“This one is different,” is the doomsayer’s litany, and, in fact, every recession is different, but that doesn’t mean it’s going to ruin us.” - Peter Lynch
“Macro, macro, macro” is the unified message from all companies.
Growth rates are slowing, customers holding back, and sales cycles are "elongated”.
Of course, (SaaS) companies are not “resilient” when their own customers need to save money or take longer to sign contracts.
But they are still great, high margin, high growth businesses which every other business in the world needs.
Nothing wrong with them!
Together, we will get through this "macro environment.”:
There will be headwinds for all of our businesses. But unless there is an isolated problem within a specific company, I will not sell.
Otherwise, I will end up holding only 1 or 2 companies. Or sit on cash and real losses.
Eventually, this phase will end too.
Just like all the previous …
- fears about oil prices
- bank crisis
- recessions
- inflations
- wars
It will end.
It always does.
And if you don’t believe me, you don’t believe in humanity.
Because humanity always finds ways to improve.
Otherwise, we wouldn’t be where we are.
My Results Against Benchmarks
My mission: Outperforming the S&P 500 accumulating ETF.
My strategy: In 2025 I will compare the total performance of my portfolio against the S&P 500 ETF. If I can’t outperform it, I will consider buying an ETF to end my active investing journey.
My method of measuring the performance: “True-Time-Weighted Rate of Return” which eliminates the distorting effects on growth rates created by inflows and outflows of money. Also, my return metric is after buying- and selling fees (which we still have to pay in the EU) and taxes.
If you want to use my benchmarks as well, here they are:
- iShares Core S&P 500 UCITS ETF (Acc), ISIN IE00B5BMR087
- iShares Nasdaq 100 UCITS ETF (Acc), ISIN IE00B53SZB19
- iShares Core MSCI World UCITS ETF USD (Acc), ISIN IE00B4L5Y983
My Portfolio
What I did last month
-
Sold ZoomInfo (ZI) after earnings
- Why: Slowing growth, likely due to macro. But not confident enough with the business model: Heavily depending on third-party data while facing privacy headwinds.
-
Trimmed Monday (MNDY) before earnings
- Why: Commentary in ZI call on seat-based subscription model facing more headwinds, costs rising due to more offices, declining revenue growth, likely not mission-critical.
-
Trimmed DataDog (DDOG) after earnings
- Why: Earnings results didn’t meet expectations, so I decided to trim slightly, now still a 15% position. My long-term confidence in them stays unchanged.
-
Added to Sentinel One (S) before earnings
- Why: Had to put the cash from trimmed/sold positions somewhere, so I this position due to higher confidence reflected by high growth and improving profitability.
-
Added to Snowflake (SNOW) before earnings
- Why: Had to put the cash from trimmed/sold positions somewhere, so I this position due to higher confidence reflected by high growth and improving profitability.
-
Added to Cloudflare (NET) before earnings
- Why: Had to put the cash from trimmed/sold positions somewhere, so I this position due to higher confidence reflected by their reliable earnings results.
-
Added to Crowdstrike (CRWD) before earnings
- Why: After the market dropped on 11/7/ I added new cash to buy a smidge since I saw this as a buying opportunity. I wouldn’t have added after earnings, though.
-
Added to Bill (BILL) before and after earnings
- Why: After the market dropped on 11/7/ I added new cash to buy BILL, since I saw this as a buying opportunity. Additionally, I liked their earnings report. In the Company Reviews section below, you can find more information.
-
Sold Upstart (UPST) after earnings
- Why: It was a 1.5%-half-assed-keep-it-on-the-radar position. More on that in the Company Reviews section below.
Disclaimer:
- 99% of my assets consist of my stock portfolio, shown above. I don’t hold any cash (just an emergency fund), nor do I have other portfolios or real estate. I feel like this piece of information is important to understand the individual investor’s perspective. A high-growth portfolio that is 5% of the total net worth makes it a different story.
- This portfolio summary is for informational purposes only and does not constitute investment advice. Don’t live in the shadows of other people’s judgment. Make your own choices in the light of your own wisdom.
Company Reviews
Absolute numbers relate to last quarter’s earnings release.
Metrics are adjusted values (Non-GAAP).
Summary of absolute Revenue and quarterly year-over-year growth:
| Company | Revenue | Growth |
|---|---|---|
| Sentinel One | $103 | 124% |
| Bill | $230 | 94% |
| Snowflake | $523 | 67% |
| Monday | $137 | 65% |
| DataDog | $437 | 62% |
| Zscaler | $356 | 54% |
| Crowdstrike | $580 | 53% |
| Cloudflare | $254 | 47% |
| ZI | $288 | 46% |
| TTD | $395 | 31% |
| Upstart | $157 | -31% |
SNOWFLAKE
What they do: Provides data storage, management, and sharing for the cloud
Confidence tier: Champion
Type of revenue: Consumption-based
Trend to profitability: Yes
Cash: $4.9B
Product revenue [unique metric]: $523M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 110.0% | 103.3% | 110.4% | 101.7% |
| 2023 | 84.5% | 83.1% | 67.3% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 19.9% | 19.1% | 22.7% | 15.1% |
| 2023 | 9.7% | 18.2% | 12.1% |
Remaining Performance Obligations: $3.3B
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 206.1% | 122.2% | 94.4% | 98.5% |
| 2023 | 82.3% | 77.6% | 66.5% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 7.4% | 6.8% | 18.0% | 46.7% |
| 2023 | -1.4% | 4.1% | 10.6% |
Free Cash Flow: $65M
| 2021 | -7.2% | -33.1% | -23.2% | 9.1% |
|---|---|---|---|---|
| 2022 | 10.2% | 1.0% | 6.4% | 26.6% |
| 2023 | 42.9% | 11.8% | 11.7% |
Customers $1M+: 246
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 66.6% | 60.3% | 52.8% | 44.1% |
| 2023 | 39.7% | 36.3% | 34.3% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 9.5% | 10.2% | 8.7% | 9.9% |
| 2023 | 6.2% | 7.5% | 7.1% |
Dollar-based net retention rate: 165 %
| DBNRR | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 168% | 169% | 173% | 178% |
| 2023 | 174% | 171% | 165% |
My thoughts:
Highlights
- Added $287M net new remaining performance obligations. An acceleration when looking at quarter-over-quarter, totaling $3B, an increase of 66 % year-over-year → Very solid and encouraging to see customers still committing.
- The dollar-based net retention rate of 165 %, a slowdown from 171 % - still nothing to complain.
- Added 28 Global 2000 customers, the largest quarterly addition in the last five periods and a QoQ acceleration from the last quarter. Those customers will contribute nicely to revenue in 3+ quarters from now as they are just ramping up.
- Added 41 $1M+, and 484 total customers, very solid compared to the previous quarters.
- Product gross margin ticked up slightly to 75.3 % from 75.1 %
- Operating income of $43.37M up from $8.47M a year ago.
- Net Income of $38.45M up from $10.83M a year ago.
- Operating cash flow of $79.28M up from $15.43 a year ago.
- Free cash flow of $65M up from $21.53M a year ago.
Room for improvement
- Product revenue came in at $523M, 67 % year-over-year growth, which was below expectations → Macro: Here we see the weakness of the consumption-based revenue model in action. Customers are pulling back spending in mids of uncertain times.
Additional insights
- Due to the nature of the consumption model, quarter-over-quarter additions are not meaningful, since consumption is tied to what customers are doing at specific times in their business → Q4 has a seasonally higher number of holidays → People are off → 70% of revenue is tied to human interaction, 30% driven by scheduled jobs → to be aware of in their next earnings
My investment decision
Compared to CrowdStrike, Frank Slootman didn’t talk much about macro, although it has obviously affected the business. This makes me question Crowdstrike a bit more and raises confidence in Snowflake. Slootman doesn’t seem to put much energy into what they can’t control but is confident in the future of the business.
Product revenue fell short, though not surprising due to its consumption-based revenue model. Based on the secondary metrics I can’t see much wrong with the business. Strong customer adds strong RPO and a very strong Dollar-based net retention rate indicate strong demand and happy customers.
Profitability improved across the board from operating-, and net income to operating- and free cash flow. Sales & Marketing expenses decreased to 37.6% - a decrease of 3.6 percentage points from the previous quarter - which helped here.
Still, I feel very confident with the 20% allocation as of now and have no plans to change that.
Cloudflare
What they do: Provides cloud-based security for infrastructure exposed to the internet
Confidence tier: Contender
Type of revenue: Subscription-based
Trend to profitability: Yes
Cash: $1.64B
Revenue: $253.9M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 51.3% | 52.9% | 51.0% | 53.7% |
| 2022 | 53.7% | 53.9% | 47.3% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 9.6% | 10.4% | 13.1% | 12.3% |
| 2022 | 9.6% | 10.5% | 8.3% |
Free Cash Flow: -$4.6M
| FCF margin | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | -1.6% | -6.4% | -23.1% | 4.5% |
| 2022 | -30.4% | -1.9% | -1.8% |
Customers $100K+: 1,908 (50%+ revenue from large customers)
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 70.0% | 70.8% | 71.2% | 71.0% |
| 2022 | 62.6% | 60.8% | 51.4% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 14.1% | 15.1% | 15.8% | 12.4% |
| 2022 | 8.5% | 13.8% | 9.1% |
Dollar-based net retention rate: 124 %
| DBNRR | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 123% | 124% | 124% | 125% |
| 2022 | 127% | 126% | 124% |
My thoughts:
$1 billion revenue run rate and $5 billion in 5 years
They mentioned that 3 times at the beginning of the earnings call and 2 times in their earnings letter. I think we got the message! And I believe them.
“Now, we’re focused on the path to organically achieve $5 billion in annualized revenue in 5 years, and we’re confident we have the products already in-market to get us there.”
They believe to achieve that organically, with the products they currently have and without any M&A. That would be 41% CAGR.
Revenue came in at $253.9M, 47.3% Year-over-Year with their lowest beat of 1.2 %. Of course, we all hoped for another 50%. But they sacrificed growth at all costs for the trend of profitability.
Additionally, revenue growth is influenced by FX headwinds:
“We also saw FX headwinds to revenue as we offer concessions to offset the strength of the U.S. dollar internationally. (…)
They are guiding to $274.50. If they beat that by 2% they will be back at 10% sequential growth The “raise” of their full-year guidance by 0.3 % to $975M from $972M is neglectable.
Highlights
- Added 4197 total customers, 2.8% more sequentially, which is a slight acceleration versus Q2 (2.4%).
- Operating Income came in at $14.8M (5.8 % Operating Income Margin), up from $2.23 in Q3 2021. They decreased expenses by mostly lowering S&M spending from 45% to 41% of revenue.
- Net Income came in at $19.1M (7.5% Net Income Margin), up from $1.35M in Q3 2021.
- Operating Cash Flow came in at $42.7M up from -$6.92M in Q3 2021
- FCF of -$4.6M (-2% Free Cash Flow Margin) but up from -$39.73 in Q3 2021. Next quarter I expect them to be break-even based on their statement: “we continue to expect to be free cash flow positive in the second half of 2022.”
- And they have $1.64B cash. A healthy business.
Room for improvement
- Revenue came in at $253.9M, 47.3% Year-over-Year with their lowest beat of 1.2 %. This should not drop much further.
- Added 159 large $100K+ customers, 9.1% sequentially. I would like to see sequential growth in the teens. A number to watch.
- Dollar-based Net Retention Rate decreased to 124 % from 126 %. I am not too concerned here and believe the bullish management to achieve their long-term target of 130%+. Also, they addressed it in the call: “The decline was primarily driven by less net expansion we have not seen elevated churn.”
- Remaining Performance Obligations came in at $831M, 9.3% sequentially, down from sequentially 10.5% in Q2.
- Gross Margin decreased by 1pp to 78% from previously 79% due to inflation. Still above their long-term target of 75%.
Additional insights
On macro:
We talked about pay-as-you-go down trading to free, saying our customers stay on the platform by downgrading. We see elongated sales cycles at the very high end in the very large customer cohorts. And we see the expansion in the mid-market segment slowed down a bit.
(…)
And so I think that while, as I said last quarter, the economy, the macro economy is challenging right now, and we have said that, I think, consistently for the last 3 calls, we do believe that we are very well positioned, and I continue to say that I wouldn’t trade places with any other CEO at any other company.
→ Similar to other companies, the sales cycles are elongated and macro is challenging. Still, they sound very confident.
While sales cycles at the high end of the business have elongated, we continue to see our $500,000-plus and $1 million plus cohort scoring faster than top line revenue. We also achieved a milestone of 75 customers larger than $1 million in the third quarter.
→ They now got 75 $1M+ customers. This means they generated about 6.3 per quarter this year. If they add another 6 in Q4, they will be at 81 $1M+ customers.
On their future:
I think regardless, we see with the products that we have in market today a clear path to getting to $5 billion of revenue. And that doesn’t assume any M&A. We believe that, that is through organic – organically that we can get to $5 billion of revenue in the next 5 years with the products that are in market today. And so I think that we don’t have to – the hyperscalers don’t have to fail for us to succeed. We actually see ourselves as much more of that glue between them. And whether companies want to be multi-cloud or not, they all are. And so that glue is critically important. And again, I think we provide the only solution as we see companies that are trying to struggle with reconciling that increasingly multi-cloud world.
→ Wow, look at that confidence: Hyperscalers are not in their way. Plus they see themselves as the only solution.
On their Dollar-based Net Retention Rate:
And then we talked about prolongated sales cycles at the very high end in the very large cohorts. And that is if you go back to the KPIs we shared where a lot of growth dynamics are happening, those cohorts are growing, in general, significantly faster than our average growth rate. So any movement we have in terms of sales cycles in the very large cohorts is impacting DNR in the current quarter. But this does not take away from the opportunity that it is in front of us, and it falls into the logic that we always had when we talked about DNR. We really see a path forward to get north of 130%, but there will be movement around that number. It will not be a straight line that gets us there.
→ In the near term, the DBNRR will suffer due to macro, but they sound very confident to hit the DBNRR of 130 %+ over time.
On macro affecting revenue-types:
I think that if you are a usage-based, a purely usage-based model, it is a place where people are looking for areas to save money. Similarly, if you are a seat-based model, as you’re seeing some companies do layoffs or, at a minimum, not expand their seats, that is something that is challenging in the current environment. I think we are fortunate that today, most of our revenue is not usage-based and not seat-based. And so while we are adding products that are in both of those categories, and we think that over time that, that will be an expansion driver for us, that today, we’re not seeing that downward pressure from people trying to rationalize or consolidate their bills.
→ That’s logical: seat- and usage-based models are less resistant. Cloudflare is only subscription-based for now. That’s great. Still, why is DataDog growing faster and generating more revenue, while having a consumption-based model?
However, in the last several months, and especially in Q3, we started to see an increase in cyberattacks coming out of both Russia and other parts of the world. That drives increasing adoption of products like Cloudflare’s products at a very, very, very high velocity. So where we’ll see close rates that you can often measure in hours or days.
And so I think that, that expectation of the war in Ukraine and other political conflicts around the rest of the world leading to more security business was something that I think a lot of the industry expected would show up in Q1 and Q2, and we actually saw it show up more in Q3.
→ They see cyber security tailwinds popping up since Q3. That’s interesting. That should mean tailwinds for our other cybersecurity companies as well.
On churn:
Higher level of churn in our pay-as-you-go customer base, primarily due to more customers shifting down to our free customer tier. We think this is a function of a more challenging macro environment. However, we are pleased to see these customers to remain on our platform.
(…)
So first of all, our pay-as-you-go business is a relatively small portion of our business. It’s much less than 20% of revenue. And so I think that what we see as the value from that pay-as-you-go business is that those customers, whether they pay us something or not, end up being our biggest advocates and our biggest champions inside whatever large organization that they operate at.
(…)
And so as Thomas said, well, they may go from paying us $20 a month to not paying us something because gas prices went up, that isn’t something that we’re trying to optimize for. What we’re trying to optimize for is that those customers love us, they understand us and they take us to work. And so as they do, that’s how we’ve been able to close so much of the Fortune 500. Behind almost every 1 of those Fortune 500 wins is a pay-as-you-go customer who advocated for us internally, and that is our secret sales force.
→ Downgrades are primarily happening in the pay-as-you-go business. But that’s less than 20% of revenue. Most of these users will upgrade, once this environment is over. I like their long-term mindset and how customer-centric they are.
On M&A:
*(…) And so I think that we will always be biased against M&A, and we will always have a very high hurdle rate to do any sort of a transaction, which isn’t to say we won’t do transactions. When we find great technologies, great teams, great ways to integrate like we did with Area 1, we will jump on that. (…)
And as Marc said in his responses, we believe we can get to $5 billion without having to build or buy any new products or companies that are out there. We think we’ve got the right products in the bag today. It’s just a matter of us continuing to execute on the go-to-market side.*
→ They seem very thoughtful about how they acquire companies to avoid Frankenstein-type solutions. Love their focus on organic. And confidence. Again.
My investment decision
Cloudflare’s focus is on profitability now. They sacrifice growth for it.
They sound very confident and bullish which gives me the confidence to hold. They penetrated only 1% of their identified market for products they already have available today.
Of course, we should watch metrics like revenue growth, large customers, and Free Cash Flow. Slowing growth, even though it’s driven by macro, doesn’t increase my confidence.
DataDog, for example, is generating 72% more revenue, consumption-based (more prone to customers saving instantly saving costs) but still growing faster and much more profitable. That’s why I moved Cloudflare from Champion to Contender.
On the other hand: Cloudflare is one of the most reliable and stable companies when it comes to delivering revenue growth. One or two weak quarters is most likely an outlier, especially since we have external macro effects going on.
If growth is not falling off a cliff in the next few quarters, we should get rewarded very well for holding on during these times.
Datadog
What they do: Provides cloud-based infrastructure monitoring
Confidence tier: Contender
Type of revenue: Consumption-based
Trend to profitability: Yes
Cash: $1.8B
Revenue: $437.0M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 51,3% | 66,8% | 74,9% | 83,7% |
| 2022 | 82,8% | 73,9% | 61,6% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 11,8% | 17,6% | 15,8% | 20,6% |
| 2022 | 11,3% | 11,9% | 7,6% | 9,0% |
Free Cash Flow: $67.10m
| FCF margin | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 22,4% | 18,2% | 21,1% | 32,7% |
| 2021 | 35,8% | 14,8% | 15,4% |
Customers $100k+: 2,600 (85% of total ARR)
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 50,7% | 59,6% | 66,4% | 63,7% |
| 2022 | 60,0% | 54,1% | 44,4% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 14,5% | 11,7% | 14,6% | 11,7% |
| 2022 | 11,9% | 7,6% | 7,4% |
Dollar-based net retention rate: 130 %
| DBNRR | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 130%+ | 130%+ | 130%+ | 130%+ |
| 2022 | 130%+ | 130%+ | 130%+ |
My thoughts:
DataDog is a very healthy, profitable, and fast-growing company that keeps innovating. Now they got 18 products! In general, customers using 2+, 4+, and 6+ products are consistently increasing. They also mentioned during the earnings call: One customer is using 14 different products which - next to the consistent Dollar-based Net Retention Rate of 130 % - indicates that customers love what they are doing.
In early November they released their Q3 earnings results. They announced the acquisition of Cloudcraft, which won’t affect revenue growth. From their earnings call:
Just to make sure it’s clear, it’s a small company. It’s an acqui-hire like we’ve done, meaning we are bringing on board the engineers, it does come with a customer base. It’s an immaterial amount of revenues relative to our total.
As written in my past summary we should have expected slowing Quarter-over-Quarter growth and this is what happened:
DataDog generated $437M in revenue, which is 61.6 % Year-over-Year and 7.6 % Quarter-over-Quarter. A deceleration compared to the previous quarter which grew at 11.9 %. Their guidance implies a slight sequential acceleration to about 9 % again, but which is mostly driven by a seasonally strong Q4. DataDog also raised full-year revenue guidance to $1.654b by a neglectable 1%. Still, a raise is a raise, right?
I believe these numbers are neither great nor bad. Appropriate to this environment. Growth slowed as anticipated, not due to cloud saturation or other reasons. But due to customers lowering usage similar to COVID. From their earnings call:
*In conclusion, while we recognize macroeconomic uncertainty continued into Q3, we see no change in the importance of cloud migration and digital transformation, which are critical to our customers’ competitive advantage
(…)
When you look at the usage and where you might see cost optimization, I think there are two different stories there. There’s these customers that are largely cloud native and normally pretty scale in the pub environment, so then have cloud end-to-end on public cloud that are definitely planning to save money. And these are companies that, in general, also tend to have their own growth rates affected or probably affected in the future by the macro trends. So that’s why they’re doing that.
But when you look at the other customers, the ones that are earlier in their cloud migration, they are actually not slowing down, and we see the same urgency and eagerness for them to keep scaling and keep moving into the cloud. And that’s also where the bulk of our opportunities.*
The total number of customers generated (1,000) was also a bit light. They added 180 customers with ARR > $100k which is also light. But not much of a concern for me. On the flip side: The large customer segment didn’t decelerate much further when looking at Quarter-over-Quarter numbers:
Q1: 11,9% → Q2: 7,6% → Q3: 7,4%
Remaining Performance Obligations accelerated sequentially to 6.8 % which is nice to see:
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 6,9% | 25,6% | 23,3% | 13,4% |
| 2022 | 5,3% | 2,7% | 6,8% |
Profitability is on track. Compared to Q3 2021:
- Non-GAAP Operating Income improved to $74,84M, 17.1 % margin, from $44.02M.
- Non-GAAP Net Income improved to $81.04M, 18.5 % margin, from $44.27M.
- Free Cash Flow improved to $67.10M, 15.4 % margin, from $57.08M.
- $1.8b cash. No reason to worry here.
To keep in mind the Q4 earnings results: They expect additional event- and conference expenses, which has an effect of 300 to 400 basis points in margin.
Now some notes on guidance. As we discussed last quarter, Q4 includes some large input person events, including our Dash user conference, which was held 2 weeks ago, and AWS Reinvent, our largest trade show event of the year. The cost of those events will result in an approximate 300 to 400 basis points effect on margins. As it relates to our capital expenditures, we are adding more office space around the world as we continue to return to office. We expect CapEx of about $15 million in Q4.
My investment decision
I can’t see anything which indicates a particular issue with DataDog itself. This is backed up by what they mentioned in their earnings call:
While the macroeconomic environment is likely to remain a headwind in the near term, we continue to see positive trends underpinning our business and remain bullish about the long-term opportunities and aggressive with our investment plan.
→ I believe, the trend driven by macro-headwinds will be there for a few quarters until they will be back on track again. From their earnings call:
We saw existing customer usage growth remain at levels similar to Q2 as customers continue to be more cost-conscious as they manage their businesses.
They remain very bullish:
In terms of – some part of the question is how do we know things are going to get better or worse in the future? I remind you that we have a usage technology [ph] for revenue, and we don’t have to wait until the mix renewal to give the new some customers on whether this is better or worse. But the news is good or bad, we get it early. And an example of that is that while the – broadly in the world*, we see Q3 being worse at a macro level than Q2.**
As far as our business is concerned, Q3 is very, very much in line with Q2 and whatever step function there was in terms of changing the growth rates, so some customers happened in Q2 already and didn’t change in Q3.*
→ They are basically saying: The macro environment in the world became even worse than it was in Q2. But their (DataDog’s) own performance in Q3 is in line with Q2, which indicates strength. That statement gives me a lot of confidence.
Another from the snippet above: Since they have a consumption-based revenue model instead of a subscription-based one, DataDog’s quarterly numbers should give us faster visibility into the macro situation. If we are seeing sequential revenue accelerate, then this might indicate an improvement in the macro environment.
Also, while remaining bullish they are, as usual, very conservative in their guidance:
Yeah. As a reminder, we provide guidance in a consistent way. We essentially look at the environment, the performance and given the usage model, we put conservative assumptions on top of that.
(…)
It’s also been a little bit harder to forecast in recent years with the pandemic and the behavior that – the vacation behavior that change after the pandemic. So we are little bit careful with that, and that’s all incorporated in our guidance.
And I really liked that comment:
(…) overall, all of our products meaningfully outperformed the growth of the hyperscalers.
Going into 2023, DataDog will have lapped its tough comps from 2021 which makes comparables easier. Still, everything that happens at the moment carries a bit of uncertainty, and that’s why DataDog remains a Contender.
Sentinel One
Sentinel One is the only company, that hasn’t reported, yet.
You can find my previous review on Sentinel One here.
Additionally, I recommend Bert’s recent article on S (seeking alpha):
→ SentinelOne: Time To Reconsider This Once Overvalued Cybersecurity Sprinter
- SentinelOne is probably the fastest growing company of any scale in the cybersecurity space.
- Initially its shares were dramatically overvalued. The combination of a falling stock price and triple digit growth has wrought some changes in its valuation.
- It still loses lots of money and doesn’t generate cash, and it probably will not be able to do so for at least the next year.
- But it is still gaining lots of market share and growing its platform which now includes end point identity management.
- Patient investors looking for a potential multi-bagger should consider the shares, but they are not for all classes of investors.
Crowdstrike
What they do: Leading cybersecurity firm with a "mission to protect customers from breaches”
Confidence tier: Contender
Type of revenue: Subscription-based
Trend to profitability: Yes
Cash: $2.47M
Revenue: $580.88M
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 70.1% | 69.7% | 63.5% | 62.7% |
| 2023 | 61.1% | 58.5% | 52.8% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 14.3% | 11.5% | 12.5% | 13.4% |
| 2023 | 13.2% | 9.7% | 8.5% |
Free Cash Flow: $174.1M
| % revenues | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 38.7% | 21.8% | 32.5% | 29.5% |
| 2022 | 32.3% | 25.4% | 30.0% |
Customers: 21,146
| YoY | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 82.4% | 80.9% | 74.5% | 65.0% |
| 2023 | 57.1% | 50.5% | 44.0% |
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 15.4% | 14.5% | 12.3% | 11.2% |
| 2023 | 9.9% | 9.7% | 7.4% |
Dollar-based net retention rate: 125 %+
| DBNRR | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2022 | 123% | 120% | 122% | 124% |
| 2023 | 120%+ | 125%+ | 125%+ |
My thoughts:
Let’s get this straight from the start:
(…) “However, total net new ARR was below our expectations as increased macroeconomic headwinds elongated sales cycles with smaller customers and caused some larger customers to pursue multi-phase subscription start dates, which delays ARR recognition until future quarters.” - George Kurtz
I believe him (for now).
Highlights
- Very strong profitability:
- Operating cash flow: $243M up from $159M a year ago
- Free cash flow: $174M up from $124M a year ago
- Net income: $91M up from $41M a year ago
- EPS: $0.40 up from $0.17 a year ago
- Gross retention rate remains over 98%
- Net Retention Rate was at the highest level in seven quarters, which should be at 125+ %
- RPO accelerated QoQ from 6.4% sequentially last quarter to 11.6% sequentially this quarter
- CrowdStrike’s subscription customers that have adopted five or more, six or more, and seven or more modules were 60%, 36%, and 21%, an improvement from the previous quarter
- Sounded confident during the earnings call, reiterated “We remain steadfast in our vision to grow ending ARR in $5 billion by the end of fiscal year 2026 and reach our target operating model in fiscal year 2025.”, which backs up, the lower growth is driven by macro.
- Average Contract Value was their highest at $25,890 in the past 9 quarters
Room for improvement
- Lower revenue reported came in at $580.88M than the $595M expected (53 % year-over-year).
- Beat guidance by just 0.9%, usually, it’s 4% and weak guidance.
- Still, if they beat their guidance by just 1 %, QoQ revenue growth will accelerate to 9.2 %, up from 8.5 % this quarter. If Crowdstrike stays a 9 % grower at a $2+B run rate, I am happy.
- Declining Non-GAAP Gross Margin from 77%, now 75% during the past quarters
- Added the lowest amount of net new customers (1,460) in Q3 since 9 quarters.
Additional insights
- Similar to other companies, organizations were starting to respond to macroeconomic conditions by adding extra layers of required approvals → C-level; and extending the time it took to close some deals → elongated sales cycles
- Contrary to Zscaler, SMBs increasingly delay purchasing decisions with average days to close lengthening by approximately 11% and net new ARR contribution decreasing $15 million from Q2 → This also impacted net new logo additions in the quarter → But they’ve actually seen them significantly improved quarter-over-quarter
- Still, quarter-over-quarter POV win rates increased meaningfully over more complex vendors that require more headcount to manage → They believe the vast majority of these deals are not lost, just delayed.
- For Enterprises, sales cycles or average days to close remain consistent with last quarter’s modestly higher level, but some also had to manage timing issues related to OpEx budgets and cash flow amidst the rapidly evolving macro → Customers signed contracts that have multi-phase subscription start dates, which pushes their expense and CrowdStrike’s ARR recognition into future quarters → In comparison to last quarter, in Q3, they saw approximately $10 million more ARR deferred into future quarters. → They expect these macro headwinds to persist through Q4.
- Enterprise customers observed a 68% increase in operational efficiencies with the Falcon platform, equating to an offset of approximately 3.5 full-time employees → Wow! → They believe today’s macro pressures on businesses and the escalating threat environment make Falcon’s value proposition as a consolidator more important today than at any other time in CrowdStrike’s history
- They don’t see another true consolidator like Falcon as customers are looking for technologies that reduce costs, reduce complexities, actually work and stop breaches, and that’s what we’re delivering.
- On Remaining Performance Obligations: Customers are looking at starting those subscription dates at staggered times, which makes sense for them → Customers have got to align their resources on their end and make sure that they have the right folks looking at it → For CrowdStrike those deals are confirmed and locked in as these deals are signed. Some might be deployed now, some might be later → They will be in the RPO calculations.
My investment decision
It was a disappointing quarter. I was surprised by the weaker-than-expected revenue growth and guide. If even cybersecurity is struggling, this gives me confidence in the other struggling companies, I hold.
In my last summary I wrote:
Crowdstrike seems to be on track, but not as strong as I like them to be. Sure, I can’t complain about their strong 59 % Year-over-Year growth rate while delivering $535m revenue. But revenue growth is still slowing down. Therefore, I am hesitant to add more since Cyber Security tailwinds should prevent them from slowing down further when looking at revenue and customers.
Perhaps I am not realistic enough about the law of large numbers, but I am becoming impatient about them speeding up due to the government business they should have in front of them. Other very hungry dogs, such as Sentinel One, are eager to catch up as well.
Did I sense weakness early?
Still, CrowdStrike is still growing very strong,53 % year-over-year, at a $2.3B run rate (!) and generating large amounts of cash ($174M FCF). Also, the combination of strong RPO (11.6 % QoQ), high DBNRR at 125+ %, strong gross retention rate (98 %), increased adoption of more modules per customer (up from the previous quarters), increased ARPU (highest in the past 9 quarters) and reiterated 2025 ARR targets back up the “macro-narrative” indicate no underlying execution- or competitive issues.
Despite the elongated sales cycle for small and medium-sized businesses, Crowdstrike’s competitive win rate in that space improved and SentinelOne’s results will give us more insights into the cybersecurity market.
The $1 million dollar question: Competition or macro?
For now, I trust management. And do nothing.
