Mulesoft earnings after the market closes today.

Mule is down about 14% right now. I do not own shares, but when I saw this move I thought about looking into them more seriously. I know these guys have been discussed here in the past. For those of you that have positions and are following the stock closely is this a buying opportunity or did something at the company significantly change?

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For those of you that have positions and are following the stock closely is this a buying opportunity or did something at the company significantly change?

Just my opinion, but it looked to me as if they were slightly light on their subscription revenue growth (only up 54%), which meant their deferred revenue was only up 50%… You figure out whether that is worth down 14%. I only added a little, but I had a full size position already. Here’s what the CEO said in the Conference Call:

We delivered another strong quarter. Our total revenue was $69 million, up 57% year-over-year. Subscription and support revenue was $55 million, up 54%, and we crossed the $250 million annual rate in revenue for the first time…

With respect to our market opportunity, we are pursuing one of the largest opportunities in technology today. As enterprises move their business to the cloud, deploy SaaS and embrace mobile and IoT initiatives, it is creating an unprecedented IT challenge to quickly and efficiently connect the various endpoints, and deliver the benefits of digital transformation. We provide a disruptive platform to help companies create an application network, in which they can quickly discover, reuse and compose application components to deliver new and enhanced services in days or weeks, instead of the months or years typically required previously.

The application network is analogous to the modern computer network. Just as we expect every company today to have a computer network, where you can easily plug-in laptops, servers, printers and other components to work together, we believe every company will have an application network for plugging in applications, data and devices. To build an application network, customers require key capabilities, which we provide in our Anypoint Platform:

First, they require universal connectivity to feed data into APIs from a variety of on-premise and cloud applications, data stores and devices.

Second, they need end-to-end API lifecycle capabilities to design, build and manage APIs.

Third, they need enterprise grade governance and security, as their business critical data and transactions traverse an increasingly distributed network.

As customers build out an application network, they need a collaborative engagement exchange, where APIs and other assets can be published, discovered and consumed.

Finally, they need a resilient and scalable runtime engine that keeps the application network running, and always available, processing millions of transactions every day.

Leveraging our platform, enterprises can build an application network by creating and connecting building blocks, that combine application functionality with APIs, making that functionality discoverable and reusable by developers across the extended organization. As the application network grows, new applications can be created faster, by using existing building blocks, rather than writing new code.

Saul

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Pigskin801: Mule is down about 14% right now. I do not own shares, but when I saw this move I thought about looking into them more seriously. I know these guys have been discussed here in the past. For those of you that have positions and are following the stock closely is this a buying opportunity or did something at the company significantly change?

I am invested in MULE but I have been getting increasingly jittery for some time now. About a week ago I sold most of my position leaving only a trivial remainder in place as I watch the stock. No clue why the market is reacting so strongly today!

I don’t see anything obvious about why I distrust MULE as an investment. Except possibly that they don’t seem to be headed towards profitability. Perhaps it is that they throw around so many buzzwords.

My instincts are telling me to be extremely cautious with this company so I will not buy today even though I think today is likely an overreaction and the stock price will (short term) go up at least a little bit. Anyone else have any thoughts?

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othalan, your instincts are usually pretty good so I’m wondering what you are feeling and seeing that I don’t see. Any clues will be appreciated.
Saul

I don’t know what Othalan sees that makes him nervous, but I can tell you why I never bought MULE.

First, they claim that one of the benefits of having their products makes it so that an enterprise can use pieces of existing applications as building blocks for new applications. I don’t understand how that is supposed to work in that fewer and fewer enterprises are actually building applications in house. Almost every company buys COTS rather than builds applications. Only a few specialized applications gets built by IT departments anymore. Those specialized applications that perform functions that aren’t supported by COTS because there is only a very small TAM. But, because these applications are so specialized, there’s not a lot of advantage in integration.

In my 30 year IT career I worked more with development than anything else. I watched over the years as the company migrated away from the applications that were built in house to COTS for virtually every mainline business function. Typically, COTS vendors don’t allow you to parse their applications into “building blocks.” So the “benefit” of expediting application development is decreasingly important because most enterprises aren’t developing applications and the benefit of using pieces of existing applications as building blocks does not apply to COTS (to the best of my knowledge), so in the few places on might take advantage of this benefit, it’s not available.

This is not to say that there are no benefits from using MULE to integrate applications, but IMO not to the extent that they claim. During my tenure in IT I have seen a lot of “silver bullets” that never delivered on their promise. IMO MULE displays enough of the characteristics of an off target silver bullet to make me very skeptical. Maybe they’ll so fine and deliver for their investors, but I personally see better opportunities elsewhere.

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SaulR80683: othalan, your instincts are usually pretty good so I’m wondering what you are feeling and seeing that I don’t see. Any clues will be appreciated.

Saul, I just read through the earnings transcript again and reviewed the finances to try and get more clues. The only thing I can spot which might be a source of my jitters is that it sounds almost too good to be true. That perhaps the excitement expressed by management outstrips the reality of what they have created.

From the transcript:

https://seekingalpha.com/article/4091662-mulesofts-mule-ceo-…

We provide a disruptive platform to help companies create an application network, in which they can quickly discover, reuse and compose application components to deliver new and enhanced services. By using an application network, companies can compose new services in days or weeks, instead of the months or years typically required with custom integration code.

The application network is analogous to the modern computer network. Just like we expect every company today to have a computer network, where you can easily plug-in laptops, servers, printers and other components to work together, we believe every company will have an application network for plugging in applications, data and devices. To build an application network, customers require key capabilities, which we provide in our Anypoint Platform.

Let me simplify this: How does some random application use data from some random unknown data source?

This is more or less a “holy grail” type question in software engineering. Mulesoft management talks as if this is a new problem with cloud computing but really this has been a problem since software engineers first tried to feed data into an application that was not expecting this data. Case-by-case this is not difficult as data interpretation is a relatively simple task. The challenge is solving this in a generic and extensible way because there are an infinite number of possible data sources and an infinite number of applications interpreting that data in their own unique way.

Reading the above quoted statement by Mulesoft management (and others in the transcript) it seems as if Mulesoft has solved this problem. Using the Anypoint Platform, a company will save development time, save money, accelerate product delivery cycles exponentially with each new product, and open up new development channels for increased corporate diversity!

I’m going out for a smoke, the software engineer part of my brain just had an orgasm!

I admit I exaggerate.

Nonetheless I think this may be why I am skeptical. I have heard similar stories before. I have worked with systems that supposedly would revolutionize software development. Those systems were frequently beloved by management and hated by most of the engineers. I have seen those revolutionary systems come with promises of a brighter future only to fade into obscurity when the excitement is not realized in the real world. Some few succeeded but many did not. Some were even truly great ideas that were brilliantly executed but failed to pass the test of real world use case scenarios.

I do hope Mulesoft succeeds with their vision as a widespread concept like “Application Networking” really could revolutionize software.

The big challenge they face is not if they can provide the service they claim, but rather if they can make money at it. Of course they can provide a framework for networking applications together. I have been doing similar things on a small (ok, tiny) proprietary scale since my first applications in the late 1990’s. All software engineers who send data between applications do the same with varying degrees of success depending on the availability of project funding and individual talent.

As an investor, I suppose my biggest question is if Mulesoft can create a large-scale generic solution at a lower cost than software engineers can create their proprietary versions which are reinvented with each new corporate project. The hope of cloud computing, SaaS, etc. is that the scope of this problem will be so big, software engineers and their proprietary versions simply won’t be able to keep up with the problem, driving business to Mulesoft’s Anypoint Platform.

Conclusions and Other Thoughts

As I put this into the context of MULE as an investment, all this might simply mean my instincts are simply saying it is too early to tell if MULE will be an amazing success or a total flop, no matter what management says. Mulesoft is clearly not just providing vaporware as they have products which have been in use for years. Yet neither is it clear that they can provide solutions efficiently enough to make a profit. End of the day I am an investor in this company. This means I don’t care how exciting the idea, I want to know I will make money.

As I think on this I am suddenly reminded of the dot-com crash of 2000. The vaporware and empty promises. This is not happening today. But I wonder if we have a different issue arising which might cause problems: Tech companies so focused on “bigger and better” they never actually get closer to making a profit. I am thinking of the recent discussion on SHOP vs HDP. Is this a widespread and growing problem across the industry, particularly in software companies? Is it possible that the ambitions of software companies have outstripped the price vs performance balance of hardware, making profitability unattainable for some companies? Or is growth taking too much focus from sustainable business practices? No answers to those thoughts and maybe it is all irrelevant. Just what came up as I let my mind wander on this whole issue surrounding MULE.

I still feel a bit jittery thinking of MULE but all this has helped that settle at least a bit. I’m still not selling my last tiny position and still not buying, but I am going to watch closer over the next few days and think it over. If I come up with any other insights I will pass them on.

As always, I may be wrong in all of this. I welcome thoughts, feedback and criticism!

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"…The big challenge they face is not if they can provide the service they claim, but rather if they can make money at it. "

your concern is interesting.

In the 1960s a small business proposed to connect all computers together. They went at it for maybe 2 decades before folding in the 1990s just as the web started.
Their problem is that they decided to tackle too large of a problem. Not everyone would find it useful to connect their computers to this network at once and it did not really provide an ‘organic scaling’ model. It never reached a critical mass to ignite a network effect.

I think Mulesoft framework has the potential to cause a network effect. If that takes hold, Mulesoft can become very big. If more customers start to use it, there should be scale and flexibility within and between entreprises (e.g. suppliers and their customers). I think the key is to start small and there is no plan to convert the entire IT world at once. They have started small by focusing on a few distinct customers and supported them well.

Why would you buy something that you could do in house? Maybe some things are still done in-house but it seems to me that the tendency nowadays in the cloud world is to specialize – doing pure plays- and find a way to succeed while doing that.

Isn’t Twilio and many of those software platforms companies doing just that?

tj

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From the conference call:

To deliver these innovations and to continue to press our innovation advantage. We have been growing our team. In addition to strong technical hiring throughout our normal recruiting efforts, we have also made two small team acquisitions in the recent months, and hired 12 engineers from another company, which together, brought a total of 65 engineers and product staff over to MuleSoft.

We continue to expand our direct sales capacity as quickly as we can bring on board high quality reps

During the second quarter, we again had roughly a quarter of our deals sourced by partners. Let me give you some examples; Accenture helped us win a new deal with a Fortune 100 life insurance company. Capgemini helped us win an expansion deal with a leading internet shopping site. Infosys helped us win the Fortune 100 diversified technology company I mentioned earlier; and Deloitte helped us win a Fortune 100 maker of PCs and related supplies. This increasing level of activity with our partners, gives us leverage in both our sales and deployment capacity.

Total revenue was $69.2 million for the second quarter, representing 57% year-over-year growth. Subscription and support revenue, and most important, reflection of the growing market adoption of our platform, was $65.1 million, an increase of 54% from the year ago period. Subscription and support represented 80% of our total revenue mix, compared to 81% a year ago. Demand for Anypoint Platform continues to be strong, and is driving the subscription growth.

Our blended total gross margin for Q2 was 75.1%, up 150 basis points from 73.5% a year ago, and due to the higher gross margin on each revenue type.

Thought I would just be the optimist today and point out there was an awful lot to like in the conference call, I did nibble today. Time will tell :slight_smile:

Kindest Regards,
Steve

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thejusticier: Why would you buy something that you could do in house? Maybe some things are still done in-house but it seems to me that the tendency nowadays in the cloud world is to specialize – doing pure plays- and find a way to succeed while doing that.

TJ, some very good points!

In particular with the above, I had one additional thought you bring to mind: Code Reuse is another “holy grail” problem of software engineering. It sounds great in theory. Write code once, reuse it many times. Unfortunately, reality interferes all too often and reused code often causes more problems than it solves. Thus leading to a principle that management does not like to accept: The engineer’s experience creating that code is what is valuable and needs to be reused, not necessarily the actual code itself. Unfortunately, the individuals are rarely utilized in that way for a variety of unfortunate realities of the real world.

The key is to institutionalize that expertise in the form of a specialist company (like Mulesoft) any time you have a task which is common in the world but not central to the corporate product.

From this perspective, Mulesoft unquestionably has a niche in the software world. But … is there any actual money to be made? I’m still dubious though hopeful.

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No sure anyone saw this but here’s one rational why there was such a large fall…
https://www.fool.com/investing/2017/07/28/is-this-why-muleso…
Having the fastest growing part of your business drop to zero margin isn’t inspiring.
Ant

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Great post, othalan. I would add one thought there - the challenge for Mulesoft is getting companies to adopt their framework. Their product may be too technical for the managers to understand and too disruptive for the engineers to accept (they may prefer to code their own framework).

However, once they’re in, they are not getting out of those contracts. Having your application framework replaced is a major pain in the ass - risky, expensive and time consuming.

In short, it’s difficult for Mulesoft to gain new customers but with the existing ones they have a moat made of molten lava. It’s kind of the opposite of Shopify.

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Having the fastest growing part of your business drop to zero margin isn’t inspiring.

Here are the comments on the call specific to what Ant wrote:

Professional services and other gross margin for the quarter was a positive 9%, up from breakeven gross margin a year ago. We expect this margin will vary quarter-to-quarter, and maybe negative in certain quarters in the near term, depending on the nature of services offered, the utilization of trained resources, and as we continue to rapidly build our capabilities to support our expanding customer base.

Don’t know how much this helps, but hey, you didn’t have to pay anything for it!

Take care,
A.J.

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Saul, I just read through the earnings transcript again and reviewed the finances to try and get more clues.

Thanks othalan, your post was very helpful. I appreciate you taking the time. My caveats, though, are the following:

  1. It’s hard to say there’s no demand for a product that increased sales 71% last year, and 54% this quarter in a “bad” quarter.

  2. It’s hard to imagine their clients aren’t getting some benefit as the dollar based retention rate is over 100%, meaning customers are enlarging their contracts.

  3. It’s hard to imagine their customers aren’t getting benefit when average subscription and support revenue per customer went $82,000, $105,000, and $143,000 in 2014, 2015, and 2016.

  4. And they do have $144 million in deferred revenue, which isn’t bad since their entire recognized trailing revenue is just $233 million.

But please remember that I have no tech training or expertise at all. None! I have trouble working my smart phone. My common sense reasoning may be way off.

I’ll probably stick with my position, but I’ll watch it carefully.

Saul

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No sure anyone saw this but here’s one rational why there was such a large fall…
https://www.fool.com/investing/2017/07/28/is-this-why-muleso…
Having the fastest growing part of your business drop to zero margin isn’t inspiring.
Ant

Sorry ant, but the writer of that article didn’t have a clue what he was writing about, not a clue! He should have been embarrassed to write that. Professional services are just a tiny part of revenue. It’s the technicians that the company sends out to help with installations and hold the customer’s hands to make sure they are happy. It varies from month to month depending on what projects started. This quarter it was up 70% because it was large this quarter and lower a year ago. Management is keeping margins low on this as it is just a service to make a happy customer. What any idiotic MF article!!!

Saul

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I did a lot of reviewing of MULE yesterday and feel comfortable with the company. I Should still do a lot more but I agree with Saul that the article posted on FM is junk. Overall I think things are still positive and the stock drop is over blown (IMO). I added 1/2 a position yesterday. (I had cash sitting and it was looking for a home).

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**SaulR80683:**1. It’s hard to say there’s no demand for a product that increased sales 71% last year, and 54% this quarter in a “bad” quarter.

2. It’s hard to imagine their clients aren’t getting some benefit as the dollar based retention rate is over 100%, meaning customers are enlarging their contracts.

3. It’s hard to imagine their customers aren’t getting benefit when average subscription and support revenue per customer went $82,000, $105,000, and $143,000 in 2014, 2015, and 2016.

4. And they do have $144 million in deferred revenue, which isn’t bad since their entire recognized trailing revenue is just $233 million.

Saul, all very good points. I agree with every one!

Yet … I still hesitate. If I could give you a more concrete reason I would. Perhaps I am just being irrational and everything really is going great.

Two more thoughts have come up.

Why did Mulesoft expend so much effort in the earnings call giving a sales pitch for why their product is so amazing? I am an investor not a customer. A certain amount of this is normal but it seems excessive here.

By their own admission, Mulesoft is creating its own market with the idea of the Application Network. To me, this sounds like thy are (at least partially) selling companies a product they do not yet know they need. How does that effect sales and marketing costs? Can they decrease sales and marketing costs as a percentage of revenue to help move towards profitability, or will the need to continually create new market awareness be a continuing drain?

To me, this sounds like thy are (at least partially) selling companies a product they do not yet know they need.

Hi again, othalan,

Let’s see. Did anyone know they needed the internet before it arrived? Or macintosh computers with windows on the screen (small “w”), instead of just text going across the screen one letter at a time? Or graphics processing units (GPUs) before Nvidia came out with them? Or Facebook? Or Twitter? Or iPhones? Or selling things online (amazon)? Think about it! No one felt they needed to buy books online before Amazon came along! Or SDN (Software Defined Networking), when everyone was happy with plain old Cisco ethernet switches before Arista came along? And there are a million more.

I’m not saying that Mulesoft will turn into an amazon or Apple, or Facebook, but just because it’s a new idea doesn’t mean people won’t discover they need it. And 71% revenue growth in 2016 sounds like a lot of people decided they needed it. You can’t really grow much faster than that in an orderly way and keep control of your business quality (although Shopify seems to be the exception that proves the rule).

Best,

Saul

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There is also a difference between not recognizing that one has a need and not knowing that there is a product which addresses a need which one does recognize.

Why did Mulesoft expend so much effort in the earnings call giving a sales pitch for why their product is so amazing? I am an investor not a customer. A certain amount of this is normal but it seems excessive here.

Maybe it’s because they just went IPO in March and this was their 2nd call with investors as a public company. Maybe they decided to explain this to analysts who have just started covering the company.

By their own admission, Mulesoft is creating its own market with the idea of the Application Network. To me, this sounds like thy are (at least partially) selling companies a product they do not yet know they need. How does that effect sales and marketing costs? Can they decrease sales and marketing costs as a percentage of revenue to help move towards profitability, or will the need to continually create new market awareness be a continuing drain?

Yes, the sales cycle is lengthy and therefore costly. They said on the earnings call that the sales cycle is 6 months to a year. They also said that as their product gets more complex (adding new features and capabilities to maintain and extend their advantage versus the competition) they are seeing the sales process lengthening. On the positive side, they are getting more and more deals referred by their partners; I think they said 25% of their deals came in through partners which makes these deals less costly to sell with a higher close rate (I assume). Another note: MULE is selling to enterprises and they have only 1170 customers but the customers are very large compared to a WIX or SHOP. MULE also said that full implementation for MULE’s offering takes a year so their customers are make a huge investment in time and resources and are unlikely to switch (switching costs to a competitor are huge). It’s a major decision for a customer to use MULE, and, again, this makes the sales process long, complex and costly but it also makes their offering very sticky.

As Saul already pointed out, the metrics over the past 2 years looks very good.

Here is the customer count each quarter:

655
716
758
839
946
994
1071
1131
1170

Rising steadily. Each new customer they get is a potential reference for future customers.

Here is their average support and subscription revenue (in $000) per quarter:

89
99
105
115
125
136
143
152
164

Rising steadily. The average customer is spending more and more each quarter.

Here is the average net retention rate per quarter:

112%
116%
121%
125%
122%
120%
117%
116%
116%

Rising constantly. Customers are staying with MULE and spending more.

Below was the revenue growth rates:


q/q    1 yr    1 yr(rec)  q/q (recurring)
138%			   91%  Q1 16
70%			   77%  Q2 16
65%			   70%  Q3 16
62%	70%	73%	   63%  Q4 16
56%	62%	67%	   62%  Q1 17
57%	60%	62%	   55%  Q2 17

45%	54%	55%	   44%  Q3 17 (guidance)
42%	49%	49%	   39%  Q4 17 (guidance)

Revenue growth rates are decelerating. My guess is that they will probably beat their guidance though. I would expect growth rates to be around 60% but we will see.

Chris
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In the Mulesoft conference call there was a comment made that really hooked me. That comment is when Greg Schott said During the second quarter, we again had roughly a quarter of our deals sourced by partners.

To my mind that’s like me telling my family and friends that I have purchase this new product that I love and you really need to try it.

I do have a question. In the first part of the call they said they hired new engineers, later in the question & answer section a comment made sounds like a few of the engineers come from apple. I’m a long way from silicon valley. Do you think this may be a slight positive? My guess is it would depend on how good they are at their craft. If they are excellent and went over to Mulesoft for the options that would be great. If they were average disgruntled apple employees maybe not so much and hopefully Mulesoft would have passed on hiring them. Or maybe there is such a shortage they need to take who they can get?

All that said I have bought my share of story stocks because to the conference call (clean energy). Time will tell.

Kindest Regards,
Steve