue & Guidance
-
Revenue was $149.9M, 56.9% Year-over-Year, 60% FX-adjusted, 9.5% QoQ, → Beat my expectations slightly, revenue growth seems to settle around 9 to 10% QoQ.
-
Guidance was $156M in Q1 → Slightly higher than my expectations as well**.** A similar beat next quarter will translate to $164M, 51% YoY, 9.4% QoQ → Happy with that. They also saw some optimism and momentum as they started the year.
-
Full Year 2023 revenue guide was $693M, a similar beat to last year, 9%, which would result in 45.5% YoY. → Happy with that.
-
Full Year 2023 operating loss guide of -$32M, compared to the FY 2022 operating loss guide of -$147M → I assume we will see positive operating income for the full year.
Cashflow & Profitability
-
Gross margin was 90%, best in class and holding steady.
-
Operating Income was $14.3M, 9.5% of revenues, up from -$9.93M a year ago.
-
Net Income was $22.2M, 14.3% of revenues, up from -$11.72M a year ago.
-
Earnings per share was $0.44, up from -$0.26 a year ago.
-
Operating cash flow was $34.1M, 22.7% of revenues (!), up from $13.52M a year ago.
-
Free cash flow was $29.7M, 19.8% % of revenues (!), up from $10.11M a year ago.
-
They anticipate being adjusted free cash flow positive in fiscal year 2023.
-
R&D expenses, 16.5% of revenues, went down by -5.9% sequentially, which saved around $3M to $4M due to the impact of currency exchange in Israel. The bulk majority of the hiring for 2023 is going to be focused on R&D resources. Monday DB will be a focus going forward.
-
S&M expenses, 54% of revenues, came down from 60% in Q3. I assume they have saved $7M to $9M. → Management mentioned the decrease in S&M expenses was due to competition pulling back ad spend on Google, Facebook, etc. → they’re getting more customers for less money since they have a way “BigBrain” to track the ROI for every dollar spent on sales and marketing.
-
If they hadn’t “saved” ~$10M (S&M, R&D), they would still have generated about $19M free cash flow, which I like.
Customers
-
Large customers $50K+ was 1474, 85.9% YoY, 11.4% sequentially, 151 net new. → I would like to see the growth of that cohort stabilize in the upcoming quarters.
-
Dollar-based Net Retention Rate for all customers remained at 120+ % from 125+ % in Q2, due to large customers’ (>$50K) slower seat expansion in the app market. DBNRR for that cohort declined to 130+ % from 135+ % in Q3.
-
Dollar-based Net Retention Rate declined for the cohort of 10+ Customers to 130% from 135% in Q3. → Still best in class, but I would like to see that cohort remaining stable.
-
ARR from 10+ users remains at 76% of total ARR, up from 72% a year ago.
Additional insights
-
In FY 2022, increased the number of marketplace apps to 217, including 61 monetized apps.
-
Announce a new partnership with Appfire, the world’s largest enterprise collaboration app provider with a track record of creating easy-to-use, powerful, and reliable apps for the world’s most reputable tech companies.
-
Total employee headcount was 1,549.
-
CRM
- Added 2,458 new monday sales CRM accounts.
- 12% of total new customers in FY 2022 were CRM customers.
- 50% of new paying customers are CRM customers.
- CRM offering only for new customers, existing customers will receive the offer mid-2023.
-
Monday was one of the fastest-growing new products on G2.
-
70% of our customers are non-tech and 30% is tech. Softness in demand was mostly around tech. → Might be a reason why Monday holds relatively strong, especially since they have a seat-based subscription mode.
-
They still see greenfield, for the majority of the deals, they are not competing against any other competitor.
-
They Have already added many layers that enable anyone, including themselves, to build AI tools on top of Monday. Monday Docs is already using AI to generate automatic content and summarize content within boards.
My Take
Monday was one of the few reporting companies that surprised me positively. Many analysts congratulated them on the quarter. Sequential revenue growth stabilizes and the full-year guide looks decent to me when considering the adverse macro effects.
I am keeping a close eye on customer growth, especially the $50k+ cohort and the Dollar-based Net Retention Rate for the 10+ Customers cohort. For both, I would like to see a stabilizing trend, or, preferably acceleration. Though, they expect a further decline for DBNRR by the end of 2023 due to the macroeconomy headwind.
I added a bit after earnings.
Long Story Short
On February 25th, my portfolio’s year-to-date return reached 25%, followed by a sell-off resulting in an 11% year-to-date return by month’s end. So far, so good!
Bill, DataDog and Snowflake are three companies I find most puzzling at the moment. I feel okay with my current allocations and may even add more to Bill due to its decent fiscal year guidance. For now, I plan to keep my large position and looking forward to the upcoming quarters for more clues.
One note-worthy observation @LisaOnCloud9 and I discussed: Seat-based businesses have been weak last quarter but stabilized this quarter followed by weakness for consumption-based businesses this quarter. Does it mean, layoffs and hiring stops have stabilized? Are companies going to lose their budgets for other initiatives again soon?
Could make sense: First freeze everything and get headcount under control → once the panic is over, slowly ramp up again.
I was not suprised about this earnings season, since I got what i expected: A very bad quarter, because macro is real for all companies. Still, it won’t stay forever. Here’s a quick recap of my last portfolio summary:
I anticipate 7.5 (0.5 for Snowflake) more disappointing earnings reports overshadowed by the macro environment. Unless there are isolated issues with execution, we should be fine. Let’s not forget: This will end at some point. Time is on our side.
This is what happened (though Snowflake also disapointed contrary to my believe Snowflake should hold up better than the rest of the pack), and it’s important to remind ourselves why fundamentals are the way they are in this environment.
Companies are still cautious with their budgets and spending, but I assume they plan to revise that in the second half of 2023. I don’t have a crystal ball, but I believe we’ll see another weak quarter (Q2 for most reporting companies), then finally an improvement from Q3 onward.
That said, I expect the next quarter to provide slightly more clarity than we had for the last few quarters. If that’s true, we should have the worst behind us soon!
Appendix
Earnings Calendar
| Company | Earnings release | Time |
|---|---|---|
| Sentinel One | 3/15/2023 | Post-Market |
| Crowdstrike | 3/7/2023 | Post-Market |
| Zscaler | 3/2/2023 | Post-Market |
My Watchlist
- MongoDB - reporting on 3/8/2023
- Okta - reported on 3/1/2023
My Previous Portfolio Summaries
Thank you for reading.
Happy Investing, everyone!
PS - I am planning to remove the tables of quarterly numbers in the Company Review section to keep the summary more compact. Please let me know via PM if you have objections because you find that helpful. My goal is to make my summaries as helpful as possible for you.