Green numbers again 
!
Let’s dive right in.
The review is split into 4 parts:
- The performance of my portfolio versus benchmarks
- The allocations of my portfolio and my conviction in each position
- The actions I did last month to align my portfolio with my conviction
- Company updates
1. My Results Against Benchmarks
Timestamp: 01/31/2023
2. My Portfolio
Conviction tiers
Tier 1: Champions enjoy my highest conviction due to excellent company performance and execution. They usually have a 15+% allocation.
Tier 2: Contenders are either rising stars due to good performance, but they lack full confidence or past champions due to declining performance. They are sized between 5 % and 15 %.
Tier 3: Bench – These positions are either new ones that I want to keep on my radar/get to know or fallen angels which I want to keep for some (bad) reason.
3. What I did last month
I did literally nothing since I saw no reason to. This might change soon due to the already ongoing earnings seasons - looking at you, BILL 
.
Disclaimer: This portfolio summary is for informational purposes only and does not constitute investment advice.
4. Company Reviews
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
→ Read my most recent Snowflake review here
Additionally, Snowflake announced the intent to acquire SnowConvert “to Accelerate Legacy Migrations to the Data Cloud”. It looks like Slootman is taking advantage of the current environment to fuel future growth and expand and improve Snowflake’s product.
After their earnings release on 1/3/2022, Snowflake is going to present at upcoming Investor Conferences, which might provide further insights:
- Chief Financial Officer, Mike Scarpelli, will present at the JMP Securities Technology Conference, on Monday, March 6th, at 2:30 p.m. PT.
- Chief Financial Officer, Mike Scarpelli, and SVP of Product, Christian Kleinerman, will present at the Morgan Stanley Technology, Media & Telecom Conference, on Tuesday, March 7th, at 12:15 p.m. PT.
Noteworthy: Compared to other holdings, Snowflake in particular got upgraded, favored, and had positive coverage by several analysts and investment firms throughout January.
Cloudflare
What they do: Provides cloud-based security for infrastructure exposed to the internet
→ Read my most recent Cloudflare review here
Additionally, Cloudflare held its CIO Week in early January, announcing Digital Experience Monitoring - an all-in-one dashboard that helps CIOs understand how critical applications and Internet services are performing across their entire corporate network.
In doing so, Cloudflare is competing more and more against Zscaler.
Three more positive highlights for the month:
- The announcement of expanding its relationship with Microsoft makes it easier for both customers to deploy Zero Trust services.
- Cloudflare won the CISA Contract for Registry and Authoritative Domain Name System (DNS) Services to provide managed name servers for the .gov zone and authoritative DNS hosting for .gov domain names.
- Palantir announced a strategic partnership with Cloudflare to help organizations cut cloud costs, increase control, and improve predictability over multi-cloud workloads.
Datadog
What they do: Provides cloud-based infrastructure monitoring
No updates, waiting for upcoming earnings on 2/16/2023.
→ Read my most recent DataDog review here
Sentinel One
What they do: Cybersecurity firm catching up with CrowdStrike
→ Read my most recent Sentinel One review here
The war between Crowdstrike and Sentinel One is real. After Crowdstrike announced two of Sentinel One’s exec team members switching to them, Sentinel One fired back announcing several executive appointments.
One of them was Bryan Gale who has been appointed to VP, Product Marketing. Prior to SentinelOne, Gale was the Global VP of Product Marketing at CrowdStrike, where he hired and built a marketing organization spanning product, technical, and competitive marketing as well as analyst relations.
I don’t put too much attention to those individual rotations. There can be 100 reasons why people decide to switch companies as long as it’s not the CEO - which would be a red flag to me. I remember Dmitri Alperovitch, Crowdstrike’s co-founder and CTO left Crowdstrike in 2020 and it wasn’t a big deal. Crowdstrike did well since then.
That said, all that noise is not increasing my confidence in either of them. That’s why I keep my allocations as they are. Let the upcoming numbers - earnings - talk and I will take it from there.
Lastly, Sentinel One announced a partnership with KPMG “to Accelerate Cyber Investigations and Response”, which can’t be a bad thing.
Noteworthy: Though I don’t pay much attention to investment firm ratings, I liked Guggenheims’ statement while rating Sentinel One with buy: "Over time, we believe SentinelOne can grow into the number three player in the endpoint market, implying the company scales to over three times its size today”
Crowdstrike
What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
→ Read my most recent Crowdstrike review here
Additionally to what I’ve mentioned about Crowdstrike in the Sentinel One section above:
- CrowdStrike Named to Glassdoor’s Best Places to Work in 2023 List (#15)
- Noteworthy: In this top 100 list only one other company from my portfolio/watchlist is in that list: MongoDB (#45).
- CrowdStrike Appoints Johanna Flower to Board of Directors.
- My thought: Johanna Flower is Crowdstrikes’ CMO for several years now. I always believed one of Crowdstrike’s factors of success was its strong marketing execution. It’s a good sign to see a strong executive member committing to Crowdstrike.
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
Additionally, Jay Chaudhry, CEO, and Remo Canessa, CFO, presented at the 25th Annual Needham Growth Conference Call on January 12.
Jay fired back at Cloudflare while answering a question about Cloudflare suggesting being much faster than Zscaler: “I think these guys make a lot of nonsense noise.[…] they want credibility, they want some coverage.”
I don’t pay much attention to the statements of CEOs talking about direct competitors. I put it into the “noise bucket”. CEOs are salespeople who have to promote their businesses as well as they can. Just look at Crowdstrike and Sentinel One. But eventually, the data will speak the truth.
At the end of the conference call, Alex Henderson from Needham stated “we strongly believe in the outlook here and really strongly believe that this is a company that’s going to power through it. It’s been our position from day one when this was a $25 stock that this is a company that you want to own for the long-term, and I – we reiterate that point, making it our single best idea for 2023 punctuates that.”
Admittedly, they have skin in the game, so it’s in their interest to promote the company. And this has to be put into the “noise bucket” as well. Still, by holding the shares, they continue to believe in them. So that’s at least some positive noise.
Additionally, Zscaler Introduced the “industry’s first Cloud Resilience Capabilities for SSE to ensure nonstop cloud security operations” to help organizations prepare for black swan events. Which include:
- Disaster Recovery
- Dynamic Performance-based Selection
- Customer-controlled Data Center Exclusion
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% |
Highlights
- 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 float 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.
- 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. → Boosts confidence.
- Revenue per Transaction 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.
- 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).
Room for improvement
- 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.
- The weak guidance to $248M in Q3 (meaning -5% sequentially) was 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).
Additional insights
- Completed the acquisition of Finmark, financial planning, and cash flow
an insights software company. - Announced 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 investment decision
I don’t see any isolated execution issues and believe management that macro is a real headwind. Especially the strong customer adds and profitability increases my confidence.
I thought they sounded very confident on the call, as they don’t see any competitive threats and have high confidence in their long-term potential.
[…] we have not seen any impact from a competitive perspective from anybody on what we’re able to do and drive in the market. ~Rene Lacerte, CEO
The $300M buyback program backs up their belief.
I believe it’s okay to say: As transaction revenues are 65% of total revenue, Bill should not be called a subscription-based business.
Everyone, including my own B2B SaaS company, is trying to save as much as possible as long as this uncertain environment persists, which slows down transaction revenue significantly.
Now, I am seriously asking myself: What did everyone (including me and management) expect?
John Rettig, CFO, comment from the Q1 earnings call confused me a bit:
“[…] our outlook does not assume a severe economic downturn […]”
That comment, coupled with their earnings strength increased my confidence to push my position up to 15%. Here is a quote from my last portfolio summary:
“The market might be spooked by their comments around “softness” due to macro driving potentially down TPV throughout the fiscal year. Since Transaction revenue is 68% of total revenue and driven by TPV, it is a valid concern. Still, they remain very bullish. Bill saves businesses time and money, which is especially now important.”
So, here we have the situation of Bill’s transaction revenue slowing down (faster than we thought?).
After earnings, the share price dropped by about -25%. Justified? Yes and No. Personally, until now, I didn’t act since my position trimmed itself down to about 11%.
And after going through the numbers, I would rather add again, than trim because I believe the situation is temporary. Still, two reasons stop me from doing so:
- Management obviously has fewer insights than they think or appear to have. How did they expect to have everyone continue spending while acknowledging the current environment? Sorry, but this move might make me want to trim BILL down a few percent - still thinking about it while also digesting more crowd-sourced insights.
- The 24% subscription-based business makes Bill more volatile to revenue growth (similar to other Fintech businesses) and therefore less predictable.
Bill might have a few tough quarters ahead, but it can turn quickly if the world isn’t going to hell, soon (which it will not!): In a way, Bill can be compared to DataDog. On the downside, customers quickly can reduce spending. But just as fast they can increase it again. If the business provides enough value. I believe, Bill does.
We see decade of growth ahead of us. ~Rene Lacerte - Founder, CEO
The Trade Desk
What they do: Provides a platform for Ad Buyers (Agencies, Brands, and other technology companies)
→ Read my most recent The Trade Desk review here
Additionally, they announced Galileo - “a New Approach for Activating Advertiser Data”, which enables advertisers to onboard and activate their first-party data easily.
Working in marketing at a privacy-as-a-service company myself, I have first-hand experience with how painful marketing can be while trying to stay compliant. Everything that supports advertisers in that area can only be a good thing.
Monday
What they do: Provides collaboration software based on low-code and no-code building blocks
→ Read my most recent Monday review here
Additionally, they announced the opening of another office in Denver. Is this a good or bad thing? No idea!
As written in one of my previous monthly portfolio reviews:
I am a friend of the home office and see the money better invested in S&M than in office space. Office spaces will not generate customers, sales and marketing will. On the flip side, office spaces might make employees happier. And happy employees generate more revenue. Which is what we want, right? This is why I don’t judge this move and let the management make me show their - hopefully - strong numbers in a few quarters.
Additionally, If the company has a great culture that makes people want to come to the office can be beneficial for future growth, since a great culture is essential for excellent outcomes.
Glassdoor supports that:
But again: Noise bucket.
Long Story Short
I enjoyed a silent January after the painful year of 2022. It’s great to see green numbers again: 10% gain year-to-date (actually it is 14% as of today, yay!).
Unfortunatelly Bill underdelivered in terms of guidance. Remember: This is what we had to expect as mentioned in my last summary: “[…] we will see another lousy “macro quarter” soon […] Once recovery is on the horizon, companies will surprise us with good results. And that will have a strong impact on share prices. That is the positive side of the current environment and a good time to buy stocks.”.
I will be prepared for 7.5 (0.5 for Snowflake) more lousy earning reports overshadowed by the macro environment. As long as there are no isolated execution issues, we should be fine.
Let’s not forget: This will be over at some point. Time is our friend.
Appendix
Earnings Calendar
| Company | Earnings release | Time |
|---|---|---|
| Snowflake | 3/1/2023 | Post-Market |
| Cloudflare | 2/9/2023 | Post-Market |
| Datadog | 2/16/2023 | Pre-Market |
| Sentinel One | 3/15/2023 | Post-Market |
| Crowdstrike | 3/7/2023 | Post-Market |
| Zscaler | 2/23/2023 | Post-Market |
| Bill | 2/2/2023 | Post-Market |
| Monday | 2/13/2023 | Pre-Market |
| The Trade Desk | 2/15/2023 | Pre-Market |
My Watchlist
- MongoDB - reporting on 3/8/2023
- Okta - reporting on 3/1/2023
My Previous Portfolio Summaries
Thank you for reading.
Happy Investing, everyone!
PS - I planned to post the following last month but didn’t since it sounds Off-topic. Still, I think it is inspiring and important to maintain perspective, so allow me to add it to my summary:
Imagine you were born in 1900
When you are 14, World War I starts, and ends on your 18th birthday with 22 million people killed.
Later in the year, a Spanish Flu epidemic hits the planet and runs until you are 20.
Fifty million people die from it in those two years. Yes, 50 million.When you’re 29, the Great Depression begins.
Unemployment hits 25%, global GDP drops 27%.
That runs until you are 33.
The country nearly collapses along with the world economy.When you turn 39, World War II starts. You aren’t even over the hill yet.
When you’re 41, the United States is fully pulled into WWII.
Between your 39th and 45th birthday, 75 million people perish in the war and the Holocaust kills six million.At 52, the Korean War starts and five million perish.
At 64 the Vietnam War begins, and it doesn’t end for many years.
Four million people die in that conflict.Approaching your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. Life on our planet, as we know it, could well have ended. Great leaders prevented that from happening.
As you turn 75, the Vietnam War finally ends.
Think of everyone on the planet born in 1900.
How do you survive all of that?
A kid in 1985 didn’t think their 85 year old grandparent understood how hard school was. Yet those grandparents (and now great-grandparents) survived through everything listed above.
Perspective is an amazing art. Let’s try and keep things in perspective.
Let’s be smart, help each other out, and we will get through all of this.
In the history of the world, there has never been a storm that lasted.
This too, shall pass.
Credit to HistoryCoolKids via Joe Rogan
Sources: LinkedIn - Instagram
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