Mulesoft earnings after the market closes today.

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
11 Likes

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

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 noticed the mention of Apple in the transcript. It was during the CFO’s prepared remarks. It didn’t seem right. I listened to this part of the call and it was not “Apple” who was referenced. It was something to the affect of “Aqua.”

Here’s what the CEO said and this is what the CFO was referring to.

…“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.”

It was not Apple they were referencing as suggested in the transcript.

Take care,
A.J.

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?

Steve,

It sounded to me like they hired a whole team. Maybe one smaller team came from Apple and another team was a small acquisition that was immaterial to their financial results. During the conference call they said that they had so far not had a problem finding excellent talent"

one is on the more aggressive engineering spend. I have always said that, if we have the opportunity to hire great people on the technical side, we will always take that opportunity, as long as we see the market in front of us. And whether that’s a hire or [indiscernible] hires are able to bring in a whole team, and we are fortunate enough to bring in a couple of teams. Very excited about bringing them on board…

And so we feel like, when we have seen more candidates, we have seen a stronger pipeline of candidates, I feel like we have been able to continue to have a very-very high bar and we are never going to drop that bar. That’s the one thing we just refuse to drop. And so that [indiscernible], even though we have been hiring at a higher scale this year than ever before, it felt like we have been able to do that in the right way.

1 Like

Mulesoft is trying to solve an age old problem in IT. What we can read about what most people in the field and observers know the be the case.

That’s no secret.

The secret should be in how they are actually doing it. That they will not tell most people. Many in the field may be skeptical- another one that claim to have the silver bullet, really? But someone will have it and it will move on. It is brewing and something is going on.

tj

How is Mulesoft ever going to have superior economic returns if their primary topic of concern is hiring as many high quality engineers as they can find?

There is simply no way to create superior economic returns if your product is that labor intensive relative to its selling price.

For me, I have moved on from considering the company for a long term investment unless and until they can do what they do with far fewer people relative to product distribution.

Tinker

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How is Mulesoft ever going to have superior economic returns if their primary topic of concern is hiring as many high quality engineers as they can find?

Hi Tinker,

Just maybe they want to grow from a tiny little company to a large successful one. Amazon, Google, Facebook, Nvidia, Apple, Arista, all hired lots of people in order to grow, and you probably had no objection.

That’s no guarantee that Mulesoft will become either large or successful, but I think your objection is a bit disingenuous.

Saul

5 Likes

All those companies you mentioned have made markets and are largely plug n play once you built the product.

Mule seems like another labor intensive integrator/consultant with a better tool that is project by project.

Big difference between that and mass market plug n play capabilities.

Tinker

2 Likes

Mulesoft is trying to solve an age old problem in IT.

Yes. You can tell this because they often compare themselves to ETL tools. ETL stands for Extract, Transform, & Load. It’s the way you move data around between systems: Extract it from where-ever it is, Transform it (which includes filtering, merging with other data, etc.), and the Load it into the new system (which includes format conversions, field substitutions, etc.).

ETL has been around for ages and there have been many many ways to skin that cat. An old MF recommendation, Informatica, used to have their own ETL solutions, for instance. ETLs can be as simple as fixed format conversions, or they can have intelligence for things like looking for missing data or extrapolating missing data, etc. They can even be interactive, where a person looks over the results and either filters things out or points to where missing data is, or even manually supplying the missing data themselves (rare and not scalable).

What Mulesoft appears to offer is:
• 100% Cloud based.
• A large number of “connectors” as standard (120 so far). A connector is essentially the conversion to/from different databases. For instance, Mulesoft has connectors for NetSuite and SalesForce and Slack, Workday, MS Sharepoint, SAP, ServiceNow, etc.
• A development environment for customization. This lets people write their own custom connectors (or hire Mulesoft to write them for you I would imagine). I would also assume it let you write custom logic the for the Transform part, but I didn’t see anything specific on that.

In terms of the validity of Mulesoft’s offering, Saul companies like Splunk are using Mulesoft. You can download the case study white paper from Mulesoft’s site: https://www.mulesoft.com/ty/cs/splunk (just enter garbage info if you don’t want to be spammed).

I spent about 20 minutes on their site. It’s definitely real and useful. I tend to not worry about marketing terms like “Application Network” but it looks like Mulesoft helps companies make the most use of the data they already have without hiring engineers to write specific point to point conversion programs.

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Hi smorgasbord,

IT IS really helpful to get an opinion from an apparent IT professional. I appreciate it very much.

Thanks
Saul

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Smorgasbord,

Do you follow Talend and have you commented on them at all?
You mentioned Informatica in your post who competes with Talend, so thought I’d ask.

Thanks,
AJ

1 Like

My post should have read “mass” markets, not “made” markets that are plug n play.

Dang Apple spell correct. But hopefully my point came across as companies like Facebook and Google spend a ton on engineers, but the engineers are building plug n play software for mass markets. That I think differs from Mule’s business model and ability to scale.

But look forward to others who may say that I am wrong on this.

Tinker

A connector is essentially the conversion to/from different databases.

Just a slight quibble, Smorg. I’m not a techie by any means, but I think since the connectors are translators between one API and another, it’s not just databases they are connecting (like what Talend does with Hadoop), but actually the applications themselves. Maybe this is a subtle difference, because everything moving from one App to another is in the form of “data” (this is digital technology, so what else could it be?), but to my understanding, it’s not just datasets in tables but real-time information captured in-App.

Hope that helps. Personally I think Mulesoft’s quarter was reasonably solid, although I was disappointed to see support subscription growth decelerate from 62% to 54%. We must remember, though, that these are still pretty stratospheric numbers. Mule is a young company, and this is only their second quarter to report since the IPO. Let’s give them some time to get their legs under them.

Mulesoft is still relatively expensive at a PS of 12.4, but that doesn’t sound out of bounds for a company growing total revenue at almost 60%. I will note, however, that Wix now has a PS of 8.2, which is pretty phenomenal for a company also growing revenue at 50%+. I do think we tend to fixate on revenue growth (or billings or collections), when really the leading indicators are:

  1. Are they adding customers at a rapid pace?
    and
  2. Are customers spending more with them over time?

I think the answers to these questions for Mulesoft and Wix are positive.

Bear

4 Likes

Do you follow Talend and have you commented on them at all?
You mentioned Informatica in your post who competes with Talend, so thought I’d ask.

I don’t follow either company. Honestly, ETL is pretty boring stuff to me. Informatica’s been around for ages (it was taken private some years ago). Talend is the newer company, with “Open Source” buzzword compliance.

Informatica enables you to setup an ETL process that runs on their engine. Talend enables you to setup an ETL process that is exported as Java code for you to run where ever you want.

The two companies had a battle a couple years ago (http://www.informationweek.com/big-data/software-platforms/b…) over performance. From what I can tell, it was complete nonsense on Talend’s part to even commission the test, which was timed to take advantage of Talend’s month earlier released product but a month before Informatica released its new product. The speed seemed to be more on whether MapReduce or Spark was used than anything else, anyway.

Why is Talend interesting to this board?

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…it’s not just databases they are connecting (like what Talend does with Hadoop), but actually the applications themselves.

Yeah, Mulesoft’s intention is that you can connect application functions together to build what you need without custom programming (or at least not a lot of it).

it’s not just datasets in tables but real-time information captured in-App.

I don’t think that’s the proper distinction to make. It’s not data in tables vs data in memory, it’s data versus functions/operations/services. APIs enable the calling of services to perform functions. API stands for Application Programming Interface, but that was coined back in the stone age and today it simply describes how one computer program tells some other computer program to do something. Those computer programs don’t have to exist in the same process, nor on the same CPU, nor on the same server box anymore.

The old way of looking at the problem was that you had something you wanted to do/calculate/whatever, but the source data for it had been gathered by different people and programs in different ways. So, to write your program you had to get all the data together in a format for your new program to access. That required ETL. Tough as that was/is to do right,at the end of the day, you’re still having to write programs to perform functionality. The whole dream of SOA back in the 1990s was that people would write small, modular, more general purpose services and then when something specific needed to be done, someone else would simply string a combination of pre-existing services together. This was supposed to be achieved by things like WSDL, SOAP, and UDDI - all based on Web Services. But, it didn’t really happen, because the real world is messy and new things come along all the time, whether it be virtualization or containers or whatever.

What I think is going on with MuleSoft (and other companies providing what Gartner calls IPaaS (Integration Platform as a Service which provides capabilities to enable subscribers (aka “tenants”) to implement data, application, API and process integration projects spanning cloud-resident and on-premises endpoints. Essentially, we’ve finally graduated from being primarily worried about moving and transforming data around (the ETL world) and are now thinking about better ways of stringing functions together to get something useful done. Note that MuleSoft is in Garner’s “Magic Quadrant” for IPaaS vendors.

This article (https://zato.io/docs/intro/esb-soa.html explains the situation pretty well once you know that ESB is once kind of IPaaS. Don’t worry if you can’t follow it all, just skip over what you don’t understand and keep going.

All COTS (Commercial Off The Shelf) cloud-based software you license today have APIs, intended for integration with other software. Nothing is completely self contained, that would be commercial suicide. But, there’s no unification of these APIs in terms of how they’re called, how the data needs to be handled, etc. That’s where Mulesoft is trying to add value. They even have a graphical drag-n-drop tool that you can use to string together some services - no programming required. I suspect that only works for a limited set of things, but that’s just the start.

Mulesoft is probably (I don’t know, I’m speculating here) at the stage where they need to get as many commercial software pieces connected as soon as possible. That would explain all the software hiring. They talk like they have a platform which they believe can handle whatever is needed, but if you’re a Workday shop and a Workday connector isn’t available, you won’t use MuleSoft (they have Workday connectors, of course, that’s just an example).

Now, everyone that makes software provides some level of connectivity for it. If my company uses Workday for our employee/HR stuff and we want to add Concur so employee can plan travel and submit expense reports, there probably are easy ways to connect those two systems, provided by either Workday and/or Concur. I’m salespeople for each are well versed in describing how easy that is.

But, there is still a lot of software that is less pervasive or less common, plus a company will probably have specific needs that are unique to it. Maybe thre’s even have some custom stuff done in SAP or Oracle today. All companies have company-specific data processing requirements. This is where I think MuleSoft comes in.

BTW, an apparently relatively untapped area for MuleSoft is the IoT (Internet of Things) world. Greg Schott from the earnings transcript: "Yeah. I mean, what has been really exciting there, is we are – we have been pulled into a number of IoT initiatives, and frankly, without really going full bore at IoT as a segment for – certainly not from a product standpoint. And the beauty of it is, is that every IoT initiative effectively becomes an integration challenge. You have all these – it’s just more endpoints and its more connectivity, and for us, that’s a good thing. So we are getting pulled into, I mean, one of our wins in the quarter was an automotive manufacturer, and not only are they thinking about us for the backend, for their customer relationships and what the customer sees in the dealership on their web site, but they are also bringing us into the whole digital experience in the car.

We have seen that on vending machines, we have seen that on machinery, and so we are getting pulled in these IoT initiatives. We will give that as a Use Case, a big Use Case that continues to grow. Over time, I can imagine us, building out more toward that direction and offering some specific IoT capabilities. But frankly, we are just finding that we are getting used without having to go in develop something that is a solution specifically for IoT. It’s just happening."

My feeling is that this stuff is sticky. Once you’ve integrated functionality into solutions the lock-in seems pretty absolute. Even if you change out one of the underlying software components you’ll probably find it easier to connect the new component into your MuleSoft framework to replace the old one than to write a complete integration solution from scratch. That said, I could see where sales cycles are long and customer worry about development costs to get going, and on going licensing fees.

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Tinker - I guess the question is whether they need this laborious workforce to

  1. Deliver the live solution and service the client
    or
  2. Sell more and activate more client accounts

If the former then I agree with you, if the latter then it seems like growth hiring not BAU cost base hiring.

Ant

2 Likes

It is one thing to actually make diverse applications work together … but quite another thing to draw information from multiple applications for analysis. It seems to me that Data Direct Cloud solves the latter problem without a huge overhead. One could take the extracted information and import it to another application, but often the need is just to combine sources.

Ant,

Yes, if the product can be plugged and played, and have recurring revenue without having to have consultants go project by project then that is something that can scale.

Otherwise, it is just another integration company, with a better tool, but still basically a consulting company that is labor intensive.

But if the engineers are hired to create product, that can be sold into the enterprise, installed and move on, and the product will grow year after year without having to have all this labor to integrate it and make it work, then that is something else.

That is what Google does, Microsoft does, SHOP does, ZEN does, etc. Plug n play and scale.

Tinker

How is Mulesoft ever going to have superior economic returns if their primary topic of concern is hiring as many high quality engineers as they can find?

There’s no way around it. Just like Disney is going to have to hire A-list actors to star in their movies, Mulesoft will have to have top experts. Creating and adapting inter-application frameworks is a difficult task. The good part is that once the framework is in place, companies will not want to switch it for at least 15 years. That’s why a lot of companies contract that kind of work out, it’s not something your employees should do over and over again. If Mulesoft can establish itself as a trusted provider of such a framework, their long term recurring revenue will be worth the investment in top engineers.

3 Likes