Moritz’ Portfolio Summary - November 2022

[mooo]

“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.

[mooo]

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

Trend to profitability: Yes

Cash: $1.82B

Revenue: $355.5M

YoY	Q1	Q2	Q3	Q4
2022	61.7%	62.7%	62.6%	61.4%
2023	54.2%

QoQ	Q1	Q2	Q3	Q4
2022	17.0%	10.9%	12.2%	10.9%
2023	11.8%

Calculated billings: $340.1M

YoY	Q1	Q2	Q3	Q4
2022	71.2%	58.5%	53.6%	56.6%
2023	37.3%

QoQ	Q1	Q2	Q3	Q4
2022	-25.4%	48.4%	-6.0%	50.6%
2023	-34.6%

Free Cash Flow: $95.6m

% Revenues	Q1	Q2	Q3	Q4
2022	36.2%	11.5%	15.3%	23.5%
2023	26.9%

Customers $100k+: 2,217

YoY	Q1	Q2	Q3	Q4
2022	60.6%	60.9%	62.2%	63.6%
2022	55.7%

QoQ	Q1	Q2	Q3	Q4
2022	17.1%	10.7%	12.5%	12.2%
2022	11.5%

Dollar-based net retention rate: 125+ %

DBNRR	Q1	Q2	Q3	Q4
2022	125+%	125+%	125+%	125+%
2023	125+%

My thoughts:

Highlights

• Revenue came in at $356M, 54 % year-over-year, 11.8 % quarter-over-quarter
• Billings came in at $340M, 37 % year-over-year against tough comps, still something to watch closely
• Raised FY guide by 2 %, though no billings raise; FY guide: $1.530M; Billings: $1.940M
• Operating cash flow came in at $129M, up from $93M a year ago.
• Free cash flow came in at $95.6M, up from $83M a year ago
• Operating margin was 12 % and free cash flow margin was 27 %
• Operating income came in at $42M, up from $24M a year ago
• Net income came in at $44M, up from $21 a year ago
• Strong dollar-based net retention rate of 125+ %
• Solid Gross margin of 81.4 %

Room for improvement

• Less $100K+ customers added than a year ago: 1Q23: 128 vs 1Q22: 136
• Less $1M+ customers added than a year ago: 1Q23: 21 vs 1Q23: 22
• RPO grew 57% from one year ago to $2.7B, disappointing due to the low sequential growth of only 2.9 %

Additional insights

• SMB segment is below 10%; SMBs did better than enterprises → Surprising since most companies like Snowflake reported a contrary picture → Still, on the higher end of the large enterprise segment, they haven’t seen many competitive changes at all → Perhaps their SMBs are concentrated in verticals (i.e. financial services) which are less affected
• They are not competing against firewall companies like Palo Alto when they talk to their larger deals
• Americas represented 52% of revenue, EMEA was 33% and APJ was 15%.
• Their guidance is based on historical performance → they saw a slowdown in October. But: November started to tick back up again
• They say performance is more driven by macro than anything else → Elongation of sales cycles; previously 9-12 months, now 12 months range → CIOs and CXOs state, they don’t see security budget getting reduced much (compared to IT budgets) but deals have to get approved by C-level which impacts sales cycles
• They are confident in growing their big target of $5 billion ARR
  • Deal sizes are getting bigger
  • Customers are buying more of their platform
  • Pipeline is increasing in all five regions, very strong, Q2 will be a record pipeline→ They mentioned confidence in their pipeline multiple times
  • They do well with the fed business; have landed 12 of the 15 cabinet-level agencies which are at a small level but have been growing at a decent pace → it’s early stage.
  • None of the deals are going away, they feel well-positioned and winning already
  • They made some changes at the start of Q1 in their sales org which caused some slowdown, but it’s done and already showing improvements
• Positive COVID effects ended by mid of 2020, since then, the growth of their business is driven by the need for security, transformation, digital transformation
• They say the service they are selling is more mission-critical than Office 365 since they connect everything to everything
• They have not seen pricing pressure from the competitive side → Customers told Zscaler, other vendors tried to offer a third price but they decided against it because it doesn’t meet requirements
• In most cases, their service is showing more than 200 % ROI due to the displacement of eight-point security and networking products
• They feel very confident and comfortable with the business (including billings) → If anything, it’s seasonality and macro, i.e. the decline in deferred revenue from Q4 to Q1 (-1.5 % quarter-over-quarter) is due to the seasonality of their business

My investment decision

Fewer customers added against the previous year for both $1M- and $100K cohorts is disappointing. But Crowdstrike draws a similar picture. I am keen to see Sentinel One’s customer additions after they report next week. I assume, they will show weakness as well. If not, I will buy more of S - instantly.

Also, the light growth in remaining performance obligations and no raise in the billings guide is not increasing my confidence.

That said, they are still growing strong at above 50 % year-over-year at $356M quarterly revenue, and profitability (operating cash flow, free cash flow, operating income, net income) continues to improve which looks great. Customers continue to love them, reflected by the 125+ % dollar-based net retention rate.

They sound very confident, see themselves as mission-critical, indicate a record pipeline in Q2, no competitive threats, and are just (I bolded that on purpose!) affected by the macro environment:

Remo Canessa, CFO Zscaler:

we’re in a position now that the macro environment is not favorable, but it will turn, it will turn.

I will finish my thoughts and decisions for this quarter after Sentinel one will report on Dec 6th. Based on all the information I have, I might adjust the allocation.

But for now, I plan to do the same, as I did with Crowdstrike: Nothing.

Bill

What they do: Simplifies, digitizes, and automates complex back-office financial operations

Confidence tier: Contender

Type of revenue: Transaction- and Subscription-based

Trend to profitability: Yes

Cash: $2.6b

Revenue: $229.9M

YoY	Q1	Q2	Q3	Q4
2022	156.1%	189.5%	179.4%	155.8%
2023	94.3%

QoQ	Q1	Q2	Q3	Q4
2022	51.2%	32.2%	6.7%	20.0%
2023	14.8%

Revenue (core): $214.6M

YoY	Q1	Q2	Q3	Q4
2022	168.3%	197.1%	182.3%	151.3%
2023	82.6%

QoQ	Q1	Q2	Q3	Q4
2022	51.6%	32.3%	6.4%	17.7%
2023	10.2%

Revenue (standalone): $125.6M

YoY	Q1	Q2	Q3	Q4
2022				71.0%
2023	61.6%

QoQ	Q1	Q2	Q3	Q4
2022	15.6%	25.0%	5.1%	12.5%
2023	9.3%

Customers Bill (standalone): 172,000

YoY	Q1	Q2	Q3	Q4
2022	22.4%	23.6%	26.8%	30.2%
2023	35.6%

QoQ	Q1	Q2	Q3	Q4
2022	4.6%	6.5%	8.6%	7.6%
2023	9.0%

Revenue per Transaction (standalone): $7.06

2021	Q1	Q2	Q3	Q4
2022	$4.97	$5.79	$6.20	$6.54
2023	$7.06

Dollar-based Net Retention Rate: 131 %

DBNRR	Q4
2021	124%
2022	131%

My thoughts:

Bill is a financial automation software for small and midsize businesses. And it’s one of the harder ones to understand in my portfolio. They acquired Divvy in 2021 and Q4 2021 was the first quarter they included divvy numbers, which is the reason for the jump in revenues in 2021.

Highlights

• Signed a definitive agreement to acquire Finmark, financial planning, and cash flow
  an insights software company.
• Added Google Cloud Chief Marketing Officer, Alison Wagonfeld, to our board of
  directors.
• Total revenue was $229.9 million, an increase of 94% year-over-year and 14.8 % quarter-over-quarter.
• Added 14,200 customers to bill standalone, an increase of 9 % quarter-over-quarter, the highest sequential increase to date. My personal highlight for the quarter.
• Dollar-based Net Retention Rate is only reported in Q4, but I assume it to be at similar levels around 131 %.
• Revenue per Transaction was $7.06, an increase of 8 % quarter-over-quarter, faster than the previous quarter at 5.5 %. Good, that tells us that customers continue to use their platform. They leverage it to run their financial operations even if they’re spending less in terms of overall operating expenses in TPV through the platform.
• Gross Margin was 85.8 %, up from 83.6 % in the same quarter a year ago.
• The first quarter of non-GAAP profitability
  • Operating Income was $9.1; or 4 % of revenues, their highest ever.
  • Net income was $16.9M or 7.4 % of revenues, their highest ever.
  • Operating Cash Flow was $18.15 or 7.9 % of revenues, up from -$21.13 in the same quarter a year ago.
  • Free Cash Flow was $12.01M or 5.2 % of revenues, up from -$25.48M in the same quarter a year ago.
  • EPS $0.14 cents, their best EPS to date.
• 12-month payback period, which is good to see. Usually, you want SaaS businesses with payback periods < 12 months.

Room for improvement

• Bill’s standalone revenue was $125.6M, an increase of 9.3 % quarter-over-quarter, slower than the previous quarter at 12.5 %.
• Divvy revenue was $86.8M, an increase of 8.6 % quarter-over-quarter, slower than the previous quarter at 26 %.
• The remaining performance obligations were $143.1M, a decrease of -6.3 % year-over-year.

Most of the analysts congratulated them for great results and the immediate after-hours action indicated happy investors. But during the call, the stock price went down. This could have been due to their comments around softness on TPV.

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:

*During Q1, Bill stand-alone TPV per customer, excluding the FI channel, declined by 3% sequentially. In Q4, we saw mid-market businesses beginning to moderate their spending, and that trend is now visible with our micro and SMB customers as well. These trends are reflected in our outlook, which I will discuss later.
(…)
We anticipate the trends we’ve observed with businesses moderating their spend will continue throughout fiscal 2023. And we expect that this will translate into lower year-over-year payment volume growth in the quarters ahead.
(…)
****We are expecting some of the trends that we’ve observed over the last, call it, 4 months or so of moderating spend from customers ex FI channel to continue. What that means for us is really lower growth going forward is our current expectation. We factored that into our outlook for the year. (…) We’ve assumed some of the trends that we’ve seen recently are going to continue.
(…)
We have generally seen businesses, all businesses moderate their spend in this economy. And so what you see in Divvy is that it is just growing much faster, it’s a smaller base to start with – and so we’ve continued to have strong growth in TPV year-over-year there. But we do see, I would say, softer spend across all of our customers.
(…)
****we’re seeing some softness across most of the customer segments now. It still appears to be concentrated in some of the discretionary spend categories. (…) So things like advertising spend would be a good example. We looked at a lot of the top advertisers that small businesses – or advertising channels that small businesses use to drive customer acquisition and other things.

So we looked on a vendor-specific basis and found that across really the whole segment, spend is down. And that’s something that is consistent with other data points that we’ve looked at externally. And so I think it just says that our small business customers across the size range are reacting to the external environment and being a bit more cautious about their operating expenses, and we’re seeing that across the spend habits of our customers.*

---

Still, they remain very bullish:

At the same time, in this environment, the value proposition of our platform is resonating more than ever with SMBs, and we have seen strong engagement from existing customers continued high retention and healthy new customer demand.
(…)
So what this tells us is that people are pulling back the spend, but they are actively engaged in using the product and the platform and really managing their business.
(…)
Customers can’t choose not to do this. The digital transformation wave is happening.

---

In an inflationary world choosing our platform acts as a deflationary force.

→ Well said by it’s CEO and founder Rene Lacerte. Bill saves businesses time and money.

---

Additionally, having so many of our vendors on the Bill network helps us reduce payment transit time and gain more control of our cash flow.

→ And I like Bill having a network effect. The more vendors are using Bill, the more other businesses will use it.

---

My investment decision

I believe this was a strong report. The market might lack confidence due to Bill’s uncertainty on macro effects going forward. Still, we should expect headwinds for all of our companies. I don’t see an isolated (execution) issue with Bill. And I added it after the report.

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: $1.3B

Revenue: $395M

YoY	Q1	Q2	Q3	Q4
2021	36.8%	100.9%	39.3%	23.7%
2022	43.5%	34.6%	31.2%

QoQ	Q1	Q2	Q3	Q4
2021	-31.3%	27.4%	7.5%	31.4%
2022	-20.3%	19.5%	4.8%

Non-GAAP Net Income: $128.59M

% Revenue	Q1	Q2	Q3	Q4
2021	31.8%	31.5%	29.6%	52.6%
2022	49.5%	11.8%	44.1%

Operating Cash Flow: $137.30M

OCF Margin	Q1	Q2	Q3	Q4
2021	34.2%	3.7%	43.1%	41.3%
2022	46.4%	24.3%	34.8%

My thoughts:

• Revenue came in at $395M, an increase of 31% year-over-year.
  • Certainly, it gets into a territory I don’t like. Still, also TTD has to take its toll in the current environment. Plus they are growing at more than 3x than the total ad market, as mentioned by Green on the earnings call - while others like Pubmatic are tumbling. So, we have a category leader here and I expect them to do very well. But I would like to have them keep growth above 30%.
• Profitability continues to be the strongest aspect with:
  • $163M adjusted EBITDA, 33% of revenue, up from $123M a year ago and a strong guide of $229M.
  • $137M operating cash flow, 35% of revenue, up from $130M a year ago.
  • $112M free cash flow, 28% of revenue.
  • $1.3B cash and no debt.
• Strong Customer Retention: Customer retention remained over 95% during the third quarter, as it has for the past eight consecutive years.
• Procter & Gamble, one of the world’s largest advertisers, announced its support and adoption of UID2.
• Industry Recognition:
  • Customers’ Choice for Ad Tech on Gartner® Peer Insights™
  • BIG Innovation Award for Technology Product (Solimar)
  • Sales and Marketing Technology Awards: Product of the Year for User Optimization Experience
  • Crain’s 100 Best Places to Work in NYC 2022 (9th consecutive year)
  • Stevie Awards for Great Employers - Employer of the Year, Computer Software
  • Stevie Awards for Customer Service Success - Silver, Technology Industries
  • Forbes Global 2000
  • Samantha Jacobson, Chief Strategy Officer, named to AdAge 40 under 40
• Key growth drivers: CTV, shopper marketing spend, political midterm elections
• Revenue split: US: 90% of spend, International: 10% of spend
• Channels:
  • Connected TV: 40 %, now their fastest-growing segment
  • Mobile: 30 %
  • Audio: 5 %
  • Display: 10+ %

As usual, they sounded very confident in their earnings call:

I believe that through the first 9 months of the year, we have gained more market share, grabbed more land than at any point in our history.

CTV spending grew in the majority of our international markets faster than it did in the United States.

Disney+ platform in December and they are incredibly progressive in how they are enabling advertisers to leverage their own first-party data via UID2.

I do think it’s worth noting again that in an environment where many of our competitors have contracted or grown in the single-digit range, we grew 31%.

we’ve got Disney+ and Netflix, they get a lot of the word count in the ecosystem right now. But let’s not forget, HBO Max, Paramount NBCU, Fox, the rest of Disney, Hulu, ESPN, ABC, etcetera are continuing to lean into programmatic.

So UID2, through our partnership with Disney, I think, is going to be a major catalyst for the CTV category.

---

My investment decision

The Trade Desk is a story stock. Jeff Green is great at selling it to investors. Some of their “marketing” statements like "The Trade Desk is an investment in the whole internet” in their presentations sound desperate and weak. Also, why do they never disclose some information, like: How fast is CTV growing? Growth is becoming borderline low for my taste, which I will watch closely in the upcoming quarters.

But I have to admit, the TAM is very large ($816b vs $175b traditional linear TV), and mid-term elections, connected TV tailwinds, and the opening of Netflix should support a reacceleration of revenue. 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.

Still, I am following the numbers: They tell a different story as of now. Because of that, I have no plans of increasing my position but I feel comfortable with its current size.

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: $853M

Revenue: $136.9M

YoY	Q1	Q2	Q3	Q4
2021	84.7%	93.7%	94.9%	90.5%
2022	84.0%	75.2%	64.9%

QoQ	Q1	Q2	Q3	Q4
2021	17.6%	19.7%	17.6%	15.1%
2022	13.6%	14.0%	10.7%

Free Cash Flow: $13.96M

FCF margin	Q1	Q2	Q3	Q4
2021	-2.7%	-2.1%	3.5%	10.6%
2022	-14.9%	-15.6%	10.2%

Customers $50k+: 1,323

YoY	Q1	Q2	Q3	Q4
2021	219.0%	226.4%	231.4%	200.4%
2022	186.6%	146.8%	115.8%

QoQ	Q1	Q2	Q3	Q4
2021	26.9%	40.3%	30.4%	29.4%
2022	21.1%	20.8%	14.1%

Dollar-based net retention rate 10+ customers: 135+ %

DBNRR	Q1	Q2	Q3	Q4
2021	121%	125%	130%+	135+%
2022	135+%	135+%	135+%

My thoughts:

• Third quarter revenue of $136.9 million grew 65% year over year (68% FX-adjusted), slowing from 75 % in Q2, and will continue to slow to approximately 56 % in Q4. → Macro.

• QoQ slowdown from 14 % in Q2 to 10.7 % in Q3 (and will continue to slow in Q4 at approximately 8.7 %) → Macro. Here’s hoping it will stabilize. Watching this closely.
  

• Expecting them to come in at $148.8M revenue (8.7% QoQ) in Q4.

• FCF positive at $13.96M - their highest ever, improved from $2.87M in 3Q21.

• Operating cash flow at $20.03M - their highest ever, improved from $3.79M in 3Q21.

• Non-GAAP net income at $2.58M - a first-time positive, improved from -$11.37M in 3Q21.

• They have achieved most of their profitability by reducing S&M from 70% of revenues to 60% of revenues compared to last quarter. At the same time, they rented more office spaces.

  • 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 personally don’t judge this move and let the management make me show their - hopefully - strong numbers in a few quarters.
  • Gross Margin improved slightly to a very strong 88.9
  • $853M cash gives them plenty of runways.

• Dollar-based Net Retention Rate for all customers declined to 120+ % from 125+ % in Q2, likely due to large customers (>$50K) pulling back spending since DBNRR for that cohort declined to 145+ % from 150+ % in Q2. For Customer 10 + it was stable at 135+ % - and I believe this is the main DBNRR metric we should look at.

• Large customers $50K+ came in at 163 compared to 200 in Q2 and 143 in Q3 2021. That’s a slowdown when looking at quarter-over-quarter at 14.1 % from 20.8 %in Q3. → Macro. Still, they doubled the large number of customers when looking at year-over-year (+116 %).

• 10+ users: 76% of ARR (up from 70% 3Q21), 50k+ customers: 26% of ARR (up from 18% 3Q21)

• 3000+ customers adopted one new work OS product 5 months after the launch

While I would have liked to see stronger growth, the slowdown is likely due to the macro environment.

A year ago, Monday was growing 18-20% sequentially.

Let’s compare that to other companies:

• DataDog was growing from 16% to 21% sequentially. Now: 7.6%
• Cloudflare was growing from 10% to 13% sequentially. Now: 8.3%

Should we sell them? I will not.

Will I add to MDAY? Unlikely, as I see stronger alternatives.

Yes, Cloudflare and DataDog generate more revenue in absolute numbers. But I have a hard time selling out a company that just became profitable while still growing 50% YoY.

Additionally, there is Monday’s subscription model. From Cloudflare’s last earnings call:

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.

Monday’s subscription model is seat-based and therefore more fragile in this environment. That doesn’t mean, there is an issue with the business itself. I don’t believe so. But I have to admit, there are better, less fragile, mission-critical companies.

On Monday’s marketing:

You can find my thoughts on Monday’s marketing here.

My investment decision

As I already have trimmed the position before earnings, I decided to hold the rest for now since I don’t see many issues. Yes, their revenue is slowing down sharply at only $137M which is way lower than my other companies. But it’s still growing at 65 % and is likely to stay above 50 %.

From my perspective, this is driven by macro and is not a company-specific execution issue. Since Monday’s subscription model is seat-based, they are more prone to suffer immediately. Companies are less likely to expand seats or even cancel them due to layoffs. At the same time they just became profitable, and still have a strong DBNRR of 135 %+ (!) while growing above 50 %.

I might change my mind at any time based on available information, but this is how I see it.

ZoomInfo

What they do: Provides tools for Sales & Marketing teams to find and generate more customers

Confidence tier: - (Sold)

Type of revenue: Subscription-based (seats)

Trend to profitability: Yes

Cash: $445M

Revenue: $287.6M

YoY	Q1	Q2	Q3	Q4
2021	50.0%	56.9%	60.1%	59.1%
2022	57.7%	53.5%	45.5%

QoQ	Q1	Q2	Q3	Q4
2021	9.7%	13.5%	13.6%	12.5%
2022	8.7%	10.5%	7.7%

Free Cash Flow: $99.8m

FCF margin	Q1	Q2	Q3	Q4
2021	63.6%	52.8%	37.1%	38.0%
2022	52.1%	40.5%	34.7%

Customers $100k+: 1,848

YoY	Q1	Q2	Q3	Q4
2021	50.8%	69.2%	73.6%	70.8%
2022	70.8%	60.3%	47.8%

QoQ	Q1	Q2	Q3	Q4
2021	11.8%	15.8%	13.6%	16.2%
2022	11.8%	8.6%	4.8%

Dollar-based net retention rate:

DBNRR	Q4
2021	116%
2022	?

My thoughts:

Highlights

• Operating income improved to $118.40 from $78.40 Year-over-Year.
• Net income improved to $96.80 from $50.70 Year-over-Year.
• Free Cashflow improved to $99.80 from $73.30 Year-over-Year.
• Free Cashflow margin keeps decreasing from an average of 48% in the past 3 years to 34.7%, which is still excellent.
• They raised guidance by just 0.5 % from $1.09b to $1.096b - which is negligible.

Room for improvement

• They generated $287.6M in revenue, which is 45.5 % Year-over-Year. That is only 7.7 % Quarter-over-Quarter growth. They beat by just 3% while they usually beat by ~6 %.
• They guided to $300M in Q4 which translates to $309.25M if they beat by 3% which will be again only 7.5% Quarter-over-Quarter.
• Customers $100k+ growth slowed to 48% Year-over-Year from 60% Year-over-Year the previous quarter and slowed also to just 4.8% Quarter-over-Quarter.
• They decreased guidance for Free Cashflow by -2 % from $446m to $435m.
• Low Dollar-based Net Retention Rate is going to retract, which is already relatively weak at 116 % when comparing it to other companies.
• Remaining Performance Obligations are slowing:
  
  

Snippets from their earnings call:

While this was consistent with seasonal patterns, we are adjusting our cash flow expectations in the short term to reflect the potential for more flexibility in payment terms related to a worsening macro environment.
(…)
Deals taking longer just means more meetings, more reviews with leadership more calls and e-mails to drive the same outcome that we were getting historically. And so while our gross retention has stayed largely the same, our upsell motion has seen those more macro headwinds.
(…)
But ultimately, the macroeconomic situation creates sales elongation, sales elongation creates more time spent by our sellers. And ultimately, that’s a capacity drag. And so we’re trying to make sure that we’re making the right decisions from an organization perspective to make sure that we’re relieving as much of that drag as possible.

→ Similar to other companies, they are affected by the macro environment.

*(…) as we made our way through Q3, we began to see increased macro pressure on deals, causing the level of deal review to increase and sales cycles to elongate further.

Since this started very late in the quarter, it only modestly impacted Q3 results. This elongation trend has continued into Q4, and we do expect it to impact growth in the short term.*

→ If Q3 is only modestly impacted, it will only become worse.

As a result of the more challenging environment, we now expect dollar-based net retention in 2022 to retrace the gains that we were able to achieve in 2021. In short, we are taking a prudent view of the near-term growth expectations for Q4 and 2023 until we see more definitive signs that the economic environment is improving. That said, we are still raising our guidance for the year and are confident in the value proposition that we deliver to our customers.

→ The net retention rate will worsen due to fewer seats per customer sold. Nice to see a rise in their guidance but the amount is negligible.

One of the things that we’re seeing in this macroeconomic environment is that there are industries and companies that are much more immune to the macro changes. You see that in insurance, you see it in financial services. You see it in banking and transportation and logistics.

→ Interesting insight about industries like Insurance, Financial Services, Banking, Transporation, and Logistics being immune to the macro changes. Wondering if Bill fits into the Financial Services industry.

So we still have customers that are renewing, and we have seen an acceleration in terms of functionality upsells. Where we’re seeing more pressure is with respect to the seat expansions and data expansions that we had seen historically. That’s the area where we feel our team isn’t able to go after as much of the upsell opportunity given the incremental time that they’re spending on renewals and deals in general.

→ This might affect other companies which have a seat-based model as well. Monday?

All deals, including straight renewals, are requiring more effort to reach an outcome, which stretches our sales team and capacity.

→ If ZoomInfo would be mission-critical, why do they have trouble with renewals?

My investment decision

Overall they sound confident in their business but expect macro headwinds in the near term primarily due to pressure in Europe and larger deals. There is no area of specific concentration but there are industries that are largely immune to this such as transportation, logistics, media, insurance, and financial services.

Deals are getting done by C Level (CFO) instead of VP Level. That drags time out which means less time to go for up- and cross-sell opportunities for sales reps and “elongates” deal cycles.

It might be unjustified, but I never lost this “fishy” feeling with ZoomInfo. This is based on how they are aggregating data from everywhere, how privacy might become another headwind going forward and other data providers like LinkedIn could block them from crawling data.

I brought ZoomInfo into the company I work at and Sales like to. Still, ZoomInfo was never able to address all privacy concerns properly. That’s why I never owned a big position.

Still, I have to acknowledge their very strong profitability when looking at a 34.7 % Free Cash Flow Margin and 33.7 % Net Income Margin.

But to keep ZI, they would have to deliver excellent results and grow at similar rates as i.e. DataDog does (>60%; oh, and DataDog generates 50% more revenue in absolute numbers) - but they were far from that this quarter. Which is why I sold my 4% position after earnings.

That said, Bert Hochfeld remains bullish on ZoomInfo. Over the course of the next 12 months, he expects the shares to generate positive alpha.

Upstart

What they do: AI ending platform that makes automated credit decisions and identifies risk more accurately and approves more applicants than traditional, credit-score-based lending models

Confidence tier: - (Sold)

Cash: $830M

Revenue: $157M

YoY	Q1	Q2	Q3	Q4
2021	90%	1018%	250%	252%
2022	156%	18%	-31%

QoQ	Q1	Q2	Q3	Q4
2021	40%	60%	18%	33%
2022	2%	-26%	-31%

My thoughts:

Let’s keep the numbers part short: -34% revenue growth, profitability moving in the wrong direction. And they didn’t reduce the loans on their own balance sheet… It’s all bad.

Hopefully, Upstart was my last “half-assed” (as Stocknovice likes to say) investment. I held it by telling myself “to keep it on my radar”.

Let’s be honest: Those “keeping on the radar” positions are nothing but distractions. If you want to start a position, that’s fine. But don’t keep tiny positions on your radar, because you want to keep your skin in the game for irrational reasons.

Now I am sitting here wasting time, thinking and writing about a position that is not worth holding anymore (as a concentrated hyper-growth investor) for quite a while already!

That said, I still believe Upstart will do well over the next decade. I still believe in their business model and their advantage of being ahead of their competition. I even believe the current environment will speed up the learning for their algorithm.

They have a high chance of surviving this since they have $830M in cash and they don’t need to raise any additional capital.

To me, it’s a question of: When is macro improving? Below you will find some comforting statements by the management to back that up.

So, if you are investing in an ETF or a portfolio with 50+ positions: Keep that 1% position.

But for me, it’s against my rules:

• Low, negative revenue growth
• Worsening profitability metrics
• Cyclical business
• Too complicated

Because of that, I sold my 1% to keep it on my radar position. And perhaps I shouldn’t have invested in this company in the first place.

Quotes from their earnings call

But I want to be clear, contraction in lending volume in a time of rising rates and elevated consumer risk is a feature of our platform, not a bug. In fact, it’s required in order to generate the returns lenders and investors expect. Whether due to an increase in expected loss rates, caution on the part of lenders, or higher yield demanded by credit investors, higher interest rates and reduced volumes mean that as unhappy as we are with the numbers, the system is working as intended.

While we don’t make predictions about the future, we’ve chosen to take a conservative position with respect to the direction of the economy in the coming quarters. In other words, we assume the worst is in front of us. We’ll be pleasantly surprised if this turns out not to be the case.

In recognition of the reduction in loan volume in our platform, we, unfortunately, eliminated approximately 140 hourly positions within our loan operations team, representing about 7% of our workforce.

While we dislike a weakened economy as much as you do, the increase in default rates that accompany this weakness serves to train our AI models faster. While other platforms continue to retreat to serving super-prime consumers, Upstart is rapidly learning how to price and serve mainstream Americans in all market conditions.

Third, automation. In the third quarter, we saw a record 75% of loans fully automated. This came from a variety of efforts, including an experiment to help applicants enter information more accurately that led to an absolute 1.8% lift in instant approvals.

Finally, while there’s no shortage of caution among banks and credit unions, I’m also happy to report that we deployed a record 17 new lenders onto our platform in Q3, including Alliant Credit Union, which is a top 10 credit union by asset size. This compares to 17 lenders launched in all of 2021. While these lenders are starting up cautiously, it’s encouraging that we’re planting seeds for funding capacity in our future. As of today, we have 83 lenders under contract on the Upstart platform.

We continue to be in a favorable liquidity position with $830 million of total cash and $431 million in net loan equity on our balance sheet.

And when I think we’re in a more normalized environment, we will very quickly see the benefit of things. Just by way of example, we have the highest-ever rate of automated loans, 75% of the loans on our platform in Q3 had no human intervention in them, and that’s a record high for us.

So our first goal is, of course, to retain solvency in the sort of solid footing the company is on. We have a large cash balance. We have relatively low fixed costs, and that’s really helped us all through our existence. But – so we don’t have any fear other than, look, the thing we want to keep doing, and thus far, we’re able to do so, is investing in the products.

Certainly, there are scenarios we could imagine that is so bad that we would have to cut back investment or pause products, et cetera. But we don’t see that today. I think today, we have enough volume and enough contribution margin to keep optimistically investing for the future, and that’s what we would hope.

Arvind Ramnani
Right. And as you think of your kind of, I would say, kind of existing cash burn and sort of projected cash burn in which country you’re making adjustments with – just on some of your expense line, when do you think you may need to go sort of raise kind of additional capital, whether in the form of equity or debt?
Dave Girouard
We don’t see any need to do that, Arvind. And honestly, our cash burn today is quite small even in the very constricted position we’re in. I mean, I think our volumes are pretty dramatically lower than they were, yet our cash burn is fairly minimal. So we don’t see a scenario where we have to raise cash. As Sanjay said, we have over $800 million in cash as well as loan assets on the balance sheet. So that’s just not something we anticipate at this time.

Sanjay Datta
I was just going to maybe put some quick back-of-the-envelope numbers to that. Our cash sort of fixed expense burn across payroll and OpEx every month is about $30 million. And even at zero origination scenario, we’re getting a servicing stream of revenue that’s about $15 million. So there’s sort of – maybe the sort of $15 million delta every month that we have to rely on contribution margin for to cover. So that’s sort of like on a downside scenario where the gap might be. And as you saw, we’ve got about $800 million in total cash on the balance sheet. So as Dave said, that can take us for quite some runway.

My investment decision

Bye Upstart,

wish you well.

[mooo]

About tiers

I put my companies in 3 mental 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.

Long Story Short

That was one of my busiest months in a long time. And it was a very interesting earnings season. Usually, I don’t do that many changes to my portfolio, but it had to be done. Now, I feel comfortable with my allocations.

I feel like this is true for all of my companies in the portfolio: The danger of being too ruthless in this environment might lead me to just own 3 cybersecurity companies after the earnings season - which can’t be a winning play.

And perhaps it’s about time to get rid of the Mantra, cybersecurity is any more resilient than other sectors. Plus, if even those companies struggle, it makes me feel a bit more relaxed about all the other struggling companies in my portfolio. That’s why I decided to ride things out with some companies like Monday. But I might change my mind at any time based on the information available.

Most companies now guide very conservatively, none of them wants to get caught off guard (again). They don’t know when this environment ends and expect the worst. It is likely that we see another macro quarter in 3 months. But once we get out of that even slightly, companies will surprise us with decent beats. And that’s the upside of the current environment and time to accumulate.

If you really read through everything, I wrote: Kudos to you!

One ask: I tried different styles of writing about the companies in the review section. You might have noticed: In the Cloudflare section, I quoted more and added thoughts, while in the Zscaler section I focused on bullets instead of quotes. Which style did you like more? Please let me know via direct message/email to not clutter the board. Thank you!

Appendix

Earnings Calendar

Company	Earnings release	Time
SNOWFLAKE	11/30/2022	Post-Market
Cloudflare	11/3/2022	Post-Market
Datadog	11/3/2022	Pre-Market
Sentinel One	12/6/2022	Post-Market
Crowdstrike	11/29/2022	Post-Market
ZSCALER	12/1/2022	Post-Market
Bill	11/3/2022	Post-Market
Zoominfo	11/1/2022	Post-Market
Monday	11/14/2022	Pre-Market
The Trade Desk	11/9/2022	Pre-Market
Upstart	11/8/2022	Post-Market

My Previous Portfolio Summaries

→ October 2022

My Investing Style and About Me

→ At he bottom of my first portfolio summary

Thank you for reading.

Happy Investing, everyone!

[mooo]

I had to split the summary into 3 parts, please scroll up if you haven’t

[SaulR80683]

Hi Moritz,

Thank you for a very well written and very useful and thought provoking end of the month summary. And yes, I did read it all the way through… (though I admit that I skimmed Upstart and ZoomInfo as I am no longer interested in either.) All in all, just an excellent summary.

I do have a couple of questions about your annual and cumulative results. First, your figures calculate out to a cumulative 12.7% gain, but you marked it down to 4% because of the strength of the dollar against the euro. That makes no sense to me, as you are trying to evaluate how successful your stock investing strategy has been, and the foreign exchange has nothing to do with the success or non-success of your stock investing strategy. Just my opinion.

And if you were following our board for those years you referred to in your cumulative, I don’t see how you could have made as little as 1% and 4% in 2018 and 2019, as my portfolio was up 71.4% and 28.4% in those two years (that compounds to up 120% in two years, more than a double). Just wondering how that happened?

Thanks again for the summary,

Saul

[etagordon]

Great write up. Thanks. Bullets.

[mooo]

Hi Saul,

thank you for your positive and constructive feedback! We already discussed your questions in private, but I thought it’s worth mentioning it here as well:

On USD → EUR conversion

I guess you are right about this. I will report in my own currency next month. This improves the total performance, but I also have to use the benchmarks (S&P500 etc.) in EUR, which might be confusing to some:

The year-to-date performance of the S&P500 ETF
USD: -14.23 %
EUR: -7.83 %

That’s a huge difference.

On my cumulative returns:

This is due to my investing history:

• Before October 2018, I didn’t know how to invest, what an ETF is, didn’t even have a broker account. The return in that period is from a mix of random ETFs and stocks I bought. I will exclude this year from the next summary on, since this “testing period” might not be meaningful enough.

• During 2019, I continued to learn more and discovered this board. Over the next 2 years, until 2021, I transitioned to a concentrated growth portfolio. Meaning: About half of my portfolio was dragging down my results, since I still didn’t feel confident enough until mid 2021.

While I would have loved to have a 200+ % performance in 2020, too, I don’t regret it: I’ve learned so much in such a short time from you and many others here. That’s just priceless.

Thank you once again, Saul!

Moritz