My portfolio at the end of April 2020
Here’s the summary of my portfolio at the end of April. As I almost always do, for my own convenience, I’m doing my summary during the last weekend of the month. This month there are four days left over that will carry into May. You can think of this as a four-week summary if you wish. May will be five weeks. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
Well, March had been a terrible month, due to the coronavirus turning into a really, REALLY, scary pandemic, and the market and the economy tanked even worse, much worse in fact, than than they had in February. In fact, in March the entire conversation was about the pandemic, making companies like Zoom and Crowdstrike stand out against the somber background. It was an awful month for the markets.
My portfolio finished March up 13.4% year-to-date, while the five market indexes finished March averaging down 26.6% year-to-date, which must truly have been catastrophic for many people.
April has been a better month, as perhaps the market started anticipating that there will be an end to this eventually, and my portfolio finished April up 33.3% year-to-date, and the market indexes also came back somewhat from the depths, but they are still very much in the red year-to-date, as the five indexes finished April averaging down 18.8% year-to-date.
As often happens in times of high stress, I tend to sell my low confidence or try-out positions and concentrate my funds in my high confidence companies. That’s what happened this time too, and I am currently at just five large positions in my portfolio. The five total about 98.3% of my portfolio. I also have one very small try-out position at 1.5% of my portfolio (I have eliminated my small 2% margin, and have about 0.2% in cash).
Our companies really turned in a remarkable performance in a terrible general market, and it goes against everything you’ve always been told, about how “overvalued” and “overpriced” stocks like ours would fall much faster than the “safer” stocks in a falling market.
In fact, my portfolio results seem almost unbelievable to me in the midst of a pandemic and a collapsing economy. To be up 33% when the market is down 19% almost doesn’t sound plausible, but this is the third year out of the last four with this kind of implausible results.
Let me remind you that I posted multiple times in February that, while old economy stocks could have severe revenue loss from the current virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing (supply chain problems, shipping to customer problems, and customers closing down of the duration of the epidemic)), I expected that our “wildly overpriced” SaaS companies would be seen as a safe refuge, as their revenue is recurring, and that Zoom especially might have a huge increase in revenue because almost all companies around the world are moving to video conferencing rather than travel and face-to-face meetings, because of the virus’ perceived danger.
I acted on my own advice, adding to my Zoom, and Zoom, which was just an 8.7% position at the end of January, is now a 22.8% position. That’s partly from adding to it, but also because Zoom, which was at $76.50 at the of January, is now at $158.80
MY RESULTS YEAR TO DATE
My portfolio closed this month up 33.3% (at 133.3% of where it started). here’s a table of the monthly year-to-date progress of my portfolio for 2020.
**End of Jan +21.3%**
**End of Feb +22.9%**
**End of Mar +13.4%**
**End of Apr +33.3%**
HOW DID THE INDEXES DO?
Here are the results year to date:
The three indexes that I’ve been tracking for years closed this month as follows.
The S&P 500 (Large Cap)
Closed down 12.2% YTD. (It started the year at 3231 and is now at 2837).
The Russell 2000 (Small and Mid Cap)
Closed down 26.1% YTD. (It started the year at 1668 and is now at 1233).
The IJS ETF (Small Cap Value)
Closed down 35.2% YTD. (It started the year at 160.8 and is now at 104.2).
These three indexes
Averaged down 24.5% YTD.
If you throw in the Dow, which started the year at 28538, is now at 23775, and is down 16.7%, … and the Nasdaq, which started the year at 8973, is now at 8635, and is down 3.8%, … you get down 18.8% for the average of the five of them YTD.
So the market averages got killed in March, and in April they reduced their year to date losses by almost a third, but are still very much in the red, year-to-date, while my portfolio is up over 33%!!! Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. We are not magicians. We just invested in great companies. Of course they are overvalued!
How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That books have been written that prove it? Well, guess what, Folks, the books are wrong!
And if you look at the past years you will see that picking our “overvalued” stocks has done enormously better than investing in cheap, or “undervalued” stocks.
Again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, and some even a lot better .
To simply state my goals, I’m merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.
ON WHAT’S GOING ON WITH OUR STOCKS
With the pandemic, companies in the travel and entertainment industries are collapsing. Companies in traditional retail are going bankrupt. Companies that make things are having a tough time. The oil industry… well you can read the news. Pretty much the only traditional companies that are making money are those who sell food and staples. Companies who sell things online, like Amazon, can’t keep up with demand. Companies who have their own supply chains to deliver groceries are doing fine. So how are our companies doing?
Well, we aren’t investing in companies that require a customer to come into a store. We aren’t investing in high capital expense, low margin companies, or companies with high debt, or that have maintain high-rent retail outlets, or have to build factories or wrestle with supply chains in order to make things like automobiles, refrigerators, sneakers, and houses, all things that people can decide to just go another year or two with the old ones, or even companies that make microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL.
Our companies’ revenue comes from subscriptions and thus don’t require cash registers and retail outlets. Besides, they are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. They sell subscriptions to the software that enterprises use to run their businesses. This software saves their customers money, rather than costing them extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that it uses to run its business, and that is saving it money. Our companies may see their rate of revenue growth fall , but they are extremely unlikely see their actual revenue fall unless their customer companies go out of business. Right now everyone is in a panic about the coronavirus, and our companies are bound to be affected somewhat but it’s hard to see how they will be affected the way old economy companies will be affected. Some of their customers may go into bankruptcy, and some may hold off on paying their subscriptions, or ask for temporary reduced rates, but they will be a minority. We’ll have to wait and see, but our companies should do MUCH better than the economy as a whole.
”YOU CAN’T TELL ANYTHING IN FOUR MONTHS!”
Yes, there are always the people who say you can’t tell anything in four months, so I thought I’d give you three years and four months.
In 2017, 2018, 2019, and the first four months of 2020, my portfolio was up
84.2%,
71.4%,
28.4% and now
33.3%.
That compounds to up 440% in three years and four months.
In those same periods of time, the market indexes were
up 14.4%,
down 8.5%,
up 26.4% and now
down 18.8%.
That compounds to up 7% in the same time.
So in the three years and four months, while our portfolios were up 440%, the market as a whole went nowhere, and was up all of 7%.
That’s no fluke! Yes, intelligent stock picking DOES work!!!
LAST FOUR MONTHS REVIEW
January was a quiet month for me. There were no earnings reports on any of my companies. I trimmed my position in Alteryx a tiny bit when it went above 22%, but it just kept going up and I probably won’t trim again unless it goes over 24% or 25%. My Afterpay position, which was less than 1% at the end of the year, has now tripled to 2.8% and I’ve decided to keep it for now, but not grow it much barring an American IPO, because of the awkwardness, hassle, and extra cost of having to buy on the Australian market as an American. I didn’t add any positions during the month, or sell out of any positions during the month.
February started for me as another fairly quiet month, but it turned into the first month of the coronavirus sell-off in the general market. I did very little until the big sell off near the end of the month. I sold out of my remaining small position in Zscaler after their disappointing earnings. I agree that they have a better solution, and they hired a great person to try to get them back on track, but they have structural differences (pretty much having to sell an entire business to senior management, instead of land-and-expand), which will keep them from ever growing as fast as the other companies to which I moved the money, so why would I hold on and hope.
I added to Alteryx at an average price of $140 even though it was already my largest position, to Crowd at $60.80, and to Datadog at $44.50, and to Zoom at $101, all during the meltdown a week ago Friday. This last week I added further to Zoom at $104, $106 and $108. I also added a tiny position in a new company that I’m still deciding about, and am not ready to discuss.
To raise money for these purchases, in addition to selling out of Zscaler, I sold back half of my small Afterpay positions, feeling that as a company focussed on clothing retail, while 2019 results, just announced, seemed great, their sales may be substantially below expectations during this next six month period (January through June of 2020), because of disruptions due to the virus. Fortunately I did it before their earnings release, after which they fell 10% on Friday. I also sold some Okta for cash to buy more Zoom, feeling that Zoom was a remarkable opportunity at present.
March continued the sell off because of the coronavirus pandemic. I finished selling out of Afterpay, see my reasons above which are based on the results I expected due to the virus pandemic. I added an enormous amount of Zoom, between $102 and $111, and a tiny bit above that too. I could see, from a myriad of sources that Zoom was going to explode upwards with people around the world working remotely.
I also added a lot also to my Crowdstrike, position after their amazing earnings report and conference call, but probably not quite as much as I added to Zoom. I made an atypical purchase and rapid exit from a tiny 0.5% position in Amcor, exiting because I wanted to buy more Crowdstrike and needed the cash.
To get money for some of these purchases I sold out of my Red Violet, not because I saw any bad news, but because a considerable part of their effort was leasing apps to real estate salesmen and I thought there were not going to be many houses shown in this kind of economic climate, and I had other companies that were knocking it out of the park, and upon which I had more confidence. I finished selling out of Trade Desk, for the reasons I explained in my discussion of the stock in last month’s summary. It had been as much as 11% last August but in recents months was hovering at around 3% of my portfolio. I also reduced Coupa, after their runnup after earnings, for cash to buy more Zoom and Crowdstrike. I sold some Okta early in the month at about $127, but bought back later in the month at about $111 and $95, for a small net add. I added tiny amounts to Alteryx, and Datadog, during the month.
April was a very positive month for my portfolio, and a moderately positive month for the market. I continued to sell my Coupa position, not because of anything wrong with Coupa, but because it had fallen less than the others, and because I had more confidence in my other positions, especially in the pandemic, and because the other companies were growing faster. I still had more than half of my original Coupa position, and sold it all this week at an average price of about $163. I added to Zoom, Alteryx, Crowdstrike, and Okta during the month, and took a small try-out position in Roku after some excellent discussion on the board.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years (for example, I bought Alteryx originally at $27.72, over two and a half years ago, but it’s listed below at an entry price of $100.07 because that is the price at which it started 2020.
**Zoom from 68.04 to 158.80 up 133.4%**
**Crowd from 49.87 to 72.00 up 44.4%**
**Okta from 115.37 to 155.35 up 34.7%**
**Alteryx from 100.07 to 112.54 up 12.5%**
**DataDog from 37.78 to 41.48 up 9.8%**
As you can see, it wasn’t all due to Zoom. All of my five stocks were actually up YTD in this horrible market.
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.
**Zscaler from 46.50 to 54.00 up 16.1%**
**Coupa from 146.25 to 149.00 up 1.9%**
**Afterpay from 20.50 to 17.00 down 17.1%**
**TradeDesk from 259.78 to 202.00 down 22.2%**
**Red Violet from $23.50 to $16.75 down 28.7%**
Please note that the last three of these were small, almost trivial positions.
I am tempted to quit giving my exited position prices. The price that I start a position at is easy to pinpoint (it’s when I started the position… duh), but it’s much harder to know what price to use for when I exit a position. For example I finally exited my last big chunk (more than half of my original position) of Coupa this month at an average price of about $163, but I had been trimming for five or six weeks before that from the $120’s up to $145, so giving an exit price of $163 doesn’t seem right, but the roughly average $149 price that I used above doesn’t seem quite right either, as what I sold this month, when I finally exited, was way above that, but $149 seems like the best choice.
POSITION SIZES
As often happens at times of great stress and uncertainty, I sell off lower conviction positions and concentrate my funds in my highest conviction companies. This has brought me down to just five real positions plus one tiny try-out position, which is VERY concentrated, but this is a time of great uncertainty. These are large percentage positions, but these are extraordinary times. I’ve eliminated my very small 2% margin. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions. As I wrote above in my four-month summary, I have reduced my Coupa to zero and have just a tiny positon in Roku.
Here are my positions in order of position size, and bunched by size groups…
**.**
**Crowdstrike 23.7%**
**Zoom 22.8%**
**Alteryx 19.9%**
**Datadog 17.0%**
**Okta 14.9%**
**Roku 1.5%**
STOCK REVIEWS
There were no earnings reports on any of my stocks in April.
Crowdstrike has moved up to 1st place at 23.7% (up from 17.2% a month ago. It has been as high as $96, and hit a low of $33 in the panic and is now about $72, so while it is up over 100% from that low, it is still $24 below its high in spite of the enormous, blow-out Jan quarter results that were announced in March, and which you are about to read about.
Let me start with a few paraphrased quotes from the CEO:
The competitive landscape is the best I have seen in my 27-year career. We believe this is the beginning of a multi-year trend as being driven by the industry consolidation that took place last year along with the seismic shift to cloud technologies.
We are landing bigger with more modules and increasing the number of new customers that start with ARR over $1 million.
With our cloud native platform, our lightweight agent that is easily deployed at scale, and our frictionless go-to-market engine, we are uniquely positioned to meet their cybersecurity needs
The seismic shift to cloud native technologies and cloud workloads has created an environment with massive greenfield opportunities. While our competitors are distracted trying to integrate acquired technologies, rationalizing their workforce or retooling their on-prem offerings, our mission, platform and brand are clearly resonating with customers and partners.
Furthermore, as Broadcom began integrating Symantec, we saw an increase in inquiries among both customers and partners. These dynamics have contributed to an expansion in our pipeline. We have seen significant demand as our partners try to protect customers who are left searching for alternatives as Symantec abandons large segments of the market. Several partners have launched Symantec replacement campaigns. We are closely collaborating with them. One of our partners submitted a list of several thousand of their customers that will be migrating away from Symantec in the next year and we found that there was very little overlap between these prospects and our existing customer base.
Saul here: while other companies brag about increasing their number of customers by 30% per year, Crowdstrike increases theirs by over 100%.
CEO or CFO again: Within new enterprise customers, we are landing bigger with more modules and in this quarter we more than doubled the number of new customers starting out with greater than $1 million of ARR compared to a year ago. Additionally, across all new customers, the average number of modules increased every quarter this past fiscal year.
We also continued to expand module adoption within our existing customer base. This quarter, the percent of our customers with four or more modules once again increased, and those using five or more cloud modules grew to one-third of our customer base.
As we add new modules after the first module is sold to a customer, virtually every other module after that is pure gross margin!!!
Saul here: they also point out that companies using more of their modules obviously deepens their relationship with the companies and makes them more sticky.
CEO and CFO again: As far as the impact of the coronovirus, Crowd was built to thrive with a remote workforce. Even in normal times 70% of our workforce is remote. They use Zoom.
Also as their customers and potential customers have more and more people working remotely they need more end point security. Crowd has seen a 13% increase in initial appointments since the pandemic. The people their salesmen need to contact aren’t so busy in the office, but are at leisure, more or less, at home and more willing to take time and talk.
They point out that they are all in the cloud, while with the pandemic it’s even harder for their competitorsto to set up their on-premise systems, and especially for their competitors to service customers whose people are working remotely.
Now, quarter results, very summarized
ARR was $601 million, up from $313 million a year ago, and from $502 million sequentially. It was up 20% sequentially, which was up from 18% sequentially the quarter before, which was up from 16% sequentially the quarter before that. In other words it was reaccelerating.
Revenue was up 89%. Subscription revenue was up 90%, and was 91% of revenue.
Now the GOOD stuff:
Subscription gross margin was 77%, up from 70% a year ago.
Operating Cash Flow of $66 million, up from $16 million a year ago. (That’s not a misprint).
Operating cash flow margin was 43% !!!
For the year Operating Cash Flow was $100 million, up from a LOSS of $23 million a year ago!!!
Free Cash Flow was $50 million, up from $0 million a year ago.
Free Cash Flow margin was 34% !!!
Net Profit Margin was -3%, improved from -35% a year ago!!!
Growth in subscription customers was 116% !!! In fact, January fiscal year-end customers in 2016 thru 2020 were
**165**
**450**
**1242**
**2516**
**5431**
Just look at that column! In four years they went from 165 customers to 5431 customers. That’s about a “33-bagger” in four years! In two years they went from 1242 customers to 5431. That’s more than a quadruple in two years!!! People obviously want and like what they are selling.
And this company is still 25% off its high! You can see why I was trying to buy all I could. I added to Crowdstrike this month at roughly $54, $56, $58, and $59. Crowdstrike finished the month at $72.
Zoom is in 2nd place at 22.8% of my portfolio, and is now at $159. Zoom is a company that has had an existential event change its entire world. It has gone from being a rapidly growing and successsful little niche company that most people had never heard of, to probably the most talked about company in the world, in two months!!!
I’m sure that you’ve been reading the same things I have… First we had, all of a sudden, people talking about people who are homebound having parties on Zoom, and then the British Cabinet having their Cabinet Meeting on Zoom, and others talking about their nine year olds getting paying Zoom accounts, and about Zooming with friends back in the Czech Republic from the US, or about their congregation using Zoom, and universities from California to Harvard using Zoom, about Zooming with stuck-at-home family and friends on Zoom, and homebound employees of enterprises using Zoom, and the CEO of Crowdstrike saying that he and his head of sales will have 100 meetings in 100 days, with customers and hoped for customers, on Zoom, and on and on…
Then there was a sudden, very organized, hacker and short attack from mid-March through early Apriil, with a stream of attacks dealing with Zoom’s security (which was fine for enterprises who had IT departments, but which just wasn’t set up for having 200,000 downloads of new users a day, up 20x from the previous level of 10,000). The price tanked for a while in March down to $113, but it came back to make new all-time highs, on Thursday.
The bounce back was helped by their daily users increasing to 30x their pre-pandemic levels, by very prominent security people helping them with their security, by Ellison from Oracle saying that Zoom was essential for his company, and that it would continue to be so after the pandemic, and the CEO of Okta twitting about how his company depends on Zoom, and the British Parliament saying that their meetings would be on Zoom, with people signing in from home. And music videos on Zoom, and an opera on Zoom, and people getting married on Zoom, and a little boy getting adopted on Zoom, and courts holding hearings on Zoom. On Friday they were selected for the Nasdaq 100, as of the end of this month. And later on Friday, they were partly knocked back by Facebook saying that they were setting up a competing app. (Tell me if you can see any enterprise, at all, ever holding their meetings on Facebook!)
Obviously all the myriads of new users won’t all stick, and they certainly won’t all become paying, but Zoom being the go-to name for video conferencing and video communication will stick!
I think that perhaps Zoom could grow revenue 200% this year (triple it), or more. They were probably going to grow by about 80% without all this!!! So that isn’t quite so crazy.
Here are the results of Zoom’s January quarter, which was announced in March. Remember that this Jan quarter had zero benefit yet from “work at home” and “stay at home.”
“We delivered a unique combination of high total revenue growth of 78% at a scale of $188 million, adjusted operating income of $38 million, and operating cash flow of $37 million. Our execution also drove 61% growth in the number of customers with more than 10 employees, and 86% growth in the number of customers contributing over $100K of revenue.”
Total revenue of $188 million, up 78%
Adj operating income was $38 million, up 292% from $10 million a year ago.
Adj operating margin was 20%.
Adj net income was $43 million, up from $10 million.
Adj EPS was 15 cents, up from 4 cents
Cash was $855 million.
Operating cash flow was $37 million up 129% from $16 million
Free cash flow was $27 million up from $6
Customers with more than 10 employees was 81,900, up 61%
Customers contributing more than $100,000 were 641, up 86%.
Net dollar expansion rate in customers with more than 10 employees was over 130% for the 7th consecutive quarter.
Remaining Performance Obligation (RPO) is $604 million, up 94% from $312 million [Saul here: That’s almost as much as the whole year’s revenue!!!]
Conference call
We closed Zoom Phone deals with 2,900 customers with more than 10 employees.
We signed up Johnson and Johnson and VMWare.
Okta highlighted Zoom as a preferred video application, and said Zoom had 876% growth in the Okta network over the past 3 years!
[Saul here: The CEO of Crowdstrike also talked about Zoom as if it was the obvious choice, as did the ex-CEO of Cisco].
In Gartner Peer Ratings, Zoom received the top overall rating in the “Voice of the Customer” category.
Revenue exceeded the high-end of our guidance by $12 million
Adj gross margin was 84%, up from 82% and from 83% sequentially. Due to the coronavirus, we have seen significant usage of our platform and we will expand our capacity to meet the increased demands of both paid and free users. Next quarter we believe our gross margins will thus be closer to 80%.
In the quarter, we did not see any impact yet from coronavirus, but we have definitely seen an up tick in usage since. But a lot of that is on the free side. So it’s too early to tell how much of that is going to convert long-term into paying customers. As we mentioned, we are seeing impact and we continue to build capacity to ensure that we can support this increased usage. So we are seeing impact on our gross margins, which is why we’re guiding you towards the lower end of our range for next year.
Saul here: This was obviously a terrific quarter. I’m also impressed that Zoom is so profitable at such an early stage. Yes, I know that there is a lot of argument about whether or not they have a moat, but they will have enormous growth this year, because enterprises all over the world will be avoiding travel to meetings, and using video conferencing instead, and because Zoom is simply better at video conferencing than anyone else. Given that videoconferencing instead of travel and hotels will save enterprises gobs of money, as well as avoiding risk, I just don’t see enterprises hesitating to pay a little more for the best. XXXXX
Alteryx is at 19.9% of my portfolio, and in 3rd place. It announced December quarter results in February, and they were enormous, with revenue growth accelerating both year over year and sequentially to 75%, the highest I’ve ever seen them. That was up sequentially from 51% in March, 59% in June, and 65% in September! That’s just incredible! And their stock price has fallen in the coronavirus panic from $139 at the end of last quarter to a low of $81, and is now just back up to just $113 now. There is worry that they may be hurt by the pandemic because they are not pure SaaS.
Their revenue percentage growth looks like this:
**2016: 57 67**
**2017: 61 50 55 55**
**2018: 50 54 59 57**
**2019: 51 59 65 75**
As you can see, it looks solid as a rock.
Their adjusted gross margins were 90%, 91%, 92%, and 93% for the last four quarters!
Their dollar based net retention rate has been 130% or more for the last thirteen quarters!.
For a few other figures:
Adj op income was $51 million up 93% from $26 million a year ago.
Adj net income was $44 million up over 100% from $21 million.
Adj net income margin was 28% !!!, up from 24% a year ago.
Adj EPS was 64 cents, up 100% from 32 cents
Total Shares were up just 5%
Cash was $975 million.
Op cash flow was $21 million up from $14.4 million a year ago.
What they do is to enable non-techies and techies to quickly and easily analyze data. Their clients therefore love them. Management feels they have no competition. From one of their earlier conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 132%.
Their long term goals are:
Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%
They recently announced a new collaboration to work on Smart Cities.
The stock finished 2018 up 135% yoy, and they were up 68% in 2019 on top of that, in spite of the big sell-off. They hit a low during the sell-off of about $87, and they are now sitting at about $139. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. It seems to control its space and is growing like mad. I added to Alteryx this month at roughly $82, $89, and $92. It finished the month at about $112.50.
Datadog is in 4th place at a 17% position. Let me tell you a bit about this company: It is a SaaS software company that leases subscriptions to software that monitors infrastructure, analyzes application performance and provides log management. Recently it has added new products that provide what it calls experience monitoring (what the experience of your customers is), and a network performance management product.
And it just announced the general availability of Security Monitoring, another new feature, which is fast, low cost, integrated with the other things Datadog is monitoring, and it’s turn-key but can be modified and adjusted without learning a coding language.
What makes Datadog unique is that its competitors have single products that work in silos, while Datadog integrates them all and its “three pillars of observability can be observed on a single pane of glass.” As Bert says, “DataDog built a product that is self-serve in nature and can be installed in minutes. And having a platform that offers all the monitoring, and the analysis of logs, in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator, and it facilitates different departments working together.
Here are the results of their December quarter:
Revenue grew 85% to $114 million. (Note that it’s ALL subscription revenue, no service revenue). The scuttlebutt was that their growth would slow down to 30% or 40% this year! 
GAAP Gross margins were 77% from 74% a year ago.
Adj operating income was $7 million,
Adj operating margin was positive 6%, improved from NEGATIVE 7% a year ago
Operating cash flow was $24 million, up from $4 million sequentially,
Free cash flow was $1 million, up from $(3.7) million sequentially (due to real estate capex expenses).
Customers over $100,000 at 858 up 89% from 453 a year-ago
Customers over $1 million at 50 up 72% from 29 a year-ago
They are currently “In Process” on the FedRAMP Marketplace, initiating the certification process.
Announced Security Monitoring, currently available in beta, to break down the silos between security, dev, and ops. Our vision is to offer security teams the same visibility into their infrastructure, network, and applications that developers and operations teams have.
Announced the general availability of Network Performance Monitoring (NPM). Our Simple Network Management Protocol (SNMP) integration, a component of NPM, is available in beta and extends visibility to physical network devices.
Announced the general availability of Real User Monitoring (RUM). An extension of our user experience monitoring suite, RUM provides real-time visibility into the experience of individual users, in order to quickly spot and correct otherwise costly website performance issues.
All new products are available in the same tightly integrated platform.
Launched the Datadog Partner Network, a new program expanding Datadog’s support for channel partners.
Continued product innovations, including enhanced APM functionality, deeper visibility into containers and serverless environments, and enhanced machine learning capabilities.
Conference Call (greatly edited, paraphrased, and summarized)
This quarter was a great finish to a milestone year for us. Revenue was $114 million, up 85% We ended the year with 858 customers with ARR of $100,000 or more, up 89% yoy.
About 60% of our customers are now using two or more of our products, up from 25% a year ago. Penetration is relatively even across enterprise, mid-market and SMB segments. Additionally, about 25% of our customers are using all three pillars of observability, which is up from 5% a year ago. This is especially impressive considering that our third pillar, Logs, has been available for less than two years.
Our net retention rate continued over 130% We also continue to be capital-efficient with free cash flow of $11 million.
For the full-year, we generated revenue of $363 million, up 83%, and free cash flow was positive $0.8 million for the year.
We added about 1,000 new customers in Q4, which is a record and almost twice the number we added a year ago.
We accelerated our pace of innovation with multiple exciting developments in Q4. We are pleased with the initial uptake of NPM and RUM, which demonstrates our opportunity to create future revenue drivers for our business.
We also announced security monitoring, as a first step to apply the power of our platform beyond observability use cases. We envision a future where silos continue to break down beyond dev and ops and extended security teams.
As it becomes clear that securing applications in the cloud world needs to involve all three. We believe that by harnessing the massive amounts of data we already collect we can improve our customer’s IT security.
Finally, one of the greatest surprises to us this year has been the success of initial land deals. In 2019, approximately 65% of our new logo deals had two or more products, up from only about 25% in 2018. This demonstrates the pent-up demand for our integrated platform and our ability to add value from the very start of a customer relationship.
To summarize, we believe we have a very significant opportunity to further expand our product portfolio. Investing in innovation is a core part of our business strategy.
Now, let’s move onto marketing. We have been expanding coverage in both commercial and enterprise channels to capture the opportunity across company sizes. While continuing rapid growth in North America, we are also expanding in new and existing territories internationally.
Additionally, we have been building a government-focused team. And finally, we are investing in the partner channel, with the launch of the Datadog Partner Network.
As of the end of the quarter, we had about 10,500 customers, up from 7,700 a year ago. We added about 1,000 customers in Q4, a record for us.
We ended Q4 with 858 customers with an ARR of $100,000 or more, up 89% from a year ago, up more than 130 in Q4. Given that more than 70% of our ARR is generated from customers over $100,000, we expect this cohort of customers to be a large driver of our future growth. We also ended the year with 50 customers with ARR of $1 million or more, which is up from 29 a year ago, and only 12 two years ago.
As a conclusion, we are in the early stages of what we think is a tremendous market opportunity, which we believe we are well positioned to capture. We have been performing at a very high level and our focus is on doubling down on what has made us successful today.
So in 2020, we plan to continue to invest in hiring great engineers and delivering innovation to our existing and new customers. We also remain committed to investing in our go-to-market, expanding our sales capacity globally across all geographies, as well as investing in new opportunities such as a partner channel in public sector.
CFO - I’m happy to report that the average ARR of our enterprise customers at the end of 2019 was about $230,000, an increase from $160,000 at the end of 2018. And average ARR of our mid-market customers at the end of 2019 was about $170,000, an increase from $110,000 at the end of 2018. We believe there remains ample room for continued penetration of each of these segments.
Lastly, international growth outpaced total growth. And many of these international teams are still ramping.
Gross profit in the quarter was $88.4 million, representing a gross margin of 78%. This compares to a gross margin of 76% last quarter and 75% in the year ago period.
Net income in the quarter was $10 million, or 3 cents per share, on 327 million weighted average diluted shares outstanding. Profitability outperformance was driven primarily by the revenue outperformance.
We have a highly efficient business model and have experienced a high return on our investments in S&M and in R&D. While we have operated around breakeven to slightly profitable and outperformed on profitability in Q4, we see ample opportunities to continue to invest in the large market opportunity ahead of us.
We ended the quarter with $778 million in cash
Op Cash Flow was a positive $17.4 million in the quarter and a positive $24.2 million for the full year.
free cash flow was positive $10.9 million in the quarter and positive $0.8 million for the full-year.
We are very pleased. We have growth at scale that few can match and have demonstrated efficiency in our model. We are making continued investments for growth for the foreseeable future. We believe we are at the very early stages of a multi-billion dollar market opportunity and we feel very good about our ability to build a large and successful company over time.
Okta in 5th place, is a 15% position, and is at a five star confidence level. It was up 81% in 2019, and is over a quadruple since I bought it over two years ago. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. They do a lot more than smart sign-in, more than I can understand for sure. It’s also very sticky and unlikely to be replaced. At the bottom of this meltdown it got as low as $96 and it’s now at $121.
They just had their Oktane event, which was virtual this year, and they said they got many more leads than from a physical event. They announced a lot of new products, which I admit I don’t understand. Muji has written excellent summary posts on the board about the Oktane event, which I recommend.
The Fool also just had an hour-long interview with the Okta COO and co-founder, with Tom Gardner and Bill Mann (on Zoom). I found it really interesting and understandable. You may have to be a paid subscriber to the Fool (which anyone serious about growth investing should be).
They announced January quarter results in March. They were excellent. Not like Crowdstrike (nothing can be like Crowdstrike’s report), but excellent all the same:
We’re still in the early days of a massive addressable market to modernize identity for the workforce and customers and we are in the leading position to capitalize on the opportunity for many years to come."
Revenue was $167 million, up 45%.
Subscription revenue was $158.5 million, up 46%.
Remaining Performance Obligations (RPO) was $1.21 billion, up 66%. Current RPO, which is subscription revenue expected to be recognized over the next 12 months, was $592 million, up 54%.
[Saul Here: Just look at that! RPO of $1,210 million and Subscription Revenue of $158.5 million. They have almost eight quarters of current revenue in the bag already! That’s astounding!]
Total calculated billings were $225 million, up 42%.
Adj operating loss was $5.6 million, or 3.3% of revenue, improved from $4.9 million, or 4.3% of revenue, a year ago.
Adj net loss was $1.7 million, improved from $4.4 million a year ago.
Adj EPS was a loss of 1 cent, improved from a loss of 4 cents.
Operating cash flow was $25 million, or 15% of revenue, up from $10 million, or 9% of revenue, a year ago.
Free cash flow was $18 million, or 11% of revenue, compared to $5 million, or 4% of revenue, a year ago.
Cash was $1.40 billion.
Conference Call
Another fantastic year for us. Quarter revenue grew 45%, subscription revenue grew 46%, RPO grew 66%, and we had record operating and free cash flow.
Addition of a record 142 customers with over $100,000 in spend for the quarter. Over half of these additions were from new customers. The total of $100,000 customers is now 1,467, up 41%. These large enterprise wins are from a wide range of industries.
With the adoption of zero trust environments, the traditional security perimeter has dissolved and identity is now at the heart of the new security setup.
The robust growth in total RPO reflects our continued success with large enterprise customers. These contracts tend to be larger in value and longer in length. For example, our transactions with a total contract value of $1 million or more, grew over 80%, and the weighted average term lengths of those contracts is nearly four years, which is 50% longer than our overall average term length.
Our dollar-based net retention rate was 119%, up 2 points sequentially. The increase was driven by strong customer upsell, particularly with our enterprise customers, as we grow our business within the world’s largest organizations.
We are adding headcount, primarily in our S&M and R&D teams. We’ve been successful in attracting and retaining great talent and total headcount grew 44% to over 2,200.
Right now we’re not seeing any impact in our product demand from coronavirus. We’re obviously going to monitor that very closely.
The demand environment and the market environment for our products is very, VERY robust. There’s more deals, there’s bigger deals, there’s – you know, our product seems to be really positioned in the right place and the right time. And we haven’t seen the competitive environment change. It’s really been consistent over the last several years.
What’s exciting for us as we move more and more into the large enterprise, is that we have the opportunity for large initial deal sizes, but we also have a lot more opportunity for expansion into those customers over time. And that’s really what drove the increase in the net retention rate.
We’re really, really focused on making our customers successful. So it’s one thing to get a company, but you know, even companies that have fairly large initial deals with us, our product portfolio is getting to a point where they can substantially expand. So that’s why our long-term orientation to really be obsessive about making the customer successful and turning them into fans is starting to pay off. It’s, you know, things are really rolling.
We’re going to continue to focus on hiring to capitalize on this huge market opportunity we see in front of us.
We are landing larger and larger enterprise customers with larger initial deal sizes, and not only that, but we had really big expansion into those large customers. And that’s really what our focus is going to be going forward.
If you just look at the number of organizations that we could potentially penetrate, I mean, it’s hundreds of thousands of them. So we’re very happy and fortunate with our almost 8,000 enterprise customers adding 550 a quarter, those are great results. But we’ve got a huge opportunity in terms of net new accounts that we can work with and how far we can get penetrated inside those accounts.
Saul: I added to Okta this month at $118, $124, and $130. It finished the month at $155.
THE OUTLOOK FOR THIS YEAR
This last quarter the average revenue growth rate for my five large positions, which make up 98% of my portfolio, was 74%. (If you don’t believe me, calculate it yourself). Even if they slow down more than I expect because of the pandemic, it’s hard to see the five companies with an average revenue growth rate of less than 35% to 40%, especially since Zoom and Crowdstrike are two of the companies. So I would guess that that may make make our companies very desireable to any mutual fund or hedge fund portfolio manager who wants to show good results for the year.
FINISHING UP
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously.
If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:
How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies
I hope this has been helpful.
Saul