Mulesoft (MULE) was a recent IPO (a week or so ago). I took a small look-see position this week (just over a 1.0% position). All the information I had was the SEC form S-1 which was the IPO filing. The company has an easy to use program that allows companies to make all their applications talk to each other and exchange information. Before they came along this had to be done by hand, or by klunky programs sold by the legacy companies in the field like IBM and Oracle, who were in a no growth status in this field, due, apparently, to customer frustration. Mulesoft grew revenue by 91% in 2015, and by 71% in 2016 (off a larger base), so they were obviously doing something right. They have acquired some major businesses as customers in spite of their tiny size. These include Coca Cola, Unilever, McDonald’s, Citrix, Salesforce, Spotify, etc. Here were some of their numbers I found appealing:
Customers have grown
2014 590 2015 839 + 42% 2016 1071 + 28%
Dollar-based retention rate has been
2014 110% 2015 121% 2016 117%
Average Subscription and Support Revenue per customer in thousands of dollars
2014 82 2015 105 + 28% 2016 143 + 36%
Revenue has grown (in millions)
2014 57 2015 110 + 91% 2016 188 + 71%
Free Cash Flow was minus $7.2 million, improved from minus $48.6 million the year before.
Adjusted Loss was $43 million, down from $62 million the year before.
Stock based compensation was relatively small.
Then yesterday, Bert Hochfeld wrote an excellent article about them:
As I read through the article he had a lot of good things to say about the company and its operations, but concluded that the stock price was too high and didn’t allow for much future appreciation, so he couldn’t recommend it.
Some quotes (slightly simplified):
the Average Contract Value (ACV) of their customers has risen from $77,000 in 2014, to $169,000 in 2016. At this point they have 30 customers with ACV in excess of $1 million. This is typical land and expand…
… its gross margin on subscription revenues is a relatively high 90%, which is close to the top of gross margins that have been achieved by software vendors who sell subscriptions to their platforms…
… Quite unusual for a company of its scale and maturity, it had a cash burn from operations of just $2.7 million. Part of the result was, to be sure, a function of stock based comp but that was just $7 million. There was an increase in Deferred Revenues of $52 million…
…Most customers are looking for solutions that provide the benefits of Mule’s Anypoint platform. They need to ensure that their applications work seamlessly with each other and that the data that is generated from multiple sources can be appropriately aggregated so that the applications can actually be used as intended - something more difficult than might be imagined… All of that it be done with the tools that have existed, but it is indeed “donkey work,” it is laborious and prone to error. It is a significant bottleneck in the deployment of applications.
Typically, users will get their IT organization to deliver one-at-a-time custom IT projects with very tightly coupled connections between apps (APIs). These are “brittle,” inflexible and can only be used for a specific application. The next application that needs to be deployed will require the same laborious process to be undertaken, just using a different set of APIs’. …This is one reason why, even at its current small scale, Mule already has some large enterprises as customers.
Okay, you get the idea. He likes what the company does and how it is doing it. But he concluded:
It is likely that MuleSoft will continue to improve its profitability, but again, not fast enough to justify the current valuation. I expect it to meet and beat expectations on a consistent basis, but it is hard to see any great reason to own the shares at the moment. Should it miss a quarter and see an imploding share price, or should the shares stagnate and the company grow into its valuation, it would be of interest. And given industry consolidation trends, the downside is not huge. And it rarely pays to bet long term against Anne Winblad. But I think I will pass on this name at this time.
The Anne Winblad he referred to is apparently a very renowned, very successful, Venture Capitalist. And she has a LOT of shares in MULE personally, as well as through her company, according to Bert.
I will keep my 1% position for now in spite of Bert’s conclusion.